October 11, 2017 by Emily Atkins, Editor
Business interruption, a risk as broad as the world of business itself, tops the list of threats that enterprises around the world have identified for 2017. This is a finding of the 2017 Allianz Risk Barometer study, global research that Allianz has conducted for six years running. It’s research that provides anyone working in insurance, and in claims, a valuable perspective
on the kinds of threats companies perceive, as well as offering insights into how the world of exposure and coverage is evolving. Read on for an overview of the top risks reported in Canada and around the globe.
Globally, business interruption (BI) is ranked the most serious threat by 37 percent of respondents. But in Canada and the US it ranks first at an even higher rate, at 43 and 42 percent respectively.
We spoke to Bernard McNulty, head of claims for Canada with Allianz, to gain some perspective on the Canadian outlook. He cites the competitive nature of the economy, with rivals ready to pounce.
“If a business is shut down for whatever reasons, [there is] very often a competitor right there looking to pick up that market share, and companies may struggle to regain that share after losses, if they ever can,” he says.
The days are long gone when a company has the luxury of taking months to recover, he adds.
Canadian companies are additionally at risk of contingent BI, McNulty says, because they “import far more product that is components of their finished products. So if they’re importing components from China, from Japan—specialized components that are not easily replaced— if they lose that supply chain, their business can be significantly affected.”
Indeed, according to the Allianz report, non-damage triggers that cause BI events are growing. Supply chain disruption, as McNulty suggests, is ranked a top concern by 33 percent of businesses, landing at third overall, after fire and explosion at 44 percent, and natural catastrophes at 43 percent.
Evolution in markets is the second most troubling concern for global businesses, with 31 percent of responses. In Canada, however, market forces were ranked by only 25 percent, but held second place. In the Americas overall, market forces were ranked fourth.
Companies are concerned about factors such as intensified competition, mergers and acquisitions (M&A) and market stagnation. But they are also paying attention to the increasing dependence on technology and automation that is leading to rapid disruption across industry sectors. More than half of respondents (53 percent) cited increasing digitization and use of new technologies as the most salient trends transforming their respective industry sector.
The biggest concern about digitization is the increasing sophistication of cyber attacks, data fraud and data theft, with 45 percent citing these.
Indeed, cyber threats are rapidly climbing the ranks of risks. Over the past five years, cyber has climbed the risk ladder from 15th place in 2013 to third in 2016, where it remains this year, with 30 percent of responses.
“Cyber risk is not going away and people around the world are right to be concerned,” says Emy Donavan, head of cyber North America, Allianz Global Corporate & Specialty (AGCS), in the report.
Companies are concerned because the cyber threat is still very unpredictable, and, the report notes, is “not isolated to a particular segment and spans different industries and sizes of companies, from an online retailer through to a heavy manufacturer to an oil refinery.”
Counter to trend, Canadian businesses did not place much emphasis on cyber threats, ranking them only fifth this year, with 25 percent of responses, versus last year’s ranking of first, with 57 percent. Globally, cyber was ranked third (30 percent) and second (31 percent) for the Americas. Small business, too, seems to downplay the cyber threat, ranking it sixth overall.
Yet recent research by consultancy EY shows that only 43 percent of Canadian companies would even be able to detect a sophisticated cyber attack, versus 50 percent of companies globally.
“Many [small businesses] underestimate their exposure and are not prepared for, or are able to respond to, an incident,” Jens Krickhahn, head of cyber insurance Central and Eastern Europe, AGCS says in the Allianz report. “Many do not have the resources to build a response team. This can be fatal if they become the target of a cyber-attack.”
McNulty suggests that part of this apparent lack of concern may be that cyber attacks are dealt with as quietly as possible, so their numbers and severity may not be clearly understood.
But companies should be aware that every organization is vulnerable to cyber threats. Loss of data or exposure of client data are critical in regards to reputational risk and the market reaction to this. How swiftly they respond to mitigate it, once the security incident has been detected, is key, he adds.
It is no surprise that cats are a significant concern for Canadian companies. Canadians—along with the rest of the Americas—rank cats third, with 24 percent of responses. Globally, however, cats rank fourth.
According to the AON 2016 Annual Global Climate and Catastrophe Report, natural disasters around the world in 2016 engendered economic losses of US$210 billion. The disasters caused insured losses of US$54 billion. This is the highest insured loss total since 2012.
And with major events like the Fort McMurray fire dominating headlines in this country and causing massive losses, set to surpass $9.5 billion, and with insurance payouts estimated at $3.7 billion, it’s no wonder companies see their potential impact as a major threat.
Although small, medium and large companies all ranked the cat threat similarly in the study, different sized businesses have different risk profiles to catastrophic events, McNulty says. “A small business may be more challenged to think through what options they may have to protect themselves. If they’re regionally located in a cat-exposed area, there’s perhaps nothing they can do to change their risk profile,” he notes.
But larger companies have more options, like minimizing inventory in high-risk locations, or moving to a location that’s better fire- or flood-protected. “They can minimize their profile in that area and service that particular geography from other locations they may have,” McNulty adds.
Politics and protectionism
Political developments are making many edgy these days, with the new US administration’s anti-trade, America-first pronouncements causing companies that trade with the US and globally to start making contingency plans. Although Canadians only ranked this their sixth most pressing concern (17 percent of responses), the study was done before Donald Trump was elected President of the United States.
With such possible disruption on the near horizon, “companies will need to invest more resources into better monitoring politics and policy-making around the world in order to gather the economic intelligence that will enable them to anticipate, and adapt to, any sudden ‘abrupt and massive’ changes of rules that could impact business models, amid fears of increasing protectionism and anti-globalization” the Allianz report says.
For Canadian companies, McNulty says concern is real. “Given that Canada and US are each other’s largest trading partners and the economies are tremendously linked—everything from auto manufacturing to various other business and services—the protectionism that Trump promised may well be intended for other countries such as China or Mexico,” he says. “But I think there’s a lot of Canadians who feel that we may be caught up in that or affected by that or, or we’ll be collateral damage.”
Beyond the threat to trade deals
McNulty notes there’s also concern around Trump’s tax policies. “We know there’s legislation in the works right now that could impose greater tariffs on Canadian imports and possibly start a bit of a trade war. So again, there are tremendous concerns that goods and services from Canada are not going to flow across the border as easily as they always have.”
The report notes there will be additional impacts on global trade and supply chain operations as the full implications of Brexit and the US decision not to take part in the Trans-Pacific Partnership become clear. Coming European elections might also result in even more protectionist governments being elected, adding to the threat.
The study also asked about future concerns—on the 10-plus year horizon. Cyber incidents topped the list at 42 percent, followed by new technologies at 40 percent and market developments at 33 percent.
In fact, new technologies entered the top 10 for the first time in 2016, highlighting that this risk is more than just a future concern, it is happening now.
The Allianz report notes that “increasingly, connected industries and their insurers will experience new liability scenarios. For example, human error—a leading cause of losses in many sectors—could increasingly be replaced by technical failure.”
Digitization is also expected to cause a bump in non-physical losses as corporate assets becoming increasingly IT based, and in the cloud, for example.
But it’s also a double-edged sword, with benefits accompanying the risks. “Interconnectivity enables growth, cost optimization and more flexible business models close to the final customer,” says Georgi Pachov, global practice group leader, cyber, AGCS, in the report. “However, it also poses significant risks related to inability to deliver the product or services. The utilization and application of machine learning, artificial intelligence, big data and, in general, solid analytics contributes to the ever-increasing cyber exposure. Implementing proper cyber risk management and mitigation procedures will become an indispensable part of every company’s top management priorities.”
The sixth annual Allianz Risk Barometer was conducted among Allianz corporate clients and brokers. It also surveyed risk consultants, underwriters, senior managers and claims experts of Allianz entities around the globe, during October and November 2016. The survey focused on large and small to mid-sized companies.
There were 1,237 respondents from a total of 55 countries. As multiple answers for up to two industries were possible, 4,679 answers were delivered. Participants were asked to select industries about which they are particularly knowledgeable and name up to three risks they believe to be of most importance.
Most answers were for large enterprises (over €500m/$520m revenue) with 2,325 responses, or 50 percent. Small enterprises (below €250m revenue) contributed 1,275 responses (27 percent) while mid-sized enterprises (€251m to €500m revenue) produced 1,079 responses (23 percent). Risk experts from 21 industry sectors were featured.