Businesses face complex challenges in an interconnected world

Australian businesses face new challenges from a rise of disruptive scenarios in an increasingly interconnected corporate environment, according to the fourth Allianz Risk Barometer 2015.

“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 cyberattacks can cause business interruption, not only for one company but for whole sectors or critical infrastructure,” said Holger Schaeffer, general manager of Allianz Global Corporate & Specialty (AGCS) Pacific, the dedicated insurer for corporate and special risks of the Allianz Group.

The top five risks include: business interruption and supply chain risk (47% of responses); loss of reputation and brand (35%); intensified competition (35%) and talent shortage/ageing workforce (24%); natural catastrophes (24%). For the first time, market stagnation or decline (18%) has appeared in the top 10 on the Australian list in sixth position, while internationally it has fallen to seventh from fifth in 2014.

Other risks that have remained unchanged or fallen down the list in the Australian Allianz Risk Barometer 2015 are: market fluctuations (eg, exchange rates or interest rates) (18%) - sixth to seventh; commodity price increases (18%) - seventh to eighth; changes in legislation or regulation (12%) - second to ninth; and credit availability (12%) - remained in tenth spot.

“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,” he said.

Interestingly, while cyber risk has risen to fifth from seventh position on the international Risk Barometer, it has fallen out of the Australian top 10 from fourth position in 2014. Despite this local anomaly, there is no question that the risk of cybercrime, IT failures and data breaches is on the rise. Cyber risk moved up the Risk Barometers of Europe, the Americas, the Middle East and Africa and rose into the top 5 on the overall international Risk Barometer for the first time.

Although awareness of cyber risks is generally high and increasing, many companies are still underestimating the potential impacts, according to 73% of responses from Allianz risk experts located around the world. Budgetary constraints are another reason why companies are not better prepared to combat cyber risks.

“Cyber risks are very complex. Different stakeholders such as IT security architects and business continuity managers need to share their knowledge to identify and evaluate threat scenarios. Knowledge that previously might have been siloed in businesses needs to be incorporated into one ‘think tank’, which can look at risks holistically. The ‘human factor’ should also not be underestimated, as employees can cause IT security incidents - inadvertently and deliberately,” explained Schaeffer.

For the third year in succession, business interruption (BI) and supply chain risk is the top peril in the International Allianz Risk Barometer, with almost half (46%) of the responses rating this as one of the three most important risks for companies. This aligns closely with the risk assessment in Australia, where BI is also at the top of the list according to 47% of Allianz’s Australian risk experts. The subsequent impact of a disruption on a company, its suppliers and customers often outweighs the physical damage that caused the disruption in the first place. At US$1.36m, the average BI insurance claim is already 32% higher than the average direct property damage claim (US$1.03m).

According to Schaeffer, “Businesses spend a lot of time assessing direct damage and looking at their own BI impact, but more work needs to be done analysing the risks associated with suppliers and customers.”

Supply chain risk management remains a gap in many companies’ risk management programs. Many businesses still do not have alternate suppliers. “Collaboration between different areas of the company is necessary in order to develop robust processes which identify break points in the supply chain,” he said. Concluding, Schaeffer said, “So-called ‘disruptive technologies’ such as 3D-printing or nanotechnology are increasingly dominating the long-term risk agenda. Companies can expect to face further disruption from technological innovation.”