Willis experts lay down 2013 risk gauntlet

Writing on WillisWire, the brokers' blogging platform, for a special feature on emerging risks, George Haitsch, Executive Vice President, Willis Global Solutions, argues that the biggest risk in 2013 for global businesses is missing out on what he describes as 'Bric Round 2'-or the next set of emerging economies after Brazil, Russia, India and China. "Having lived through the 'Bric' explosion as the global risk manager of a multinational technology company, I understand why so much attention was paid to the emerging economies of Brazil, Russia, India and China through much of the past decade. The impact of the business opportunity created for many organisations was amazing. However, the Bric countries' economies are maturing. I am therefore amazed at how little one hears in our industry regarding what is next! Clearly, globalisation continues at a stunning pace," he said. "If the first round of massive and rapid globalisation produced four juggernauts of economic development that most companies were desperate to tap into and at times struggled to manage, shouldn't more attention be paid now to round 2?," he asked.hideOf course the big question for companies, and their risk managers hoping to reveal the upside of risk management, is which economies to target? Mr Haitsch acknowledges there is some contention but said experts have broadly agreed that Mexico, Indonesia, South Korea and Turkey are next in line for an economic boom. "Shall we call them MIKT? Are we ready?," he added. According to Jeremy Brooks, Managing Director, Willis Global Solutions, insidious and new reputational risks will be a big threat in 2013. He argues that businesses need to look beyond their product if they are to avoid the reputational dangers of unwanted and unexpected social media coverage. "Traditionally a focus on product quality and service has been the best defence as the reputation of a company has depended almost entirely on its products being seen as 'best in class' and delivered with a high quality of service," he said. "Whilst this is still an excellent strategy to defend against reputation risks, it does not address the risk of reputational damage caused by more insidious ways." Increasingly corporate reputation can be adversely affected by corporate ethics or behaviour, such as the treatment of suppliers or a company's environmental credentials, or negative publicity generated through unexpected social media coverage. "Identifying and mitigating these risks requires much more than just a focus on product and service delivery, it also requires a crystal clear understanding of the changing business environment and stakeholder expectations," said Mr Brooks. For his part Julian Roberts, Executive Director, Willis Weather Risk Solutions, warns that unpredictable weather, which is fast becoming a norm that affects almost every business sector worldwide, should be a key focus for risk managers this year. They can no longer afford to disregard the impact of extreme weather as something that is beyond their control, he said. 2012 marked the wettest summer in over 100 years in England whilst across the Atlantic, American farmers are currently facing the consequences of last summer's exceptional drought. Crop insurer losses currently stand at $11.58bn and overall US GDP is likely to be gravely affected. Whilst extreme weather alone does not represent a new risk, what these and other events of last year highlight is the relentless increase in likelihood of extreme weather and a heightened volatility that affects almost every business sector worldwide, writes Mr Roberts. "It is this emerging awareness that means risk managers can no longer afford to brush off the weather as something the consequences of which are beyond their control in 2013," he explained. Whilst certain insurance policies protect against damage caused by extreme weather events such as hurricanes and floods, it is the non-damage-related impacts resulting from the 'wrong' weather that need to be addressed, he continued. "Take the retail sector for example; unexpected seasonal weather can result in under or over stocking of appropriate merchandise; be it barbeques for that hot summer or overcoats for winter. This mismatch and the attendant impact on footfall impacts the revenues and margins of an already stretched high street retail sector. Other similar examples abound; from leisure and entertainment to power and energy," he said. He added: "As the changing pattern of weather continues to throw out surprises, one thing that can be predicted is its very unpredictability. The past is no longer a reliable indicator of the future. It is for that reason that businesses should address this exposure where they have not before: consider the available means to mitigate its impact before it is too late." Whilst extreme weather represents the major concern for Mr Roberts, Richard Magrann-Wells, Senior Vice President, Financial Services Practice Leader, Willis North America, cites the latest development in cyber warfare, whereby attacks on financial institutions are increasingly being funded and coordinated by sovereign states, as his number one risk. "When two countries pick up arms against each other, we call that 'war'. When two companies compete for business we call that 'free enterprise'. What then do we call it when a sovereign nation deliberately targets a company, specifically a financial institution, from another country? At some point is that not war?," he argued. The last few months have seen a drastic increase in reported aggressive cyber attacks against some of the largest banks and financial institutions in the US. Experts believe that these attacks are being funded and coordinated by sovereign states, even if independent operators execute the actual attacks. These are sometimes simple Distributed Denial of Service type of attacks aimed at slowing or crashing an institution's online capability, others are more nefarious, designed to steal data or corrupt systems. This new threat has very real insurance implications for the financial sector, said the broker. "Insurers have not yet designated such attacks as an uninsurable 'Act of War' but if such attacks persist, (and we have every reason to believe they will) insurers can be expected to price their coverage accordingly with the knowledge that specific institutions are being targeted not by business rivals but by sovereign states. And in my book...that is war," he explained. According to Tom Teixeira, Life Sciences Practice Leader in Willis Global Markets International, companies are increasingly exposed to reputational damage as a result of unethical supply chains. He argues that improvements in the availability and quality of risk data leaves companies facing the serious reputational risk of being exposed, for example, as environmentally unfriendly. "Whilst the loss of suppliers and supplies due to natural catastrophe events and non-damage-related perils such as industrial disputes and financial insolvency are still very much on the agenda, there is increasing focus on reputational risk in relation to sustainability issues. If you look at the annual reports of many companies you will see strategies to ensure they have environmentally friendly and sustainable supply chains, or that they in fact already have a 'green' supply chain," he said. This growing interest was reinforced when the Chartered Institute of Purchasing and Supply recently published the three most requested topics from its members-sustainability, risk and effectiveness. "Suddenly the level of transparency in the supply chain has increased considerably and companies now face the reputational risk of being exposed to environmentally unfriendly supply chains. When the reality does not meet expectations, it creates unhappy stakeholders and a negative reputational impact. This can affect future earnings and eventually destroy company value," concluded Mr Teixeira. For organisations falling within the reach of the US, Ann Longmore, D&O, Employment Practices Liability and Fiduciary Leader for the New York office of broker Willis, warns that the country's Foreign Corrupt Practices Act should be a big concern." There is no business necessity exception and no affirmative defence. Nor, for the regulators, is there a materiality requirement: they will enforce the statute on big (they like big) as well as small infractions (in the tens of thousands of dollars)," she said. "You are responsible for not only the actions of your own organisation and employees, but those of your agents and business partners (and those at the organisations that you may purchase)," warned Ms Longmore. Adding: "An organisation may purchase Directors and Officers (D&O) Liability insurance, which may help with some of the defence costs and potentially some nominal personal civil penalties, but the reality is that no insurance company is going to go to jail for an offender, salvage the reputation of an individual or organisation or pay multi-million (or billion) dollar criminal penalties." Although not a new risk, Malcolm Cutts-Watson, Chairman of Willis' International Captive Practice, believes ensuring that captives used in a global programme are compliant and above board will become ever more problematic. "Captive owners and practitioners face the challenge of designing a cost-efficient and silent-running global insurance programme incorporating a captive whilst complying with local territory insurance premium tax (IPT) requirements. This is becoming even more important as local tax authorities are showing signs of enforcing strict compliance rules on foreign (ie captive) insurers to protect their local insurance industry," he said. The solution is for the insurance buyer and the captive to fully understand their respective responsibilities, he added. Global programme premium should be apportioned to each territory on a justifiable (and auditable) basis, he advised. Additionally insurance carriers should be required to provide clear documentary evidence of the management and settlement of foreign Insurance Premium Tax (IPT) and programme structures should be re-examined to consider the role of non-admitted cover provided by the captive versus local underlying policies. "In the past, risk managers may have chosen to downplay IPT compliance, today tax authorities are forcing a re-think and it is vital that this issue is tackled to avoid unwelcome calls from tax authorities," added Mr Cutts-Watson.

Willis experts lay down 2013 risk gauntlet

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