Business Case

Allianz Global Corporate & Specialty (AGCS) recently announced the top business risks for 2014, and once again, natural catastrophes and business interruption (BI)/supply chain top the list of risks for Canadian companies. The third annual Allianz Risk Barometer surveyed more than 400 corporate insurance experts – including risk consultants, underwriters, senior managers and claims experts – from 33 countries.

The Canadian survey included a dozen risk and insurance professionals who work with over half of the top 100 companies in Canada across all major industries and geographic regions.

The AGCS survey highlights the increasing complexity of business risks, including a combination of new technological-, economic- and regulatory-related risks, potentially creating a systemic threat for businesses. Canadian companies need to respond to these growing challenges through stronger internal controls, combined with a holistic approach to risk management.

NATURAL CATASTROPHES DOMINATE

It is no surprise that natural catastrophes continue to dominate the top spot in business risks for Canadian companies. The devastating floods in Alberta last June cost insurers $1.74 billion in damages, the Insurance Bureau of Canada has reported. And barely a month later, Toronto experienced unprecedented flooding resulting in insured losses of $940 million.

Globally, Swiss Re reports natural catastrophes accounted for insured losses of approximately $41 billion in 2013 and occupy the number two spot on Allianz’s global risk barometer rankings as more countries adjust to this new normal of extreme weather patterns.

As the increase in the number of extreme weather events around the globe demonstrates, climate change is becoming more specific and threatening. Many industry experts would likely agree more needs to be done in terms of prevention, than to rebuild what has been destroyed after each disaster.

The 10 most costly insured catastrophe losses during 2013 were all weather-related events, which offers a stark reminder that volatile weather activity is increasing around the world.

Allianz research shows that insurers have paid out more than $75 billion for damages from extreme weather events globally every year for the last three years alone. In the 1980s, about $16 billion a year was paid out for such claims.

There are four key steps that businesses can implement now to be better prepared for future extreme weather events: update and test emergency preparedness plans; review business contingency plans; understand the company’s insurance policy; and know what to prepare for.

BUSINESS INTERRUPTION A GROWING CONCERN

The second most frequently cited business risk in 2014 for Canadian companies is business interruption and supply chain losses, which account for around 50% to 70% of all insured property losses, as much as $28 billion a year based on 2013 data from AGCS. These risks are ranked number one in the global results, including in the United States, where more than 60% of participants identified them as the top business risk in 2014.

Businesses in Canada are discovering that supply chains are becoming increasingly complex in a globalized world. Any disruption – be it due to natural catastrophes, IT/telecommunication outages, transportation issues, a supplier’s bankruptcy or civil unrest – may lead to a snowball effect that can be devastating to their bottom lines.

Business continuity planning is critical and should be part of any risk manager’s supplier selection process. But it is no longer enough to have transparency of an organization’s most important suppliers; it is also necessary to know how they manage their own supply chains.

Today’s global supply chains work to an ever-tighter set of interdependencies, where “just-in-time” and “lean manufacturing” have become standard practices. This evolution – coupled with an increasing trend among companies to source globally and a rise in disruptive natural catastrophes (often in those areas where new supply capacity has been developed) – has led to growth in BI and contingent BI.

Supply chains have evolved over the past two generations to become increasingly complex. In addition to natural catastrophes, they are also at risk from other perils, like IT or telecommunications outages, transportation network disruptions and civil unrest. As a result, insurers are beginning to put much greater weight on supply chain risk when underwriting large industrial risks.

Business continuity planning should be an integral part of any company’s procurement and selection process. However, without adequate data, it is not possible to identify hotspots within a supply chain. Therefore, data transparency between clients and insurers will become an increasingly important part of any supply chain analysis.

INTERCONNECTIVITY OF RISK INCREASES

While there is a broader range of risks in the 2014 results than in the past, the survey revealed an increased interconnectivity and dependency of different risks. The global risk landscape continues to evolve and is increasingly complex due to the growing interdependency of different industries and processes. This, combined with inadequate internal processes, equates to an increasing need for deployment of holistic, state-of-the art risk management and mitigation strategies.

Today’s business continuity plans must prepare for an increasing range of risk scenarios, which need to reflect the sometimes hidden knock-on effects. For example, a natural catastrophe can result in BI, systems failure, power blackouts and a host of other perils.

It is critical that companies review their business continuity plans with their insurance partners to ensure they account for different risk scenarios that reflect these hidden incidental effects.

EMERGING RISKS IN 2014

Cyber and loss of reputation issues were identified as emerging risks on this year’s risk barometer, as risk managers worldwide are increasingly on red alert about the threat that such fast-evolving, high-tech perils pose. Cyber risk is the biggest mover in this year’s global results, making the top 10 for the first time.

And while cyber crime ranked as the sixth business risk for North and South America, it did not rank in the top 10 in the Canadian results. This may be because the Canadian authorities have not yet implemented the same requirements for companies to have cyber risk coverage as other countries have in place. Allianz expects this to change over the coming months.

Amid rising cyber criminality, IT security is not enough. A comprehensive set of information and network security policies and procedures backed by the board of directors is essential. They also need to be properly implemented, tested and updated on a regular basis to ensure that the risk management approach is adequate.

RISKS VARY BY INDUSTRY

On a global basis, the 2014 barometer identified some interesting findings on how different industries view business.

• For the manufacturing sector, BI and supply risk is comfortably the major concern, with supply chain in particular deemed to be difficult for manufacturers to manage as a result of global demands for raw materials and competition.

• Legislative change is the top risk in the power and utilities sector, with BI/supply chain risk second and power blackouts third. The risk posed by the latter is increasing. Major power outages in the U.S. caused by weather increased from five to 20 each year during the mid-1990s, to 50 to 135 each year during the past five years. Power quality and blackout issues in the U.S. now cost industrial and commercial companies $132 billion to $209 billion.

• After natural catastrophes, theft, fraud and corruption are the second major concern for the marine and shipping sector. Theft is also a major concern in the transportation sector, with Allianz experts noting that many companies are awar
e of incidences of internal fraud being perpetrated by staff, but are unsure how to solve or mitigate this issue.

• For the financial services sector, changes in regulation and legislation remain the top concern, reflecting increasing supervisory intervention around the globe following the financial crisis. Cyber crime was also identified as a fast-emerging risk in the sector.

FOREWARNED IS FOREARMED

Now that it is clear what risks are keeping Canadian executives up at night, what can be done about them?

One of the most crucial first steps is to partner with an insurer with superior capacity who can assess every aspect of an organization’s risk exposure. Many carriers have engineers on staff to provide co-ordinated risk surveys and advisory services to match the requirements of the client.

Understanding the intent of the policy is a critical and often overlooked step. During the recent floods in Alberta, many companies assumed that they were covered for flood damage when, in fact, they were not. It is essential to really understand the intent of the policy wording and what is covered.

Having tested business contingency and vendor management plans in place can prevent many of the typical problems a company faces during a crisis. How will the business operate if employees cannot get to the office? Is it known where back-up suppliers are located if primary suppliers cannot deliver?

When Thailand was devastated by floods last year, many companies discovered too late that their back-up suppliers were located in the same region as their primary suppliers. This type of unwelcome surprise can easily be avoided with rigorous planning and testing.

Canadian executives need to ask themselves if their business continuity plans are robust enough to adequately deal with any kind of major business interruption. As has been seen all too often recently, events outside of Canada can greatly impact companies here.

It all comes down to this: success in managing external risks is intrinsically linked to the quality of a business’s internal risk management.