Top 10 global risks facing businesses in 2021

Top 10 global risks facing businesses in 2021

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A trio of Covid-19 related risks heads up the 10th Allianz Risk Barometer 2021, reflecting potential disruption and loss scenarios companies are facing in the wake of the coronavirus pandemic. Business interruption (#1 with 41% responses) and Pandemic outbreak (#2 with 40%) are this year’s top business risks with Cyber incidents (#3 with 40%) ranking a close third.  The annual survey on global business risks from Allianz Global Corporate & Specialty (AGCS) incorporates the views of 2,769 experts in 92 countries and territories, including CEOs, risk managers, brokers and insurance experts.

Given the unprecedented disruption caused by the coronavirus outbreak, it is no surprise that business interruption and pandemic outbreak top the 2021 Allianz Risk Barometer.

Pandemic is the biggest climber this year (up 15 positions), with cyber incidents ranking a close third. All three risks – and many of the others in this year’s top 10 – are interlinked, demonstrating the growing vulnerabilities and uncertainty of our highly globalised and connected world, where actions in one place can spread rapidly to have global effects.

Looking forward, the pandemic shows companies need to prepare for a wider range of business interruption triggers and extreme events than previously. Building greater resilience in supply chains and business models will be critical for managing future exposures.

1. Business interruption

Prior to the Covid-19 outbreak, Business interruption (BI) had already finished at the top of the Allianz Risk Barometer seven times and it returns to the top spot after being replaced by cyber incidents in 2020. The pandemic shows that extreme global-scale BI events are not just theoretical, but a real possibility, causing loss of revenues and disruption to production, operations and supply chains. 59% of respondents highlight the pandemic as the main cause of BI in 2021, followed by Cyber incidents (46%) and Natural catastrophes and Fire and explosion (around 30% each).

The pandemic is adding to the growing list of non-physical damage BI scenarios such as cyber or power blackouts. “The consequences of the pandemic – wider digitalization, more remote working and the growing reliance on technology of businesses and societies – will likely heighten BI risks in coming years,” explains Philip Beblo, expert in AGCS’s global Property underwriting team. “However, traditional physical risks will not disappear and must remain on the risk management agenda. Natural catastrophes, extreme weather or fire remain the main causes of BI for many industries and we continue to see a trend for larger losses over time.”

In response to heightened BI vulnerabilities, many companies are aiming to build more resilient operations and to de-risk their supply chains. According to Allianz Risk Barometer respondents, improving business continuity management is the main action companies are taking (62%), followed by developing alternative or multiple suppliers (45%), investing in digital supply chains (32%) and improved supplier selection and auditing (31%). According to AGCS experts, many companies found their plans where quickly overwhelmed by the pace of the pandemic. Business continuity planning needs to become more holistic, cross-functional, and dynamic, monitor and measure emerging or extreme loss scenarios, be constantly updated and tested and embedded into an organisation’s strategy.

2. Pandemic outbreak

The pandemic has demonstrated just how vulnerable the world is to unpredictable and extreme events and has highlighted the downside of global production and supply chains. When container shipping was effectively grounded in Spring 2020, with fleets taking numerous ships out of service in response to capacity shortfalls, global supply chains came under pressure. Subsequently, components failed to arrive and production came to a standstill in many industries, especially in the automotive sector.

A study by Euler Hermes found that almost all (94%) companies surveyed reported a Covid-19-induced disruption to their supply chains, while more than a quarter (26%) of US companies reported “severe disruption” as a result of the pandemic. This means awareness of business interruption risk is now at the very top organisational level. It has become a discussion not just for risk professionals but for company boards and shows the need for businesses to build more resilient supply chains, as well as to find new ways to address uninsurable risks. Covid-19 is a reminder that not all perils are insurable, and that risk management and business continuity planning play a critical role in helping businesses survive extreme events.

3. Cyber risks

Cyber incidents may have slipped to #3 but it remains a key peril with more respondents than in 2020 and still ranking as a top three risk in many countries.  The acceleration towards greater digitalisation and remote working driven by the pandemic is also further intensifying IT vulnerabilities. At the peak of the first wave of lockdowns in April 2020, the FBI reported a 300% increase in incidents alone, while cyber crime is now estimated to cost the global economy over $1trn, up 50% from two years ago. Already high in frequency, ransomware incidents are becoming more damaging, increasingly targeting large companies with sophisticated attacks and hefty extortion demands.

“Covid-19 has shown how quickly cybercriminals are able to adapt and the digitalization surge driven by the pandemic has created opportunities for intrusions with new cyber loss scenarios constantly emerging,” says Catharina Richter, Global Head of the Allianz Cyber Center of Competence at AGCS. “Attackers are innovating using automated scanning to identify security gaps, attacking poorly secured routers or even using ‘deepfakes’ – realistic media content modified or falsified by artificial intelligence. At the same time, data protection and privacy regulation and fines for data breaches continue their upward trend.”

4. Market developments

As the world continues in the throes of an economic downturn amid a disruptive coronavirus pandemic, market developments climbs one position year-on-year in the Allianz Risk Barometer, reflecting the risk of rising insolvency rates following the pandemic.

One of the major factors fuelling this concern is the gradual phasing out of temporary policy measures, such as JobKeeper in Australia, designed to support businesses through the peak of the pandemic financially. It is feared that removing these payments will take a toll not only on the businesses that rely on them but also on the economy.

But while this seems rather grim, the pandemic is also predicted to jumpstart a period of innovation. We are likely to see some market disruption with a shift away from traditional sectors and a rise in new competitors’ opportunities.

Businesses are also expecting to see the acceleration towards greater digitalisation and an increase in remote working.

5. Changes in legislation and regulation

Covid-19 may have caused some delays of the regulation train but it did not stop or even derail it, quite the opposite, 2021 promises to become a very busy year in terms of new legislation and regulation.

Two areas stand out for their significant business impact: data and sustainability. Access and use of data determine the competitive landscape in the 21st century and new rules aim at creating a more level playing field. This includes, for example, a new framework for artificial intelligence and cyber security, as well as new standards and rules for digital finance and digital services and platforms.

Meanwhile, in order for a successful transition to a zerocarbon economy to happen integrating sustainability considerations into all business activities is key. To achieve this goal, a certain level of regulation is necessary. In particular, improving the availability, comparability and reliability of reported non-financial data – including climate-related key performance indicators based on greenhouse gas emissions – would help to steer sustainable investments successfully and to facilitate the green transformation.

6. Natural catastrophes

Devastating wildfires in California and Australia and the record breaking number of tropical storms in the Atlantic Ocean were among the natural catastrophes to dominate the headlines in 2020. No previous Atlantic hurricane season on record has produced as many named storms (30) of which 13 developed into hurricanes. Meanwhile, Australia suffered its worst-ever bushfire season, unprecedented in its extent and intensity, burning through over 46 million acres of land and causing damage to countless homes and buildings.while five of California’s six largest fires occurred in 2020, including its first “gigafire”, the August Complex Fire which burned more than one million acres.

With the regularity of these catastrophic weather events occuring globally, it will be crucial that businesses have a plan in place to help manage any associated risks and minimise losses.

7. Fire, explosion

Large-scale events such as the devastating explosion in the port of Beirut, Lebanon in August 2020, which has resulted in total damages of up to $15bn, according to industry estimates, and around $1.5bn in insured losses to date, or the catastrophic explosion in the port of Tianjin in China five years ago, which caused insured losses estimated between $2.5bn and $3.5bn, remind both industry and the general public of the terrible impact industrial fires and explosions can have.

In many cases it’s not even the material damage of such an incident – although this is often costly – that results in the biggest losses. A major fire or explosion can prevent companies from servicing their customers or resuming operations for some time and such incidents are the most frequent drivers of business interruption claims in particular. In fact, fires and explosions were the number one cause of losses for businesses worldwide over a fiveyear period up until the end of 2018, according to Allianz analysis, causing in excess of €14bn ($15.7bn) worth of insured damage from more than 9,500 claims.

It is a good idea for businesses to review their fire mitigation practices and ensure all risk management plans are shared with any employers, partners, contractors, clients, and neighbours from other businesses.

8. Macroeconomic developments

In the short term, the global economic outlook is looking better than intially anticipated. According to the report, global GDP is likely to lift by +4.4% in 2021, compared to the expected contraction of -4.5% in 2020.

However, this is conditional, highly dependent on the successful deployment of effective COVID-19 vaccines and ongoing fiscal, financial, and monetary measures. The staggering $277trn of global debt will also influence economic growth potential for both individual and global economies.

9. Climate change/increasing volatility of weather

Our global climate is changing and will continue to change in ways that will influence the planning, operational and investment decisions of businesses, government agencies and other organisations.

The most significant threat climate change creates for businesses is the physical loss impact on business property and assets due to extreme weather catastrophes. But it is also the impact on supply chains, customers, and communities that is of equal importance.

In 2021, we are seeing a strong push for climate change to be back on the global priority list. Policy changes, new taxing regimes, reporting requirements and sustainablity metrics are to be expected. Rising regulatory and legal risk associated with climate change is also likely to impact businesses, particularly those in high carbon-emitting sectors.

So, what can businesses do? Identifying company-specific climate risks and opportunities is a great first step and will help businesses build a resilient climate strategy. This will also help to ensure that businesses are committed to making appropriate adjustments to their current strategy and business models.

10. Political risks and violence

Political risks and violence returns to the top 10 of the Allianz Risk Barometer for the first time since 2018, reflecting the fact that civil unrest incidents such as protests and riots now challenge terrorism as the main political risk exposure for companies. The number, scale and duration of many recent events has been exceptional, such as the “yellow vest” protests in France (insured losses around $90mn), as well as unrest in locations like Hong Kong ($77mn), Chile (about $2bn) and Ecuador ($821mn).

We have seen many anti-lockdown demonstrations turn violent in several western countries and a rise in protests and racially charged riots in support of the Black Lives Matter movement. It is expected that more than 70 countries will likely experience an increase in protests over the next two years.

Businesses do not have to be directly impacted by civil unrest or terrorism to suffer financial loss. If the surrounding area is closed off or under repair, this can mean access is restricted for customers, business owners, and suppliers for an extended period. Revenue can take a significant hit until normal operations can be resumed.

The information provided in this article is of a general nature only and has been prepared without taking into account your individual objectives, financial situation or needs. If you require advice that is tailored to your specific business or individual circumstances, please contact HDL.

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