Business interruption (BI) and cyber incidents interlink as the major threat for companies globally in 2018, according to the insight of 1,911 risk experts from 80 countries in the Allianz Risk Barometer 2018. However, for construction, engineering and real estate companies, natural catastrophes (45 percent), including storm, floods and earthquakes, takes the top spot. BI ranks second (40 percent), followed by fire/explosion (29 percent) and cyber incidents (22 percent), which hit at the top of the risk list for these sectors for the first time.

MAJOR RISKS IN NATURAL CATASTROPHES

Industry sources have estimated $330 billion in overall losses from natural catastrophes in 2017 with approximately $135 billion in insured losses. At least $90 billion resulted from the three category 4+ hurricanes -- Harvey, Irma, and Maria (HIM) -- that wreaked havoc in September, making it the most active hurricane month on record.

There was more than $2 billion in insured losses from an earthquake in Mexico in September and nearly $10 billion worth of wildfire insurance claims in California through October. It doesn’t take long to locate a startling statistic about natural catastrophe activity during 2017. And the numbers could get worse. Given the wide-ranging impact of HIM – from flood damage by Harvey in Houston to BI from record power outages in Puerto Rico caused by Maria – it may be some time before the final loss total is known.

These recent events are a reminder of how significant the impact of natural catastrophes can be, both socially and economically. As industries become leaner and more connected globally, it is becoming clearer that natural catastrophes can trigger or contribute to many other risks, such as business interruption or loss of market share. The impact of natural catastrophes goes far beyond physical damage to structures in the affected areas. They disrupt the normal dynamics of societal and industrial operations in the immediate regions affected and beyond, impacting a large variety of industries that might not seem affected at first glance.

CHANGING CLIMATE AND RAPID URBANIZATION

Risk Barometer respondents fear the 2017 natural catastrophe year could be a harbinger of things to come with many believing the intensity of natural catastrophes will increase in future due to the impact of a changing climate. Research shows there has been a 46 percent increase in weather disasters since 2000 and that 797 events were recorded in 2016 alone, resulting in $129 billion of losses.

Climate change/increasing weather volatility is a new entrant in the top 10 global risks in 2018 and many scientists agree that changes in the climate and weather patterns have the potential to affect extreme events around the world in three primary ways – more intense windstorms, incidences of heavy rainfall leading to flooding events and more severe drought episodes.

“There are more people and more development in harm’s way especially along the U.S. coasts,” says Andrew Higgins, Technical Manager, Americas, Allianz Risk Consulting. “In order to protect coastal communities, there need to be ample zoning laws to prevent unbridled over-development, along with less concrete and more green space to allow tropical rains to properly drain. For example, some areas of Houston received about half of the amount of rain from Hurricane Harvey compared with a record-setting deluge in Nederland, Texas (154cm/60.6 inches) but experienced much worse flooding. The difference is over-development.”

NEW TOOLS FOR RAPIDLY-CHANGING RISK CONCENTRATION

In order to keep up with rapidly-changing risk concentration, insurers are using a variety of new catastrophe management tools and insurance solutions to monitor storms and assess natural catastrophe damages from events such as those in 2017. These tools include drones – used outdoors to assess roof wind damages and inaccessible locations, but also indoors to assess water damage in large facilities – and satellite technology and 3D imagery, to locate risks more quickly and more precisely.

BUSINESS INTERRUPTION: AN INCREASING NUMBER OF DISRUPTIVE SCENARIOS

For businesses in the construction, engineering and real estate sectors, BI ranked second as a major cause of concern in 2018. BI can be triggered by traditional property damages resulting from natural catastrophe losses or a break in the supply chain due to property damages at the premises of a supplier or customer, often known as contingent business interruption (CBI).

BI losses for businesses can often be much higher than the cost of any physical damage. The average large BI property insurance claim is now in excess of $2 million. This is more than a third higher than the average direct property damage loss. ($2.4m and $1.75m respectively).

But as many businesses transition from being rich in physical assets to deriving more value from intangibles and services, increasingly, BI is being triggered by non-traditional risk exposures that don’t cause physical damage but result in lost income – so-called nondamage business interruption (NDBI).

BI impact is easy to underestimate and risks can be extremely complex. In many cases, it is difficult to know what the actual exposure is, how to calculate the loss, or even where the actual disruption in the supply chain occurred. Companies often underestimate the complexity of getting back to business and can have bottlenecks in their emergency plans, particularly with regards to alternative suppliers.

Nevertheless, risks can be mitigated. Businesses should continuously fine tune their emergency plans to reflect the new BI environment, plan for a variety of scenarios and have strategic alignment through all departments on predictive detection of risks.

CYBER RISKS EVOLVING

Five years ago, cyber incidents ranked #15 in the Allianz Risk Barometer; this year it is #2 globally and #1 in the U.S. It also ranks as the most underestimated risk and major long-term peril. For construction companies, cyber risk hit the top five for the first time coming in at #4.

Recent events such as the WannaCry and Petya ransomware attacks brought significant financial losses to a large number of businesses. Others, such as the Mirai botnet, the largest-ever distributed denial of service (DDoS) attack on major internet platforms and services in Europe and North America, at the end of 2016, demonstrate the interconnectedness of risks and shared reliance on common internet infrastructure and service providers.

On an individual level, recently identified security flaws in computer chips in nearly every modern device reveal the cyber vulnerability of modern societies. The potential for so-called “cyber hurricane” events to occur, where hackers disrupt larger numbers of companies by targeting common infrastructure dependencies, will continue to grow in 2018.

Allianz Risk Barometer results show that awareness of the cyber threat is soaring among small- and medium-sized businesses, with a significant jump from # 6 to # 2 for small companies and from # 3 to # 1 for medium-sized companies.

One of the drivers of this increase is reliance on digitalization, as businesses continue to upgrade technologically in order to be competitive. Many factors trigger BI, including system interconnectedness and outsourced suppliers, and businesses need to think about data as an asset, similar to the way they might think about physical property or raw products. As data-driven incidents through hacking, human error or technical failure continue to increase, businesses need to understand what may prevent this data from being used and what real impact it may create.

The threats of today might be understood, but what about tomorrow? Or the next day? It’s an ongoing diligence to keep abreast of the impacts by understanding new and different aspects that are going to change as a business evolves. And, on top of that, there is a need to understand global supply failure and to ensure that there is supplier resiliency, business continuity and proper supplier diversification. Insurance can help to mitigate this discrepancy.