Top 10 risks to business

Unsurprisingly, perhaps, the No. 1 risk to business, as perceived by those companies that took part in Aon’s Global Risk Management Survey for 2009, was economic slowdown. Business Editor Lindsey Turnbull hears more about the Top 10 risks and how businesses ought to be dealing with those risks and reports in this second of a two part article.
 
As key strategists in the global business of risk, Aon is a risk advisor and insurance broker to thousands of clients all over the world. Its most recent Global Risk Management Survey (conducted at the end of 2008 with a report published in early 2009 – its first ever survey was conducted at the end of 2006) polled over 500 client companies in 40 countries to find out exactly what worried business the most on a global scale.   
 
Aon Global Risk Consulting’s Stephen Cross, gave his presentation on the findings of the report at last year’s Cayman Captive Forum held at The Ritz-Carlton in early December and said that the findings, although relating to business perception at the end of 2008, were still extremely relevant as we move into 2010.
 
At No. 6 in the latest rankings, reputation risk has moved away from its top spot in the 2007 survey. “It has dropped in importance due to the global economic slowdown but its importance nevertheless has not diminished,” Cross stated.
 
He then went on to list several recent cases, such as the baby food contamination, contamination of peanut butter and lead paint in toys, all of which affected the reputation of the companies involved.
 
“Some companies came through better than others,” Cross explained, saying that the Asian company boss which produced the toys contaminated with lead paid the ultimate price, as they executed him.
 
The ultimate effect on a company if reputation risk is not effectively and quickly managed could well be a decrease in new and recurring sales as well as a drop in stock market price.
 
Identifying potential existing risks as well as understanding the impact of risks on a company’s reputation were key strategies in overcoming reputation risk, as were implementing quality control in the supply chain and developing early warning systems and proactive communication and contingency plans.
 
Cross warned, however, that this risk could well be one where recovery was not possible.
 
At the time of the survey, oil prices were spiking dramatically, so it is therefore probably not a surprise that commodity price risk was a new entry this time at No. 5.
 
“This is a new entry because of dramatic volatility in the price of oil, coal, metals and agriculture,” Cross confirmed.
 
Mitigating this risk was straightforward as adapting a long term strategy that avoided speculation and plans wisely makes common sense. Cross also urged understanding the impact of the commodity on the other cost drivers of the business and also understanding the supply chain and business interruption risks. Balancing locking in contracts with avoiding peak market prices was also well advisable.
 
Increased competition was also a new entry for the 2009 survey and had been driven by an aggressive global business environment. Economic impact included lower consumer demand and rapid market changes resulting in potentially irreversible loss of market share.
 
Getting round these issues again made sound business sense and included focusing on where a company’s particular industry was heading as well as taking a high level enterprise-wide approach that included identifying and understanding competitors, consumer trends, technological advances, regulatory changes, economic trends and globalisation.
 
Business interruption, which ranked at No. 2 in the 2007 survey moved down slightly to third place in 2009.
 
“So many businesses get this wrong,” Cross said. “Many don’t understand business interruption risk and are under insured. This really is the job of the chief financial officer in any operation.”
This risk is linked to supply chains, the interdependency of global partners, outsourcing and offshoring.
 
The financial impact to a business could well be supply chain interruption and uncertainties as well as reduced cash flow forcing leaner operations, limiting reaction time and resources.
Mitigation strategies included installing proper insurance programmes and contingency planning.    
 
Regulatory and legislative changes was placed at number six in the 2007 however it moved up to the second spot in this latest poll.
 
In the industry of captive insurance Cross said that this was an area which had seen a good deal of movement “some good, some bad”. Examples included salary caps, investment restrictions, pension rule changes and REACH legislation.
 
The anticipated increase in regulation globally would have an economic impact on business, as would non-compliance which could include penalties imposed by enforcement agencies coupled with loss of markets, reputation and customers.
 
The only solution was to increase focus on risk governance and compliance.
 
And finally on to the top spot as far as risks to business were concerned. Aon’s clients voted the economic meltdown as the most important risk factor, ranking just eighth in the 2007 survey.
 
“There is a pressure on companies to deliver results with fewer resources and it is tough to remain committed to established effective risk management strategies in this climate,” he said. “It also affects all other risks in the survey and requires constant application of excellence in all facets of risk management.”

TOPASM

From left, IMAC’s Dan McLean, speaker Stephen Cross and

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