Business interruption and supply chains account for around 50-70% of all insured property losses, as much as $26bn a year - Allianz

Business interruption (BI) and supply chain losses account for around 50-70% of all insured property losses, as much as $26bn a year based on 2013 data. As such, it comes as no surprise that these factors are rated as the biggest concerns for all business sectors according to the Allianz Risk Barometer 2014. As reported in last year’s Risk Barometer, they represent the number one concern for businesses around the globe, including the UK, Australia, Brazil, France, Germany, and the US.

Even more costly than Business Interruption damages, insured losses from the second top risk, natural catastrophes, totalled about $38bn in 2013 (sources: Swiss Re Sigma, AGCS). A year earlier, due to a more damaging Atlantic hurricane season, they even amounted to $75bn.

In Europe the third annual Allianz Risk Barometer, which surveyed over 400 corporate insurance experts from 33 countries, shows that companies are feeling much more confident about the future of the Eurozone than 12 months ago. However, a number of countries, such as Spain and Portugal, remain worried about the impact of austerity programs.Fear of economic stagnation and decline, as the economy improves, is particularly worrying for UK businesses. Market stagnation/decline features in the top five risks globally and top three in the UK, previously being placed at 9th in the UK. This shows the concerns over sluggish growth in mature markets and slower than expected growth in emerging markets, even though there is increasing evidence that the UK economy is showing signs of growth in 2014.

From a pure insurance perspective, increased trading from a growing economy may mean larger inventories and greater assets at risk – and greater liabilities. It’s essential that businesses match their coverage to their risks as they grow. This is particularly important when businesses make the key step into new international markets. This is a critical time in any firm’s evolution, bringing great opportunities but also introducing new risks. Distribution chains become extended and operations face new challenges, perhaps by exporting to new markets where legal liabilities are differently assessed. Economic upturn can also mean M&A opportunities, which again can bring a whole new set of challenges.

There was an interesting breakdown of results according to different business sectors. Engineering and construction sector is most worried about the impact of natural catastrophes and BI/supply chain risk and is the only sector to regard availability of credit as a top five concern.

For the manufacturing sector, BI and supply risk is significantly the major concern (60% of respondents citing this) with supply chain in particular deemed to be difficult for manufacturers to manage due to global demands for raw materials and competition. Legislative change is the top risk in the Power and Utilities sector with BI/supply chain risk second, and power blackouts the third biggest concern.

After natural catastrophes, theft, fraud and corruption are the second major concern for the Marine and Shipping sector (which includes cargo operators). Theft, particularly internal fraud, is also an important threat in the Transportation sector.

Meanwhile, in the Aviation sector there is growing concern about the impact a large-scale cyber-attack could have, particularly given the interconnected world of booking systems and client data. Cyber-crime was also identified as a fast emerging risk for the financial services sector. Nevertheless, regulatory changes remain the sector’s number one concern, reflecting increasing supervisory intervention around the globe following the financial crisis.

Emerging risks such as cyber threats are actually the biggest mover in this year’s Risk Barometer, climbing seven places to join the top ten for the first time.

Amid rising organised cyber criminality, IT security is not enough. Companies need to have a set of broad-backed policies and procedures in place around hardware, training and software protection. Procedures need to be tested and updated. As Nigel Pearson, Global Head of Fidelity (including Cyber) at AGCS says: “Even with the best risk management framework, companies will never be 100% save from glitches in the IT-infrastructure, failure of internal processes or external cyber-attacks. Each business needs to decide whether it prefers to carry that risk itself or transfer it by taking out a cyber-insurance policy.”

What our survey shows is that ultimately it is essential for management to drive a uniform risk management culture throughout the organisation, from shop floor through to the Board. There should be visible risk ownership with Board level responsibility for risk management, backed up by clearly communicated policies. We firmly believe that companies should combine prevention with cure by adopting a robust risk management approach with the back-up of a comprehensive insurance programme.

Carsten Scheffel is CEO of Allianz Global Corporate & Specialty (AGCS) UK

Carsten Scheffel