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Credit: Crain's

February 2023

Cyber and BI Top Threats As Economic and Energy Risks Rise: Allianz Risk Barometer

Cyber incidents and Business interruption rank as the biggest company concerns for the second year in succession.

    In the Allianz Risk Barometer 2023, there is both stability and change. For the second year in a row, cyber incidents and business interruptions top the list of company concerns (34% of replies each). However, as the economic and political repercussions of Covid-19 and the Ukraine war take hold, macroeconomic developments like inflation, financial market volatility, and a looming recession—up from #10 to #3 year over year—as well as the impact of the Energy crisis—a new entry at #4—are the top risers in this year's list of global business risks.

    Companies must respond quickly to such urgent issues, which is why both natural disasters (from #3 to #6) and climate change (from #6 to #7) fall in the annual rankings, as well as pandemic outbreak (from #4 to #13), given that vaccines have ended lockdowns and limitations. The top 10 global hazards now include political risks and violence at number 10, while a shortage of skilled workers jumps to number 8. Changes in laws and regulations continue to be a major danger at number 5, while fire and explosion move down two spots to number 9. View the complete country and worldwide risk rankings.

    The Allianz Risk Barometer is an annual ranking of business risks created by the corporate insurer of the Allianz Group, Allianz Global Corporate & Specialty (AGCS), in collaboration with other Allianz entities. It incorporates the opinions of 2,712 risk management professionals in 94 countries and territories, including CEOs, risk managers, brokers, and insurance experts. This is the 12th time it has been printed.

    Joachim Mueller, CEO of AGCS, offers the following analysis of the data: "The Allianz Risk Barometer shows that enterprises are most concerned about rising cyber risks and business interruption. At the same time, they saw the oil crisis, approaching recession, and inflation as direct challenges to their industry. Companies, particularly those in Europe and the US, are concerned about the continued "permacrisis" brought on by the pandemic's effects as well as the political and economic repercussions of the ongoing war in Ukraine. The good news is that as an insurance, we observe continual improvement in this area among many of our clients, notably around enhancing business continuity planning, enhancing cyber controls, and making supply chains more fail-proof. Given the recent events, building resilience and reducing risk is now a top priority for businesses.

    The top four threats in the Allianz Risk Barometer for 2023 are largely the same for large, medium, and small businesses worldwide, as well as for core European economies and the US (energy crisis excepted). The diverse effects of the ongoing conflict in Ukraine and its economic and political ramifications can be seen in the risk concerns for firms in Asia Pacific and African nations.

    Digital Disruption Dangers
    For the first time, cyber incidents—such as IT failures, ransomware attacks, or data breaches—rank as the top risk globally for the second year in a row. It also tops the list of threats in 19 other nations, including Canada, France, Japan, India, and the UK. Small businesses (with yearly revenues under $250 million) are most concerned about this risk. The hazard in cyberspace is still greater than it has ever been for many businesses, and cyber insurance claims are still at a high level. Large corporations can now fend off most attacks since they are accustomed to being targeted. Small and medium-sized firms are increasingly affected, and they frequently underestimate their risk. According to Shanil Williams, AGCS Board Member and Chief Underwriting Officer Corporate, who is in charge of cyber underwriting, all of them need to consistently make investments in bolstering their cyber controls.

    The Allianz Cyber Center of Competence reports that while the average cost of a data breach is at an all-time high of $4.35 million and is anticipated to surpass $5 million in 2023, the frequency of ransomware assaults remains high. The likelihood of a significant cyberattack by state-sponsored actors is rising as a result of the crisis in Ukraine and broader geopolitical tensions. Additionally, there is a growing shortage of cyber security experts, which makes it difficult to increase security.

    Because many business models are susceptible to rapid shocks and change, which in turn affect profitability and revenues, 2023 is probably going to be another year of increased business interruption (BI) risks for enterprises in many countries. The top danger in nations including Brazil, Germany, Mexico, the Netherlands, Singapore, South Korea, Sweden, and the US is BI, which ranks #2 internationally.

    Disruptive sources cover a broad range. The top fear among BI firms is cyber (45% of respondents); the energy crisis comes in second (35%), followed by natural disasters (31%). Some energy-intensive sectors have been compelled to use energy more effectively, relocate operations to new places, or even consider temporary shutdowns as a result of the growing cost of energy. The ensuing shortages pose a threat to the supply of a number of vital industries in Europe, including those in the food, agriculture, chemicals, pharmaceuticals, building, and manufacturing sectors. However, the continent's mild winters and the stabilization of gas prices are helping to alleviate the energy situation.

    Another anticipated source of disruption in 2023 is a potential global recession, which might lead to supplier failure and insolvency. This is especially concerning for businesses with just a few or no essential suppliers. Allianz Trade predicts a sharp increase in worldwide business insolvencies in 2023: +19%.

    Macroeconomic Depression
    Macroeconomic developments, such as inflation or economic and financial market instability, are ranked as the third highest risk for businesses globally in 2023 (25%) – up from #10 in 2022 – marking the first time in ten years that this risk has made the top three. According to Allianz Research, which projects that both Europe and the US will experience recession in 2023, all three of the world's major economic regions—the United States (US), China, and Europe—are currently experiencing crises, albeit for different causes. Since it is "eating" into many organizations' pricing strategies and profit margins, inflation is a particular cause for concern. The financial markets, like the real economy, are in for a challenging year as central banks reduce excess systemic liquidity and trading volumes fall even in historically liquid areas.

    "2023 will be a difficult year; strictly speaking, many homes and business are likely to look back on it as a year to forget. But there's no need to give up, argues Allianz Chief Economist Ludovic Subran.
    "For starters, the change in interest rates is beneficial, especially for the millions of savers. Even though - or rather because of - the oil crisis, the medium-term picture is actually much more promising. Beyond the anticipated recession in 2023, the implications are already starting to become apparent: a forced transition of the economy toward decarbonization as well as heightened risk awareness across all facets of society, bolstering social and economic resilience.

    Fallers and risers
    The Allianz Risk Barometer shows that the Energy Crisis is the biggest risk that has increased, ranking #4 for the first time (22%). Some industries, such the production of chemicals, fertilizers, glass, and aluminum, may be dependent on a single energy source (Russian gas in the case of many European countries), making them vulnerable to interruptions in the supply or rises in energy prices. If these foundational businesses struggle, it may have an impact on industries lower down the value chain. The energy crisis will continue to be the biggest profitability shock for European countries in particular, claims Allianz Trade. The majority of non-financial corporate profits would be wiped out by energy prices at their current levels, as pricing power is eroding due to sluggish demand.

    Motivated by the knowledge that 2022 will be another turbulent year with conflict and civil unrest dominating the news, At #10 (13%), political hazards and violence is a new entry. As the cost-of-living problem bites in many nations, businesses are increasingly concerned about rising interruption from strikes, riots, and civil unrest activity in addition to war.

    Natural disasters (19%) and climate change (17%) continue to be top worries for businesses while falling in the rankings year over year. They continue to rank among the top seven global risks in a year that featured Hurricane Ian, one of the most powerful storms ever recorded in the US, as well as heatwaves, droughts, and winter storms with losses insured at more than $100 billion.

    Source: Allianz

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