Global Risk Map

Companies worldwide are bracing themselves for a year of increased uncertainty, driven by growing concerns over political, legal and regulatory developments around the globe. That are the results of the actual Allianz Risk Barometer. The sixth annual study identifies the top corporate perils, and potential responses, for 2017, based on the insight of more than 1,200 risk experts from 50+ countries.
Digital dilemmas such as the impact of new technologies on the risk profile of industries and cyber incidents are a rising concern as well, while natural catastrophe activity remains high on the agenda. But what troubles businesses most are actual or anticipated losses from a business interruption.

Business Interruption Seen as Top Risk Globally

Business interruption is the top risk for the fifth year in succession, but new triggers continue to emerge. Perils such as natural catastrophes and fires are the causes businesses fear most, but the nature of the risk is shifting increasingly towards non-damage events. A cyber incident or the indirect impact of an act of terrorism or political violence are events that can result in large losses without causing physical damage. More of these types of events are expected to occur in future.

Insurance claims analysis shows that the average large BI property insurance claim is €2.2m ($2.38m), 36% higher than the average direct property damage loss of €1.6m ($1.75m) [Global Claims Review: Business Interruption in Focus, Allianz Global Corporate & Specialty], emphasizing the significant impact BI can have on companies’ revenues. Accordingly, physical perils like fire and explosion (44%) and natural catastrophes (43%) are the top causes of BI that businesses fear most. However, alongside these perils, so-called non-physical or non-damage causes of BI are becoming a much bigger issue. Impact of supplier failure (33%), cyber incidents (29%) and the wider disruption caused by a terrorist event (10%) are just some of the many incidents that can cause large losses for companies without causing property damage. Businesses will need to think about how to mitigate these risks as more of these events occur in future. Meanwhile, BI risk continues to further evolve.

For example, insufficient management of societal and environmental risk topics (ESG) could lead to a BI event ordered by authorities moving forward. "BI again tops the Allianz Risk Barometer survey," notes Volker Muench, Global Practice Group Leader, Property Underwriting, AGCS. "That’s because new triggers for BI emerge constantly. These can range from cyber incidents to market developments to the changing political landscape. Going forward we expect there to be more non-damage triggers of BI. It is important that our insured customers understand the evolving threats they are facing."

Which causes of business interruption (BI) are feared most?

[Source: Allianz Global Corporate & Specialty. Figures represent the percentage of answers of all participants who responded (499). Up to three answers possible]

Better monitoring of politics and policy-making around the world

Companies will need to invest more resources into better monitoring of politics and policy-making around the world in order to anticipate, and adapt to, any sudden changes of rules that could impact business models and markets. This comes amid fears of increasing protectionism and anti-globalization, which could produce a business interruption threat of a different kind.

Political and legal perils, such as changes in legislation and regulation (goverment change, economic sanctions, protectionism, etc.) [5th], political risks and violence (8th) and Brexit, Eurozone disintegration (16th), rank higher year-onyear in the Risk Barometer. Many expressed concern about the uncertainty surrounding the political and business landscape – and how this is impacting planning – following the UK’s decision to leave the European Union and Donald Trump winning the US Presidential election – outcomes widely unexpected 12 months ago. Others said the results of 2017 elections in Europe could exacerbate the current situation. Protectionism or government intervention in business is perceived to be an increasing threat as well, according to Risk Barometer responses.

"Since 2014 we have seen about 600 to 700 new trade barriers being introduced globally every year, including in the service sector," explains Ludovic Subran, Head of Euler Hermes Economic Research, Deputy Chief Economist of Allianz Research and Director of Macroeconomic Research. "We see these protectionist measures in emerging markets such as China, Brazil or Indonesia, but also coming from the US or UK."
Subran believes protectionist measures will increase further and expects them to become more complex in their implementation. "There will be less obvious, brutal trade bans but more sophisticated measures which will make sure that somehow local companies are favored," he says. New forms of protectionism in the financial services, food, pharmaceuticals and healthcare sectors are anticipated. "Companies need to monitor and understand better the political, legal and regulatory environment in which they operate. It’s important for every company to better monitor public policy-making down to a local level and do more contingency planning and scenario building, including their subsidiaries in various regions. It’s no longer only about managing effects from economic cycles on your top line growth or revenue base, it’s preparing for potentially very abrupt and massive changes which may impact the way you do business. These can force you to change your risk management approach and partners. They can force you to look on your operations with a very critical eye as it will become more difficult to do business in certain countries and regions."

Terrorism risk is rising and a business does not have to be the direct victim of an act to feel the effects. Locations can become inaccessible and supply chains impacted in the wake of an attack. The growing risk of political violence, acts such as war, civil war, insurrection and other politically motivated incidents, which focus on countries rather than certain locations, should also not be underestimated, as the impact for global businesses can be much greater and longer-lasting.

Fear of political unrest and terrorism moves up one position in the overall Risk Barometer rankings year-on-year to 8th position, while Act of terrorism and sabotage is the number one concern for businesses in this risk category. Terrorism resulted in 29,376 deaths and cost the global economy $89.6bn in 2015 [2016 Global Terrorism Index: Measuring and understanding the impact of terrorism, Institute for Economics & Peace]. While conventional terrorism is a real concern, the growing risk of political violence events, such as war, civil war, insurrection and other politically motivated incidents which focus on countries – particularly in the Middle East and Africa – rather than certain locations should not be underestimated, according to Christof Bentele, Head of Global Crisis Management, AGCS. "The impact for globally operating businesses and our customers can be much greater and longer-lasting," he says.

Political risks and violence are an increasing concern for multinational business. Which risks are most worrying?

[Source: Allianz Global Corporate & Specialty. Figures represent the percentage of answers of all participants who responded (1,040). Up to three answers possible]

How disruptive innovations are changing the risk (and opportunity) landscape

Market developments ranks as the second top risk for businesses overall but the top perils vary by industry sector. Increasing reliance on technology and automation is transforming, and disrupting, companies across all industry sectors. Digitalization is shifting the nature of corporate assets from mostly physical to increasingly intangible, producing new risks as well as benefits.

"Companies that don’t want to become a victim of disruption but rather shape their industry, must be able to innovate, change and adapt their business model," says Solmaz Altin, Chief Digital Officer, Allianz. "For example, at Allianz, we have set-up ‘Allianz X’ (a new business unit) to build and connect with startups. Through Allianz X we are also gaining access to new business models to hedge against disruption.
"Digitalization is, above all, about what clients need and want. Technology is only the enabler. Today’s customers want simple and convenient solutions that are tailored to their needs and accessible anywhere, anytime."

Digitalization is also changing the risk profile of industries. In the 2017 Risk Barometer, the risk impact of new technologies ranks in the top 10 for the first time (10th). 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. An increase in non-physical losses is also anticipated, as digitalization will shift the nature of corporate assets from the mostly physical to increasingly intangible. Such intangible risks will require specialist services and solutions such as crisis management and forensic IT support, for example. Loss activity patterns could also change. Frequency of losses could be reduced due to increased predictive maintenance, driven by real-time monitoring and data analytics. However, this may be accompanied by the potential for larger-scale losses from cyber-attacks and infrastructure breakdown.

"The technological advances over the last decade are the main driver of the growing cyber exposure landscape," comments Georgi Pachov, Global Practice Group Leader, Cyber, AGCS. "There is no industry untouched by the penetration of digitalization and the vast amount of information exchanged at all stages of the business value chain. This interconnectivity enables growth, cost optimization and more flexible business models close to the final customer. 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.

Digitalization is significantly impacting business models. Which risk impact of increasing digitalization do you fear most?

[Source: Allianz Global Corporate & Specialty. Figures represent the percentage of answers of all participants who responded (1,006). Up to three answers possible]

Regional differences in Risk Perception

There are significant local and regional differences in the top 10 risks around the world. Business interruption (inc. supply chain disruption) [BI] remains the top business risk for 2017 in three of the four regions – Americas (43%), Asia Pacific (42%) and Europe (35%). However, there are some significant differences in the risk rankings around the world. Market (39%) and macroeconomic (37%) developments rank as the top two risks in the Africa & Middle East region. "Nigeria and South Africa continue to face challenges: from low commodity prices, the Chinese slowdown and the tightening of US monetary policy, as well as internal pressures such as inflation, weak domestic demand and socio-political tensions," says Delphine Maidou, CEO, AGCS Africa. Businesses are also increasingly focused on the threat of political risks and violence in the region, with this a top three business risk for the first time. Instability in African states such as Burundi, Democratic Republic of Congo, Libya, Somalia and South Sudan is a chief concern as well as the persistent Islamic terrorism of Boko Haram in some parts of Nigeria. Fear of loss of reputation is also rising across the region.

Across the Americas region, fear of BI, cyber incidents and natural catastrophes are the three major concerns for businesses. "Each of these issues at times may be an unknown or hidden risk exposure, but an exposure that could create potentially both short and long-term consequences to a company’s bottom line," says Thomas Varney, Regional Manager, Americas, Allianz Risk Consulting. "Understanding of a supply chain exposure requires a partnership between client and carrier." Fears over macroeconomic developments and the new risk impact of increasing interconnectivity are rising.

Across Asia Pacific market developments (32%) ranks behind BI as the top concern for businesses in 2017, with natural catastrophes ranking third. The region saw the costliest disaster globally of the year in 2016 – the earthquake (and aftershocks) which struck the Kumamoto prefecture in Japan in April. The total economic cost of this event is estimated at $20bn, but just $5bn of this was insured. "Governments are working together to achieve an integrated ASEAN insurance market which will facilitate a wider distribution of risks through cross border solutions and open access to the individual domestic markets," comments Mark Mitchell, CEO, AGCS Asia. "This will result in safer and more cost-effective provision of insurance which will help pilot critical capacity gaps in respective ASEAN jurisdictions. It will also help reduce the burden on governments, corporates and consumers, as well as strengthen economies’ resilience to catastrophe losses." Cyber, fire and new technology-related risks are among the ranking risers year-on-year.

Across Europe, while BI remains the top risk year-on-year, fear of cyber incidents climbs to second position, while political risks and violence climbs to seventh position. "Cyber-attacks continue to proliferate and hit the headlines," says Nigel Pearson, Global Head of Fidelity, AGCS. "Looking ahead, the introduction of the General Data Protection Regulation in May 2018 significantly increases the liabilities for companies doing business in Europe or with European citizens."

Top 10 Global Business Risks for 2017

[Source: Allianz Global Corporate & Specialty | Photos: iStockPhoto]