Lloyds Risk Index 2011

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This second Lloyd's Risk Index, based on a survey of global business leaders by the EIU, shows that business leaders' perceptions of risks have evolved significantly in the intervening two years. In all regions of the world, across all sectors, business leaders now perceive the world as an inherently riskier place.

Survey respondents were distributed across Europe (35%), North America (27%) and Asia-Pacific (27%), with the rest of the world comprising about 11%. Financial services provided the largest number of respondents at 19%, followed by professional services at 13%, manufacturing at 10% and technology at 10%. The remaining 48% of respondents represent a wide range of other industries. Around half of respondents represent corporations with annual revenues of over US$500m.

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Lloyds Risk Index 2011

  1. 1. Lloyd’sRISK INDEX2011Featuring content by
  2. 2. REspoNdENt pRoFILEs WHICH OF THE FOLLOWING WHAT IS YOUR COMPANY’S ANNUAL WHAT IS YOUR DESCRIBES YOUR JOB TITLE? GLOBAL REVENUE IN US DOLLARS? PRIMARY INDUSTRY? Financial services 18.6% Professional services 13.2% Manufacturing 10.4% % % IT and technology 9.8% Energy and natural resources 8.6% Healthcare, pharmaceuticals and biotechnology 4.8% Entertainment, media and publishing 4.4% Construction and real estate 4.2% Board member 8.5% $499m or less 51.0% Retailing 3.2% CEO/President/Managing director 52.7% $500m to $999m 14.9% CFO/Treasurer/Comptroller 15.6% $1bn to $4.999bn 17.1% Consumer goods 3.0% CRO/Chief risk officer 3.8% $5bn to $9.999bn 5.4% CIO/Technology director 5.7% $10bn or more 11.6% Agriculture and agribusiness 2.6% Chief compliance officer 0.6% Other C-level executive 13.1% Chemicals 2.6% Education 2.6% Telecommunications 2.6% IN WHAT REGION ARE YOU PERSONALLY BASED? Transportation, travel and tourism 2.6% Aerospace/Defense 1.8% Government/Public sector 1.8% Logistics and distribution 1.8% North America Europe 27% 35% Automotive 1.6% Asia-Pacific 27% Rest of the World 11%Lloyd’s Risk Index 2011
  3. 3. 01coNtENts Introduction Foreword by Richard Ward, Chief Executive, Lloyd’s 02 Executive summary of findings from the Economist Intelligence Unit (EIU) 03 01 02 03 the top mind the Risk awareness five risks (reality) gap rises in the east Loss of customers 10 Political, crime and security risks 16 An increased appreciation of risk 24 Talent and skills shortages 11 Environmental risks – a balancing act for business 19 Reputational risk 13 The selective invisibility of natural hazards 20 Currency fluctuation 13 Changing legislation 14 conclusions Conclusion 26 Appendix and methodology 27Lloyd’s Risk Index 2011
  4. 4. 02 INTRODUCTIONforeword Foreword by DR Richard Ward Risk awareness rises in the East In 2009 much of the world held its breath as Fascinating too, is the speed at which risk we watched banks fail, high street businesses awareness in the East has grown. The rise in collapse and the damaging impact of the the scores given across all categories of risk, credit crunch on the ‘real economy’. It was compared to 2009, by Asia-Pacific respondents in that highly charged context that Lloyd’s, in is significant, as is the increase in levels of collaboration with the Economist Intelligence business preparedness to deal with them. Unit (EIU), published its first global survey1 Interestingly, these greater scores do not apply on risk attitudes amongst business leaders. only to natural hazards, of which Asia-Pacific has had direct recent experience, but across all Two years later, global economies remain in five categories of risk surveyed. This awareness a state of flux, with growing debate on how presents both risks and opportunities for long it will take to play out, as we see with domestic and international business, as the the current political and sovereign debt crisis. new world balance of economic and political This second Lloyd’s Risk Index, based on a power shifts. survey of global business leaders by the EIU, Reality and perception at odds shows that their perceptions of risks have Business leaders have scored themselves evolved significantly in the intervening two as more than adequately prepared for 48 years. In all regions of the world, across all out of the 50 risks. For Lloyd’s, and for the sectors, business leaders now perceive the The last two years have world as an inherently riskier place. insurance industry as a whole, the fact that this ‘preparedness gap’ exists for only two thrown the world into As we look at these changing priorities in of the listed risks, compared to eight in economic and political more detail in this report, three key strands 2009 is interesting. I welcome any increase turmoil from which it emerge from the findings. in the implementation of formal risk systems, but businesses also need to recognise such has yet to emerge. From Credit Crunch to talent crunch systems cannot anticipate so-called ‘black swan’ There has been a change in emphasis in events. When it comes to risk management business risk rankings. In 2011, businesses planning businesses need to increasingly are less concerned about the availability of think the unthinkable in order to identify all credit and more worried about the loss of their vulnerabilities and minimise them. customers and orders created by a new age of austerity in the West. In the last two years, the world has been thrown into economic and political turmoil More surprising is the way that the risk posed from which it has yet to emerge. It will be by talent and skills shortages has shot up the intriguing to see the impact on business list to become the second highest priority for attitudes over the next two years, when we businesses. There are a number of theories publish the third Lloyd’s Risk Index in 2013. as to why this move from credit crunch to talent crunch has occurred, some of which we outline in this report. We hope it will DR RICHARD WARD encourage debate about how businesses can Chief Executive manage this escalating risk more effectively. Lloyd’sLloyd’s Risk Index 2011
  5. 5. 03EIU executive summary Prepared by the Economist Intelligence About this executive summary In this summary, we identify the key risk areas Unit for Lloyd’s of London* The aim of this executive summary, based by looking thematically at the overall risk on findings and analysis from the EIU and ratings, the top risks and the biggest changes commissioned by Lloyd’s, is to assess corporate from 2009. We also examine the survey risk priorities and attitudes around the world. results through a regional lens for the biggest The findings are based on a global survey of differences in relation to current economic, over 500 C-suite and Board level executives political and commercial operating contexts. conducted in August 2011. Survey respondents were distributed across Summary of Insights Europe (35%), North America (27%) and Three years on from the start of the worst Asia-Pacific (27%), with the rest of the world financial crisis for more than a generation, comprising about 11%. Financial services there is still uncertainty about the future. Will provided the largest number of respondents at we manage to avoid a double-dip recession 19%, followed by professional services at 13%, and emerge into a period of growth? If we manufacturing at 10% and technology at 10%. do, will it be strong growth, or a prolonged The remaining 48% of respondents represent period of slow progress, as many economies a wide range of other industries. Around half are currently experiencing? of respondents represent corporations with annual revenues of over $500m. How can businesses manage risk in this The combination of In this summary, we examine some of the environment? The financial crisis has undoubtedly reduced global economic global shocks through over-arching trends and themes emerging resilience and, as the World Bank argues increasingly interlinked and from the 2011 survey. We also identify major in its 2011 report on the macroeconomic shifts from the 2009 survey and report, interdependent systems Lloyd’s 360 Risk Insight: Risk Priorities and risk landscape, the combination of global shocks through increasingly interlinked and has raised the threat levels Preparedness. We would like to thank the interdependent systems has raised the threat respondents who took the time to participate of risk across the board. in the survey. level of risks across the board. Economies in many developed countries are weighed down with debt and face years of sluggish growth, and may lack the agility required Methodology to efficiently manage external factors in The survey examined attitudes to risk across this context. Meanwhile, Asia’s 3.5 billion five key categories: consumers and dynamic market environment >> Business and strategic risk may provide a massive growth opportunity. >> Economic, regulatory and market risk A number of interesting insights and >> Political, crime and security risk consistent themes can be seen emerging >> Environmental and health risk, and from the survey. There is a greater sense >> Natural hazard risk. of preparedness to address risk across the Respondents to the survey were asked to rate world’s boardrooms, a significant global both the overall risk category and a series of key disparity across the entire risk arena between risks within each category against their corporate East and West and a heightened sense of risk priorities and degree of preparedness to priority across all risk categories. manage those risks. A score was calculated for Anything high on an executive’s risk priority each where zero represents the lowest level list can be considered in terms of a potential of priority or preparedness and ten represents critical point of failure for business; some the highest. significant changes in the risk landscape over Some new risks have been added to the 2011 the past two years reflect new critical points survey from the 2009 version. These enable of failure, such as risk of talent shortages. us to explore in greater detail the role of Yet, while executives’ attitudes to risk do government, demographic forces, and global not suggest they are anticipating a new era resource issues such as food security and of growth, their leading concern – that they water scarcity, all of which we believe will will lose customers – shows that fear of give a more complete picture of corporate a double-dip recession is high up in their risk priorities in 2011. thinking. Uncertainty is still the issue of the day. * The EIU bears sole responsibility for the content of this executive summary. The EIU editorial team executed the online survey, conducted the analysis and wrote this summary.Lloyd’s Risk Index 2011
  6. 6. 04 introductionEIu executive summarycontinued KEy INsIghts aNd thEmEs Chart 1 All overall risk priorities are notably compared to two years ago, how are you higher than two years ago, with Asia prepared for risks to your business and leading the way. operations? While risk priorities generally increased across all five risk categories globally, the East drove this increase with an average overall priority score increase of 26% since 2009, compared with only 4% in Europe and North America. 70% The global imbalance between high and low growth economies is no doubt driving the regional disparities. But the notable overall increases are likely to be a combination of this and other factors, including the state of longer-term economic uncertainty in the current business environment. The survey suggests that the discipline of risk management are better prepared has also become more important, and this is demonstrated in many practical ways. Businesses feel distinctly better prepared to manage risks to their business and operations than they did two years ago. Our survey finds that a strong sense of preparedness prevails in boardrooms around 27% are about 3% the same are not well the world. More than 70% of survey respondents prepared report that their company is better prepared to manage business and operational risks than they were two years ago, and fewer than 3% say they are less prepared. This is a markedly different result from our 2009 survey, when we found ‘preparedness gaps’ (defined as risks where the preparedness score was not as high as the priority score), in eight out of 41 individual risks, compared with only two out of 50 in 2011. One should not ignore the fact that, for many companies, there will be a difference between actually being prepared and simply believing that they are prepared. But in view of the severity of financial and natural disasters over the past three years, and the rise in practical risk management measures internally, perhaps executives themselves have re-calibrated, for the better, what it means to be prepared.Lloyd’s Risk Index 2011
  7. 7. 05Overall business and strategic risks, as Environmental and natural hazardswell as economic, regulatory and market are seen as lower priorities overall.risks, still dominate risk priorities globally. Risks concerning natural hazards, andAlthough business and strategic risks overall longer-term environmental trends suchedged past economic, regulatory and market as climate change, still tend to be of lowerrisks for the top priority spot this year, the scores and less immediate concern to board-levelfor both were high (7.3 and 7.2 respectively). executives. ‘Black swan events’, which haveThere are some regional differences in whether a relatively small probability but a high impact,one or the other of these risk categories is tend to be low on our survey respondents’ listseen as the top priority, but it is important to of priorities. Despite the relatively high profilerecognise that globally, the top three risks are of global issues such as food security andall business and strategic risks: loss of customers water scarcity, these are also perceived to beand orders, talent and skills shortages and a low priority, as are demographic factors –reputational risks. Meanwhile, the next five although there are notable regional differences.are all economic risks: currency fluctuation, What is also particularly interesting this year,changing legislation, cost and availability of is that environmental and health risks increasedcredit, price of material inputs and inflation. in priority by the greatest amount, despite still remaining at a moderate risk priority level overall. Pollution and environmental liability is the top risk in this category, probably reflecting the anticipated costs of increased regulation. The companies which may be hit hardest by these costs are those with operations in countries such as China, where environmental regulations are currently well behind those in the West, but are likely to catch up quickly.Table 1. Overall risks, 2011 versus 2009 *2011 2011 2011 2009 2009Priority Priority Preparedness Priority PreparednessRank Overall Risks Score Score Score Score1 Business and strategic risk 7.3 7.1 6.5 6.02 Economic, regulatory and market risk 7.2 6.5 6.8 5.83 Political, crime and security risk 5.4 6.5 4.9 5.14 Environmental and health risk 5.0 6.1 4.0 5.15 Natural hazard risk 4.2 5.5 3.9 5.4* The survey conducted in 2009 offered respondents a list of 41 risks. The 2011 Lloyd’s Risk Index updated this list to reflect the current risk environment by removing some of these risks and adding others. A full list of these removals and additions can be found in the Appendix. This means that the 2009 and 2011 rankings are not statistically directly comparable, although they do offer an insight into changes in both perceptions of risk priority and preparedness over the last two years.Lloyd’s Risk Index 2011
  8. 8. 06 introductionEIU executive summarycontinuedChart 2individual risks, priority and preparedness scores 2011Risk1 Loss of customers/Cancelled orders Business 6.2 6.32 Talent and skills shortages (including succession risk) Business 6.2 5.93 Reputational risk Business 5.8 6.64 Currency fluctuation Economic 5.6 5.95 Changing legislation Economic 5.6 5.46 Cost and availability of credit Economic 5.5 6.47 Price of material inputs Economic 5.4 5.78 Inflation Economic 5.4 5.59 Corporate liability Business 5.4 6.610 Excessively strict regulation Economic 5.4 5.611 Rapid technological changes Business 5.3 6.112 Cyber attacks (malicious) Political 5.3 6.013 High taxation Economic 5.2 5.514 Failed investment Business 5.2 6.115 Major asset price volatility Economic 5.2 5.716 Theft of assets/Intellectual Property Political 5.2 6.117 Fraud and corruption Political 5.2 6.318 Interest rate change Economic 5.1 6.019 Cyber risks (non-malicious) Political 5.1 6.220 Poor/incomplete regulation Economic 5.0 5.421 Critical infrastructure failure Business 4.9 5.922 Government spending cuts Economic 4.9 5.423 Supply chain failure Business 4.8 6.124 Pollution/environmental liability Environmental 4.7 5.725 Sovereign debt Economic 4.6 5.2Score – out of 10 0 1 2 3 4 5 6 7 Priority PreparednessLloyd’s Risk Index 2011
  9. 9. 07Risk26 Increased protectionism Economic 4.6 5.427 Industrial/workplace accident Environmental 4.6 6.228 Energy security Business 4.5 5.829 Insolvency risk Business 4.5 6.230 Demographic shift (eg ageing population, youth emigration) Environmental 4.4 5.231 Strikes and industrial action Political 4.2 5.832 Climate change Environmental 4.1 4.833 Pandemic Environmental 4.0 4.734 Piracy Political 3.9 5.635 Water scarcity Environmental 3.9 4.936 Terrorism Political 3.9 5.037 Urbanisation Environmental 3.9 5.138 Population growth Environmental 3.8 5.139 Riots and civil commotion Political 3.7 5.140 Food security Environmental 3.6 4.841 Harmful effects of new technology Environmental 3.6 4.742 Flooding Natural 3.6 5.243 Expropriation of assets Political 3.4 5.244 Earthquake (including tsunami) Natural 3.3 4.545 Abrupt regime change Political 3.3 4.846 Windstorm (eg hurricane, cyclone, typhoon) Natural 3.2 4.547 Drought Natural 3.0 4.448 Threats to biodiversity Natural 2.8 4.349 Impact of space weather (eg solar flares) Natural 2.6 3.850 Volcanic eruption (including ash) Natural 2.4 4.0Score – out of 10 0 1 2 3 4 5 6 7 Priority PreparednessLloyd’s Risk Index 2011
  10. 10. 08 introductionEIU executive summarycontinuedLoss of customers is seen by businesses The top economic risk priorities There is an imbalance betweenas the leading risk. have become more sophisticated. East and West.During times of economic uncertainty, sensitivity The uncertainty that dominates global business When exploring the main themes emergingto losing customers becomes a critical point is reflected in the economic risk priorities of from our survey, significant regional and sectorof failure for businesses. In Asia, for example, the respondents to our survey. A good deal disparities emerge. There is a significantwhere the economy is dominated by tradable of the uncertainty is likely to be caused by an imbalance in the consumer sector, where Asia,goods, sensitivity to losing customers is more expectation that regional current events may particularly China, is faring very well and Europeabrupt; businesses in this region were hard hit escalate to cause bigger, global problems. and the US are struggling. Certainly, one of thein 2008, but recovered quickly in the following There are very real threats to the eurozone’s key challenges for policymakers at this timeyear – a relatively quick recovery is possible in economic stability, for example, as problems is to make allowances for the ways in whicha goods-dominated market. In the West, where have spread from Ireland and Greece to Italy, other regions will manage their own economicservices comprise a significant portion of the Spain and France. Meanwhile, there is ongoing policies. In the US and Europe, emerging fromeconomy, companies continue to look for new uncertainty caused by the downgrading of the recession, or avoiding a double-dip recession,market opportunities, particularly in regions US credit rating in August of this year, and also has not typically been consumer-led in thewhere the cost of capital has gone down. The concern that inflation may escalate in the East past, but stimulated by government policy, assurvey suggests that companies understand unless exchange rates are carefully managed. well as innovation, particularly in technology.that the most successful strategy for shoring Survival was certainly the theme of 2008-2009, One of the developments we may be seeingup against the threat of recession is to attract when cost and availability of credit and in the higher risk scores across Asia-Pacificand retain customers. currency fluctuations were the top two global is a lack of confidence that they will continue risk priorities. These are still in the top ten, to be able to achieve the kind of growthRisk of talent shortage has escalated but the picture is now more complicated. generated in the past. Their export opportunitiesdramatically. Corporate leaders also recognise the critical are shrinking and many are looking to moreThe risk of talent and skill shortages rose from role of policy such as legislation and exchange dynamic markets closer to home as beinga relatively lowly 22nd ranked priority in 2009 rate policy and its impact on inflation, on more promising sources of long-term growth.to 2nd in 2011, and companies feel relatively their businesses. Linked to this is the price of And the region’s 3.5 billion consumers stillless able to manage this risk. A number of material inputs, which have risen substantially provide a massive growth opportunity.pressures are likely to have driven this shift, in priority in our survey rankings.including demographic (China, for example,has a large population of young and old people,but a deficit of working-age, professionalworkers), competitive (including the need forinnovation and entrepreneurship to help leadthe West out of recession) and productivity(doing more with less). The search for talentis also much more acute in the Asia-Pacificregion. In our survey, 70% and 60% ofrespondents from the Asia-Pacific regionand the rest of the world respectively, ratedtalent as high or very high priority, comparedto only 42% and 45% of respondents inEurope and North America respectively.Lloyd’s Risk Index 2011
  11. 11. 09 01 thE top FIvE RIsKs Loss of customers 10 Talent and skills shortages 11 Reputational risk 13 Currency fluctuation 13 Changing legislation 14Lloyd’s Risk Index 2011
  12. 12. 10 SECTION onethe top five risks Then and now – what has changed? The risk posed by ‘talent and skills shortages’ In 2009, the top three risks prioritised by has shot up the Index since 2009, rising from business leaders were direct responses to the a mid-list ranking in 2009 to number two today. liquidity crisis which began in 2008 – the cost More optimistically, the biggest reduction in and availability of credit, currency fluctuation priority has been ‘insolvency’, which has dropped and insolvency risk. from third place in 2009 to just 29 in 2011. Two years later, as governments, businesses The last two years have seen major reputational and individuals have started to tighten their crises, such as Deepwater Horizon and recalls belts and deal with their debts, the availability by car manufacturers, particularly in Europe of credit has dropped from the number one risk and the US and their impact on the bottom line to number six, replaced by loss of customers is reflected in the rise of reputational risk from and orders as businesses’ primary concern. nine in 2009 to number three in 2011. Currency fluctuation does, however, remain Other notable changes include the increased a serious cause for concern, moving from weighting given to the cost of materials from number two to number four. 17 in 2009 to seventh today, reflecting the major price hikes of commodities including energy and many raw materials. Businesses are generally much better capitalised of the PIIGS (Portugal, Italy, Ireland, Greece and TOP FIVE RISKS 2011 than they were two years ago. From concern Spain) is affecting global stock markets from about the availability of credit, business leaders New York to London and dramatically reducing 1. are now facing an even more fundamental risk; the evaporation of those wanting – or able – the world’s wealth. According to research by the Federal Reserve Bank San Francisco5, Loss of to buy. the financial crisis has wiped out 25% of the US’s net worth and the crisis of the euro may There are multiple reasons for this loss of mean Europe fares even worse. Customers consumers. Western governments have prioritised the need to drive down their deficits Emerging economies such as India and China and are cutting back both on investment are changing focus as they deal with the dual and public services – as customers they are issues of reduced international demand and retrenching. At the same time, the high cost encouraging domestic consumption. These of many materials and of energy is driving up growing markets present huge opportunities inflation, making products more expensive to for domestic and international companies buy. Faced with the triple factors of static or alike. It’s estimated, that China has over 10 falling incomes, rising inflation and widespread million Small and Medium-sized Enterprises job insecurity, consumers in North America and (SME’s)6 and financial services, for example, Europe are paying down their debts, buying currently have low market penetration. less and buying more cheaply when they do. Against a background of dwindling demand for Nor are they confident about the future. In goods and services, supply chain failures or September 2011, consumer confidence across reputational damage can mean the difference much of the West was weak; in Italy 2 it was the between business survival or collapse. As worst for three years, France3 registered the margins are increasingly squeezed, mitigating weakest level since February 2009 and US4 against these types of risks has become more levels stagnated near a two-year low. important than ever. Pensions and savings income have been eroded, cutting spending power. The spreading debt crisisLloyd’s Risk Index 2011
  13. 13. 11 2. The prioritisation of ‘talent and skills shortages’ skilled in expanding market share, rather as the number two risk facing businesses, and than a more forensic model for steering one of only two risks which respondents felt businesses through challenging times. Talent they were insufficiently prepared for, begs many questions. In a time of business consolidation It may be that ever-expanding markets made it easy for businesses to thrive with and skills and record unemployment, the pool of surplus an existing skill set. available talent should, in theory, be significant. The Index does not give us all the answers And yet, at the very top of organisations, there shortages and there is inevitably a degree of speculation is huge anxiety about the suitability of available about the causes behind this finding. However, staff for the roles required. respondents across all sectors agree this Severe skills shortages, for example, are is a significant and widespread problem. being reported as a growing risk in the North The resulting business risks could include Sea oil fields7, with frequent staff movement everything from poor product development as companies poach staff from each other. to inappropriate risk management strategies. The Australian mining industry, suffering cycles Many sectors are waking up to this risk of interstate poaching, is now running regular and taking action. Some IT companies, for job fairs as far afield as Canada8. Poaching example, are undertaking audits to identify from a dwindling pool of suitable staff is not staff at risk of being poached and targeting a sustainable strategy. packages for retention. But prevention is Concern over talent or skills shortages could just part of the solution and many industries be the result of a number of factors. The are investing in a process to identify and retirement of the ‘baby boomers’ in the West train the talent they need from scratch. is taking a whole tier of well-educated and Parts of the insurance industry, including experienced staff out of the job market. It may Lloyd’s, have started programmes to recruit also be that the booming market trends of the raw talent and train them to ensure an last 20 years have led to an executive level expert and innovative future workforce. The Germans have a word for it – result in a search for the best by the firms ‘Fachkräftemangel’ that survive. “These companies survive According to Lloyd’s general representative for by streamlining their processes to ensure Germany, Burkard von Siegfried, the impact of their competitiveness in world markets, the ‘talent crunch’ in Germany is now becoming and qualifications needed at these levels acute; there is even a specific term for it, are increasingly high.” But Germany is also a ‘Fachkräftemangel.’ “The problem is particularly country which traditionally has a strong SME severe in the engineering, medical and IT fields”, sector and, as thousands of owners retire von Siegfried notes, “with their intensive training each year, owner succession problems are and high drop out rates.” As a result, Germany acute. In response, the German government is increasingly seeking foreign expertise. and other stakeholders have started an Economic recessions, he believes, tend to initiative9 to support business transfers.Lloyd’s Risk Index 2011

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