During this time of great uncertainty—marked by protracted pandemic-related risks, rising geopolitical tensions, expanding cyberthreats, talent market upheavals, and more—senior leaders are sharpening their focus on resilience. What makes some companies so much more resilient than others? How can we build resilience into our organizations? How should we think about potential trade-offs between resilience and more immediately obvious benefits such as speed, efficiency, and cost?
McKinsey recently hosted a virtual leaders’ summit on building resilience in uncertain times. Among the guest speakers was Greg Case, CEO of Aon, a global professional-services firm. Greg is also a member of the company’s board of directors and serves on multiple boards externally. He was interviewed by McKinsey senior partner Alex Singla, global leader of McKinsey Analytics and QuantumBlack.
Alex Singla: Since you became CEO in 2005, Aon has grown tremendously amid unprecedented levels of volatility. To what do you attribute Aon’s resilience?
Greg Case on resilience: Part 1
Greg Case: Resilience is typically defined as a defensive capability that’s needed to “protect the house.” At Aon, we consider resilience a company-building capability, which is a fundamentally different orientation. We define resilience as the ability to take actions at scale that simultaneously defend the house and build the house, and we’ve seen many opportunities to do both during volatile times.
The most compelling and durable source of resilience is organizational. About 15 years ago, we recognized that our clients’ needs were outpacing our ability to innovate, so we took targeted actions to improve. This included making structural changes to operate as a truly global firm, which we call Aon United. Our organizational ability to deliver the best of Aon to our clients globally through this strategy has proven critical to our success. It’s helpful in times of crisis, but, as we’ve learned from our clients, it also enables us to see opportunity where others may see only volatility and risk.
Alex Singla: How do you respond to corporate leaders who question the return on investment in resilience?
Greg Case: It’s natural to ask, “What’s the ROI on resilience?” But, again, that philosophy assumes a discrete investment in resilience, whereas we take a broader view. If resilience drives opportunity in times of volatility, then it’s not ancillary to the core business. Fundamentally, resilience is the business. Having the ability to quickly take action at scale while others are struggling to mobilize opens doors. We certainly saw this during the pandemic when some—but not all—companies acted quickly to defend the house and, in so doing, to also build the house by capturing opportunities that arose in the moment.
Leaders who are unable to link the two may be less resilient than they think in times of unexpected volatility. Those who clearly establish how resilience fits into their core business—and use that understanding to inform better decision making—can most effectively protect and build their businesses.
Alex Singla: Do organizations need to invest more in risk management?
Greg Case: Risk placement as a percent of global GDP increased for 20 straight years from the 1970s to the 1990s. But from the 1990s until today, it has decreased almost every year, despite the proliferation of risks—from aging populations, a higher concentration of people living in high-risk coastal areas, more interconnected companies, and much more. On a proportional basis, risk management and investments are lagging increased volatility. Our mission is to break that 30-year cycle.
Alex Singla: You’ve previously observed that the pandemic has caused a great awakening among CEOs about the next generation of long-tail risks. What did you mean?
Greg Case on resilience: Part 2
Greg Case: Within months of the first case of COVID-19, companies of all sizes and in every global region were confronting unprecedented volatility. This prompted many leaders to deeply consider, perhaps for the first time, the true implications of other long-tail risks. Climate risk, for example, has been on our radar for a long time, but the pandemic’s profound impact on supply chains laid bare what can happen when a massive disruption takes place.
Intangible assets including intellectual property are another category of long-tail risk that companies may be underestimating. Roughly 90 percent of the aggregate value of the world’s companies today is in intangible assets, yet there’s little they can do to accurately value and protect them.
Cyberrisk, which intensified during the pandemic, is another long-tail risk that likely warrants even more attention than many companies are giving it. Whereas these and other long-tail risks were primarily on the minds of risk leaders, COVID-19 has catalyzed CEOs, CFOs, and boards to question how to manage them more actively.
Alex Singla: How can leaders manage disruptions that may be low probability individually but in aggregate are occurring more frequently?
Greg Case on resilience: Part 3
Greg Case: Of the $5 trillion in economic loss from adverse events so far this century, only about 20 percent of that loss was insured. That’s the biggest gap ever, and it’s growing. Every three or four years we’re seeing a once-in-a-100-year event, so we may need a new definition. Adverse weather events caused by global warming, for example, are becoming more frequent. Combine that with the possibility of future pandemics or cyberattacks, and the likelihood of a disruption—no matter what the cause—is increasing. This is challenging for the largest, most sophisticated companies, and even more so for midsize and smaller companies that have fewer options to prepare or protect themselves. It starts with prioritizing resilience backed by risk management strategies that proactively tackle volatility.
Alex Singla: With respect to the climate crisis specifically, what role will insurers play in promoting resilience?
Greg Case: Mounting a resilient response when the next earthquake, flood, or wildfire occurs takes a combination of public and private support. For example, the Pacific Alliance countries of Chile, Colombia, Mexico, and Peru are experiencing more frequent and severe earthquakes than ever before and have struggled to respond due to a lack of financial support. In 2018, they asked the World Bank for help transferring earthquake risk to capital markets. The World Bank responded by issuing a cat [catastrophe] bond that provided $1.36 billion in earthquake cover.
The cat bond attracted more than 45 investors globally, including insurance-linked securities funds, pension funds, and reinsurers. Those responsible for overseeing the disbursements—to rebuild schools, roads, hospitals, and so on—have future climate resilience as a key criterion.
Having proven that this approach to matching capital with risk works, how can we scale it to other countries and companies? How can we apply it, for example, to facilitate the transition of a company’s massive fleet from carbon-based fuel to electric with as little operational impact volatility as possible?
Certainly, insurers have a role to play, but they can’t do it alone. The industry’s balance sheet in aggregate is worth about $4 trillion, compared to $150 trillion for pension funds, sovereign funds, and high-net-worth individuals. If we can mobilize that funding engine, then we can really start to activate the business transition to net-zero emissions and protect countries.