Chris Sutton speaks to three members of the Risk Management Board about how best to communicate risk to stakeholders and other audiences
Risk is complex and multifaceted. We believe actuaries have an important role to play in developing risk management practices. The COVID-19 pandemic and the climate crisis show that good risk practice is of limited value if expertise and analysis cannot be communicated to a range of audiences. Four members of the profession’s Risk Management Board recently met to discuss what makes for good risk communication.
What makes communicating risk difficult in a commercial or financial context?
Chris Makomereh: The first thing that comes to mind is the multiple stakeholders, who all have different interests in the information you’re presenting. This provides a layer of complexity to risk communication.
Louise Williamson: With risk decisions, people are making an investment now in something further out on the time horizon, whether it’s an investment of time or money. It can go against the pressures we have in industry, and against our natural instincts to ask people to sit down and think realistically about the bigger picture and the longer term.
Russell Gill: Risk is often based around models, and that can be a bit of a turn-off for some people who would prefer to rely on their experience and expert judgment. There can also be a tendency to overcomplicate risk communication – Einstein famously once said, “everything should be made as simple as possible, but not simpler”.
Chris Sutton: We also need to communicate scenarios that people really haven’t got their heads around.
RG: From a financial and operational perspective it’s important to think about what could go wrong, and then translate that into where you might need to enhance controls, invest in people, processes and technology – or strengthen your balance sheet to absorb losses. The crux of this is: you’re not saying something will happen, but rather, if it does, how financially and operationally resilient are you?
How can we prepare our audiences to receive information about risk?
LW: I think storytelling is powerful – taking people on a journey so we can help them understand what we’re trying to get across, perhaps by giving a case study or real-life example. You can start with something simple that everyone in the room is going to understand quite quickly to get their attention. Then you can move from that point in the direction you’re trying to take people. It’s a matter of knowing where to start and where you want to end up.
RG: I think risk professionals need a kind of humility. When someone doesn’t understand something you’re presenting, some people will automatically say that we need to train them to understand better. I prefer to take accountability and ask myself, “have I explained this well enough?” I take the view that if you can’t explain something simply, you don’t understand it well enough.
We should also ask our audiences for feedback so that instead of preparing them, we’re preparing ourselves. What do you like and not like? How can we find different ways to present information?
If you think about good examples of risk communication you have witnessed, what stood out?
CM: Have the key messages upfront, alongside the metrics the audience cares about. A lot of analysis and many different technical aspects might have happened in the background, but the communication needs to focus on those key messages.
LW: When I think about successful projects, managing and being conscious of people’s natural resistance to change was important. The project would be positioned as a gradual improvement on the status quo – ‘let’s build on what we’ve got’.
RG: People don’t base decisions purely on data and logic; emotion plays as big, if not a bigger, role. That means decision makers need time to reflect, and need to be engaged in various ways. A 10-minute presentation at a board meeting is not a lot of time to reflect, so we sometimes need a longer governance process that supports good decision-making.
CM: I prefer proposals that weigh the pros and cons of different options and give a recommendation about which one to pursue. That is better than saying ‘here is the answer and here is the analysis to back up that answer’, without showing the alternatives that were considered.
RG: I agree, a recommendation is useful for anchoring the conversation. Another good example of risk communication is RAG status: red, amber, green. This helps to highlight where there are issues; importantly, it needs to be clear what each colour means and what action should result.
CS: It strikes me there are two different types of scenarios we work in: discrete projects that need a decision (are we going to invest in private equity; are we going to launch this new product?) and horizon scanning for ongoing risks, including tail events and the new risks creeping up over time.
CM: For business-as-usual ongoing risk, we have moved management information from lengthy packs with lots of slides to a dashboard view, where on one or two slides you can quickly see how key metrics are doing and what is within the risk appetite. Then there is supplementary information about anything that’s not green, with an explanation of why it’s not green, what we are doing to get it back and within what timeframe we are doing so.
The communication for discrete decisions needs to present the risks associated with the decision, and explain how to mitigate them.
What about introducing new risks or a new line on that dashboard?
RG: External and emerging risk will not necessarily fit neatly into your existing risk taxonomy – for example climate risk is a ‘cross-cutting’ risk that can impact several risk types. However, risk managers have worked hard to put climate risk into their risk taxonomy to give it proper focus. We need to be flexible and nimble with our risk frameworks, because the world is complex and rapidly changing.
CM: This is about risk awareness – understanding what additional risks you should be tracking. Any risks that are of concern to management should be added to the register.
“If you can’t explain something simply, you don’t understand it well enough”
What can actuaries learn from others working in the field or from other industries?
RG: A lot! If you’ve got diverse stakeholders, you want diverse inputs. In the actuarial profession we need to be careful that we’re not labelling ourselves like Harry Potter characters, where you’re either a wizard or a Muggle. I would encourage actuaries to be curious and to strive to always learn from others. Indeed, the best risk colleagues I’ve worked with consider themselves students, possessing a healthy dose of both inquisitiveness and challenge.
LW: Another thing I found interesting when working with people whose background is in banking (mine is pensions) is that having a different regulator brought quite different insights. You see some different priorities driven by the legislation and regulation that underpin various industries, and seeing different approaches has been really useful.
While we are looking at communication and behaviour, perhaps we can learn from ‘appify’ culture. Today there is an app for everything and we have seen how powerful they can be in generating interest in things that people were not interested in before. Who was monitoring their sleep cycle or how many steps they took each day until they saw it on their phone or watch? They have changed everyday behaviours. I think there are parallels in risk management and communication to consider.
Is there a case for getting more diverse voices into reports or presentations as we seek to make connections with different stakeholders or different types of decision-makers?
LW: It’s important to make sure that the whole team is engaged on what is being delivered. That means work that is appropriately targeted, listening to each other while working together. That way, the report or the people presenting it reflect all the voices involved.
CM: The risk function needs to leverage the whole team, and even to go beyond the team to various stakeholders in some cases to convey messages that are part of a risk communication strategy built over time. This needs to consider and blend in many different perspectives.
What has the pandemic taught us about effective risk communication?
LW: We saw a new age of infographics come into play and everyone was watching. The PowerPoint presentations from government advisers were full of detail, with charts and graphs. That allowed us to see that the public is interested in facts and figures, and they are interested in risks when it is relevant to them. We saw real engagement from people, which shows that there is a place for good risk communication. We also witnessed people responding very differently when presented with the same information.
RG: We were in uncharted waters, and now we have that with climate change risk as well. This means traditional ‘rear-view mirror’ risk measures over one-year, such as value-at-risk, won’t provide meaningful insights. We need to develop our approaches to stress testing, and scenario planning, and express greater judgment where data and models do not give the complete picture. This will require upskilling of risk teams.
CM: I work in a life reinsurance company, and for years, a pandemic has been one of the biggest risk scenarios we have modelled. From a capital and financial perspective, the results of the pandemic were informative but not novel per se. There have been more learning opportunities on the operational side, such as rethinking business continuity planning.
For example in crisis management, how quickly we can get the right people involved in a particular issue, coming up with new playbooks and tabletop exercises to build muscle memory in risk management.
Chris Sutton is senior lecturer in actuarial science at Queen Mary University of London
Chris Makomereh is head of Risk Framework and Market Risk at Pacific Life Re
Louise Williamson is head of governance at Smart Pension
Russell Gill is a risk professional in banking and fintech