In a globalised world, today’s risks can be no longer be viewed in isolation. But which risks have the strongest interconnectedness and how are risk managers mitigating this new landscape that can have potentially systemic consequences?
A long and sustained cyber attack disables a company’s critical IT systems systems, rendering it unable to fulfil its contractual obligations, satisfy clients and retain its employees. Those who do stay are unable to create and innovate, as they are too busy trying to overcome a challenge that is ruining the firm’s reputation and threatening to close its doors for good.
This simple hypothetical shows the extent to which the interconnectedness of risks serves to amplify the impact of each risk. This makes the identification of the links between risks vital to the process of mitigating the effects of uncontrollable risks.
That’s is exactly what more than 145 of Asia’s top risk professionals were asked to do in the 2015 StrategicRISK Asia-Pacific Benchmark Survey. Participants were presented with a long list of risks, and asked to consider the connections between them.
Aon Risk Solutions Asia regional director Nicholas Clarke argued that the results highlighted the interdependency among many of the top risks identified in the SR survey.
“For example, damage to company reputation/brand will be heavily linked to attracting and retaining talented workforce, targeted cyber attack, contractual risk, failure of critical IT systems, and failure to innovate,” he said.
High levels of connectivity also add to risk complexity, Clarke points out. “When the dominos start to fall, they fall fast and the damage is widespread,” he explained. “This interdependency between risks illustrates that organisations can no longer evaluate risk in isolation but must consider their interconnectedness.”
Reputation risk came out of the survey as having the greatest connectivity to all risks that firms face. It is closely connected with targeted regulatory risk, injury to workers and supply chain, but it’s cyber attack that is named as the most likely event to damage a firm’s reputation.
Head of enterprise risk management at Indonesian energy company ABM Investama and PARIMA board member Bernado Mochtar believes that the danger of reputation risk is that it is, “the one that is never really noticed by the risk owner”.
“Many risk owners think operational risk is more important and reputation risk could not happen if risk managers and risk owners put more attention on operation and servicing the client,” he said.
Nevertheless, senior vice-president and chief of insurance at Reliance Industries and the Indian representative on the PARIMA board Saurabh Verma calls reputation risk “the greatest risk a firm faces”.
“In the space we are in today, which is so well connected, bad new travels fast,” he said. “Managing this is very challenging unless firms have very robust crisis management plans in place – managed by professionals and constantly being monitored.”
Head of risk management at Myanmar Brewery and PARIMA board member Jagath Guru said he views a company’s reputation “as akin to body nerves”.
“It may not be clearly visible, but nevertheless it has the capacity and potential to bring down an organisation,” he said. “The emerging smart system hackers, keyboard warriors of the social media, and cyber attackers continue to be undercurrents, which form strong external forces [that can] wreck an organisation’s reputation.”
After reputation risk, economic conditions was the most connected risk. While it is most closely connected with political risk, the relationship between economic conditions and currency risk is also high – a connection that has increased dramatically since last year’s survey.
Verma said: “A stable currency is the backbone of any business or business plan. At a time where the margins on business are eroding or thinning down, managing currency risk comes high on the agenda.”
Guru agreed, citing China’s devaluation of the renminbi as a challenge.
“It has, to a certain extent, triggered currency depreciation in certain countries like Malaysia. This move has resulted in China’s exports becoming more competitive compared to goods produced elsewhere in the region.”
Economic conditions are also strongly connected to and influenced by failure to innovate and increased competition. In fact, the appearance of failure to innovate in the top 10 risk list for the first time, said Clarke, “highlights the inter-connected relationship of risks”.
“Failure to innovate and as a consequence meet customer needs is closely related to two other risks in the top 10 list from the StrategicRISK benchmarking report, and closely interconnected with increasing competition,” he said.
‘Era of transition’
Clarke also highlights the connection between increased competition and failure to attract and retain a talented workforce. “Innovation and talent are critical to a company’s competitiveness,” he said. “And a competitive company, in turn, attracts talents that are innovative.”
Guru believes that we are in an “era of transition between Generation X (the loyal workers generation) and the new Generation Y, who tend to get bored easily”. “The phenomenon now is that even if we are able to substitute the ageing workforce, there is a very high probability that these new substitutes may not remain for long,” he said. “Particularly with the emergence of pulling factors of new competitors in the market who potentially seek the shortest route to market by… poaching their competitors’ employees by offering them better perks. Hence, this calls for a having a succession planning programme in place and ensuring business continuity.”
The connection between political risk and regulatory risk is also very strong, Guru said. “Even though a country is objectively seen as potential growth market from the business point of view, the first issue that need to be critically assessed is the political climate of the country, which revolves around the issue of flexibility of conducting business,” he said.
As Verma puts it: “The fundamentals of any investment are based on a stable political landscape and predictable regulation. This has come under stress due to prevailing economic conditions across the globe.”
More than 145 of the region’s top corporate risk and insurance managers took part in the 2015 StrategicRISK Asia-Pacific Benchmark Survey, which
forms part of SR’s Asia Risk Report, an annual thought leadership study examining risk management best practice, sponsored by XL Catlin.
The full results of this survey will be published in this report, which will be published and available for download next month at www.strategic-risk-global.com/asia