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2011
LLoyds
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WHICH OF THE FOLLOWING DESCRIBES YOUR JOB TITLE? WHAT IS YOUR COMPANYS ANNUAL GLOBAL REVENUE IN US DOLLARS? WHAT IS YOUR PRIMARY INDUSTRY?
Financial services Professional services Manufacturing 18.6% 13.2% 10.4% 9.8% 8.6%
%
Board member CEO/President/Managing director CFO/Treasurer/Comptroller CRO/Chief risk ofcer CIO/Technology director Chief compliance ofcer Other C-level executive 8.5% 52.7% 15.6% 3.8% 5.7% 0.6% 13.1% $499m or less $500m to $999m $1bn to $4.999bn $5bn to $9.999bn $10bn or more
%
51.0% 14.9% 17.1% 5.4% 11.6%
IT and technology Energy and natural resources Healthcare, pharmaceuticals and biotechnology Entertainment, media and publishing Construction and real estate Retailing Consumer goods Agriculture and agribusiness Chemicals Education
4.8%
4.4%
North America
27%
Europe
35%
Asia-Pacic
Automotive
27%
Rest of the World
11%
Lloyds
01
coNtENts
Introduction
Foreword by Richard Ward, Chief Executive, Lloyds Executive summary of ndings from the Economist Intelligence Unit (EIU) 02 03
01
02
03
Political, crime and security risks The selective invisibility of natural hazards
conclusions
Conclusion Appendix and methodology 26 27
Lloyds
02
INtRoductIoN
FoREwoRd
FoREwoRd by dR RIchaRd waRd
In 2009 much of the world held its breath as we watched banks fail, high street businesses collapse and the damaging impact of the credit crunch on the real economy. It was in that highly charged context that Lloyds, in collaboration with the Economist Intelligence Unit (EIU), published its first global survey1 on risk attitudes amongst business leaders. Two years later, global economies remain in a state of flux, with growing debate on how long it will take to play out, as we see with the current political and sovereign debt crisis. This second Lloyds Risk Index, based on a survey of global business leaders by the EIU, shows that their 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. As we look at these changing priorities in more detail in this report, three key strands emerge from the findings.
The last two years have thrown the world into economic and political turmoil from which it has yet to emerge.
Lloyds
03
In this summary, we identify the key risk areas by looking thematically at the overall risk ratings, the top risks and the biggest changes from 2009. We also examine the survey results through a regional lens for the biggest differences in relation to current economic, political and commercial operating contexts.
summaRy oF INsIghts
Three years on from the start of the worst financial crisis for more than a generation, there is still uncertainty about the future. Will we manage to avoid a double-dip recession and emerge into a period of growth? If we do, will it be strong growth, or a prolonged period of slow progress, as many economies are currently experiencing? How can businesses manage risk in this environment? The financial crisis has undoubtedly reduced global economic resilience and, as the World Bank argues in its 2011 report on the macroeconomic risk landscape, the combination of global shocks through increasingly interlinked and interdependent systems has raised the threat 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 to efficiently manage external factors in this context. Meanwhile, Asias 3.5 billion consumers and dynamic market environment may provide a massive growth opportunity. A number of interesting insights and consistent themes can be seen emerging from the survey. There is a greater sense of preparedness to address risk across the worlds boardrooms, a significant global disparity across the entire risk arena between East and West and a heightened sense of priority across all risk categories. Anything high on an executives risk priority list can be considered in terms of a potential critical point of failure for business; some significant changes in the risk landscape over the past two years reflect new critical points of failure, such as risk of talent shortages. Yet, while executives attitudes to risk do not suggest they are anticipating a new era of growth, their leading concern that they will lose customers shows that fear of a double-dip recession is high up in their thinking. Uncertainty is still the issue of the day.
The combination of global shocks through increasingly interlinked and interdependent systems has raised the threat levels of risk across the board.
mEthodoLogy
The survey examined attitudes to risk across five key categories: > > > > > Business and strategic risk Economic, regulatory and market risk Political, crime and security risk Environmental and health risk, and Natural hazard risk.
Respondents to the survey were asked to rate both the overall risk category and a series of key risks within each category against their corporate risk priorities and degree of preparedness to manage those risks. A score was calculated for each where zero represents the lowest level of priority or preparedness and ten represents the highest. Some new risks have been added to the 2011 survey from the 2009 version. These enable us to explore in greater detail the role of government, demographic forces, and global resource issues such as food security and water scarcity, all of which we believe will give a more complete picture of corporate risk priorities in 2011.
* 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.
Lloyds
04
introduction
Chart 1
compared to two years ago, how are you prepared for risks to your business and operations?
70%
are better prepared
27%
are about the same
Lloyds
05
Overall business and strategic risks, as well as economic, regulatory and market risks, still dominate risk priorities globally. Although business and strategic risks overall edged past economic, regulatory and market risks for the top priority spot this year, the scores for both were high (7.3 and 7.2 respectively). There are some regional differences in whether one or the other of these risk categories is seen as the top priority, but it is important to recognise that globally, the top three risks are all business and strategic risks: loss of customers and orders, talent and skills shortages and reputational risks. Meanwhile, the next five are all economic risks: currency fluctuation, changing legislation, cost and availability of credit, price of material inputs and inflation.
Environmental and natural hazards are seen as lower priorities overall. Risks concerning natural hazards, and longer-term environmental trends such as climate change, still tend to be of lower and less immediate concern to board-level executives. Black swan events, which have a relatively small probability but a high impact, tend to be low on our survey respondents list of priorities. Despite the relatively high profile of global issues such as food security and water scarcity, these are also perceived to be a low priority, as are demographic factors although there are notable regional differences. What is also particularly interesting this year, is that environmental and health risks increased 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.
1 2 3 4 5
busINEss aNd stRatEgIc RIsK EcoNomIc, REguLatoRy aNd maRKEt RIsK poLItIcaL, cRImE aNd sEcuRIty RIsK ENvIRoNmENtaL aNd hEaLth RIsK NatuRaL hazaRd RIsK
* The survey conducted in 2009 offered respondents a list of 41 risks. The 2011 Lloyds 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.
Lloyds
06
introduction
Chart 2
1 Loss of customers/Cancelled orders 2 Talent and skills shortages (including succession risk) 3 Reputational risk 4 Currency fluctuation 5 Changing legislation 6 Cost and availability of credit 7 Price of material inputs 8 Inflation 9 Corporate liability 10 Excessively strict regulation 11 Rapid technological changes 12 Cyber attacks (malicious) 13 High taxation 14 Failed investment 15 Major asset price volatility 16 Theft of assets/Intellectual Property 17 Fraud and corruption 18 Interest rate change 19 Cyber risks (non-malicious) 20 Poor/incomplete regulation 21 Critical infrastructure failure 22 Government spending cuts 23 Supply chain failure 24 Pollution/environmental liability 25 Sovereign debt
Score out of 10
Business Business Business Economic Economic Economic Economic Economic Business Economic Business Political Economic Business Economic Political Political Economic Political Economic Business Economic Business Environmental Economic 0 1 2 3 4 5 6 7
6.2 6.3 6.2 5.9 5.8 6.6 5.6 5.9 5.6 5.4 5.5 6.4 5.4 5.7 5.4 5.5 5.4 6.6 5.4 5.6 5.3 6.1 5.3 6.0 5.2 5.5 5.2 6.1 5.2 5.7 5.2 6.1 5.2 6.3 5.1 6.0 5.1 6.2 5.0 5.4 4.9 5.9 4.9 5.4 4.8 6.1 4.7 5.7 4.6 5.2
Priority
Preparedness
Lloyds
07
Risk
26 Increased protectionism 27 Industrial/workplace accident 28 Energy security 29 Insolvency risk 30 Demographic shift (eg ageing population, youth emigration) 31 Strikes and industrial action 32 Climate change 33 Pandemic 34 Piracy 35 Water scarcity 36 Terrorism 37 Urbanisation 38 Population growth 39 Riots and civil commotion 40 Food security 41 Harmful effects of new technology 42 Flooding 43 Expropriation of assets 44 Earthquake (including tsunami) 45 Abrupt regime change 46 Windstorm (eg hurricane, cyclone, typhoon) 47 Drought 48 Threats to biodiversity 49 Impact of space weather (eg solar flares) 50 Volcanic eruption (including ash)
Score out of 10
Economic Environmental Business Business Environmental Political Environmental Environmental Political Environmental Political Environmental Environmental Political Environmental Environmental Natural Political Natural Political Natural Natural Natural Natural Natural 0 1 2 3 4 5 6 7
4.6 5.4 4.6 6.2 4.5 5.8 4.5 6.2 4.4 5.2 4.2 5.8 4.1 4.8 4.0 4.7 3.9 5.6 3.9 4.9 3.9 5.0 3.9 5.1 3.8 5.1 3.7 5.1 3.6 4.8 3.6 4.7 3.6 5.2 3.4 5.2 3.3 4.5 3.3 4.8 3.2 4.5 3.0 4.4 2.8 4.3 2.6 3.8 2.4 4.0
Priority
Preparedness
Lloyds
08
introduction
Loss of customers is seen by businesses as the leading risk. During times of economic uncertainty, sensitivity to losing customers becomes a critical point of failure for businesses. In Asia, for example, where the economy is dominated by tradable goods, sensitivity to losing customers is more abrupt; businesses in this region were hard hit in 2008, but recovered quickly in the following year a relatively quick recovery is possible in a goods-dominated market. In the West, where services comprise a significant portion of the economy, companies continue to look for new market opportunities, particularly in regions where the cost of capital has gone down. The survey suggests that companies understand that the most successful strategy for shoring up against the threat of recession is to attract and retain customers. Risk of talent shortage has escalated dramatically. The risk of talent and skill shortages rose from a relatively lowly 22nd ranked priority in 2009 to 2nd in 2011, and companies feel relatively less able to manage this risk. A number of pressures are likely to have driven this shift, including demographic (China, for example, has a large population of young and old people, but a deficit of working-age, professional workers), competitive (including the need for innovation and entrepreneurship to help lead the West out of recession) and productivity (doing more with less). The search for talent is also much more acute in the Asia-Pacific region. In our survey, 70% and 60% of respondents from the Asia-Pacific region and the rest of the world respectively, rated talent as high or very high priority, compared to only 42% and 45% of respondents in Europe and North America respectively.
The top economic risk priorities have become more sophisticated. The uncertainty that dominates global business is reflected in the economic risk priorities of the respondents to our survey. A good deal of the uncertainty is likely to be caused by an expectation that regional current events may escalate to cause bigger, global problems. There are very real threats to the eurozones economic stability, for example, as problems have spread from Ireland and Greece to Italy, Spain and France. Meanwhile, there is ongoing uncertainty caused by the downgrading of the US credit rating in August of this year, and also concern that inflation may escalate in the East unless exchange rates are carefully managed. Survival was certainly the theme of 2008-2009, when cost and availability of credit and currency fluctuations were the top two global risk priorities. These are still in the top ten, but the picture is now more complicated. Corporate leaders also recognise the critical role of policy such as legislation and exchange rate policy and its impact on inflation, on their businesses. Linked to this is the price of material inputs, which have risen substantially in priority in our survey rankings.
There is an imbalance between East and West. When exploring the main themes emerging from our survey, significant regional and sector disparities emerge. There is a significant imbalance in the consumer sector, where Asia, particularly China, is faring very well and Europe and the US are struggling. Certainly, one of the key challenges for policymakers at this time is to make allowances for the ways in which other regions will manage their own economic policies. In the US and Europe, emerging from recession, or avoiding a double-dip recession, has not typically been consumer-led in the past, but stimulated by government policy, as well as innovation, particularly in technology. One of the developments we may be seeing in the higher risk scores across Asia-Pacific is a lack of confidence that they will continue to be able to achieve the kind of growth generated in the past. Their export opportunities are shrinking and many are looking to more dynamic markets closer to home as being more promising sources of long-term growth. And the regions 3.5 billion consumers still provide a massive growth opportunity.
Lloyds
09
01
Loss of customers Talent and skills shortages Reputational risk Currency uctuation Changing legislation
Lloyds
10
sEctIoN one
1. Loss of customers
Businesses are generally much better capitalised than they were two years ago. From concern about the availability of credit, business leaders are now facing an even more fundamental risk; the evaporation of those wanting or able to buy. There are multiple reasons for this loss of consumers. Western governments have prioritised the need to drive down their deficits and are cutting back both on investment and public services as customers they are retrenching. At the same time, the high cost of many materials and of energy is driving up inflation, making products more expensive to buy. Faced with the triple factors of static or falling incomes, rising inflation and widespread job insecurity, consumers in North America and Europe are paying down their debts, buying less and buying more cheaply when they do. Nor are they confident about the future. In September 2011, consumer confidence across much of the West was weak; in Italy 2 it was the worst for three years, France3 registered the weakest level since February 2009 and US4 levels stagnated near a two-year low. Pensions and savings income have been eroded, cutting spending power. The spreading debt crisis
of the PIIGS (Portugal, Italy, Ireland, Greece and Spain) is affecting global stock markets from NewYork to London and dramatically reducing the worlds wealth. According to research by the Federal Reserve Bank SanFrancisco5, the financial crisis has wiped out 25% of the USs net worth and the crisis of the euro may mean Europe fares even worse. Emerging economies such as India and China are changing focus as they deal with the dual issues of reduced international demand and encouraging domestic consumption. These growing markets present huge opportunities for domestic and international companies alike. Its estimated, that China has over 10 million Small and Medium-sized Enterprises (SMEs)6 and financial services, for example, currently have low market penetration. Against a background of dwindling demand for goods and services, supply chain failures or reputational damage can mean the difference between business survival or collapse. As margins are increasingly squeezed, mitigating against these types of risks has become more important than ever.
Lloyds
11
The prioritisation of talent and skills shortages as the number two risk facing businesses, and one of only two risks which respondents felt they were insufficiently prepared for, begs many questions. In a time of business consolidation and record unemployment, the pool of surplus available talent should, in theory, be significant. And yet, at the very top of organisations, there is huge anxiety about the suitability of available staff for the roles required. Severe skills shortages, for example, are being reported as a growing risk in the North Sea oil fields7, with frequent staff movement as companies poach staff from each other. The Australian mining industry, suffering cycles of interstate poaching, is now running regular job fairs as far afield as Canada8. Poaching from a dwindling pool of suitable staff is not a sustainable strategy. Concern over talent or skills shortages could be the result of a number of factors. The retirement of the baby boomers in the West is taking a whole tier of well-educated and experienced staff out of the job market. It may also be that the booming market trends of the last 20 years have led to an executive level
skilled in expanding market share, rather than a more forensic model for steering businesses through challenging times. It may be that ever-expanding markets made it easy for businesses to thrive with an existing skill set. The Index does not give us all the answers and there is inevitably a degree of speculation about the causes behind this finding. However, respondents across all sectors agree this is a significant and widespread problem. The resulting business risks could include everything from poor product development to inappropriate risk management strategies. Many sectors are waking up to this risk and taking action. Some IT companies, for example, are undertaking audits to identify staff at risk of being poached and targeting packages for retention. But prevention is just part of the solution and many industries are investing in a process to identify and train the talent they need from scratch. Parts of the insurance industry, including Lloyds, have started programmes to recruit raw talent and train them to ensure an expert and innovative future workforce.
result in a search for the best by the firms that survive. These companies survive by streamlining their processes to ensure their competitiveness in world markets, and qualifications needed at these levels are increasingly high. But Germany is also a country which traditionally has a strong SME sector and, as thousands of owners retire each year, owner succession problems are acute. In response, the German government and other stakeholders have started an initiative9 to support business transfers.
Lloyds
12
sEctIoN one
problems, The domestic skill set to manage mergers and acquisitions, particularly on an international stage, is very light. As the move by Japanese businesses to invest further into overseas markets grows, there is increasing pressure on the number of people available to recruit to run these businesses. The risk management landscape of Japan is also changing. As more Japanese companies become involved in overseas trading or buy overseas assets, they are having to improve their understanding of international standards and, in some cases, adopt them. The small pool of risk and compliance staff in Japan are in high demand as a result.
Ferguson also highlights the changing culture of Japanese boardrooms, Chairmen, In the meantime, the West has moved on in Presidents and Directors have, until recently, terms of entering international markets. Mergers enjoyed a fairly ceremonial existence but as and acquisitions activity has risen considerably the personal liability of directors becomes a and Japan, while well capitalised for this type real issue, they are now under pressure to 11 of expansion, finds itself at a disadvantage . improve their skill sets from shareholders Priority Preparedness As Lloyds Japanese representative, 1 Very well prepared asking how their capital is being used to 1 Very high 2 2 IainFerguson notes this presents obvious fund international expansion.
3 4 5 Very low Priority 1 Very high Priority 2 1 3 Very high 2 4 3 Very low 5 4 13.5 5 Very low Preparedness 1 Very well prepared 2 3 4 5 13.5 at all prepared Not 13.5 28.7 29.6 3 4 5 Not at all prepared Preparedness 1 Very well prepared Preparedness 2 1 3 Very well prepared 2 4 3 Not at all prepared 5 4 1.9 5 Not at all prepared 31.5
Chart 3
9.3
europe
% 4.7 4.7
9.3 9.3
24.1
21.8 16.2
europe
% 13.5 6.8 6.8
europe
33.8 33.8 14.5 33.3 1.5 33.3 1.5 % 3.5 9.3
10.6
31.5
c
21.8
21.8
24.1
21.8
27.8 27.8
% 12.9
rest north 24.1 of 16.2 europe europe the america 21.89.6 3.0 % 16.2 11.0% 3.5 world 10.6 11.6 % 14.5 % 21.8 asia3.5 3.0 11.6 16.2 10.6 pacific asia- 29.6 14.5 30.8 % 33.3 28.7 pacific 39.5 37.9 north % europe america % north north % 45.9 29.4 america america europe 1.9 3.5 % 45.9 1.9 29.4
24.1 28.7 % 14.5 37.9 37.9
% 16.7 29.6 27.8 42.6 6.8 1.5 4.7 9.6 29.6 24.1 27.8 11.0 19.9 16.2 4.7 9.6 rest 11.0 21.8 19.9 of 4.7the 1.9 1.9 world 13.5 6.8 1.5 asia19.9 16.7 % north 42.6 pacific 1.9 1.9 europe america % north 16.7 % 21.8 42.6 27.8 % europe 37.0 america rest % asia% 33.8 of the % europe
Priority 1 Very Priority high 2 1 Very high 3 2 4 3 5 4 Very low 5 Very low
Preparedness 1 Very well prepared Preparedness 2 1 Very well prepared Preparedness 3 2 1 Very well prepared 3 4 2 4 3 5 Not at allNot at all prepared 5 prepared
4 5 Not at all prepared
11.0
9.3
13.5
11.0 rest 31.5 europe of the % rest world of the % world north rest % 33.3 33.8 america 29.6 27.8
1.99.6
9.3
4. 19.9
26.3 26.3
% 11.6
21.8 21.8
north america
%
45.9
europe 29.4
%
26.3
35.6
37.9
39.5
21.8 37.0 rest 12.9 3.0 10.6 21.8 33.8 of the12.9 33.3 world asia% asianorth pacific pacific america % asianorth 30.8 % % pacific 37.0 america 21.8 % %
16.7
%
42.6 3.0
30.8 30.8
37.0
10.6
10.6
% 29.4
28.7 %
euro
27.8 42.6
42.6 14.5
3.0
27.8 27.8
10.6
26.3 26.3
35.6 35.6
14.5
27.8
3.5
37.9 37.9
12.9
16.7
10.6 rest europe of the % rest world of the % world north % 1.9america39.5 1.9 37.9 % 37.0 37.0
3.5
euro 30.8 %
39.5
42.6
37.9
35.6
asiapacific
%
north america
%
europe
%
Lloyds
27.8 26.3 35.6
13
3. Reputational Risk
In 2009 reputational risk was ranked ninth, in 2011 it comes third. The intervening two years have seen the unfolding of a reputational crisis in many countries. While politicians, bankers and ratings agencies have all come under severe scrutiny, business has not escaped criticism either. From recalls by car manufacturers in the US, Europe and China to the Deepwater Horizon disasters impact on BP market value, to the drop in the price of Research In Motion, makers of Blackberry shares, awareness of the impact of reputation on the bottom line is growing. A 2010 study12 of the worlds 1,000 largest companies found 80% of companies lose more than 20% of their value at least once in a 5-year period because of a major reputational event. Business fails to protect itself from reputational damage at its peril.
Certain business practices can themselves directly increase the likelihood of reputational risk. Operating in new territories without a thorough understanding of local geopolitical tensions can carry significant reputational risk, as well as operational uncertainty and higher security costs, as many international companies operating in Nigeria13 have discovered. The Index shows that businesses believe they are, if anything, actually over-prepared to deal with reputational risk, scoring the preparedness at6.6 against a priority score of5.8. At a time when the reputation of companies is becoming of greater importance to consumers, and therefore to shareholders, it will be interesting to see if events confirm this degree of optimism.
4. currency Fluctuation
The number two priority given overall to currency fluctuation in our 2009 survey was virtually universal geographically, in 2011 it was included in the top five risks of all regions apart from North America. Export-led countries such as India and China, particularly in industries heavily reliant on importing raw materials and exporting finished products, had every reason to fear exchange rate fluctuation as a brake on sustainability and growth. In the face of the subsequent slowdown in orders from Europe and North America, China is increasingly investing in its own infrastructure and encouraging greater domestic consumer spending. It now has the worlds highest savings rate and unlocking some of the more than $350bn14 current account surplus will encourage Chinese manufacturers to prioritise supplying domestic markets. Reducing this domestic savings surplus means a corresponding reduction in buying foreign government debt; the implications for the exchange rates of other countries could be significant, including higher interest rates on national bonds globally. Interestingly, however, China demonstrated little enthusiasm for buying European debt during the 2011 crisis in the eurozone.
This crisis has proved deeply destabilising. In Europe and the US, the plummeting values of the euro and the dollar caused a flight to the Swiss franc, forcing the Swiss National Bank to peg its value to that of the euro in September 2011. The write down of Greek debt in the Autumn of 2011 was compounded by the crisis in Italy which saw yields on one-year government bonds break the 8% mark in November. The Prime Ministers of both countries became casualities of the crisis and 2011 ends with speculation that the eurozone may not survive in its current form. Given the volatility of global markets, low yields in safe havens appear increasingly likely to be the investments of choice for governments and corporate investors, for the foreseeable future. Investment yields will be increasingly inadequate to subsidise unsustainable businesses.
Lloyds
14
sEctIoN one
5. changing legislation
The global financial crisis has provided a major legislative response. For the banking industry, the capital requirements of BaselII have been added to by the provisions of BaselIII due for full implementation in 2019. At an international level, G20 leaders are taking steps to give the Financial Stability Board greater power and strengthen its monitoring function to ensure BaselIII and subsequent requirements are implemented consistently across all countries. The requirements of SolvencyII, aimed at the European insurance industry, which may well have played a part in increasing risk awareness in Europe, are currently likely to be fully implemented in 2014. Switzerland and Japan are being assessed for equivalence alongside Bermuda. Despite the G20 drive for global parity of much financial regulation, there is a move towards regulatory protectionism; with different countries keen to promote their own regime as more business friendly than those of potential competitors. Businesses in the City of London, for example, have pointed out the economic risks of disproportionate European regulation15, driving financial services to countries with lower capital requirements and lighter corporate tax regimes.
In the US, the Dodd-Frank (Wall Street Reform and Consumer Protection) Act, introduced in July 2010 has overhauled the previous agency oversight system for financial services, including the creation of a Financial Stability Oversight Council and a Federal Insurance Office to oversee financial institutions. In addition to this layer of supervision, accountability and reporting standards have been raised. In the East, too, emerging economies are tackling their problems with more regulation. At the start of 2011, China announced the acceleration of plans to control pollution caused by heavy metals16. Vice-Environment Protection Minister, Li Ganjie, has warned he will shut down the operations of multinational companies that try to conceal their creation of environmental hazards. In April 2011, the China Ministry of Transportation issued additional regulations for ship owners in Chinese waters covering water, oil waste and sludge disposal. Chinas growing resolve to tackle its status as the worlds biggest polluter presents opportunities for a range of waste and other environmental businesses. It also serves as a warning that business practices which worsen Chinas environmental health are less likely to be tolerated in the future.
Lloyds
15
02
Political, crime and security risks Environmental risks a balancing act for business The selective invisibility of natural hazards
Lloyds
16
sEctIoN two
5.4 6.5 5.3 6.0 5.2 6.1 5.2 6.3 5.1 6.2 4.2 5.8 3.9 5.6 3.9 5.0 3.7 5.1 3.4 5.2 3.3 4.8
0 1 2 3 4 5 6 7 Priority Preparedness
Lloyds
17
Other risks are also contributing to the likelihood of unrest. Sovereign debt (which came in fairly low down the Index at number 25) leads directly to volatile markets and low investment yields, while civil unrest leads to business continuity disruption and property damage. The Association of British Insurers, for example, estimate that the claims for the UK riots will top 200m, with bills for compensation adding at least another 133m to that total17. The growing sovereign debt crises of many European states will take years to fully resolve continued austerity measures, which have already demonstrably led to unrest, seem likely. Despite this, riots and civil commotion only just escape the bottom ten of the Index, while strikes and industrial action come in at number 30 and sovereign debt at 25. More than ever, businesses need effective plans in place to protect their plant, infrastructure, property, staff and supply chains from the fallout of political, social and economic threat.
Chart 5
Priority
5.4
4.4
3.2
Preparedness
Lloyds
18
sEctIoN two
The UK story may be typical of the problem. In 2010, a survey indicated that 90% of large businesses reported at least one cyber security incident in the previous two years19. Almost half of these businesses had increased their expenditure on information security, yet the number of breaches had more than doubled. Given the roll call of recent victims, even large businesses need to ask if they really understand the nature of the risk to which they are exposed. Are they, in fact, spending money on the right things? For smaller businesses the associated costs of a data breach could put their very sustainability at risk. Recognising this, in March 2011 Lloyds insurer Kiln and broker Lockton joined forces to provide cyber insurance to small and medium-sized online retailers. In a world where comparison sites now exist to help criminals select data theft software, cyber security threats have become ubiquitous. Technical solutions are needed that evolve more swiftly, together with improved reporting of breaches to help quantify the risk more accurately. In the interim, businesses should consider making the need to protect themselves and their customers a much greater priority.
table 3. political, crime and security risks, 2011 ranking versus 2009* ranking
political, crime and security Risk cybER attacKs (maLIcIous) thEFt oF assEts/ INtELLEctuaL pRopERty FRaud aNd coRRuptIoN cybER RIsK (NoN-maLIcIous) stRIKEs aNd INdustRIaL actIoN pIRacy tERRoRIsm RIots aNd cIvIL commotIoN EXpRopRIatIoN oF assEts abRupt REgImE chaNgE
* In 2009 there were 41 risks whereas in 2011 there were 50.
2011 RaNK
2009 Ranking
12 16 17 19 31 34 36 39 43 45
Lloyds
19
Chart 6
5.0
manufacturing
6.1
Litigation and business: transatlantic trends (2008)20 shows, there is a growing risk of forum shopping, where litigants choose the jurisdiction in which they launch their claim. Given that the risk of mass litigation varies across countries, businesses need to be fully aware of the rules and procedures governing class actions wherever they operate. Insurance for businesses and reinsurance for insurers is likely to play a much greater role as this trend develops and it becomes harder to predict where litigation may arise. New geographical frontiers of corporate liability are also opening up with the development, for example, of new, potentially riskier, means of energy production such as shale gas extraction and deep water drilling. The Lloyds 2011 report, Drilling in extreme environments21, highlights the emerging risks involved and ways in which these energy industry and insurers can work together to reduce the risks in operating in harsh environments, such as deep water and the Arctic.
5.6
6.5
5.6
7.3
financial services
5.2
5.8
other industries
5.0
6.0
24 27 30 32 33 35 37 38 40 41
29 25 Not available 33 34 Not available Not available Not available Not available Not available
4.7
7.3
professional services
4.4
IT and technology
5.8
4.1
Score out of 10
5.3
Lloyds
20
SECTION two
21
Chart 7
2011 2010
2011 2010
CANADA
Slave Lake Wildres
ICELAND
Volcano
RUSSIA
Heatwave, Forest Fires
CHINA
Earthquake
US US
*
EUROPE
Windstorm Xynthia
Tornadoes
US ^
Flooding
Hurricane Irene
TURKEY
Earthquake
BURMA
Earthquake
JAPAN
Earthquake, Tsunami
US #
Wildres
THAILAND PAKISTAN
Floods Floods
MEXICO
Earthquake
HORN OF AFRICA
Droughts
PAKISTAN
Earthquake
BRAZIL
Floods, Mudslides
AUSTRALIA
Floods
NEW ZEALAND
Earthquake
AUSTRALIA CHILE
Earthquake Floods, Cyclone Yasi
NEW ZEALAND
Earthquake
Lloyds
Lloyds
22
sEctIoN two
When it comes to natural hazards, what happens in Japan doesnt stay in Japan. Globalisation and extended supply chains mean that a Japanese tsunami can close a car factory in the UK a fact reflected by the launch of new nuclear business interruption cover by Lloyds broker Willis after Fukushima. The interconnectedness of global trade means flooding, drought, windstorms and earthquakes have an immediate effect on supply chains as well as longer-tail impacts on a countrys debt infrastructure, import and export ability and even its political stability. Yet the Index shows Western business leaders continue to give the risks these hazards present low weightings. There is, perhaps, much greater scope for a more proactive partnership between science and planning models in managing the risks of natural hazards. In 2011, Italian scientists were
prosecuted for manslaughter by the Italian state for failing to provide sufficient warning of the severity of the LAquila earthquake in 200923. The final verdict will be awaited keenly by both the scientific community and by casualty and property insurers. It may be that the Western businesses approach to natural hazard risk still remains out of sight, out of mind. As the impacts of climate change accumulate, they may be failing to grasp the very real threats that natural catastrophes pose to business continuity. In the ongoing debate over whether climate change is man made or cyclical, businesses, planners and governments may be in danger of losing sight of the urgent need to prioritise mitigating against the effects of natural hazards.
Chart 8
4.3 5.5 5.2 6.2 4.7 5.4 4.6 5.7 4.1 5.4 3.5 4.5 3.3 5.1 3.1 5.9
0 1 2 3 4 5 6 7 Priority Preparedness
Chart 9
EUROPE
3.4
EUROPE NORTH america NORTH america
GLOBAL
4.7
ASIApacific
4.3
GLOBAL
4.7
4.1 6.5
ASIApacific
5.4
4.9
5.5
Priority Preparedness
Score out of 10
5.8
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03
An escalated appreciation of risk
Lloyds
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section three
Chart 10
7.1 6.1 6.5 6.2 6.4 5.9 6.3 6.7 6.2 7.1
0 1 2 3 4 5 6 7 8 Priority Preparedness
Chart 11
business
7.3 7.1 7.2 6.5 5.4 6.5 5.0 6.1 4.3 5.5
7.1 6.9 7.2 6.5 4.8 6.7 4.5 6.3 4.1 6.5
7.0 6.9 7.2 6.4 5.0 6.2 4.5 5.9 3.4 4.7
7.7 7.3 7.3 6.8 6.1 6.8 6.0 6.6 5.4 5.8
7.9 7.3 7.3 6.3 6.9 6.4 5.2 5.1 4.7 4.9
economic
political
environmental
Priority Preparedness
Score out of 10
natural
Lloyds
25
Concern about talent and skills shortages, in particular, is considerably higher in Asia-Pacific than in the other regions of the world. 70% of Asia-Pacific respondents gave it a very high or high priority, against 42% for Europe, 45% for North America and 60% for the rest of the world. With this degree of priority, it is interesting that Asia-Pacifics score for being very or well prepared against this risk is only 48%. This is the highest gap between priority and preparedness for this risk of any of the worlds regions. Having experienced a devastating year of natural catastrophes, its not surprising that the Asia-Pacific region gives the risk category natural hazards the highest priority of all other world regions, with a score of 5.4. What is, perhaps, surprising is that respondents still believe they are slightly over-prepared for the risk at 5.8. Given that, for example, the claims made to the non-life insurance industry for damage caused by the Japanese earthquake and tsunami were $30bn and the total economic loss to the region has been estimated at nearer $100bn24, the belief in near-parity between risk priority and preparedness may be harder to justify.
Chart 12
2011
7.7
6.5
Business
7.3
6.6
economic
6.1 6.0
5.0
4.7
political
environmental
natural
5.4
4.3
Score out of 10
2009
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conclusion
coNcLusIoN
By any standards, the two year period between 2009 and 2011 has been more than usually eventful. Exceptionally frequent and costly natural disasters, waves of political change across North Africa and the Middle East, and an escalating sovereign debt crisis in Europe have created new economic, political, environmental and social uncertainties. That the risk priorities of business leaders across the globe have changed is not surprising. What is more surprising is the general level of confidence, with some notable exceptions, that respondents show in their ability to deal with these risks. Whatever the trends or partial explanation, we come back to the fact that in 48 out of the 50 risks in the Index most respondents believe their preparedness for a particular risk outweighed its sense of priority. As a major international insurer we have to ask: do people feel better prepared, at least in part, because they have the option of insurance? It is interesting that levels of perceived preparedness increase in those areas where insurance is most readily available, such as natural hazards, and shrink in relation to areas where it is not, such as in preventing the loss of customers, eradicating sovereign debt or solving talent and skills shortages. Does the location of insurable risks at the bottom of the Index suggest that the insurance industry is doing exactly what it aims to do allowing the transfer of risks away from companies? If so, does this mean that insurers can congratulate themselves on a job well done? We believe this is premature. The wide take-up in the West at least of insurance to manage risks such as floods or earthquakes clearly has a positive impact on boards levels of preparedness. But neither insurers nor their clients can afford to be complacent about the risks presented by low probability high impact events. Is it credible that so many boards across the world are adequately prepared for climate change, another volcanic ash cloud or a major earthquake? The terrible succession of events in Japan this year illustrates that, while insurance can help rebuild communities and infrastructure, it cannot stop our planet being battered by natural disasters. Nor, importantly, can it cover every eventuality. After the unfolding events of the last two years, businesses need to give much greater priority to planning carefully for the risks they cannot prevent, as well as being realistic about those they can.
Is it credible that so many boards across the world are adequately prepared for climate change, another volcanic ash cloud or a major earthquake?
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appENdIX
aNNEX 1: 2009 RIsKs
> > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > Cost and availability of credit Currency fluctuation Insolvency risk Loss of customers Major asset price volatility Cancelled orders Risk of excessively strict regulation Corporate liability Reputational risk Project delivery risk Abrupt interest rate change Risk of poor/Incomplete regulation Increasing protectionism Failed investment Fraud and corruption Information security breach Price of material inputs Theft of assets/Intellectual property Rapid technological change Cyber attacks Workforce health Talent and skills shortages Supply chain failure Succession risk Industrial/Workplace accident Energy security Piracy Strikes Pollution (caused by business) Flooding Terrorism Currency inconvertibility Climate change (impact on business) Pandemic Expropriation of assets Earthquake Drought Riots and civil commotion Windstorm (eg hurricane or typhoon) Abrupt regime change Wildlife
2011 RIsKs
> > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > > Loss of customers/Cancelled orders Talent and skills shortages (including succession risk) Reputational risk Currency fluctuation Changing legislation Cost and availability of credit Price of material inputs Inflation Corporate liability Excessively strict regulation Rapid technological changes Cyber attacks (malicious) High taxation Failed investment Major asset price volatility Theft of assets/Intellectual Property Fraud and corruption Interest rate change Cyber risks (non-malicious) Poor/Incomplete regulation Critical infrastructure failure Government spending cuts Supply chain failure Pollution/Environmental liability Sovereign debt Increased protectionism Industrial/Workplace accident Energy security Insolvency risk Demographic shift (eg ageing population, youth emigration) Strikes and industrial action Climate change Pandemic Piracy Water scarcity Terrorism Urbanisation Population growth Riots and civil commotion Food security Harmful effects of new technology Flooding Expropriation of assets Earthquake (including tsunami) Abrupt regime change Windstorm (eg hurricane, cyclone, typhoon) Drought Threats to biodiversity Impact of space weather (eg solar flares) Volcanic eruption (including ash)
Lloyds
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appendix
appendix continued
mEthodoLogy
The Lloyds Risk Index is based on results of a survey of 500 board level executives, carried out by the EIU in August 2011. Respondents rated, on a scale of one to five, how much of a priority each of the 50 risks will be to their business for the next year in the region they are based. On a similar scale they rated how prepared they expect their organisation will be to deal with that risk. Responses were converted to a one to ten index and averaged to calculate the priority and preparedness scores. The 2009 risk survey contained 41 risks and took place in March 2009. It surveyed 570 board level executives spread across major regions of the world.
Abrupt interest rate change Cancelled orders Climate change (impact on business) Cyber attacks Earthquake Loss of customers Pollution (caused by business) Strikes Succession risk Talent and skills shortage
Interest rate change Loss of customers/cancelled orders (amalgamated) Climate change Cyber attacks (malicious) Cyber risk (non-malicious) Earthquake (including tsunami) Loss of customers/cancelled orders (amalgamated) Pollution/environmental liability Strikes and industrial action Talent and skills shortages, including succession risk (amalgamated) Talent and skills shortages, including succession risk (amalgamated)
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aNNEX 2:
Chart 13
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50
Talent and skills shortage (including succession risk) Currency fluctuation Inflation Loss of customers/cancelled orders Reputational risk Fraud and corruption Changing legislation Interest rate change Corporate liability Excessively strict regulation Failed investment Price of material inputs Cost and availability of credit Poor/incomplete regulation Rapid technological changes Theft of assets/intellectual property High taxation Critical infrastructure failure Pollution/environmental liability Cyber attacks (malicious) Energy security Major asset price volatility Industrial/workplace accident Supply chain failure Demographic shift (eg ageing population, youth emigration) Sovereign debt Climate change Cyber risk (non-malicious) Increased protectionism Water scarcity Pandemic Urbanisation Piracy Insolvency risk Terrorism Government spending cuts Food security Flooding Earthquake (including tsunami) Population growth Strikes and industrial action Harmful effects of new technology (eg nanotechnology, EMF) Abrupt regime change Riots and civil commotion Expropriation of assets Drought Windstorm (eg hurricane, cyclone, typhoon) Threats to biodiversity and conservation affecting our operations Impact of space weather (eg solar flares) Volcanic eruption (including ash) 0 1 2 3 4 5 6 7 8
7.11 6.52 6.43 6.32 6.24 6.10 5.98 5.95 5.93 5.88 5.87 5.86 5.74 5.73 5.62 5.55 5.55 5.49 5.47 5.45 5.45 5.42 5.36 5.30 5.23 5.23 5.17 5.11 5.11 5.06 5.00 5.00 4.98 4.98 4.89 4.89 4.75 4.72 4.72 4.69 4.53 4.53 4.45 4.43 4.28 4.06 3.90 3.59 3.55 3.26
Score out of 10
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appendix
appendix continued
Chart 14
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50
Loss of customers/cancelled orders Talent and skills shortage (including succession risk) Currency fluctuation Cost and availability of credit Changing legislation High taxation Reputational risk Failed investment Excessively strict regulation Corporate liability Inflation Price of material inputs Major asset price volatility Cyber attacks (malicious) Rapid technological changes Government spending cuts Sovereign debt Cyber risk (non-malicious) Theft of assets/intellectual property Fraud and corruption Interest rate change Critical infrastructure failure Poor/incomplete regulation Insolvency risk Supply chain failure Pollution/environmental liability Strikes and industrial action Industrial/workplace accident Increased protectionism Energy security Demographic shift (eg ageing population, youth emigration) Climate change Pandemic Piracy Riots and civil commotion Urbanisation Terrorism Water scarcity Population growth Expropriation of assets Harmful effects of new technology (eg nanotechnology, EMF) Abrupt regime change Food security Flooding Earthquake (including tsunami) Windstorm (eg hurricane, cyclone, typhoon) Threats to biodiversity and conservation affecting our operations Drought Volcanic eruption (including ash) Impact of space weather (eg solar flares) 0 1 2 3 4 5 6 7 8
6.00 5.66 5.53 5.34 5.33 5.20 5.18 5.12 5.12 5.06 5.01 4.99 4.97 4.94 4.94 4.90 4.88 4.82 4.80 4.77 4.69 4.57 4.56 4.56 4.54 4.32 4.32 4.26 4.22 4.12 3.95 3.73 3.68 3.55 3.45 3.45 3.40 3.28 3.16 3.13 3.06 3.01 2.99 2.91 2.59 2.57 2.49 2.38 2.27 2.24
Score out of 10
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Chart 15
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50
Talent and skills shortage (including succession risk) Fraud and corruption Loss of customers/cancelled orders Currency fluctuation Reputational risk Price of material inputs Cost and availability of credit Inflation Failed investment Rapid technological changes Corporate liability Critical infrastructure failure Changing legislation Excessively strict regulation Supply chain failure Major asset price volatility Poor/incomplete regulation Energy security Cyber risk (non-malicious) High taxation Theft of assets/intellectual property Increased protectionism Cyber attacks (malicious) Interest rate change Pollution/environmental liability Industrial/workplace accident Riots and civil commotion Water scarcity Urbanisation Climate change Strikes and industrial action Insolvency risk Government spending cuts Food security Demographic shift (eg ageing population, youth emigration) Population growth Terrorism Pandemic Flooding Expropriation of assets Sovereign debt Harmful effects of new technology (eg nanotechnology, EMF) Piracy Abrupt regime change Earthquake (inc. tsunami) Drought Threats to biodiversity and conservation affecting our operations Windstorm (eg hurricane, cyclone, typhoon) Volcanic eruption (including ash) Impact of space weather (eg solar flares) 0 1 2 3 4 5 6 7 8
6.94 6.18 6.16 6.11 6.11 5.75 5.56 5.52 5.51 5.46 5.42 5.42 5.37 5.37 5.28 5.23 5.14 5.09 5.05 4.95 4.91 4.90 4.81 4.81 4.81 4.76 4.72 4.53 4.38 4.33 4.25 4.21 4.21 4.10 4.10 4.01 3.98 3.96 3.61 3.44 3.43 3.37 3.35 3.30 3.24 3.11 2.59 2.13 1.94 1.90
Score out of 10
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appendix continued
Chart 16
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50
Loss of customers/cancelled orders Reputational risk Changing legislation Cyber attacks (malicious) Price of material inputs Talent and skills shortage (including succession risk) Rapid technological changes Cost and availability of credit Corporate liability Theft of assets/intellectual property Major asset price volatility Cyber risk (non-malicious) Excessively strict regulation Government spending cuts High taxation Inflation Poor/incomplete regulation Interest rate change Currency fluctuation Supply chain failure Failed investment Critical infrastructure failure Increased protectionism Pollution/environmental liability Fraud and corruption Demographic shift (eg ageing population, youth emigration) Sovereign debt Industrial/workplace accident Insolvency risk Energy security Strikes and industrial action Population growth Windstorm (eg hurricane, cyclone, typhoon) Piracy Pandemic Terrorism Climate change Harmful effects of new technology (eg nanotechnology, EMF) Water scarcity Flooding Food security Urbanisation Earthquake (including tsunami) Drought Riots and civil commotion Expropriation of assets Threats to biodiversity and conservation affecting our operations Impact of space weather (eg solar flares) Abrupt regime change Volcanic eruption (including ash) 0 1 2 3 4 5 6 7 8
6.18 5.94 5.71 5.63 5.54 5.51 5.46 5.35 5.35 5.34 5.33 5.30 5.22 5.22 5.13 5.09 4.93 4.83 4.70 4.67 4.67 4.59 4.54 4.42 4.41 4.40 4.31 4.25 3.99 3.93 3.82 3.69 3.63 3.61 3.56 3.56 3.53 3.52 3.43 3.37 3.23 3.21 2.99 2.93 2.91 2.83 2.70 2.57 2.57 1.95
Score out of 10
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Chart 17
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50
Reputational risk Corporate liability Industrial/workplace accident Loss of customers/cancelled orders Fraud and corruption Cost and availability of credit Insolvency risk Theft of assets/intellectual property Failed investment Rapid technological changes Pollution/environmental liability Supply chain failure Cyber attacks (malicious) Piracy Cyber risk (non-malicious) Critical infrastructure failure Currency fluctuation Energy security Talent and skills shortage (including succession risk) Demographic shift (eg ageing population, youth emigration) Interest rate change Increased protectionism High taxation Strikes and industrial action Government spending cuts Poor/incomplete regulation Inflation Major asset price volatility Population growth Excessively strict regulation Price of material inputs Urbanisation Changing legislation Expropriation of assets Sovereign debt Terrorism Pandemic Climate change Abrupt regime change Water scarcity Food security Riots and civil commotion Flooding Earthquake (including tsunami) Harmful effects of new technology (eg nanotechnology, EMF) Windstorm (eg hurricane, cyclone, typhoon) Drought Threats to biodiversity and conservation affecting our operations Volcanic eruption (including ash) Impact of space weather (eg solar flares) 0 1 2 3 4 5 6 7 8
7.06 6.89 6.73 6.67 6.60 6.48 6.48 6.45 6.35 6.35 6.35 6.31 6.28 6.26 6.23 6.22 6.15 6.09 6.09 6.07 6.05 6.00 6.00 6.00 5.98 5.91 5.90 5.86 5.81 5.76 5.76 5.73 5.70 5.70 5.68 5.66 5.57 5.51 5.51 5.47 5.38 5.38 5.32 5.19 5.19 4.74 4.70 4.62 4.36 4.34
Score out of 10
Lloyds
34
appendix continued
Chart 18
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50
Reputational risk Corporate liability Cost and availability of credit Loss of customers/cancelled orders Cyber risk (non-malicious) Insolvency risk Fraud and corruption Industrial/workplace accident Cyber attacks (malicious) Failed investment Currency fluctuation Talent and skills shortage (including succession risk) Theft of assets/intellectual property Rapid technological changes Supply chain failure Interest rate change Critical infrastructure failure Energy security Pollution/environmental liability Strikes and industrial action Price of material inputs Excessively strict regulation Major asset price volatility High taxation Government spending cuts Changing legislation Inflation Piracy Increased protectionism Sovereign debt Poor/incomplete regulation Urbanisation Expropriation of assets Demographic shift (eg ageing population, youth emigration) Riots and civil commotion Flooding Food security Climate change Water scarcity Terrorism Pandemic Harmful effects of new technology (eg nanotechnology, EMF) Population growth Abrupt regime change Windstorm (eg hurricane, cyclone, typhoon) Threats to biodiversity and conservation affecting our operations Drought Earthquake (including tsunami) Volcanic eruption (including ash) Impact of space weather (eg solar flares) 0 1 2 3 4 5 6 7 8
6.26 6.17 6.13 6.11 6.10 6.09 5.94 5.90 5.90 5.86 5.83 5.81 5.81 5.80 5.80 5.75 5.67 5.54 5.54 5.52 5.52 5.45 5.38 5.25 5.25 5.23 5.09 5.09 4.85 4.81 4.78 4.75 4.69 4.68 4.54 4.52 4.51 4.49 4.48 4.47 4.46 4.46 4.38 4.26 3.92 3.85 3.71 3.68 3.65 3.33
Score out of 10
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Chart 19
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50
Cost and availability of credit Corporate liability Reputational risk Fraud and corruption Supply chain failure Interest rate change Loss of customers/cancelled orders Failed investment Critical infrastructure failure Industrial/workplace accident Energy security Theft of assets/intellectual property Rapid technological changes Cyber attacks (malicious) Major asset price volatility Price of material inputs Talent and skills shortage (including succession risk) Insolvency risk Cyber risk (non-malicious) Poor/incomplete regulation Strikes and industrial action Currency fluctuation Excessively strict regulation Changing legislation Inflation Piracy High taxation Increased protectionism Government spending cuts Sovereign debt Flooding Riots and civil commotion Terrorism Food security Population growth Expropriation of assets Pollution/environmental liability Urbanisation Earthquake (including tsunami) Water scarcity Abrupt regime change Demographic shift (eg ageing population, youth emigration) Drought Climate change Windstorm (eg hurricane, cyclone, typhoon) Harmful effects of new technology (eg nanotechnology, EMF) Pandemic Threats to biodiversity and conservation affecting our operations Volcanic eruption (including ash) Impact of space weather (eg solar flares) 0 1 2 3 4 5 6 7 8
6.81 6.79 6.76 6.60 6.34 6.20 6.16 6.11 5.88 5.87 5.83 5.79 5.74 5.69 5.65 5.65 5.65 5.65 5.61 5.60 5.58 5.46 5.46 5.46 5.37 5.37 5.23 5.05 5.05 5.00 4.86 4.81 4.54 4.43 4.41 4.39 4.38 4.33 4.31 4.10 4.06 4.04 3.84 3.61 3.58 3.56 3.27 3.21 2.69 2.27
Score out of 10
Lloyds
36
appendix
appendix continued
Chart 20
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50
Corporate liability Reputational risk Cost and availability of credit Fraud and corruption Cyber risks (non-malicious) Rapid technological changes Insolvency risk Cyber attacks (malicious) Interest rate change Theft of assets/intellectual property Strikes and industrial action Loss of customers/cancelled orders Industrial/workplace accident Major asset price volatility Supply chain failure Failed investment Talent and skills shortage (including succession risk) Currency fluctuation Pollution/environmental liability Energy security Flooding Critical infrastructure failure Price of material inputs Excessively strict regulation Inflation Piracy Expropriation of assets Poor/incomplete regulation Increased protectionism Population growth High taxation Sovereign debt Riots and civil commotion Demographic shift (eg ageing population, youth emigration) Urbanisation Windstorm (eg hurricane, cyclone, typhoon) Government spending cuts Changing legislation Water scarcity Abrupt regime change Terrorism Drought Climate change Earthquake (including tsunami) Harmful effects of new technology (eg nanotechnology, EMF) Pandemic Threats to biodiversity and conservation affecting our operations Food security Volcanic eruption (including ash) Impact of space weather (eg solar flares) 0 1 2 3 4 5 6 7 8
6.67 6.52 6.42 6.41 6.41 6.38 6.21 6.17 6.15 6.15 6.15 6.15 6.11 6.07 6.06 6.01 6.00 6.00 5.98 5.97 5.93 5.91 5.88 5.81 5.72 5.69 5.65 5.60 5.58 5.55 5.53 5.47 5.47 5.47 5.40 5.32 5.28 5.26 5.25 5.23 5.22 5.13 5.10 5.04 5.00 4.90 4.87 4.85 4.53 4.44
Score out of 10
Lloyds
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REFERENcEs
REFERENcEs:
1. Lloyds 360 Risk Insight. Global Business Leader Survey: Risk Priorities and preparedness. www.lloyds.com 2. ISAE Italian Index of Consumer Confidence, October2011 3. Insee Index of business confidence, September2011 4. Conference Board sentiment index, September2011 5. Federal Reserve Bank San Francisco Economic Letter, January2010 6. Chinese Ministry of Industry and Information Technology, August2010 7. www.theengineer.co.uk, March2011 8. Dan Karpenchuk, ABC Australia, May2011 9. nexxt.org 10. Andrew Monahan et al, Wall Street Journal, wsj.com, February 2011 11. Keidanren Growth Strategy 2011, www.keidanren.or.jp 12. Oxford Metrica Reputation Review, 2010 13. http://www.guardian.co.uk/business/2011/feb/03/ shell-nigeria-analysis-environmentalist-criticisms, http://www.globalsecurity.org/military/world/war/ nigeria-2.htm 14. Martin Feldstein, China Daily, March2011, www.chinadaily.com.cn 15. Financial Markets Law Committee, October2011, www.fmlc.org 16. China.org.cn, June2011 17. BBC, August2011, Insurance Daily, August2011, www.insurancedaily.co.uk 18. Symantec Internet Security Threat Report Volume 16, Sept2011 19. PwC Information Security Breaches Survey 2010, www.pwc.co.uk 20. Lloyds and RAND, Litigation and business: transatlantic trends, 2008, www.lloyds.com 21. Lloyds, AndrewRees, David Sharp, Drilling in Extreme Environments, 2011, www.lloyds.com 22. Munich Re 2011 half-year natural catastrophe review, http://www.munichre.com/app_pages/www/@res/pdf/ media_relations/press_dossiers/hurricane/2011-halfyear-natural-catastrophe-review-usa_en.pdf 23. Scientists in the dock, The Economist, September2011 24. RMS (www.rms.com), EQECAT (www.eqecat.com) and AIR Worldwide (www.air-worldwide.com) estimates, April2011
Disclaimer Except for the Executive Summary (pages 3-8), which was written by the Economist Intelligence Unit (EIU), the Lloyds Risk Index has been prepared by Lloyds based upon the results of a survey carried out for Lloyds by the EIU in August 2011 and is published for general information purposes only. While care has been taken in producing this document, Lloyds does not make any representations or warranties as to its accuracy or completeness and accepts no responsibility or liability for any loss occasioned in reliance upon it.
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