The globalization of today’s economy means that businesses are more interconnected than ever, creating a greater risk of business interruption, supply chain disruption, and exposures that can quickly multiply.
According to UNCTAD, over the last 50 years the number of multinational companies has grown exponentially from 7,000 to almost 104,000, and could reach more than 140,000 by 2020.
The Allianz Risk Barometer 2015 surveyed more than 500 risk managers and corporate insurance experts in 47 countries to identify the primary challenges facing businesses this year. Some risks such as political upheaval, cybercrime and business interruption were viewed as a greater risk, while natural catastrophes, technological innovation and market stagnation were viewed as having less of an impact.
Here is a look at the top 5 business risks for 2015 as identified by the Allianz Risk Barometer.
1. Business interruption and supply chain risks (46%)
Business interruption (BI) and impacts to the supply chain continued to lead the list of major concerns for businesses for the third year in a row. With so many businesses interconnected on a global scale, the impact of an event in one part of the world can have negative repercussions halfway around the globe.
“The growing interdependency of many industries and processes means businesses are now exposed to an increasing number of disruptive scenarios. Negative effects can quickly multiply. One risk can lead to several others. Natural catastrophes or cyber attacks can cause business interruption not only for one company, but to whole sectors or critical infrastructure,” says Chris Fischer Hirs, CEO of Allianz Global Corporate & SpecialtySE (AGCS). “Risk management must reflect this new reality. Identifying the impact of any interconnectivity early can mitigate or help prevent losses occurring. It is also essential to foster cross-functional collaboration within companies to tackle modern risks.”
The top risks leading to supply chain disruptions are: natural catastrophes, the political environment in a country, and globalization, particularly for specialty suppliers. The major causes of business interruption that concern companies the most include: fire/explosion, natural catastrophes, and a service delivery failure by a supplier.
2. Natural catastrophes (30%)
Despite a relatively quiet year in terms of catastrophes, companies are still acutely aware of the impact Mother Nature can have on their balance sheets.
“The lessons of the Bangkok floods and Japan tsunami have resulted in growing awareness from businesses of the knock-on effect from BI and supply chain management,” explains Mark Mitchell, regional CEO, Asia, AGCS. “Companies now have a greater understanding of the need to monitor risk aggregations, not just geographically, but also in business interruption exposures.”
3. Fire/explosion (27%)
An analysis by AGCS found that fire is the number two cause of business loss overall, with business interruption causing more damage than the actual fire itself.
In 2013, fire impacted eight of the 20 largest non-natural catastrophes, resulting in almost $4 billion in insured losses.
4. Changes in legislation and regulation (18%)
For the financial sector, the number one risk involved changes in legislation and regulations.
The risk jumped nine positions from 2013 and has the second largest impact on supply chain disruptions (53%) after natural catastrophes. There is also concern that the lower oil prices will impact the budgets of countries deriving most of their income from oil revenues.
5. Cybercrime (17%)
Concern about the risks associated with cybercrime rose significantly, jumping 10 positions from 2013, when it ranked number 15. Cybercrime brings with it concerns about economic impacts, loss of reputation, as well as business interruption issues. And while companies are far more aware of the cyber risks, according to 73% of the responses, they are still underestimating its impact.
For businesses, the main cost of a cyber attack involves the impact to their reputation and the resulting financial damages, as well as the loss of customer business. The breaches at Sony, Target, Staples and Home Depot demonstrated the damage that can be caused to corporate reputations. Seventy-one percent of customers indicated they would leave an organization following a data breach according to the Edelman Privacy Risk Index.
Allianz also found that companies are still underestimating the risks from a cyber attack and fail to take the necessary precautions due to budget constraints or a failure to analyze their vulnerabilities.
Purchasing better hardware, implementing stronger internal processes, and improving training and awareness among employees were identified as the primary solutions to the problem.
The study also identified the primary risks for the next five years, which were:
- Cyber risks (37%)
- Political/social upheaval and war (21%)
- Natural catastrophes (19%)
- Terrorism (15%)
- Business interruption and supply chain risks (11%)
Long-term risks (5-10 years) were identified as:
- Climate change (19%)
- Natural catastrophes (19%)
- Political/social upheaval and war (18%)
- Technological innovation (17%)
- Cyber risks (15%)
“Weather is becoming more volatile and less predictable at a time when cities and populations are growing in areas exposed to natural catastrophes,” said Michael Bruch, head of emerging trends, AGCS.
Technological innovations such as 3D printing and nanotechnology will bring new risks, which must be managed through a collaborative approach.