July 1, 2013 by Thomas Varney
The Allianz Risk Barometer, carried out towards the end of each year, gathers opinions from risk management and underwriting experts at Allianz Global Corporate & Specialty (AGCS) throughout the world, forming an outlook for the coming year. The survey identified economic risks as the most pressing concern in 2011, while a year later, respondents identified business interruption, natural catastrophes and fire risks as the most worrying risks.
Another interesting aspect, though, is looking at the most underestimated risks. For 2013, the most underestimated risks by business worldwide included cyber risks, as well as power outages. These also applied to North America and, in particular, to Canada: only 8% of the 166 responses in the United States and Canada considered power blackouts and technological innovations a major risk to large companies.
OFF THE RADAR
Allianz experts report that businesses take some risks very seriously, but widely underestimate others. For example, IT failures – whether self-inflicted by human error or the result of cyber crime – can entail high economic losses in an increasingly digitized economy. Nonetheless, only a few of the Allianz experts globally report that their clients are really aware of this risk.
Similarly, the risk of supra-regional power blackouts features on the risk radar of few companies. “Reliability of power supply will decrease in the future due to aging infrastructure and the lack of substantial investments,” explains Larry Hunter, risk consultant at AGCS Americas.
If a blackout occurs, the impact is 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.
Blackouts are on the rise worldwide. Countries such as China are investing in more grids as they are acutely aware that taking down their grid can substantially weaken them. In the U.S., most of the power grids and power plants were built in the 1950s, meaning the infrastructure is aging to say the least. Power still mainly comes from old coal fire plants, and transformers are 60 years old on average. Most of them were designed to last for approximately 20 years.
In order to mitigate this risk, it is important to build in redundancy in the power supply, usually using at least two feeds.
For instance, during the most recent Super Bowl in February, only half of the stadium went dark when the power went out. That is because even though the stadium in New Orleans is fairly old, it was fed from two power sources. The cameras were certainly critical loads, as was emergency lighting like exit signs, which are usually powered by local batteries.
Many companies in the Americas generally underestimate the risk of supra-regional power blackouts with high economic losses. Consider that the Northeast blackout of 2003 affected an estimated 10 million people in Ontario alone.
It will be necessary to expand and link decentralized sources of power generation – especially renewable energies – and to enable cross-border trading of power and grid services. Smart grids with metering, communication and control technologies and new storage and transport capacities are needed to handle the growth of renewable energies.
Canadian companies are currently exploring emerging wind and solar technologies, as well as tidal and thermal energy technologies. As of today, Canada already generates a lot of its electricity from hydroelectric sources (mostly through dams) and is one of the fastest-growing wind energy markets worldwide.
UNDERESTIMATING CYBER CRIME
Despite being taken seriously in the information and communication technology (ICT) sector, the risk of cyber crime seems to be underestimated in many other areas. Insurance policies covering property and liability often provide no cover for cyber risks, while the percentage of companies that do take out specific cyber cover remains low.
While ICT companies are used to being under the constant threat of hacker and malware attacks, industrial companies should not underestimate the risks. The Stuxnet attacks – a computer worm used to attack Iran’s nuclear facilities to damage the country’s nuclear program – have moved IT systems of industrial facilities, production lines and power plants into the spotlight.
Security experts watched with concern as Internet connections for data transfers were added to previously isolated SCADA systems used to control industrial facilities. “This theoretically opens the door for hackers, especially as SCADA systems’ security functions lag far behind those of commercial IT systems,” comments Jose Fidalgo, an IT expert at AGCS.
ENVIRONMENTAL RISKS IN CANADA
Beyond IT, there are also a number of other risks rated as low importance across all industries, such as environmental changes and terrorism. The environmental risk is one that should be taken particularly seriously across Canadian businesses, where the environment is one of the country’s largest assets.
For instance, the exploration of oil sands and oil exploration has been under public scrutiny. However, as Doug Pope, a Toronto-based mining and power generation expert and risk consultant, explains: “Another factor that needs to be considered is the fact that the energy efficiency is higher with oil sands than with regular wells.”
Oil sands, which are often also called unconventional oil reserves, refer to a different extraction technique than the traditional drilling of oil wells.
There is no question that these new exploration techniques bring with them new and increased risks. In the future, it will be important for the insurance industry, together with their energy partners, to continue monitoring oil sands mining techniques closely.
DIFFERENT INDUSTRIES, DIFFERENT RISKS
The most recent top three risks – business interruption, natural catastrophes and fire – rank consistently highly across the majority of industries, with only a few exceptions. Fire and explosion is a far less important risk for industries with little or no production sites, such as professional services or telecommunications and IT.
A clear risk profile can be identified for a number of industries:
• Consolidation in the aerospace, defence and aviation industries sees intensified competition named as major risk, ahead of market fluctuations.
• For pharmaceuticals and chemicals, changes in legislation can heavily affect their businesses. Fire and explosion is another major risk in these industries that often process highly inflammable substances.
• For financial services, the top risk is Eurozone breakdown, closely followed by natural catastrophes and regulatory changes.
• For marine and shipping, theft, fraud and corruption was identified as the number one risk.
CARGO THEFT A RISING CONCERN
Concern around cargo theft is increasing, both globally and in Canada.
Theft, in particular, has long been a problem for cargo insurers. Both the number of incidents and the amount of losses have substantially increased every year since 2006, reports Freight Watch International.
In the European Union alone, the Transported Asset Protection Association notes that the cost to businesses is estimated to be 8.2 billion Euros a year. Emerging markets such as Mexico, Brazil and South Africa currently rank highest in terms of cargo theft.
But Canada has seen an increasing amount of cargo theft as well. Every year more than US$5 million worth of cargo is stolen in Canada, and this is becoming a huge issue for the Canadian trucking industry.
This is why AGCS announced at the end of 2012 an agreement with Verisk Crime Analytics that helps reduce cargo theft and the theft of heavy equipment in Canada. Clients receive a deductible waiver if they are members of CargoNet or the National Equipment Register.
“Cargo theft is a low incident/
high-impact event that usually has a major effect on our clients’ supply chain. We work closely with the companies and their transport providers to put deterrents in place to minimize theft and hijacking exposures. In Canada, this is especially important near the cargo hubs in Ontario and Quebec, but also increasingly in Atlantic Canada,” says Phil Best, head of marine at AGCS in Canada. “We have seen many policyholders getting engaged with the program and thefts getting reported to CargoNet and the National Equipment Register immediately,” Best adds.
There are a substantial number of risks that are currently underestimated both globally, but also within Canada. As risk professionals, it is necessary to look outside of the well-known risks and explore what else is out there.