Risk managers unprepared for major risks and underestimating others: Aon survey

The biannual survey produced by the risk consulting arm of insurance broker Aon identified and ranked the top 50 risks facing businesses. It showed that the number of firms that had a comprehensive plan or formal review of the top 10 of these risks had declined by 7% (to 59% from 66%) since 2011. The lack of readiness comes despite an increased awareness of risk, evidenced by the fact that there was a 47% increase in the number of companies that took part in the survey (from 960 in 2011 to 1415 in 2013). According to Stephen Cross, Chairman of Aon Global Risk Consulting, this worrying trend could be a result of the economic slowdown and the lack of a recovery.hide“This has strained organisations' resources, thus hampering the abilities to mitigate many of these risks. Risk management departments have not got smaller but neither have they got any larger. Meanwhile the risks they face have become more challenging and more complex.” The state of the global economy also has a strong correlation with the top ten risks. The economic slowdown is cited as the number one risk by the respondents, followed by regulatory changes and increased competition. These three risks occupy the top three slots in the five main regions (Europe, North America, Middle East and Africa, Asia Pacific and Latin America) as well as for 24 of the 28 industries. The remaining top ten risks are damage to reputation, failure to attract and retain top talent, failure to innovate, business interruption, commodity price risk, cash flow/liquidity risk and political risk. According to Aon, the perception and ranking of the top ten risks can be linked to important global events that have occurred in the last 12 months, including the continued weakness in the eurozone, typified by the crisis in Cyprus, the retarded growth in the Chinese and Indian economies and the high rate of unemployment in many developed countries. Other events such as the re-election of Barack Obama and the introduction of broader regulatory oversight in countries around the world have been linked with the growing concern over legislative changes. Meanwhile the political turmoil in the Middle East and north Africa, tension in the Korean peninsula and the transition of the Communist Party leadership in China have all helped to push political risk and uncertainty into the top ten risks for the first time since the survey began in 2007. In addition to ranking the top ten risks, Aon has also issued a projection of the top ten for 2016 based on the survey’s responses. While the projection shows that the top three are expected to remain in place, it anticipates that political risk will increase in importance (to number six) while weather risk, currently ranked at number 16, is projected to break into the top ten by 2016 (at number nine). Conversely reputation, business interruption and liquidity risk are all projected to reduce in importance. Insurability also has an impact on the perception of risk and the development of insurance coverage around these areas, BI especially, may be a reason for this anticipated decline. However, the top three risks are largely uninsurable and Mr Cross said this reflects badly on the insurance industry’s ability to meet the sensitivities of risk managers. Whereas the presence of established insurance lines in areas like property and casualty or workplace injury have helped to contribute to the confidence risk managers feel about these risks, the same cannot be said for many other emerging risk areas. Furthermore the low ranking of certain risks suggests that companies are underestimating some issues, said Mr Cross. He cites the examples of pandemics that are listed at number 44 and also terrorism that is listed at number 46. “To some extent it is a case of out of sight, out of mind,” he said. There may also be a lack of appreciation of the interconnectedness of risk, said Aon, and, for example, the possibility that an incident of unethical behaviour (ranked number 49) could potentially lead to a reputational issue (ranked number four). The relative low ranking of cyber-related risks also concerns Mr Cross. Social media comes in at number 40 while computer crime is ranked at number 18. Regional disparity may play some part in this given that computer crime is ranked as number 8 in the US but as number 30 in Asia and Latin America. However, the fact that it is ranked as low as 18 in Europe is unusual given the high profile that cybercrime has had in the last two years. “It is an emerging risk that not all risk managers totally understand. And there are gaps in insurance coverage,” said Mr Cross. One possible explanation is that the risk management industry may be at an inflection point and in the middle of a handover from a generation of retiring risk managers from an engineering background to a new and younger breed more aware of the enterprise nature of risk management and the importance of technology. “The required skill sets are not quite there yet and many companies find that they still have to outsource to specialists. This has created a temporary knowledge gap,” said Mr Cross. He is hopeful that the industry is indeed at a turning point and that the survey in 2015 will reflect more encouraging trends. “I would like to think that by 2015 computer crime will be a top ten risk, BI will have dropped out and social media will be in the top 15,” he said. The survey also shows some pivotal changes in priorities for risk managers when choosing insurers, with claims service and settlement replacing financial stability at the top of the list. This change is not entirely unexpected, says Aon, given that 2011 was one of the largest loss years in recent history and 2012 was not too far behind in terms of insured losses thanks to Superstorm Sandy. The survey shows a general satisfaction (80%) with the limits purchased and the level of retentions and deductibles while coverage terms and conditions remain stable, with property and directors & officers policies experiencing the most improvement. While there are few regional differences in the purchase of D&O, there is a greater disparity when viewed in terms of industry with the banking sector unsurprisingly having the lowest comfort level (54%) with its D&O limits. The use of global programmes remains consistently high. Almost half of the companies (49%) operating in more than one country procure all insurance programmes from central headquarters and liability (86%), property (78%) and D&O (63%) remain the most popular lines for global coverage. The number one reason given for using global programmes is certainty of coverage with cost cited as the second reason. Less common is the use of captives with just 15% of respondents using an active captive or Protected Cell Company. Historically the US has been the largest user of captives and Aon anticipates that captive use will steadily increase both in established and emerging markets such as Latin America and parts of Asia Pacific.

Risk managers unprepared for major risks and underestimating others: Aon survey

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