On Aon Podcast: The Rising Risks of Human Capital

February 13, 2024 14 mins

On Aon Podcast: The Rising Risks of Human Capital with Joe Peiser and Lambros Lambrou

Episode 67: Our Aon experts look into the survey results and the rising risk of human capital, climate, cyber risk and AI.

Key Takeaways

In this episode, Aon experts identify the characteristics, key topics and demographics of the GRMS.
Aon experts discuss the impacts of climate as a key consideration in risk mitigation plans.
Episode 67 provides insights into the severity of cyber threats to an organization.

Intro:
Welcome to “On Aon,” an award-winning podcast featuring conversations between colleagues on, well, Aon. This week, we hear from Lambros Lambrou for a discussion on Aon’s GRMS results and the rising risk of human capital. And now, this week’s host, Joe Peiser.

Joe Peiser:
Hi, my name is Joe Peiser and I'm the CEO of Commercial Risk at Aon. Today, we're talking about the 2023 Global Risk Management Survey, or the GRMS, as we call it. The GRMS is conducted every two years. The survey is designed to assess business leaders' attitudes to risk and risk management in general. The newest report gathered data from almost 3000 decision makers, including risk managers, C-suite leaders, treasurers, human resource and talent professionals. And they're from 16 industry clusters, which include companies in 61 countries around the world.

The results provide firsthand insight into the key risks on business leaders' minds and the steps they're taking to manage them. This year's survey found that failure to attract and retain talent reached its highest ever ranking, establishing human capital as a key business risk across all buyer groups. With me today to discuss this rising risk of human capital is Lambros Lambrou, the CEO of Human Capital at Aon. Thanks for being here today. Lambros.

Lambros Lambrou:
Happy to be here, Joe, really looking forward to the discussion.

Joe Peiser:
In our discussion, Lambros, we're going to walk through several questions on human capital, but we'll also touch on climate risk, cyber risk, and artificial intelligence. So let's get started. This year's report found that human capital issues are no longer just a people problem. What did the report show us and why is that important?

Lambros Lambrou:
Thank you, Joe. Human capital issues are a key business risk that can hamper innovation and competitiveness. In 2023, attracting and retaining top talent ranked fourth globally in the survey. In 2021, it wasn't even in the top 20. So this demonstrates a shift in how risk managers are now viewing human capital. And this underpins the fact not only are specific people related risks are on the rise, but there is increasingly a human element in traditional risks, thereby intensifying many other business challenges.

For example, significant shortfalls in talent, workforce and critical specialized skills. It can increase exposure to cyber attacks, regulatory breaches, supply chain issues, business interruption and reputational damage. And in roles requiring specialized skills, the competition for talent is so intense that some businesses and even entire sectors are lagging behind. Let's take the 200,000 registered nurses that left the US workforce between 2020 and 2022.

This could impact service levels and patient care and increase in organization's risk of exposure to medical malpractice and the ensuing reputation and finance impacts of that. So, when you take a step back and look at the macro drivers, the war on talent and the affordability issues associated with increasing costs versus meeting the ever more tailored employee value proposition expectations, most CEOs now have talent strategies as one of their top priorities today.

And in support of that, the HR buyer is becoming more of a strategic role and asset for their leadership teams as they work across organizations. This is likely to increase the awareness of the human element to risk, and so we expect human capital risks to continue to increase in ranking in future risk surveys. More than ever, there is greater awareness around the connectivity between an organization's risk and people strategy and the implications that they can collectively as well as individually impact business performance.

Joe Peiser:
That's great insight, Lambros. Next question. While the report showed how important human capital risks are, interestingly, it also showed that only 11 percent of survey respondents have quantified the risk of attracting and retaining top talent. What do you think the challenges are to quantifying that risk

Lambros Lambrou:
Thanks, Joe. It's interesting that through COVID, the virtual nature of working brought leadership teams together to problem solve in real time. That created greater awareness of risk and people issues for leadership teams and the interconnected nature of these issues as opportunities and challenges. But the 11 percent shows that there is still a significant gap between risk awareness and risk preparedness. And it makes sense. It's a massive challenge to calculate the true impact of highly complex human capital risks.

Because, while data and analytics can be helpful, you also must consider the human element such as the expectations of the employee from their employer, which have risen so significantly since the pandemic. Today we know that employees are focusing more on the purpose and impact of their employment, looking at their employers with a more critical lens. Which then puts pressure on organizations to reset for relevance, to focus not only on profits, but also on people and purpose in order to create truly sustainable and successful business models.

Employers see this and need the role of HR to evolve, to keep pace with the rate of change impacting their workforce. Today, nearly 90 percent of companies say their HR functions need to adapt. And so, when you layer on the pressure of high inflationary environment, medical costs rising even faster. Organizations are increasingly focused on how to achieve the highest return on their talent strategies through optimizing their total rewards and differentiating their employee value proposition.

Because for employees, wellbeing and wellness are priorities across physical, emotional, social, and financial pillars. Unequal pay, uneven financial education and challenges in health equity are driving an increasing health wealth gap. Variations in workforce populations and where and how work is done are underpinning a reset in tailored employee needs and expectations. And finally, aging populations are increasing their demand for health services.

Joe Peiser:
Thank you for that. It is complex, isn't it? I'm going to switch gears now, Lambros. Climate change, it's not in the top 10 global risk list, and that's despite constant media coverage and adverse weather events that are increasing in frequency and severity. Do you think this is a case of company leaders just thinking about this differently? For example, is it that they're focused on climate transition risk versus the impact of climate change? And is that what prevents this from being in the top 10?

Lambros Lambrou:
Joe, I was surprised to see that climate did not make the top 10 list. I feel that it should have, given that the reality is that climate change is a root cause of so many risks in the GRMS survey. As a standalone concern, our clients have not highlighted climate, but we know that in order to address and mitigate our client's top concerns, climate insights and solutions are required as managing climate risk can deliver significant benefits to our clients across a range of risk considerations and create growth.

So when we look at the top 10 risks, the following seven are directly aggravated by and or caused by climate change drivers, business interruption, failure to attract and retain top talent, regulatory and/or legislative changes, supply chain or disruption failure, commodity price risk, scarcity of materials, damage to reputation and brand, failure to innovate and meet customer needs. And when you look more deeply, even more comes to light. So, let's take supply chain. Climate change can impact sites at different stages of a supply chain exposed to climate related perils.

Extreme weather events like flooding can damage key facilities, disrupt travel, cut off-key resources and materials. And additionally, rising sea levels can disrupt coastal infrastructure highly utilized by global supply chains. Now, to put this in context, according to a recent study, climate risk is estimated to cause $7.6 billion worth of losses for ports each year, a staggering amount. So, I think it's clear that although it may not be top of mind risk for our clients currently, it really should be a consideration in any organization's risk mitigation plan.

Joe Peiser:
Indeed, Lambros, not surprising to me, the number one global risk is cyber attacks. Would you agree with that and what would your top risk have been?

Lambros Lambrou:
That's a great question, Joe. I mean, I think that given that cyber spans across both traditional and people risks and can be defined as the risk of financial loss, business interruption, or damage to an organization from some failure connected to its information or operational technology systems, I think it is well-placed in the number one spot. In working with clients, particularly ones in the C-suite, we saw that they came to the stark realization that cyber events had the potential to impact all areas of their business.

Consequentially, achieving cyber resilience is a recurring theme in boardroom discussions, and the threat is finally being considered from a holistic risk perspective. Navigating the path towards achieving cyber and ultimately, business resilience is a significant challenge for any organization. Resilience is an essential component to help minimize risk from a financial, operational, and reputational perspective. It demands a holistic view that connects proactive risk management, response preparation and risk transfer mechanisms.

But cyber risk goes far beyond technology. Cyber is, among others, a holistic and enterprise risk that poses a financial, operational, people, regulatory and even catastrophic threat to all organizations regardless of size or sector. And as such, understanding an organization's business drivers and the daily decisions related to them often proves the critical link towards managing the journey to achieving holistic and sustainable cyber resilience.

Joe Peiser:
The final question I have is about artificial intelligence. AI is ranked 49 globally in the current risk ranking, but it rises to number 17 in the future risk ranking. This signals to me that while organizations recognize AI's economic potential and they're embracing new technologies to fuel growth. They also recognize the potential cybersecurity, legal, operational, and human capital risks it brings. What have you heard from our clients in this regard?

Lambros Lambrou:
So, Joe, in general, I'd say accelerated digitization gives rise to some of the risks that businesses across the globe are most concerned about. Artificial intelligence is a great example of a risk that impacts an organization's workforce both directly and indirectly. Automation and AI will create a significant number of new jobs that will require differentiated skills to fulfill. And conversely, millions of jobs will become obsolete over time.

And this means that organizations can lean into the AI opportunity through re-skilling and/or up-skilling their current workforces to adapt to new business and operating models. And with the labor market more fluid than ever, investment in the right talent goes hand in hand with the adoption of AI to be successful.

Joe Peiser:
Well, that's a wrap, Lambros. Thanks so much for joining us today. That's our show for today. Thank you all for listening. In the next months, we'll have episodes covering climate risk, workforce wellbeing, ESG trends and more. So, until next time, thanks again.

Outro:
This has been a conversation “On Aon” and the rising risk of human capital. Thank you for listening. If you enjoyed this latest episode, tune in soon for our next edition. You can also check out past episodes on Simplecast. To learn more about Aon, its colleagues, solutions and news, check out our show notes, and visit our website at Aon dot com.

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