This article was first published on April 10, 2020.
AUTHORS AND CONTRIBUTORS
Anthony Bice, Partner, Financial Services and Head of EMEA Insurance
Michael Moloney, Partner, Financial Services and Head of Americas Insurance
We would like to thank the following contributors: Rick Chavez, Chris Leach, Ugur Koyluoglu, George Netherton, Anders Nemeth, Will Tsai, and Michael Zeltkevic
Risk-based management came into its own in the 2008-2009 financial crisis, amidst huge market turbulence and massive government intervention. Add fear for human life and deliberate restriction of normal societal functioning and you’ve got today’s novel coronavirus (COVID-19) pandemic — negatively impairing almost all financial and operational aspects of businesses at once.
We are optimistic that containment efforts underway across major geographies and zones will be able to check the first wave of the pandemic within months. This initial success, however, will mean that proportions of local populations infected and recovered by summer will be well below what is necessary for “herd immunity.” As a result, iterative and potentially uncontrolled cycles of outbreak and containment will continue to play out at varying intervals and speeds globally until an effective vaccine is available (not likely for another 18 months at a minimum, and potentially much longer).
Navigating a large financial-services firm through this period will require a leadership mindset tuned to absorbing large, complex, and evolving datasets, along with an aptitude for “three-dimensional chess,” capable of developing and deploying contingent management action plans in real time
Executive teams must be integrated to an extreme, with every part of the enterprise operating at “clock speed.” Achieving that requires rapid assimilation of emerging data and cascading of coherent and consistent planning scenarios throughout the organization. This kind of speed and alignment is not feasible without an effective COVID-19 crisis war room serving as mission control for business operations for the foreseeable future.
As executive teams transition from human safety, connectivity, and business continuity efforts to developing forward-looking projections and plans, we think a construct similar to that outlined in our new paper, Navigating the Pandemic's Next Waves, is required.
The COVID-19 Crisis War Room
Many companies have created a crisis war room of some form, initially focused on near-term operational issues. As these immediate issues settle, that war room should pivot to helping the business navigate through the coming months and years, based on an understanding of these different pathways.
At the core of this crisis war-room approach must be a small set of possible COVID-19 scenarios, taking into account what we know of the epidemiology and potential public policy and health system responses.
Oliver Wyman’s health and data experts have built a model that captures these factors—the Oliver Wyman COVID-19 Pandemic Navigator, which forecasts the number of new and cumulative coronavirus cases across nearly 40 countries, incorporating the effectiveness of containment and suppression measures.
Key components of the Crisis War Room
1COVID-19 INSIGHTS ENGINE
The Oliver Wyman COVID-19 Pandemic Navigator reveals where containment and suppression efforts are working, including first-peaks and post-first-peak trajectories on a regional basis. Given the uncertainty in infection trajectories at this point, we think it critical for war room constructs to build access to broad and live datasets that can inform scenario planning. For example, are we seeing a trend in the data that suggests the pandemic can be controlled within a geography through relaxed measures? What can we observe from actions in places that have emerged from the initial epidemic (such as China, Hong Kong, and Singapore) or appear to havea slower spread (such as Japan) that will shape border controls and travel restrictions?
There will be impacts to the supply-demand, the business's liability-side of balance sheet, and the financial market. Our paper further dives into each of these impacts.
3INDUSTRY AND BUSINESS IMPACTS
Financial planning and analysis (FPA) teams have a massive task ahead of them to produce a coherent set of reforecasts for each major COVID-19 scenario, with frequent adjustments as new information emerges on a daily basis. To understand how these drivers play through — and allow for fully-informed decisions — a full-company model is required, capturing contract-level effects on revenues, costs, and solvency, as well as the various corporate overlays (fixed costs, distribution costs, fund and company-level taxes, solvency ladders, and more). The challenge is to get the trade-off right between a rich, detailed, and accurate model and one that can be created quickly and used to provide answers in the same timeframe as decisions are being made. New technologies can help, but this really calls for old-fashioned human judgment.
As crisis impacts are examined and communicated with boards and investors, we expect a much greater focus on value and on managing costs. We think striking the right vision-value balance is critical to the financial-services industry’s future. The pandemic, we believe, will accelerate the trends that were driving industry disruption before the crisis, and will lead to consolidation and a growing gulf between leaders and laggards. And we also believe that incumbents will be in a good position to meet unfulfilled consumer needs by assembling and absorbing fintechs and insurtechs, many of which are unlikely to weather the storm. Effective vision vs. value balance requires action plans that maximize the chances of survival through the short-to-medium term while setting up the business to thrive over the longer term.
We are living through a period of uncertainty and volatility never seen in most of a person's lifetime
The impact of the COVID-19 crisis on human lives and health is nowhere near understood as yet, let alone the way the pandemic will change businesses and our way of life. Undoubtedly, mistakes will be made as businesses try to navigate through this storm.
A robust war room, built on dynamic and real-time COVID-19 scenarios, is a must-have for management teams to manage through the uncertainties of the next 12 to 18 months — and it is likely to prove a valuable ongoing management tool long after the first wave of this crisis is passed.