From flu pandemics and terrorist attacks to dramatic fluctuations in global weather patterns, today’s organisations face a new breed of risks. Nathan Skinner presents the results from our most extensive survey yet.
Almost daily, fresh reports detail the financial, social and human cost of the latest crisis or catastrophe threatening modern society. How well prepared are risk managers and insurance and reinsurance companies to deal with these emerging risks? Global Reinsurance teamed up with sister publication StrategicRISK, the leading magazine for risk managers in Europe, to unearth senior risk professionals’ opinions on emerging risks and find out what you, our readers, are doing to prepare.
Of most concern to the readers of Global Reinsurance were natural disasters (82%), terrorism (76%), the environmental and economic impacts of climate change (71%), followed by economic recession (59%), pandemics (53%), and cyber terrorism (47%). Fewer – around one quarter (24%) – of the reinsurers were concerned by population surge in developed nations as over-population, climate change and scarcity of resources drive mass migration, and less than 10% were seriously worried about the human health risks of wireless radiation, nanotechnology or GM crops. Strikingly, while 35% of reinsurers admitted to concerns over lack of access to clean water, none had taken steps to prepare for this.
In a result that seems to reflect their own business continuity strategies, almost two thirds of reinsurers (60%) said they had prepared for pandemics and 40% said they had taken steps to prepare for IT-related risks. Sixty percent of respondents had also taken steps to address the two other major risks – natural disasters and terrorist attacks. Less than half (47%) had taken steps to prepare for the environmental and economic impacts of climate change. About a third (27%) had made preparations for an economic recession.
The biggest fear for most European risk managers is the threat posed by a pandemic disease outbreak capable of spreading around the world. Sixty-four percent of StrategicRISK readers said this constituted a genuine concern; followed by cyber terrorism (63%) and terrorism (61%). A little over half of the risk managers were concerned about global climate change (56%), natural disasters (56%) and economic recession (56%). In line with these findings, most respondents said their company had taken steps to prepare for pandemics (74%), natural disasters (63%), terrorism (55%) and IT risks (55%). Fewer had taken steps to respond to the long-term environmental and economic impacts of climate change (36%). Less than a third (28%) had prepared for an economic recession.
Some respondents seemed to believe the risk of a pandemic had been overemphasised: “The turmoil around pandemic risk seems a little exaggerated,” said one risk consultant. While this was not a view shared by all, it was clear from further comments that much clarity was missing from the debate.
“A future pandemic will not be contained in any specific region, unlike most of those in the past, so it represents a global threat with several knock-on risks
Preparing for tomorrow’s risks
Many appeared keen to stress the need for a coordinated global strategy to effectively deal with a disease outbreak: “There should be more activities made by governments and inter-state agreements,” said one head of insurance. The real risks arising from a flu pandemic were interpreted as the impact on people’s lives, such as travel restrictions and loss of staff. The lack of availability of raw materials and medicines to deal with a global epidemic were common themes among the risk managers. A typical comment was: “Our main concern is the ability to continue offering key services with potentially depleted resources.”
The unpredictable effects of a pandemic on the global economy were highlighted by others: “A future pandemic will not be contained in any specific region, unlike most of those in the past, so it represents a global threat with several knock-on risks,” said a legal advisor to one reinsurance company. The ease with which infected migratory birds can transcend any and all barriers to the spread of pandemic diseases was raised by another Global Reinsurance respondent.
Of less immediate concern to our risk managers were the human health risks as a result of nanotechnology (19%), radiation from wireless technologies (21%) and population surge in developed nations (21%). Notably, just over a quarter were concerned about significant reductions in access to clean water (27%). Most were not concerned by the agriculture or human health risks as a result of genetically modified crops, with only 16% saying this was a serious risk.
One local government risk manager warned against complacency towards human health risks: “These are very real risks which people don’t attach enough importance to,” he said. Fewer than 10% of respondents had taken steps to prepare for these emerging risks, possibly reflecting the view that individual corporations simply can’t mitigate against certain risks.
On the steps companies had taken to prepare for emerging risks, business continuity planning (BCP) was the most favoured move with the vast majority of reinsurers and risk managers choosing to prepare one, reflecting an overarching theme in risk management. In addition, well over half of those surveyed had implemented a communications or information flow plan (59% of risk managers and 44% of reinsurers). The BCP methodology surfaced as a popular approach for dealing with, in particular, a pandemic crisis – 73% of the risk managers who chose pandemic as a serious concern had also prepared a BCP.
“The most common reason given by both sets of respondents for not taking action was because they felt the risk was not relevant to their organisation
Interestingly, of the respondents from both magazines who chose terrorism as a risk, only about half (53%) had prepared an evacuation plan or practiced what to do in an emergency. Only around a quarter – 22% of risk managers and 25% of reinsurers – had taken out additional insurance and reinsurance policies to cover any of the emerging risks, which could reflect the limited number of products available in the market.
While these findings seem to vindicate the view that insurance is insufficient to save a business in the event of a disaster, only 40% of risk managers and 25% of reinsurers said they had established a specific operations centre to be used as a command centre during an emergency. Furthermore, less than half – 42% of risk managers and 44% of reinsurers – said they had researched or modelled the nature of the risks. Encouragingly, only 37% of risk managers and 25% of reinsurers felt the need to seek third-party advice.
For the reinsurers, a different set of results could also be expected. Around a third (31%) thought a well-diversified portfolio was a useful way of spreading their risk. While transferring risk to the capital markets is undoubtedly on the radar of most reinsurers, only 6% of survey respondents thought it was a viable way to respond to these types of risks.
While planning and training was a popular precaution, this was couched in a realisation of the need to be able to react to the situation as it arises. “We have prepared contingency plans for pandemics but I believe they are likely to be of little use unless the pandemic hits on one continent, rather than globally. If the global scenario hits, I think we will just have to close down and see what remains after the pandemic passes,” said one director of risk management.
The most common reason given by both sets of respondents for not taking action was because they felt the risk was not relevant to their organisation. Fifty-three percent of risk managers and 57% of reinsurers gave this response. Meanwhile, 38% of the risk managers and 29% of reinsurers said they had not taken steps because the threat was purely theoretical. One fifth of those surveyed said it was because the risk was too large to manage. Around 1 in 10 said they believed the risk was not their responsibility. Positively, only 5% of risk managers and 7% of reinsurers felt taking action would slow down their business. Thirty-three percent of risk managers compared with 14% of reinsurers did not take steps to mitigate because they thought the risk was too expensive.
Nathan Skinner is senior reporter of Strategic Risk.