Recording the Cost of the Coronavirus Pandemic – Early Days

By Dr.Luke Carrivick, Research & Information Director at ORX, the world’s largest operational risk association

To support its membership of over 100+ banks, insurers and asset managers with responding to the challenges posed by COVID‐19 (coronavirus), ORX has hosted two discussion calls each week where senior operational risk professionals meet to share insights, ideas and practice.

Understanding the true financial cost of coronavirus is central to assessing its impact. For such a wide‐ranging crisis, there is a challenge both of scope – in collecting information from every area of an organisation – and of definition – deciding what is and is not a genuine impact of coronavirus.

This has led to a variety of approaches such as centralised or decentralised, and broad or focused models for gathering data.

As we are all unlikely to return to the same working environment, there is also a conceptual challenge. What would normally be considered an operational risk loss, measured as a cost of returning to a prior or modified operating state, may simply be considered a cost of doing business in a ‘new normal’. Raising the fundamental question of: how long, if at all, should response costs constitute a loss?

Members are all still at an early stage of identifying and capturing operational risk losses for coronavirus. All reported that they had not seen significant general increases in operational risk losses, but many cautioned that it was still early in the process and losses may yet materialise. There is also the potential risk of under‐reporting due to operational disruptions. The crisis is ongoing, and challenges with the identification and aggregation of losses make the total cost of the crisis very difficult to assess.

Practically capturing and classifying the cost of the pandemic

One of the main challenges facing firms when it comes to recording the cost of the coronavirus crisis is deciding what information they should capture. From this discussion with our members it appears that there are two approaches:

• Broad and swift: The first is to provide employees with a broad set of guidelines instructing
  

  Dr.Luke Carrivick

  them to capture anything that could be related to the coronavirus pandemic, then to sort and aggregate them at a later stage. A key benefit of this approach is that it should theoretically give a more complete picture of the cost of the pandemic, and a broader range of data will be available to draw from later. The downside is that this method is more labour intensive, and those responsible may not have the resources while focusing on customer facing activities.

• Focused and measured: The second approach involves taking time to develop a more concrete set of guidelines on what exactly to capture and how to do so. This may also include holding off activities, for example making system changes such as implementing a coronavirus event tag. This approach has the benefit of requiring less processing of information afterwards, but the downside is that certain early‐stage impacts may be missed.

Top‐down or bottom‐up?

Another key question surrounding data collection is whether to collect information at the individual business level (bottom‐up or decentralised approach), or whether to record events from a groupwide perspective (top‐down or centralised approach). Certain types of information are better suited to one of these approaches – a common example is IT costs that are more likely to be collated centrally. In most cases, a hybrid approach is needed, with the majority of direct losses being captured centrally, and indirect losses and other impacts being captured from within the business units.

Aggregating the loss

Firms are considering how best to aggregate and report losses. Some said that they will likely aggregate direct losses into a single event to be recorded as “Natural Disasters & Other Events, and the broad group of secondary or indirect losses will be individually tagged with a coronavirus flag.

Timing also presents a fundamental issue for aggregation – at what point do we stop associating losses with the pandemic itself, as opposed to expenses in the ‘new normal’? Are costs incurred genuine operational risk losses, accelerated investments, or simply the true costs of operating?

Members offered some guiding principles on when losses should just become costs of doing business in the ‘new normal’, such as when public health agencies declare the pandemic to be over, and when direct costs are featured in operating budgets