Reports gauge near threats, long-term risks

Cybersecurity, supply chain and business interruption, and environmental issues top the risk concerns of leaders across the insurance and risk management sector, according to reports released last month.

The COVID-19 pandemic and the uneven recovery from it were also cited as leading concerns, with inflation also poised to become a risk factor. 

The World Economic Forum’s Global Risk Report and Allianz Global Corporate and Specialty SE’s Risk Barometer 2022 also note the interconnection of risks and the continuing influence on other risks of the pandemic.

The Risk Barometer, which is conducted annually and is based on a survey on 2,650 risk management professionals, including Allianz customers and staff from 89 countries, pegged cyber incidents, business interruption and natural catastrophes as the most important global business risks of 2022. Climate change placed sixth, its highest rank ever, rising three positions from the 2021 barometer.

Cyber was again in the top spot after slipping to second last year, said Rani Christie, regional head of distribution, North America, in Alpharetta, Georgia, for AGCS. 

“Ransomware attacks, data breaches and information technology outages are at unprecedented levels. We’ve seen a trend over the last few years almost like a commercialization of cybercriminal activity,” Mr. Christie said.

Risk managers are building resilience in their organizations to contend with cyber criminals facing a much lower barrier to entry in terms of technical skills and financing, and who have a global reach, he said. 

The risks factors have a bearing on other risks, such as the pandemic leading to more staff working from home, which in turn led to heightened cyber exposures, said Colleen Zitt, chief risk officer at Zurich North America in Schaumburg, Illinois. “The digital transformation and working from home certainly has attracted bad cyber actors and ultimately increased the risk to companies and businesses,” she said.

“The remote work environment we’ve been in for the last couple of years, that’s obviously created vulnerability,” Mr. Christie said. 

The WEF’s Global Risk Report, produced in partnership with Marsh & McLennan Cos. Inc., Zurich Insurance Group Ltd. and South Korean conglomerate SK Group, identified heightened supply chain and cyber risks among top near-term challenges, while climate and environmental issues dominated the long view. The report is based on WEF’s Global Risks Perception Survey, using 959 responses from professionals across eight regions in technology, economics and other fields. 

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Marc Wagman, New York-based managing director in the credit and political risk practice group of Arthur J. Gallagher & Co., said more clients are reacting to the uncertainty and potential for increased exposure.

“We are seeing an increase in both consultative activities as well as increased demand for these types of covers. People are more keen than ever to cover credit and political risk exposures,” he said. Such coverages relate to payment risks and political risk, he said, “the type of coverage banks, private equity funds and large multinationals buy to protect their assets and income streams in emerging markets.”

The pandemic has acted like a stress test for business systems, such as supply chains, highlighting weaknesses, sources said.

“We started to see where the limits of our supply chain and the resiliency were,” said Reid Sawyer, head of the emerging risks group and U.S. cyber consulting practice for Marsh LLC in Chicago. 

The interconnectivity of the risk factors complicates addressing exposures, Mr. Sawyer said. “How do you stress test for pandemic, even environment, because all of these things intersect with supply chains at some point.” 

Business interruption, the second greatest threat according to Allianz’s Risk Barometer, can directly affect supply chains, Mr. Christie said, again showing how the perils affect each other. “The ripple effect of business interruption is massive,” he said.

Environmental concerns dominated the WEF report’s long-term view, with “climate action failure,” “extreme weather events” and “biodiversity loss” ranking as the top three most severe risks over a 10-year horizon. “It’s clear that a transition is needed from fossil fuels,” Ms. Zitt said.

Mr. Sawyer said climate change poses some of the same risk and exposure challenges as COVID-19. “How do we think about systemic risk? It’s the same system dynamics that are now being tested in ways they haven’t been over the past 10 to 15 years,” he said.

The WEF report highlights the potentially disparate paths toward recovery from the pandemic taken by different nations and regions as one type of systemic threat. “The economic fallout from the pandemic is compounding, with labor market imbalances, protectionism and widening digital, education and skills gaps that risk splitting the world into divergent trajectories,” the report said.

“It’s not going to be a balanced process,” said Rafael Docavo-Malvezzi, New York-based global chief underwriting officer, political risk, credit and bond, at Axa XL, a unit of Axa SA. “We were all preparing for a smoother transition away from COVID.” 

 Inflation could compound challenges to the economic recovery from business, supply chain and labor disruptions. The combination of inflation becoming more ingrained and central banks adjusting monetary policy and raising interest rates “has the potential to be quite destructive in a lot of emerging markets,” Mr. Docavo-Malvezzi said.

“The transition to a higher interest rate environment can be very disruptive,” he said.

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US, China tensions raise global concerns

As the largest trading partner of the United States, China plays a central role in global supply chains, and any deterioration in relations between the nations could worsen exposures for those managing supply operations, experts say.

“COVID-19 highlighted the weaknesses in the supply chain,” including “the high dependence on China for a lot of basic inputs,” said Rafael Docavo-Malvezzi, New York-based global chief underwriting officer, political risk, credit and bond, at Axa XL, a unit of Axa SA.

Goods imported from China last year totaled $456.8 billion through November and accounted for 17.7% of imports, according to statistics from the U.S Census Bureau. 

With nearly one fifth of U.S. imports coming from China, rising tensions between the two countries over trade policies, Taiwan and other issues could threaten supply chain security. 

“Given how important China is as a trading partner to us, I have a significant concern over what happens” if tensions keep rising, especially in the South China Sea, said Marc Wagman, New York-based managing director in the credit and political risk practice group of Arthur J. Gallagher & Co. “This could be hugely disruptive to the global economy,” along with the geopolitical ramifications. “That’s a lose-lose for everybody.”

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