What’s at the End of the Covid Tunnel?
Even as we begin to emerge from the health crisis, the light at the end of the tunnel may very well be a politics-fueled train.
Now that public health agencies and other organizations have distributed nearly 3 billion doses of 10 different Covid-19 vaccines across more than 100 countries, and as the World Health Organization (WHO) reports that the number of new cases worldwide is continuing to decline, could there be a light at the end of the tunnel?
Many people think so. Dr. Anthony Fauci, the leading infectious disease expert in the United States, has said that by the end of 2021, life in the U.S. could approach a level of normalcy. But for businesses, this “level of normalcy” prediction may be too optimistic. In fact, the light at the end of the tunnel may very well be a train.
Evidence does not suggest that uncertainty will subside at the same pace as Covid-19 cases decline. The reality is that businesses are coming out of the pandemic economy at a very difficult and precarious time that is ripe with social angst over political parties that take diametrically opposed, intractable positions on nearly every issue.
The current “cancel culture” has sparked valuable discourse and change. However, the prospect of being canceled is a minefield for businesses. When companies find themselves on the receiving end of a barrage of judgment, they may experience severe reputational damage, and the fallout might decimate their bottom line.
According to a study by Edelman, 64 percent of consumers around the world will buy or boycott a brand solely because of its position on a social or political issue. In March, Goya Foods came under fire after its CEO claimed former President Donald Trump was “the real, the legitimate, and still the actual president of the United States.” Celebrities and social media personalities vowed to stop supporting the brand. Quaker Oats’ Aunt Jemima brand and Mars’ Uncle Ben brand were also recently canceled after claims of racism: Quaker Oats retired the Aunt Jemima name, and Uncle Ben changed to just Ben.
In addition to the possibility that they will get canceled, businesses currently face risks associated with civil unrest. The Covid dialogue appears to have increased to the political and social divides that were already gaping two years ago. People are either worried or not worried about the disease, pro-mask or anti-mask, trusting of the government or distrusting, wanting businesses open or closed, and wanting students to attend classes either in person or virtually.
These differences have partisan implications. A paper by Brookings that incorporated Gallup survey responses from 50,000 adults describes how states won by Hillary Clinton have been far more likely to accept mask mandates, social distancing, and limitations on social gatherings. The result has been an escalation in unrest.
Unlike many prior periods of civil unrest characterized by peaceful protests, strikes, and “sit-ins,” more recent civil unrest has been characterized by violence, bodily injury, wanton property damage, and looting. These are not the only costs. In some cases, the unrest has created a barrier to entry for businesses trying to get off the ground or move into a new area, and in some cases it has even forced established businesses to shut down.
The United States is not the only nation facing these challenges. According to data in Global Trade Review magazine, 46 countries have experienced civil unrest in the past 18 months, driven largely by perceived social inequalities.
As businesses seek a return to normalcy, executives need to consider not just the external sociopolitical climate, but also the internal repercussions facing their workforce. Covid-19 has taken a toll on mental health. Four in 10 adults have reported anxiety or depression, up from 1 in 10 prior to Covid, and 40 percent have said their activity level fell, while 30 percent took a leave of absence due to Covid, according to a World Economic Forum–Ipsos survey. Workers reported difficulty sleeping and eating, as well as increased alcohol intake and substance abuse. These problems, combined with the challenge of moving to a remote work model and then re-entering office spaces, could create an unstable environment. Employers need to prioritize mental health, while also seeking ways to diminish the risk of workplace violence.
What Are Businesses to Do?
With all this in mind, there’s reason to believe the light at the end of the tunnel is a train. It’s important to keep in mind, though, that we don’t know what type of train it will be. Risks like a pandemic, cancel culture, civil unrest, and mental health crises or workplace violence are all extremely complex, and are nearly impossible to predict. This complicates the question of what business leaders can do to mitigate potentially detrimental outcomes.
1. Have a plan. If your organization faces a threat or business interruption, how will you keep up day-to-day operations? Preventing disruption is key, since an interruption of daily business activity would likely mean lost revenue and reduced profit. Still, 51 percent of organizations around the world do not have a business continuity plan, according to a study based on Mercer’s Business Responses to the Covid-19 Outbreak Survey.
A business continuity plan is a document that provides a framework for addressing how to operate during a disaster, how to communicate, and how to recover. Covid-19 has shown many businesses the fallout from not having a business continuity plan. Now is the time to start planning for the next crisis.
A sound plan starts with an evaluation of the risks and exposures that are unique to the business. This evaluation (or risk assessment) is a great opportunity for treasury, finance, and risk professionals to collaborate with other key stakeholders throughout the business to identify vulnerabilities and determine the potential impact of interruptions to critical business processes. Developing a business continuity plan gives executives a chance to think outside the box and expand conversations about business resiliency beyond rote responses to the standard set of hazards.
2. Have enough funds to cover operating expenses for a predetermined time period. During a time of crisis, businesses need to retain a larger-than-usual percentage of current assets or liquidity to cover payroll, utility bills, inventory, and other expenses in case revenue takes a hit. At a minimum, every company should be prepared to withstand a 40 percent decrease in revenue for a 12-month period.
Another factor that risk managers should consider in these calculations: A crisis may mean higher-than-normal insurance claims and the possibility of losses. Thus, holding more cash might make a significant difference in the company’s ability to remain solvent, and might enable the business to ride out the period of uncertainty.
3. Review insurance policies. During Covid-19, many businesses found themselves in a challenging environment when their pandemic-related insurance claims were denied. It’s important to review insurance policies regularly. At this moment in time, part of that review should entail finding out whether the policy covers reputational damage related to publicly getting “canceled,” and whether it covers workplace violence.
Commercial insurance policy exclusions may leave gaps in coverage. That’s why it’s important for risk managers to assess the risks the business could potentially face, and identify which risks it may be uninsured or underinsured for.
4. Consider a captive insurance company. Insurance is a primary means for businesses to mitigate risks, especially complex ones. Commercial property insurance is essential but is often expensive and sometimes doesn’t go far enough. Commercial policies often exclude pandemics, business interruption due to civil unrest, reputational damage, workplace violence, and various natural disasters as well. Some of these gaps can be closed by purchasing additional insurance, but insurance isn’t always available, and if it can be found, it may be very expensive. Furthermore, an unexpected policy exclusion can be devastating and result in denial of a claim.
One option in the alternative risk transfer market is a captive insurance company. A captive can write coverage to fill the gaps or exclusions in an insurance policy, so it effectively prepares the organization for the unforeseen. As licensed insurance companies, captives can gain access to reinsurance pools or reinsurance markets to provide a backstop for the risks they insure. And, just like commercial insurance companies, captives receive favorable tax treatment to help them accumulate assets to back corresponding loss reserves. (Any captive insurer assets backing loss reserves that are not paid out in claims or expenses accumulate from year to year. These accumulated assets can pay claims to the business in the event of an insured loss and provide a powerful defense against the unexpected.)
Whatever strategy a company settles on to prepare for and mitigate the complex risks we’re all facing right now, this is a great time for treasury, finance, and risk managers to evaluate whether their business is truly prepared to learn what the light at the end of the Covid tunnel might be. Start planning today to mitigate the risks ahead—and maybe the train can be stopped before damage is done.