Business interruption still tops corporates’ risk agenda

Businesses globally are less concerned about the impact of traditional industrial risks such as natural catastrophes or fire, but are increasingly worried about the impact of other disruptive events, fierce competition in their markets and cyber incidents according to Allianz.

The German insurance giant has issued the Allianz Risk Barometer 2016, the fifth annual survey on corporate risks published by Allianz Global Corporate & Specialty (AGCS), which surveyed over 800 risk managers and insurance experts from more than 40 countries.

The 2016 edition finds that the risk landscape for businesses is substantially changing. While business and supply chain interruption (BI) remains the top risk for businesses globally for the fourth year in succession, many companies are concerned that BI losses, which usually result from property damage, will increasingly be driven by cyberattacks, technical failure or geopolitical instability as new “non-physical damage” causes of disruption.

Allianz notes that two major risers in this year’s Risk Barometer feature in the top three corporate risks for the first time, with market developments ranking second and cyber incidents third. The latter are also cited as the most important long-term risk for companies in the next 10 years. In contrast, natural catastrophes drops two positions to fourth year-on-year (YoY), reflecting the fact that losses from natural disasters in 2015 reached their lowest level since 2009.

“The corporate risk landscape is changing as many industrial sectors are undergoing a fundamental transformation,” says AGCS chief executive (CEO) Chris Fischer Hirs.

“New technologies, increasing digitalisation and the ‘Internet of Things’ are changing customer behaviour, industrial operations and business models, bringing a wealth of opportunities, but also raising awareness of the need for an enterprise-wide response to new challenges.”

A challenging environment

Just over one in three responses to the latest Index cited market developments such as intensified competition or market volatility/stagnation as one of the three most important business risks in 2016, ranking this new survey category as the second top peril overall.

Market developments are a particular concern in the engineering, financial services, manufacturing, marine and shipping, pharmaceutical and transportation sectors, where this risk ranks among the top three business risks respectively. In addition, this risk ranks as a top two concern in Europe, Asia Pacific, Africa and the Middle East.

The insurer reports that many businesses face a growing number of challenges, which threaten their profitability and possibly also their business models.

“Businesses constantly have to be on their toes, turning out new products, services or solutions in order to stay relevant to the customer and to thrive in this rapidly changing and globally competitive environment,” says Bettina Stoob, head of innovation at AGCS.

“Innovation cycles are becoming rapidly shorter; market entry barriers are coming down; increasing digitalisation and new “disruptive” technologies have to be quickly adopted while potentially more agile start-ups are entering the game.”

At the same time businesses must also comply with changing or enforced regulation, increasing safety requirements or import/export restrictions.

Sophisticated cyberattacks

Another area of increasing concern for businesses globally are cyber incidents, including cybercrime or data breaches as well as technical IT failures. Cyber incidents gained 11 percentage points year-on-year to move from fifth position into the top three global risks for the first time (28% of responses). In the UK, cyber incidents have leapt to the top of the risk table from third place with 65% of responses.

For the first survey back in 2011, cyber incidents were identified as a risk by just 1% of global responses. Loss of reputation (69%) is cited as the main cause of economic loss for businesses after a cyber incident, followed by BI (60%) and liability claims after a data breach (52%).

Companies are also increasingly concerned by the growing sophistication of cyberattacks. “Attacks by hackers are becoming more target-oriented, lasting for longer and can trigger a continuous penetration”, says Jens Krickhahn, cyber insurance expert at AGCS.

“Studies show that it takes, on average, 90 days for businesses to discover they have been hacked. Often the incident is identified, not by the business itself, but by the customer or another stakeholder, which is another reason why cyber risks pose a huge threat to a company’s reputation.”

Companies are warned that while cyberattacks are becoming more frequent and more severe, they should also not underestimate the impact of an operational failure in today’s highly digital and connected industries. “A simple technical failure or user error can result in a major IT system outage disrupting supply chains or production,” says Volker Muench, AGCS expert for property underwriting. Krickhahn adds that early warning and better monitoring systems are essential in preventing large cyber BI losses.

Geopolitical instability

Noting that BI remains the top peril in its latest Risk Barometer for the fourth successive year, with 38% of responses, the insurer adds that BI losses for businesses are increasing, typically accounting for a much higher proportion of the overall loss than a decade ago and often substantially exceeding the direct property loss.

Responses show that the major causes of BI feared most by companies are natural catastrophes (51%) and fire/explosion (46%). However, multinational companies (MNCs) are also increasingly worried about the disruptive impact of geopolitical instability as war or upheaval could impact their supply chains or their staff or assets could suffer from acts of terrorism.

Answers from UK respondents show that despite substantial political and financial effort there is still uncertainty regarding the eurozone disintegration. British voters could be voting as early as this summer in a referendum to decide whether the UK will remain a eurozone member. The outcome remains to be seen but the uncertainty is rising on the risk register having entered the UK resulting for the first time.

“Businesses need to prepare for a wider range of disruptive forces in 2016 and beyond,” says Axel Theis, member of the board of management, Allianz SE. “The increasing impacts of globalisation, digitalisation and technological innovation pose fundamental challenges.”

To read a recent related article, ‘Interdependency fuels business interruption claims’, click here.

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