Looking Smart…

…at a $240bn Pharmaceuticals Company

Story: Risk Management and Governance Look Smart at a $240bn Pharmaceutical Company

In 2024, investors openly encouraged companies to strengthen financial resilience. They asked that boards punish CEOs for risk management failures or loss of reputation value. Boards looked for new ways to comply and “look smart” to all of their stakeholders.

Twenty minutes into their weekly lunch meeting, the global pharmaceutical company’s CEO asked her CFO to pause his update.

“I have a risk issue,” she said. “The Chairman called me after an evening event at his club, and told me he learned that one of our main competitors had pulled off a PR-worthy risk management coup.”

“And it’s an issue for you,” the CFO asked.

“There’s more,” the CEO added. “He also caught up with an executive from one of our largest investors who mentioned the same thing, and asked if we intended to follow our competitor’s lead.”

The CFO sat back in his chair. “So what is this risk management coup?”

“I’d like you to find out,” the CEO said. “They’re calling it ‘Business Resilience Insurance,’ and since they pulled the trigger, their stock price is up 26%…and the Chairman emphasized that it makes their board look really smart. Even he was impressed.”

“Got it”, said the CFO as he headed out of the executive dining suite and straight to meet with the Risk Officer, who was, thankfully, in his office.

“Yeah, I just read about it in one of the insurance captive’s magazines,” the Risk Officer replied after the CFO told him what he’d just been told. “The funny thing is that there is no mention of insurance limits in any of the stories on this risk management coup, and yet the value boost is large,” he continued.

“Typically, risk management breakthroughs that mitigate mission-critical risks and make reputations more resilient can be expected to raise equity value by 9% on average. An uptick of 26% is wild, but the timing and share trading volumes fit.”

“What could they have possibly done,” the CFO asked.

The Risk Officer smiled. “They turned their risk management into a strategic advantage. They told the world they recognized that supply chain, product recall, and reputation were mission critical risks to their business resilience…and then they insured all three in their captive under some structure, and then validated the quality of their risk management efforts with outcome-based reinsurance.”

“Well, that sounds smart,” the CFO said. “Where’d they buy the insurance?”

“They didn’t,” the Risk Officer said. Now was his turn to sit back in his chair.
“They built it, from scratch, pulling together separate players and probably spending over a year to do it.”

The CFO let out a long sigh. “The CEO doesn’t have a year to wait and, frankly, pulling together some novel, bespoke deal to manage risk sounds pretty risky to me. And expensive.”

“We don’t have to,” the Risk Officer said. “Our ERM is solid. We have most of our mission-critical risks in our captive already. For reputation risk, there’s a market-ready outcome-based parametric insurance solution backed by Lloyd’s that also covers differences in conditions. We can use it to both cover reputation risk in our captive and reinsure the captive-based package…and call it our own reinsurance-authenticated ‘Business Resilience solution’.”

“What are the limits of this parametric reputation insurance?” asked the CFO.

“I don’t think it matters,” said the Risk Officer. “From what I am reading, it’s not about insurance costs or limits. The value boost comes from telling a simple, convincing story about mission-critical risk management. Our investors see how we are strengthening financial resilience without the high costs of enormous insurance limits.’

The CFO didn’t believe it. “ So we don’t specify the amount of balance sheet protection?”

“Nope,” the Risk Officer replied. “Considering the stock price jump and confidence of the Chairman’s friend at the club, the data speaks for itself.”

“Good point,” the CFO conceded. “So, you’re telling me we can look smart with a plan for our mission-critical risks, our captive, reinsurance with parametric reputation insurance, and risk management processes in a week instead of a year?”

“Maybe weeks, but yeah,” the Risk Officer replied. “And the pieces will come already integrated, so we can hit the ground running communicating it to our stakeholders.”

The CFO stood and opened the door and then turned around.

“Also, if limits aren’t a factor, see if you can keep the costs down. I like small denominators when I am calculating ROI for the CEO and board. And get the rough framework of the plan and numbers to me by the end of the week, please, in case our CEO gets a probing call from a large investor or runs into another friend at the club.”

“I can do that,” the Risk Officer said through a smile.

With reputation risk forecasting, management, and insurance, Steel City Re helps companies build and prove to stakeholders their thoughtful risk management and dutiful governance over all that is mission-critical. It is an authenticated story stakeholders can appreciate and value.

Not to be outclassed as investors comment on Astrazeneca PLC’s brilliant resilience insurance solution and remarkable equity bump, a competitor takes action. Read the story or listen to the the episode in 5-Minute Adventures in Risk and Resilience linked below.
Listen to the Risk Manager’s success story in 5-Minute Adventures in Risk and Resilience.
Steel City Re’s Resilience Monitor for AstraZenenca PLC 10 May 2024 showing the performance of the reputation value metrics and equity more than two months after binding a resilience solution for mission-critical risks. Click on the image above for the report.
Two month performance of Astrazeneca PLC’s equity showing its outperformance following binding of a clever insurance solution. Click on the image above for a larger view of the chart.
Michael Spence developed the theory of “signaling” to show how better-informed individuals in the market communicate their information to the less well informed. This theory underpins many strategies that seek to elevate and differentiate products and services to enhance value. Click on the image above for the full article.

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