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MANAGEMENT: Identifying and Addressing Top 10 Risks in 2013

 





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Economic uncertainty remains the main and ongoing concern of business, followed closely by regulatory changes. How companies manage capital and profits against a backdrop of deepening strategic risks arising from economic, political, competitive and regulatory factors will be a key focus for all boards during 2013 and the foreseeable future.

This is according to Guy Scott, CEO of Risk Solutions at Aon South Africa. “From Aon’s Global Risk Management Survey, economic slow-down still tops the list of the top 10 risks facing business. In light of the current economic uncertainty and the ongoing Euro crisis, we believe this will remain a top 10 risk for the foreseeable future. We’re also seeing for the first time two new risks entering the top 10 list - failure to innovate and meet customer needs and technology/system failure,” explains Guy.

Aon’s risk management survey (2011) reveals the interdependency between the impact of the economy and various additional key risks. The fallout from the credit crisis first identified in mid-2007 continues to impact on organisations around the world. “Throughout the economic recession, many organisations heavily curtailed spend on information technology and put a freeze on hiring, research and development projects. But business leaders are realising that this is not a sustainable strategy. As a result of the continued cautionary approach to spending on key strategic areas of the business even after the recession, organisations are now facing new risks in the form of failure to innovate and fulfil customer needs and failure to attract top talent. Businesses must begin reinvesting in fundamental areas of the business if they are to survive and thrive.”

According to Aon’s Global Risk Management Survey, the top 10 risks facing business are:
1. Economic slowdown
2. Regulatory/legislative changes
3. Increasing competition
4. Damage to reputation/brand
5. Business interruption
6. Failure to innovate/meet customer needs
7. Failure to attract or retain top talent
8. Commodity price risk
9. Technology failure/system failure
10. Cash flow/liquidity risk

Regulatory/legislative changes have also remained a top 10 global risk since the previous survey done in 2008. This risk revolves around the inability of an organisation to comply with current, changing or new regulations. Failure in compliance can result in severe consequences including direct financial penalties in the short term and the loss of markets, reputation and customers in the long term. In the past, regulatory and legislative changes normally took shape in a gradual process, allowing companies some time to formulate responses or coping strategies.

“We have seen regulatory changes, even small ones adding tremendous cost to corporations, for example the new FAIS Legislation in South Africa has added significant cost in terms of time and training of staff in complying with the new legislation.

With the heavy reliance on technological infrastructure, businesses are also becoming more vulnerable to system failures, data breaches and social media exposure, causing business interruption, loss of customers and reputational damage. “In fact, as the frequency and voracity of cyber-attacks increases worldwide, it is estimated that over 70% of South African businesses are significantly unprepared for cyber liability risks, and in turn, woefully underinsured when it comes to managing the financial and legal implications that follow a major cyber breach,” says Guy.

Legislatively, the Protection of Private Information Bill (POPI), which has just been passed by parliament and will be signed into South African law within months, will also make onerous demands on how a client’s personal data is managed, stored and used by a business. The growing use of cloud computing also brings with it its own set of security risks. The reality is that most companies have no idea where their information is stored in the cloud. Organisations need to remember that while they may be depositing their data in a public cloud, they do not transfer their risk. If any information is compromised the liability remains with the organisation.

Aon also adds that 2013 could see the entry of a new risk into the top 10, that being climate change, ranked at #16 in the 2011 survey. “Recent weather catastrophes both globally and locally are ensuring that climate change makes its presence felt, with an increased prevalence of catastrophe risks in certain geographies including earthquakes, tsunamis, flooding, wind storms, tornadoes, hurricanes and run-away fires. Overseas insurers and reinsurers are being impacted by adverse catastrophe claims which are resulting in deteriorating underwriting results. As a result, we expect to see a hardening of rates in 2013 with regards to these risks,” explains Guy.

In terms of the political risk landscape, there continues to be a deteriorating political risk trend in a number of countries. The most volatile region still remains the African continent with a number of countries which have been downgraded.

Multinationals in the natural resources sector, such as oil and coal for example, are facing increased political and economic risks as governments readdress the balance of power by taking more control over their domestic product. These companies face potential problems such as confiscation, sovereign non-payment and political interference. These political risks could threaten global oil supplies and push oil prices even further. In addition, an increasing number of power crises on a world-wide scale have elevated the principal fuels for power stations, namely coal and to a lesser extent uranium, to the status of strategic assets likely to incur forms of state intervention in private enterprise.

“In South Africa, the government has injected billions of Rands into Eskom coffers, partly to maintain the utility credit rating, but also to fund its expansion drive and the increase in coal purchases that will be needed to cope with the increased electricity demand.”
A particularly interesting angle is added in South Africa by the difference in the country’s cheap low quality coal, which has until now been the staple fuel for power stations, and high quality, high value export coal.

With a number of previous prolonged periods of power interruption being partly blamed on poor quality coal supplies, pressure is bound to increase from Eskom on the coal producers to divert export products to the power stations. This has resulted in intense negotiations between Eskom and the suppliers, with Eskom’s projected price tag for burning higher quality coal already in the billions. As this in turn increases the price of electricity, how long before the government decides that coal is a strategic national asset as it relates to power generation, and increases its interference in the industry‘

On the upside, the uncertainty and an increased focus from regulators are important external drivers to strengthen risk management within organisations. Companies are working hard towards better understanding their range of unique risks, optimising their insurance programmes and lowering their total cost of risk. Risk remains firmly on the board agenda where the focus is on risk oversight and management.

“It is crucial for businesses to understand the nature and extent of the kinds of risks and threats to their operations and to take appropriate action to mitigate these risks. One way of doing this is by reviewing and strengthening their specialist insurance cover under the guidance and advice of a professional risk advisor. While it is difficult to predict which risk will emerge in 2013 and demand attention, we can be certain that successful companies will not be the ones that adopt a ‘wait and see’ approach. Instead they will be the ones that prepare themselves thoroughly to anticipate future needs and undertake the difficult process of finding solutions to address them. They will not just fix what is broken, but view their new circumstances as a portal to the next generation of business opportunity,” concludes Guy.


 
 
 
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