Business and supply chain interruption, natural disasters and fire and explosion have been identified by more than 500 corporate and industrial insurance experts across the Allianz Group as key risks that companies in particular regions and sectors face in 2013.
Fire has sparked new interest, moving up on the risk manager’s agenda from tenth in 2011 to third in 2012, notes Allianz Risk Barometer 2013, a survey conducted last fall by Allianz Global Corporate & Specialty (AGCS) and released yesterday. (Although there were 529 respondents from 28 countries, since multiple answers for up to industries were possible, 843 answers were delivered.)
“Its resurgence in this year’s survey shows that companies should not compromise their fire protection systems due to economic pressures,” says Thomas Varney, head of risk consulting, Americas for AGCS, which provides insurance and risk management support across the spectrum of marine, aviation and corporate business.
Varney points to AGCS loss statistics, which show that of fire caused six of the seven large industrial property losses exceeding $US13 million each in 2012. “Fires are relatively rare, but can cause high property and business interruption claims especially in manufacturing industries,” he notes in the AGCS statement.
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Business interruption is also associated with natural disasters, losses from which appear on the rise. “Insurance claims caused by natural disasters have risen 15-fold over the past 30 years,” Varney says. “And they will continue to grow because of the increase in insured assets in Asia, in particular, and the ongoing shift towards development in high-risk coastal regions.”
Many of the world’s million-strong cities are not sufficiently equipped to cope with storms, Allianz Re meteorologist Markus Stowasser states in the survey report, Allianz Risk Pulse, Focus: Business Risks. “What is more, as global warming progresses, there is a risk that sea levels will rise in the future. This means that in the worst-case scenario, the potential economic damage caused by a very strong hurricane in the New York metropolitan area could rise to trillions of U.S. dollars by 2050 without mitigation measures,” Stowasser predicts.
Despite how natural catastrophes can influence business operations, as recently demonstrated with Hurricane Sandy, companies appear to be poorly prepared for certain types of business interruption. These include IT failures and power outages, both of which poll results show businesses widely underestimate.
IT failures can carry high economic losses in an increasingly digitized economy, but just 6% of polled Allianz experts report their clients are truly aware of this risk. With regard to supra-regional power blackout, the AGCS statement notes that “the impacts are much higher today than 10 to 15 years ago due to the high dependence on information and communication technologies and the lack of preparedness on the part of businesses.”
Looking forward, Michael Bruch, head of R&D risk consulting at AGCS, points out that “reliability of power supply will decrease in the future due to aging infrastructure and the lack of substantial investments.”
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It is also important to consider the effect that cost-cutting efforts can have. AGCS reports that by choosing to run lean global supply chains to reduce costs, many companies lack sufficient alternative suppliers.
“The flooding disaster in Thailand showed that business interruption at a key supplier can cause a ripple effect felt across an entire industry,” Timon Mueller, head of property underwriting for AGCS, notes in the company statement.
“Due to slow growth in their home markets, American manufacturing and technology companies are forced to look for new revenue sources, for instance by sourcing in emerging markets,” Varney adds.
“The flexibility that provides a modern supply chain with its cost advantages has also created its inherent vulnerability,” Paul Carter, global head of risk consulting at AGCS, says in the survey report. “Checking a supplier’s own business continuity planning should also be embedded in the supplier selection process and, ideally, include even the suppliers of the primary suppliers,” the report adds.
Overall, Allianz experts identify the top risks for 2013 as follows: business interruption, supply chain risk – 45.7%; natural catastrophes – 43.9%; fire, explosion – 30.6%; changes in legislation and regulation – 17.1%; intensified competition – 16.6%; quality deficiencies, serial defects – 13.4%; market fluctuations, 12.6%; market stagnation or decline – 12.3%; Eurozone breakdown, – 12.1%; and loss of reputation or brand value – 10.4%.
A similar survey conducted in 2011 identified economic risk as the most pressing concern, followed by business interruption and natural catastrophes.
Looking at specific regions, the most important risks for businesses in the U.S. and Canada were as follows: business interruption, supply chain risk – 54.8%; natural catastrophes – 53%; fire, explosion – 31.9%; intensified competition – 24.7%; changes in legislation and regulation – 22.3%; market fluctuations, 12%; theft, fraud, corruption – 12%; loss of reputation or brand value – 12%; commodity price increases – 8.4%; and credit availability – 7.2%.