Expert Risk Articles

Allianz Risk Barometer 2016 - Top risks in focus: Digitalization

Digital innovation, introduction of new technologies and the emergence of the “Internet of Things” - an ever-growing network of interconnected devices, people and machines - which has been forecast to result in more than 50 billion devices being linked by 2020 (1) is transforming industry and bringing a wealth of
opportunities elsewhere.

The world is embarking on what many commentators are calling the fourth industrial revolution, Industry 4.0 or the industrial internet. Integration of digital and physical technology (as evidenced in driverless cars, unmanned aerial vehicles, “smart” cities and factories, nanotechnology, artificial intelligence, 3D printing and increasing use of “big data”) can deliver many potential benefits, such as increased efficiency, greener technology, reduced maintenance, increased service levels and reduce the risk of human error.

“Industry 4.0 creates enormous new value potential, especially for industrial companies and not least for our global economy and society,” says Michael Bruch, Head of Emerging Trends, AGCS.

“These new trends will change communication, the working environment and industrial development radically. Production in future will be done in “smart”
factories. Businesses and value-added processes will transform fundamentally.”

The merger of physical and digital worlds also means a growing reliance on technology and increasingly sophisticated production processes, which are
accompanied by a number of new operational, security and strategic risks for businesses.

While production will potentially become more customized, efficient, robust and safe, there is a growing vulnerability to cyber-attacks and infrastructure breakdown in a highly interconnected world.

“The current level of security of connected devices is still low. Cyber security risk will increase as each device is a potential entry point for data breaches and interconnectivity can increase the damage significantly, creating high accumulation potential ,” says Bruch. “This will also fuel the demand for specific cyber insurance solutions.”

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Technological risks are prominent in this year’s Risk Barometer results. As well as entering the top three business risks for the first time, cyber incidents also ranks
as the top long-term risk, while impact of digitalization and new technology also feature in the top 10 risks identified here.

New technologies (impact of increasing interconnectivity and innovation) almost entered the top 10 risks for the first time in the 2016 Risk Barometer. With 10% of responses this risk is one of the biggest risers in the rankings year-on-year in 11th position. In 2015 it was ranked 19th, with just 3% of responses.

Impact of disruptive technologies and the VUCA world

Digitalization and technology progressing at a rapid pace also poses a significant challenge to many companies’ business models as well. As the Risk Barometer results show, many businesses believe the world is becoming increasingly competitive. Market entry barriers are coming down with non-traditional competitors such as Airbnb (tourism), Apple (automotive), Google (insurance)
Paypal (financial services), Skype and WhatsApp (telecommunications) and Uber (transportation) entering industry sectors. These new players are turning business
models “upside down”, says Bruch, as they start from the perspective of the customer first.

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“We have been talking about the digital revolution for some time now and sometimes this means we miss the point that the real revolution and disruption is coming from the user contributor situation,” adds Ludovic Subran, Chief Economist, Euler Hermes. “It is not just about the tool, it is about people as well. Peer to peer businesses are increasing. People want to disintermediate because they are not happy with the go-between: they want to change the goods and the services, customize and share.

“For many businesses the biggest asset will be their community and the fact that they can leverage millions of people from one platform. Businesses who put the  consumer back at the center of everything also get feedback that improves their services for free. Thebusinesses and industries that will benefit the most in future are the ones that understand this reality.”

“Businesses have to perform in a volatile, uncertain, complex and ambiguous (VUCA) environment,” says Bettina Stoob, Head of Innovation, AGCS.

“Economies of scale as a business mantra will be replaced by speed to market in the fourth industrial era. Innovation cycles are becoming rapidly shorter, which means that businesses constantly have to be on their toes, turning out new products, services or solutions. In order to stay relevant to the customer, and to thrive in this rapidly changing and globally competitive environment, businesses have no option but to be innovative and agile,” she concludes.


(1) Source: Cisco IBSG April 2011, device per person, AGCS Expert Days presentation