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Top risks in focus: Market developments - Rising impact of new technology and digitalization continues

Market developments remains a priority concern for businesses in the Allianz Risk Barometer, maintaining second position in the global rankings (31% of responses). Companies are concerned about the potential risk impact of factors such as intensified competition, mergers and acquisitions (M&A) and market stagnation. At the same time increasing dependence on technology and automation is transforming, and disrupting, companies across industry sectors, including the insurance industry. Digital innovation brings a wealth of opportunities but many companies are also concerned about its impact. More than half of Risk Barometer responses (53%) cited increasing digitalization and use of new technologies as the most prominent trend currently transforming their respective industry sector.

“Companies that don’t want to become a victim of disruption but rather shape their industry, must be able to innovate, change and adapt their business model,” says Solmaz Altin, Chief Digital Officer, Allianz. “For example, at Allianz, we have set-up ‘Allianz X’ (a new business unit) to build and connect with startups. Through Allianz X we are also gaining access to new business models to hedge against disruption.

“Digitalization is, above all, about what clients need and want. Technology is only the enabler. Today’s customers want simple and convenient solutions that are tailored to their needs and accessible anywhere, anytime.”

Risk impacts of increasing digitalization

Changing risk profile

Digitalization is also changing the risk profile of industries. In the 2017 Risk Barometer, the risk impact of new technologies ranks in the top 10 for the first time (10th). Increasingly, connected industries and their insurers will experience new liability scenarios. For example, human error – a leading cause of losses in many sectors – could increasingly be replaced by technical failure. An increase in non-physical losses (see Top Risks in Focus: Business Interruption) is also anticipated, as digitalization will shift the nature of corporate assets from the mostly physical to increasingly intangible. Such intangible risks will require specialist services and solutions such as crisis management and forensic IT support, for example.

Loss activity patterns could also change. Frequency of losses could be reduced due to increased predictive maintenance, driven by real-time monitoring and data analytics. However, this may be accompanied by the potential for larger-scale losses from cyber-attacks and infrastructure breakdown.

“The technological advances over the last decade are the main driver of the growing cyber exposure landscape,” comments Georgi Pachov, Global Practice Group Leader, Cyber, AGCS. “There is no industry untouched by the penetration of digitalization and the vast amount of information exchanged at all stages of the business value chain. This interconnectivity enables growth, cost optimization and more flexible business models close to the final customer. However, it also poses significant risks related to inability to deliver the product or services. The utilization and application of machine learning, artificial intelligence, big data and, in general, solid analytics contributes to the ever-increasing cyber exposure.

Implementing proper cyber risk management and mitigation procedures will become an indispensable part of every company’s top management priorities. This requires understanding and quantifying the cyber risk, training employees and identifying exposures to be transferred to the insurance industry.”

Sector Analysis: Top business risks in 2017 by industry

The 2017 Allianz Risk Barometer analyzes responses from 21 different industry sectors, generating a diverse range of risk concerns.

Engineering, Construction, Real Estate:

Engineering, Construction, Real Estate: Top business risksImpact of natural catastrophes (40%) is the new top risk for the sector replacing market developments. In recent years the cost of engineering claims has been rising with the trend towards ever-higher values and risks that are increasingly interconnected and concentrated on areas with exposure to natural hazards. Earthquakes pose a particular threat. A five year analysis of large insurance claims (€1m+) showed earthquake to be the top cause of loss in the engineering sector, accounting for 65% of all claims according to value[1].

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Financial Services:

Financial Services: Top Risks by IndustryLittle change in the sector year-on-year with market developments continuing to maintain the top risk ranking. Cyber incidents remains the second top risk but events such as the hacking of the banking arm of supermarket chain Tesco in the UK[2], which led to money being stolen from thousands of accounts, has raised fresh concerns about the methods used to detect this risk. The Bank of England has said the threat of cyber-attacks is one of the major risks facing the industry.

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IN FOCUS Manufacturing (including Automotive)

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“The top risk, business interruption, is a consequence of many of the other risks identified,” comments Michele Williams, Global Practice Group Leader, Heavy Industries & Manufacturing, Property Underwriting, AGCS. “Insurers can support identifying some of the risks through services such as supply chain risk management assessment and risk consulting. However, focusing on the cause of the business interruption is incredibly important in this process. There are insurance/risk transfer solutions available for many of the risks identified. Often the problem is that an insurance budget is set and it is very difficult to get approval for additional spend for a new product unless the ‘coverage gap’ has been identified by the business and there are some concrete examples of losses. For newer risks this information is limited. This is where close communication between insurers and clients is key to develop and provide solutions to protect against new risks.”

Market developments – Automotive

Overcapacity and increasing pressures across the automotive supply chain resulted from the combination of the maturity of the industry, low margins and the slowdown of emerging market economies. This is resulting in short term cost optimization which could have negative consequences in the longer term.

To counter this there are a number of new players entering the market who benefit from flexibility and a low cost base, along with an innovative approach to technology, design, manufacturing and distribution. These companies are designed around the customer and are ideally suited to operate in the changing environment.

Marine and Shipping

Marine and Shipping: top risks in focusThe global shipping industry has been weathering rough seas for years. According to Euler Hermes[3], this situation is not likely to change soon given evidence in the container segment where insolvencies rose by more than 10% during the first half of 2016. Business interruption rises up the risk rankings in the wake of the fall-out of the collapse of Hanjin Shipping. Human error is a new entry in the top five risks. It is estimated that around 80%[4] of marine accidents can be attributed to this.

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Business interruption is the new top risk in the Power and Utilities sector and, together with market developments, in the Transportation sector.


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IN FOCUS Small to mid-sized (MidCorp) businesses

Business interruption (BI) is ranked as the top risk by mid-sized companies (€250m to €500m revenue): it ranks second among small-sized companies (<€250m) in the 2017 Allianz Risk Barometer. For small- to mid-sized companies, generally, market developments is a major risk concern. Naturally, smaller enterprises are affected heavily by market stagnation, leading to a cap in small-to mid-sized business lending, barely balanced by government grants or other support. Highly competitive industries like the service sector, construction or food services dominate this space. While larger companies may face fewer new market entrants, small- to mid-sized businesses in these sectors have to continue to address an incoming stream of competition, says Vinko Markovina, Global Head of MidCorp, AGCS. “The MidCorp business segment plays such an important role in our global economy,” says Markovina. “At the same time, this segment can be particularly vulnerable to slower economic growth and increasing geopolitical turmoil.”

Interestingly, cyber incidents ranks just sixth top risk for small-sized companies. “Are small companies underestimating cyber risk? Yes,” says Jens Krickhahn, Head of Cyber Insurance Central and Eastern Europe, AGCS. “Many underestimate their exposure and are not prepared for, or are able to respond to, an incident. Many do not have the resources to build a response team. This can be fatal if they become the target of a cyber-attack.”

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[1] Global Claims Review, Allianz Global Corporate & Specialty
[2] Tesco Bank announces full service has resumed for customers, corporatetescobank.
[3] Rough Seas For The Shipping Industry – Consolidation Wave Still Rolls, Euler Hermes
[4] Human Reliability and Error in Transportation Systems, Springer

Photos source: iStockPhoto