Intangible risks fly up Asia Pacific risk agenda finds AGCS survey

The survey was conducted among global businesses, as well as risk consultants, underwriters, senior managers and claims experts within both AGCS and local Allianz entities during October and November 2015. Its focus is on the corporate insurance sector for both large and small to mid-sized industrial companies. There were a record 824 respondents from a total of 44 countries. Most answers (59%) were for large enterprises (more than €500m/$540m revenue). Small and mid-size enterprises (up to €500m revenue) accounted for the other 41% of the answers. Non-tangible risks The trend was clear on a global basis as well as in the Asia Pacific region—risk managers and risk experts are increasingly worried about non-tangible risks such as cyber, market volatility and political risk as opposed to traditional tangible risks such as property damage and natural catastrophes. If anything, this shift is even more evident in Asia Pacific than in other regions of the world.hideThis is perhaps linked to their fast-rising concern about the impact of intangible risks on the global supply chain, upon which the regional economy remains so reliant. This is part of the reason why BI, including supply chain disruption, retains top spot in the AGCS Barometer and received an even higher proportion of votes for number one position, with 56% against 42% last year in Asia Pacific. There were three new risks in the top 10 and they were all intangibles. Market developments (volatility, intensified competition, market stagnation) flew up to second spot. Macroeconomic developments (austerity programmes, commodity price increase, inflation/deflation) flew into fourth spot. Political risks (war, terrorism, upheaval) crept into 10th spot, not surprisingly. Other non-tangible risks moved up the table. Cyber incidents (cybercrime, data breaches, IT failures) climbed up the table into fifth spot and changes in legislation and regulation such as economic sanctions and protectionism moved up to seventh spot. The Asia Pacific survey respondents relegated the importance of traditional physical risks such as natural catastrophes (storm, flood, earthquake) and fire and explosion. “In the Asia Pacific region, market developments rank as the second top risk, just one percentage point behind BI. Businesses are concerned about intensified competition from new market entrants and increasingly competitive pricing in some emerging territories,” commented AGCS in the report. “At the same time businesses are having to adapt in order to service the changing profile and needs of their customer base, as the so-called ‘millennial’ generation comes of age,” it added. On a global basis, BI—including supply chain disruption—ranks as the top peril in the Allianz Risk Barometer for the fourth year in succession, with 38% of responses rating this as one of the three most important risks for companies. AGCS said that, although the share of responses is down year-on-year (46% in 2015), this is mitigated by the fact that many of the other top 10 global risks, such as natural catastrophes, fire and explosion, cyber incidents and political risks can also have severe BI implications. BI losses on the rise AGCS insurance claims analysis published late last year showed that BI losses are increasing, typically accounting for a much higher proportion of the overall loss than a decade ago. The claims analysis found that the average large BI property insurance claim is €2.2m ($2.4m), more than a third higher than the average direct property damage claim of just over €1.6m ($1.75m). “The primary driver behind increasing BI losses is that interconnectivity of risk is growing day-by-day, as technology, globalisation and social change create a complex web of relationships and interdependencies with ‘just-in–time’ and ‘lean’ manufacturing now standard practices,” said Hugh Burgess, global head of mid-corporate and head of corporate lines North America, AGCS. “It is also evidenced in the impact of financial crises, as well as in cyber space, with the rise of social networking and the so-called Internet of Things,” added Mr Burgess. AGCS also pointed out that, at the same time, the global impact of natural catastrophes is more obvious, with an increasing concentration of production and economic value in natural catastrophe hazard-prone areas, such as southeast Asia. According to the Risk Barometer responses, the major causes of BI that businesses fear the impact of most are natural catastrophes (51%), closely followed by fire and explosion (46%). Supplier failure ranks third (32%). “It’s not surprising that natural catastrophes top the causes of BI global businesses fear most as these events always lead to BI,” said Volker Muench, global practice group leader, property, AGCS Property Underwriting. AGCS pointed out that major loss events such as the Japanese earthquake and Thailand floods in 2011 saw hundreds of businesses file such insurance claims. The majority of these notifications came from companies based outside of the affected areas. The insurer also concluded that it is also unsurprising that fire and explosion is the second top cause of BI that businesses fear most. Its analysis of more than 1,800 large BI insurance claims during the past five years shows that this peril is actually the top cause of BI loss around the globe, accounting for around 59% of the value of such claims. Each fire and explosion incident costs around €1.7m ($1.8m) in BI losses on average. “Whereas a large fire or explosion may once have only impacted one or two companies, today such losses can impact multiple companies in different locations. This was evidenced during 2013, when a fire at a semiconductor plant in China stopped delivery to many electronic equipment manufacturers in North America and, more recently, by the explosions at the port city of Tianjin in China in August 2015, where there have been a number of BI losses as a result of the subsequent interruption of flow in stock and production when the port was closed by authorities,” stated the AGCS Barometer. “Five years on from the Japanese earthquake and Thailand floods, many companies have taken steps to address and minimise their BI exposure. Supply chain management and business continuity plans have become more robust,” said Thomas Varney, head of Allianz Risk Consulting Americas. AGCS noted that some large companies have shifted from a predominantly procurement-driven view of supply chain risk to one that brings together management disciplines to overcome the risks. “Businesses are also using a much broader array of early indicators to pick up on supplier problems. These include looking for inconsistencies in product quality as a warning signal of financial problems rather than just monitoring a company’s financial strength rating,” commented the insurer. It also noted that companies are also monitoring their suppliers’ competitors in order to identify the development of any potential problems within the industry environment in question. But Mr Muench said that as global interconnectivity continues to intensify, so companies need to be more proactive with their management of the BI risk. “There needs to be a more proactive steering of risk management policy in order to actively manage the BI risks of the future that are emerging from the fast-changing environment in which businesses are now operating,” said Mr Muench. Connected world The interconnection between BI losses and the intangible risks that are rising up the AGCS Barometer makes sense, according to AGCS. “More BI claims resulting from events such as cyber incidents and technical failures, interruptions caused by import/export restrictions, disrupted production due to strikes, political violence, terrorism, war or the actions of authorities, and loss of reputation due to various environmental, social and governance activities are expected to result in sizeable financial losses in future,” concluded AGCS. The insurer said that insurance can provide protection from such “disruptive forces”. But it added that swift crisis communication and response management are also crucial to mitigate the loss impact. Malaysian terror attack underlines fear of political risk The terror attacks in Malaysia midway through January, for which ISIS has claimed responsibility, underline why political risks such as war, terrorism and upheaval remain a priority concern for businesses in the Asia Pacific region and worldwide. It should therefore come as no surprise that the Allianz Risk Barometer found that political risk maintained its ninth position in the global rankings. Multinational businesses are actually most worried about the introduction of sanctions. But terrorism also ranks as the third top long-term risk. According to responses gathered by Allianz Global Corporate & Specialty (AGCS), countries that pose an increasing risk include Indonesia, Malaysia and Thailand. Russia tops the list, followed by China, the Ukraine and Brazil. Christof Bentele, head of global crisis management, AGCS, said that companies have to “actively address” the mounting risks. “Ongoing evaluation of the global security situation, which is always in a state of flux, including a corresponding assessment of individual risks, is imperative. Contingency plans have to be developed for various scenarios involving political violence. Far from all companies have such plans in place,” noted AGCS in its report. The insurer noted that more companies are working with specialist crisis and risk consultancy firms that provide analytical information and local security experts to try and ensure information is accessible before a crisis occurs. “This ensures processes can be checked and employees trained—factors which can [make the difference] between success and failure in the worst-case scenario,” concluded AGCS.

Intangible risks fly up Asia Pacific risk agenda finds AGCS survey

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