RISK IN 2015

Your guide to the year ahead.

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“The future is already here, it’s just not very evenly distributed”. So said sci-fi writer William Gibson, who coined the term “cyberspace”.

Every month, Touchpoints features an exclusive News Analysis by StrategicRISK. These look behind the current headlines to identify trends and offer insights into the future. In this guide to 2015, we bring together eight of these analyses. They provide an expert commentary on the developments that could shape 2015 and the implications for risk managers.

Contents:

Page

2. The future of risk

3. Cyber war

4. Beware of El Niño

5. State of the union

6. A risk in the chain

7. Contagious risk

8. Independance day

9. Planning for a rainy day

2

news analysis

risk management

strategicRisk [ January 2015 ] www.strategic-risk-global.com

The future of risk

The interconnected and inter-dependent nature of modern society has arguably elevated the status of risk management to a more central and a generally more respected role within the corporate arena.

the responsibilities of a risk man-ager, however, are not universally defined and often vary from one busi-ness to another. these variations and

different perspectives regarding the role of a risk manager have created confusion among business leaders and is perhaps inhib-iting the professional recognition of risk management.

With risks becoming ever more connected and their conse-quences potentially more widespread, raising the standards of risk management education and practices is something firms may find to be a worthy investment. establishing standards of education and practice would arguably help risk managers achieve profes-sional recognition from within the corporate environment and bring greater value to their respective organisations.

the current lack of a universally agreed definition of risk management is inhibiting the effectiveness of the function within businesses, according to arcelorMittal Luxembourg gen-eral manager, asset risk management, adrian clements.

“Because there are several opinions as to what risk manage-ment is, chief finance officers, chief executives and chief operat-ing officers become confused when they speak to risk managers. as a result, risk managers are not taken seriously,” he says.

the issue has been acknowledged by the wider risk manage-ment community and 2015 is set to be a milestone year for the professional development of risk management.

the Federation of european risk Management associations (FerMa) has created a certification programme that establishes pan-european standards for training and practice. the certificate, european certified risk Manager, will be open to applications from individual risk managers and organisations with risk

Professional recognition for risk managers could bring greater value for businesses and wider society

management training programmes in spring/summer 2015, and will act as a benchmark against which risk management compe-tence, gained through education and experience, will be measured and awarded.

applicants will have their competence in risk management measured in terms of knowledge, experience, ethics and contin-uing professional development. risk managers can apply for two separate certificates: ‘FerMa certification passport’, awarded to risk managers with a foundation in risk and insur-ance; and ‘FerMa advanced’ for more experienced profession-als. the former will recognise qualifications such as diplomas and degrees in certain fields of risk management and the latter will recognise professional experience.

FerMa president and law firm dLa Piper director of risk management and insurance Julia Graham says the certificate does not intend to define risk or risk management, but rather to find a common ground to develop training programmes. She says: “We use different language all over the world. ‘cocoa’ is the term used in the US, but elsewhere people might say ‘chocolate’. Likewise, ‘risk’ has many definitions and these differ from country to country. our aim is to harmonise these different definitions.”

FerMa’s certification programme has received positive sen-timent from the wider risk community and its objectives have been endorsed by risk management leaders around the world.

“risk managers face a widening spectrum of challenges and the trend is not expected to lower in the near future,” says Lau-rent nihoul, board member of Luxembourg association for risk Management (aLriM). “aLriM welcomes and fully supports FerMa’s certification project, which should enhance the neces-sary cross-disciplinary understanding and practical knowledge that risk managers need to tackle their organisation’s current and upcoming risk management challenges,” nihoul adds.

Global issueSingapore based head of enterprise risk management and inter-nal audit at aviation firm tigerair, Gordon Song also recognises the same issues in asia and says professional development is essential to retain the best talent.

“there is not enough proper training for risk managers, which is a major reason why risk managers leave the profession,” says Song. “risk management is a profession, which must be recog-nised. although some business people come into risk management later in their careers and also bring value, there must be recogni-tion for risk managers who choose risk management as a career.”

events of the past five years, such as the disappearance of Malaysia airlines Flight Mh370; the 2011 ash cloud that envel-oped europe and the tohoku earthquake in Japan and multiple social uprisings have arguably highlighted the significance of risk management for businesses. Yet, the future of risk management could extend beyond corporate interests, says clements.

“in 10 years, risk managers at corporates will be asked to help advise local villages, townships and even cities on how to manage their infrastructure and properties better because governments will not be able to afford it,” he says.

“risk management will have a major role to play socially and so it will be important that risk managers have the right key-stone education to help the people make robust decisions.”

if clements’ prediction is correct, risk managers will have even greater responsibility within society. in the meantime, FerMa’s certification programme may be evidence of the function’s grow-ing status and influence within the corporate environment. sR

‘“Risk” has many definitions and these differ from country to country. Our aim is to harmonise these different definitions’Julia Graham, FErMa and DLa Piper

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3

news analysis

Cyber risk

strategicRisk [ September 2014 ] www.strategic-risk-global.com

Cyber war

F or many, cyber risk connotes a deep, confusing, faceless and murky underworld of crime. corporates are gradually coming to terms with what was deemed an emerging risk less than four years ago but is now a major threat to businesses irrespective of their location or sector.

targeted cyber attacks have become more frequent and, at a time when the

geopolitical landscape is undergoing a significant transition, the security of critical national infrastructure is particularly vulnerable.

meanwhile, the global balance of power is shifting and, for example, the financial crisis has enabled the brics to challenge the West’s economic dominance.

World leaders are increasingly concerned that cyber warfare could target critical infrastructure with financial institutions, energy providers, communications, food, health, water and other organisations being at high risk of attack.

Growing threatin response to the growing threat, Us president barack obama’s administration set about constructing a cyber security frame-work (csF), in which critical infrastructure firms are invited to adopt the framework with an incentive of reduced insurance premiums.

the csF was made available to Us firms in February 2014 and acts as a guideline to improve and maintain cyber security standards.

However, the Us is as much an instigator as a target of cyber warfare. When iranian nuclear facilities were targeted and sig-nificantly damaged by the stutnex virus in 2010, experts, includ-ing control system expert ralph Langer, believed israeli actors were behind the attack. However, Langer later concluded the Us

Cyber attacks have been increasing and there is growing concern that critical infrastructure may be targeted

was responsible for the attack. subsequently, symantec senior director of security response kevin Hogan told global media that the virus appeared to target iranian infrastructure in general.

“the threat has existed for a long time. there is a prolifera-tion of people who have the capability to instigate attacks, which is a big part of the problem,” says bae systems director cyber services James Hatch.

reacting to the increase in cyber risk, the eU published a cyber security strategy early in 2013 and, in march 2014, a draft cyber security Directive was passed at the european Parlia-ment, although it is yet unclear when it will come into force in each member state.

a major issue regarding cyber security in europe is a reluc-tance to accept vulnerability, according to ey assistant director security and investigations massimo cotrozzi.

“one of the main problems with critical infrastructure firms is a general mentality of ‘they will not target me, they will target them’”, cotrozzi says. “Unfortunately, everyone is ‘them’ for someone else, so they are all targets. critical infrastructure is under daily attack.”

although firms may be reluctant to accept that they may be vulnerable, world leaders are not complacent and similar frameworks to the csF may be adopted.

“a major attack on critical infrastructure is a concern for every country and it is on the radar with the Uk government, although it has not yet been decided how it wants to approach the problem,” says Lockton producer ben beeson, who was invited to discuss the csF with obama’s council at the White House last year.

reduced premiums and streamlined underwriting of cyber risks are a significant component of the csF, but large gaps in available coverage remain.

The insurance will followinhibiting the progression of the cyber insurance market is a lack of market data owing in no small part to the fact that most vic-tims of cyber crime do not always report having been targeted (depending on the nature of the breach).

“the insurance sector will provide products where a market needs them. as the risks evolve, i’m sure the insurance market will evolve with them,” says Hatch.

the complexity of cyber risk means businesses are still coming to terms with the size of their cyber exposures, and Hatch says the exposures are likely to increase with continual advancements in technology.

“as technology continues to progress into more physical domains, whether that be the increasing use of internet proto-cols in industrial systems, the ‘internet of things’ as a concept or the connected technology in the home, the scope for people to attack will increase,” he says.

“it means things that were previously thought of as being irrelevant to cyber space are at risk from hackers, which is certainly a concern area for coming years.”

cyber risk is real and no individual or business can afford not to take the threat seriously. a major attack on critical infrastruc-ture operating systems or industrial control systems could have catastrophic consequences at national and regional levels.

the avenues and channels for attackers are increasing as tech-nology progresses and evolves. the interconnected nature of modern business means improving standards of cyber security is arguably a matter of global importance. sR

‘One of the main problems with critical infrastructure firms is a general mentality of “they will not target me, they will target them”’Massimo Cotrozzi, eY

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4

news analysis

Weather risks

strategicRisk [ August 2014 ] www.strategic-risk-global.com

Beware of El Niño

Climatologists expect the el Niño phenomenon to occur later this year and, if this is correct, multinationals with operations in key emerging mar-kets will need to be prepared.

although el Niño traditionally reduces the count of tropical cyclones globally, heat waves and droughts are common in south america, east asia and india, while south-western regions

of the Us and bordering mexico witness unusually high amounts of rainfall. corporates must be alert to the potentially damaging effects of el Niño to operations in affected areas and plan their exposures accordingly.

“the latest forecasts are between 75%-80% of this being an el Niño year,” says postdoctoral scientist at the Walker institute for climate system Research Dr Nicholas Klingaman. “the usual pattern with el Niño is that the warm waters in the pacific build up at about this time of the year and through the autumn and reach their peak around November or December in terms of when the waters reach the most irregular temperatures.

“el Niño is defined by unusually warm ocean temperatures in the equatorial pacific ocean. there are related changes in the atmospheric circulation as a result of these warm waters. Warm water provides an additional source of energy and moisture into the atmosphere and there tends to be more rainfall over areas of warmer water.”

Global effectsthe event is not usually considered a major risk for businesses in europe but multinationals with interests in emerging markets of south america, south africa, asia-pacific and india are bound to be affected.

a positive aspect of el Niño for many firms, however, is the reduced number of tropical cyclones. the atlantic cyclone

El Niño is increasingly likely to occur this year and has never been so critical for European firms

season is forecast to be mild this year owing to the phenomenon.

“in many of the areas where tropical cyclones strike land in east asia, australia, the Us and the caribbean islands, there tends to be fewer tropical cyclones in an el Niño year,” says Klingaman.

he says the effects of an el Niño this year are expected to be mild but some affected areas are already suffering from deficient precipitation. “the current indian monsoon has already been affected and is running at about 30% below normal in terms of the rainfall, which is extremely deficient as a dry season is considered to be anything less than 10% below normal.

“the consequences on the agriculture in india are signifi-cant, as it is largely rain-fed. irrigation is increasing but much of indian agriculture is still small farms that depend on the mon-soon rains, so in terms of the rice, wheat crops and the ground nuts, it’s been a poor season so far.”

Furthermore, University of British columbia climate scien-tist simon Donner says the effects of el Niño could profoundly affect global markets.

“el Niño is no joke. Regional heat and drought brought by a classic eastern pacific el Niño can be devastating to farmers in southern africa, india, south−east asia, australia, the pacific islands and even the canadian prairies.

“the warm el Niño waters also choke off the supply of nutri-ents to the great fisheries off the coast of south america. the effects on global food prices are obvious,” Donner says.

heat waves and subsequent droughts are expected in large parts of south america too, says Klingaman, who explains that the reduced cloud cover over these areas intensifies the sun’s heat and magnifies el Niño’s effects. as a result, businesses with opera-tions in the region must prepare for a dip in production and operational performance as the heat is likely to induce sickness and poor health among labour forces.

Contingency plansconcerns have arisen, for example, regarding a potential increase in food prices as crops are expected to fail in various aforementioned regions.

the National agency for Risk and Disaster management (NgRD) of colombia has put aside €13.66m to implement a four-stage contingency plan in preparation for el Niño.

NgRD expects el Niño to be responsible for increases in inci-dences of sickness in livestock and people, the decreases in crop yields, deterioration of ecosystems, coral bleaching and infrastruc-ture damage. if el Niño transpires to be as damaging as the NgRD expects, emerging economies affected by the phenomenon could witness a fall in gross domestic product.

conversely, if el Niño occurs this year, california may expe-rience a much-needed rainy spell after a three-year drought, says Klingaman, as the south-West of the Us is one of few land masses to witness higher levels of rainfall during el Niño years.

although a rainy season would be welcomed in california, many firms could suffer through loss of sales and operational delays as a result of the wet conditions and may seek to purchase weather insurance to mitigate the expected losses.

the consequences of an el Niño event occurring this year will be felt globally. europe’s economic recovery has witnessed an expansion into emerging markets, which el Niño is likely to affect hardest, meaning that multinationals need to be aware of the risks it poses to their business. sR

‘The usual pattern with El Niño is that the warm waters in the Pacific build up at about this time of the year and through the autumn’Dr Nicholas Klingaman, Walker Institute for Climate system Research

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5

news analysis

EuropEan troublEs

strategicRisk [ June 2014 ] www.strategic-risk-global.com

State of the union

The european parliament elections last month gave euroscep-tics the opportunity to be heard, with right-wing parties winning 95 of the 751 seats in Brussels.

not all nationalist parties have the same goals, though. Some champion their countries’ withdrawal from the eu, others campaign for its disband-ment and others advocate for its

structure to be remodelled and its power redefined and even curtailed.

the increased presence of anti-european parties in the euro-pean parliament means that the latter will now be able to pro-mote their anti-eu political agenda more easily, and perhaps even question the eu’s raison d’être and existence.

at a time of increased competition from more flexible emerging markets, the potential threat to the eu’s long-term existence is putting the continent’s economic growth and recovery in jeopardy.

however, although the eu is unlikely to collapse or even change significantly soon, businesses operating within and from europe should look at the long term and be prepared for changes to the political risk landscape and accompanying instability, which could disrupt their operations.

protectionist policies may also increase, according to Fleish-man hillard’s institutional research unit. this means that national governments may attempt to weaken how much power the eu holds. this could affect mergers and acquisitions, the allocation of state aid, trade negotiations and cross-border investments. Further, the fiscal discipline agenda in member states is likely to come under increased pressure, which would introduce more uncertainty into markets and jeopardise any economic recovery.

The 2014 European Parliament elections have highlighted anti-EU feelings among European citizens

Uncertainty with neighboursto compound the immediate uncertainty on the continent, the eu’s frosty relationship with russia has cooled further following the former ukrainian peninsula of Crimea opting to rejoin russia.

observers may identify the deteriorating situation in ukraine as the beginning of the end for ukraine as a nation state. how-ever, the same commentators may also point out the situation is unsatisfactory for russia and the eu as both have a vested inter-est in a stable ukraine.

although that consensus might exist in theory, russia and the West are moving further apart – as are eu member states – and russian action in Crimea has exposed divisions on how the West should act.

“in the West, we are seeing crisis management,” says Dr Daragh mcDowell, senior russia analyst at maplecroft. “Crises were seeable but weren’t actively foreseen and prepared for. [the eu wasn’t] ready for a big russian response; it didn’t know how to act.

“risks are going to be increasing along a long spectrum in eastern europe. russia is going into recession and becoming more authoritarian, which is affecting business there; ukraine’s economy is on the verge of collapse. there are supply chain issues for firms transiting out of former Soviet republics.”

in addition, in the long term, concerns arise in respect of the eu’s ability to project a deterrent and call russia to account. as a result, the Kremlin could perhaps feel freer to act aggressively.

“there are greater divisions within europe over this and other issues, so what happens to the eu when another round of the euro crisis takes place?,” says mcDowell. “What happens as eurosceptic voices become louder? What effect will this have on the eu’s ability to take external action?”

“Destabilisation in ukraine is serious,” says Steven eke, russia and ukraine analyst at Control risks. “in some respects, there is an existential challenge to the state and its viability as an inde-pendent european state. this could have serious ramifications.

“risk managers need to take a long-term perspective and follow the longer-term trends of those competing interests that clash in eastern europe.”

Growing uncertaintyin the short-term, right-wing parties may pressure the eu to introduce tighter regulations on the mobility of labour forces.

any legislative changes in the uK, however, may not include Scotland. in october, Scottish citizens will take to the polls and decide whether it should remain part of the uK or become an independent nation state, which would also mean an immediate withdrawal from the eu and relinquishing the pound as its national currency.

the situation in europe is unpredictable. although the main-stream parties hold a majority of seats in the european parlia-ment, the momentum gathering behind eurosceptic groups will pressure traditionally central parties to adopt more nationalistic policies.

this pressure is likely to manifest itself most in the uK and Sweden, which will hold general elections in the next 12 months, and in France, where the far-right Front national advocates strong policies on immigration.

as a result, businesses could face a more challenging trading environment, with a weaker economy, in spite of the euro con-tinuing to recover. sR

‘What happens as eurosceptic voices become louder? What effect will this have on the EU’s ability to take external action?’Steven Eke, Control Risks

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6

news analysis

Supply chainS StrategieS

StrategicRisk [ May 2014 ] www.strategic-risk-global.com

A risk in the chain

The expansion of the corpo-rate platform since the dawn of glo-balisation has enabled organisations to scope far and wide for the best resources and supplies and, as a result, supply chains have become more complex and far-reaching.

however, the economic downturn has seen the majority of corporates consolidate to cut expenses and save

money. the centralisation of suppliers and resources is therefore now more common place.

Keeping everything in one place increases efficiency but also increases supply chain exposures as many firms found the hard way. however, is there an alternative?

centralising suppliers has its merits and is an attractive strat-egy for many organisations such as food retailer Morrisons, which revealed plans to increase the centralisation of its supply chain and distribution networks after turnover had dropped 2% for the year ending 2 february.

Morrisons chief executive Dalton phillips said: “the strategy we are announcing is a bold and comprehensive response to the fun-damental structural changes that are taking place in grocery retail.”

the retailer plans to improve stock flow through greater cen-tralisation from regional to central distribution centres and to save £200m from indirect procurement and loss prevention.

improving procurement functions is a common strategy for larger organisations, according to procurement and supply chain consultancy state of flux chairman alan Day.

“typically, organisations will have more suppliers than they can deal with and the first thing they will look at is removing maverick spend, which is spend that goes to non-approved or non-preferred suppliers. this strategy is partly aimed at managing risk and partly at ensuring the volumes being negotiated actually translate.”

the procurement departments of larger organisations can have up to 3,000 employees. however, Day says that employees

Firms must negotiate extended supply chains without it costing the business while reducing the risk of disruption

managing hundreds of accounts is a key factor for firms centralis-ing suppliers. “in a procurement or supply chain organisation, there are potentially hundreds of suppliers per person, of which only a handful are strategic partners, but it makes sense that the hundreds that aren’t [strategic] you try to migrate towards the stra-tegic ones so that you have more visibility with what’s going on. that is where the control element comes in; because with such a high volume of suppliers you tend to lose visibility.”

Migrating resources, supplies and products towards strategic suppliers is a risk, but arguably one worth taking.

“You should understand the supplier’s business as well as they understand it − if not better, but with hundreds of suppliers you can’t get across them all. so, in some ways, you are better off consolidating suppliers and understanding one supplier well, rather than many not so well.”

Tiering strategya common strategy employed by large firms struggling to manage their huge supply base is ‘tiering’ suppliers and allowing strategic suppliers to manage others. Day says tiering the supply base creates opportunities for the large suppliers while reducing the risk exposure for the organisation.

“tiering is an opportunity for larger suppliers. it is in their best interest to manage risk better for the organisation and take on tiering for them to become the lead supplier.

“the challenge when you are tiering suppliers is that you could potentially be layering cost. a supplier could be charging you an extra 10% for the joy of managing them. clearly, what procure-ment tries to do is, at minimum, keep those costs neutral.”

however, firms should proceed with caution when looking to strategically tier their supply base, warns Day. he says that even the smallest supplier with little-to-no risk management framework in place can be crucial to the company’s success.

“You may be removing a supplier of 20 years simply because they are a small supplier with no risk framework. equally your business could pivot on that supplier that doesn’t have the proper risk structure because it knows your business inside out.”

evaluating each supplier’s relationship can expend too much time and too many resources for large corporates, but in the age of technology, managing suppliers need not be such a monumental challenge.

Keeping suppliers spread apart is key to continuity, but the potential savings made possible through tiering the supply base and the greater understanding that comes with a centralised supply base mean firms should move to incorporate both strategies, according to Day.

“technology lets firms manage suppliers more rigorously and gives them more visibility to help drive similar or consistent processes throughout the supply base. i would argue that you want both; in that you do want to consolidate some [suppliers] as a number of the larger corporates are managing well over 100,000 suppliers and, despite having procurement functions of 2,000 or 3,000 people, the number of suppliers per person is still ridiculously large so they have to consolidate the supply base to a certain degree.

“But really it’s about moving to better contract, performance and relationship management. that means putting that govern-ance structure in with those key suppliers and ensuring the perfor-mance metrics are reflecting the contract and that the relationship is aligned. Ultimately, this is what firms have to do and if they can automate that with technology, then even better.” sR

‘Typically, organisations will have more suppliers than they can deal with and the first thing they will look at is removing maverick spend’Alan Day, State Of Flux

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7

news analysis

Ebola

StrategicRisk [ April 2014 ] www.strategic-risk-global.com

Contagious risk

The ebola virus outbreak in West africa has raised many ques-tions for organisations regarding the standard of health practices, par-ticularly in developing countries, where firms are seeking growth opportunities.

although the world’s media has been watching the ebola virus spread through Guinea and into liberia,

Mali and sierra leone, there are many other significant infec-tious disease outbreaks occurring globally that do not receive equivalent attention.

Perhaps, this can be explained by the virus’s 90% mortality rate. at the time of writing, 121 deaths had been recorded out of about 200 confirmed cases of infection. international and local health organisations have been fighting to reduce the number of victims, but with no available vaccine, the virus can only be contained.

aside from the obvious health risks posed to employees living in regions experiencing an infectious disease outbreak such as ebola, disruptions to supply chains and productivity are among the risks most overlooked by businesses, says Dr Jonathan o’keeffe, a medical director at international sos.

he said the first major impact of the outbreak is heightened levels of anxiety for people living in or near affected areas, owing to the high levels of mortality. as a result, people are anxious to have access to healthcare for routine check-ups to protect them-selves from severe viruses such as the current ebola strain.

“the second impact is on business continuity. You might have a situation where borders are closed or air corridors are closed, which causes supply chain issues and employees not being able to turn up for their rotation at a particular location.”

the damage to businesses because of the ebola outbreak are beginning to show already, according to aon chief executive sub sahara africa and managing director for kenya Joe onsando.

Apart from obvious health effects, the Ebola outbreak has also curbed economic growth in affected countries

“the outbreak has curbed economic growth in liberia by slowing cross-border commerce, reducing customs revenue and investment. the disease has halted economic activity in the country’s interior and many foreigners are reluctant to invest in the country,” onsando says.

he adds: “Many countries have taken measures to prevent the outbreak from spreading by restricting cross-border movements and air corridors and, as a result, hotels in the region have already experienced a decline in business since the outbreak was reported. at least 80% of reservations have been cancelled, decreasing tour-ism in the country, which is a significant part of the state’s income.”

although it is difficult to plan for such a widespread and deadly outbreak such as ebola, Dr o’keeffe says businesses with operations in emerging and developing markets such as africa and the asia-Pacific region, where new cases of avian flu have been reported, should be implementing a health incident plan.

“Companies are not always adopting preventive measures along the lines of a health incident plan, which is a policy that governs the communications and responsibilities of different parts of an organisation to deal with things such as a measles outbreak in an office or a tb case at an oil and gas rig,” Dr o’keeffe says.

“those examples are of infectious disease outbreaks but not to the scale and level of avian flu or ebola, but they are happening all the time.

“organisations are not usually well equipped to deal with them because they will attend to the safety issues of a site, but tend to neglect the health issues.”

Better response systemsnow that the global economy is arguably on its way to recovery, many international and multinational organisations seeking growth opportunities in emerging markets must be wary of health risks, which vary in different parts of the world.

“sometimes, companies naively assume the same risks apply from one jurisdiction to another, but sometimes the environ-ment they are heading into requires careful planning, an under-standing of local health infrastructure, endemic risks and health resources, such as the qualifications of healthcare professionals, which is crucial,” says Dr o’keeffe.

“in terms of the business continuity impact of other diseases, having an appropriate malaria policy and a health incident plan is probably a much more useful immediate policy for organisations to adopt and develop.

“it is important for organisations heading to emerging markets to realise health infrastructure is relatively underfunded, so by comparison to the West, you will experience exposure to infectious diseases and the ability to deal with large numbers of casualties and restricting the spread of infection is curtailed.”

From an insider’s perspective, onsando believes sufficient efforts are being made to improve the health infrastructure in West africa, but learning from the most recent ebola outbreak, better worldwide disease-detection and response systems are needed together with improving emergency response resources.

infectious disease outbreaks can vary in severity from the novovirus to avian flu, but the impact they can have on businesses need not be so varied.

the headline-grabbing ebola crisis is one of many significant infectious disease outbreaks occurring globally, but it has shown that firms are not always sufficiently protecting their assets and resources, leaving themselves vulnerable in the face of a crisis. sR

‘You might have a situation where borders are closed or air corridors are closed, which causes supply chain issues and employees not being able to turn up for their rotation’Dr Jonathan O’Keeffe,international SOS

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news analysis

risks

strategicRisk [ march 2014 ] www.strategic-risk-global.com

Independence day

scotland’s referendum on independence poses significant politi-cal, economic and regulatory risks for uK businesses. such a radical change to the risk landscape – for banks and oil and gas firms in particular – have prompted many industry leaders to oppose the referendum. a ‘yes’ to independence is likely to have serious consequences, as organisations on

both sides of the anglo-scottish border prepare for a controver-sial change to the political environment.

Prime minister david cameron believes the uK will lose a huge part of its identity if scotland votes ‘yes’ to independence on 18 september. scotland’s first minister, alex salmond, who champions the cause for independence, believes a break away from the uK shouldn’t deprive the new nation state of its right to continue trading in the pound. But conservative, labour and liberal democrat leaders are united in their stance that leaving the uK means leaving the pound.

shutting the door on the pound would be a huge blow for scot-tish companies, but a route back into the eu may provide some economic protection. However, european commission president José manuel Barroso said it would be “extremely difficult” for an independent scotland to join the eu.

as the referendum creeps closer, banking giants across the uK have begun publicly to voice concerns over the possibility of a divided Britain. lloyds Banking Group announced in its 2013 annual report that, as a scottish business, it would face “material costs” in an independent scotland as the regulatory and tax regime would be likely to increase compliance costs.

“the outcome of the referendum could contribute to pro-longed uncertainty around certain aspects of the scottish econ-omy and scottish companies, which could, among other things, increase the cost of the group’s funding,” the report said. “While the group is monitoring and assessing the potential impacts on its

We won’t know until 18 September, but businesses must prepare for a ‘yes’ vote for Scottish independence now

business of a vote in favour of scottish independence, the situa-tion remains inherently uncertain,” it added.

the royal Bank of scotland (rBs), along with pensions and investment giant standard life, made their referendum contin-gency plans public. Both have signalled a transfer of business operations south of scotland, primarily to remain compliant with european law, which requires organisations to have their head office in the same member state as their registered office.

the european Parliament’s council directive 95/26/ec, implemented on 29 June 1995 but never tested in court, also implies that the registered head office of an organisation should be located where the bulk of its activities are. for the majority of scotland’s largest corporations, this would mean england.

there is also unease over the oil and gas sector – an industry that contributed £22bn to scottish GdP in 2012. shell chief exec-utive Ben van Beurden announced at the company’s annual reception that the aberdeen-based oil giant would prefer scotland to remain part of the uK in the interests of stability. However, north sea oil production has declined since the start of the millen-nium – to the equivalent of 1.5 million barrels per day in 2013, according to trade body oil & Gas uK.

the importance of the oil and gas industry to scotland is spelled out in a white paper released by the scottish government, Scotland’s Future – Your guide to an independent Scotland. to ease concerns over tax and compliance risks for the oil and gas sector, the paper outlines plans to work with the tax authority, revenue scotland, to simplify the tax system – reducing compliance costs – streamline reliefs and help reduce tax avoidance.

oil & Gas uK said in a statement: “Both the uK and scottish governments recognise the importance of the uK oil and gas industry and are aware the industry must be able to work in a secure and predictable fiscal regime.

“With six months until the referendum, it is essential the con-stitutional debate does not create instability for our industry.”

Sterling questionHowever, co-operation between an independent scotland and the other uK nations will prove difficult if no agreement is reached over the sharing of the pound.

supporting the need for a united and “truly free market”, busi-ness secretary Vince cable has warned of the damaging effects independence could have on uK firms, adding to the regulatory barriers faced by businesses.

“the union works for businesses on both sides of the border. scotland is famous for its world-class products and enterprising spirit, and the uK’s truly free, integrated and growing market helps scottish firms exploit these to the full,” cable said at the launch of the government’s Scotland Analysis report last year.

“as the economy starts to heal, now is the time to focus on renewed opportunities to do business. the last thing firms need is a new set of rules and regulations, new costs on exports, a smaller labour market and less reliable support for innovation and knowl-edge transfer. Breaking up scotland’s most lucrative market would destabilise enterprise and potentially put growth and jobs at risk.

“my message to the scottish business community is that we’re stronger and more secure together.”

economic uncertainty over scotland’s referendum, com-pounded by political tensions and compliance issues, all threaten uK businesses. organisations must be prepared to handle increased currency, taxation and compliance costs in the event of a ‘yes’ vote or risk disastrous financial implications. sR

‘Scotland is famous for its world-class products and enterprising spirit, and the UK’s free, integrated and growing market helps Scottish firms exploit these to the full’Vince Cable Business secretary

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NEWS ANALYSIS

RISKS

StrategicRISK [ FEBRUARY 2014 ] www.strategic-risk-global.com

Planning for a rainy day

LAST DECEMBER AND JANUARY were the wettest two months in Eng-land and Wales on record for 248 years.

The rainfall caused landslips, dis-rupted rail travel and fl ooded entire towns. Although it is too early to report total insured losses infl icted by the most extensive fl ooding to hit the UK in living memory, PwC estimates insured losses to reach about €600m.

Worryingly for businesses and insurers, the severity of the weather seems all too familiar.

Between 26 and 31 October 2013, the St Jude storm killed at least 17 people in Northern Europe and caused about €1bn worth of damages, according to Aon’s Impact Forecasting catastrophe insight report. A month later, Windstorm Xaver battered North-ern Europe, killing at least 15 people in less than a week. Hitting the UK on 5 December, Xaver caused insured losses of about €800m, with Scotland, Germany, the Netherlands, Belgium, Scandinavia and Poland being most aff ected, according to Aon.

Businesses are therefore increasingly concerned that extreme weather, including excessive rainfall and 150km/h+ winds, is becoming a regular risk. Indeed more than 700 experts rated “greater incidence of extreme weather” as the sixth highest con-cern for their business in 2014 according to the World Economic Forum Global Risk report 2014.

A likely linkThe weather experienced in the UK and Northern Europe in December and January can be attributed to the up-stream per-turbations to the jet stream over North America and the North Pacifi c according to a February Met Offi ce report, Recent Storms.

The report also highlights that the sea level along the English Channel is rising, having increased by 12cm in the past 100 years. An 11cm-16cm rise is expected by 2030, which would equate to 23cm-27cm of total sea level rise since 1900.

Extreme weather events seem to be increasing and organisations need to be prepared or face high costs

Experts are unable defi nitely to confi rm the link between the recent storms and rainfall in Europe and climate change, but researchers at the Met Offi ce believe they are likely to be linked. A Met Offi ce spokeswoman said: “We can’t defi nitively link the recent storminess, rainfall and fl ooding to climate change partly because of the highly variable nature of UK weather and climate. However, some studies suggest an increase in Atlantic depressions taking a similar track to those we’ve seen recently.

“There is also evidence that daily rainfall totals are becoming more extreme. That would be consistent with the basic physics of a warming world – a warmer atmosphere can hold more water.”

Extreme seasonal weather also aff ects insurers, as they feel the squeeze of increasing claims. The cost of cover for companies in Europe may also increase.

The estimated economic damage caused by the December and January weather in the UK is about €757m, according to PwC insurance partner Mohammad Khan. However, he said the excessive January rain was not as damaging as the weather in December and estimates the cost for insurers at about €600m.

He said: “It is too early to tell whether the weather will aff ect insurers’ results for next year. Last year, the weather was benign from January to October and insurers’ results from household and commercial property business were positive, even allowing for the December storms and fl oods.”

Worst-case scenario startBusinesses can also be signifi cantly aff ected by severe weather. For example, organisations made up for about a quarter of all claims after the 2007 summer fl oods in the UK.

Supply chain and business interruption are the most common claims arising out of severe weather, and PwC insurance catas-trophe expert Dom Del Re believes that preparation for such events can make a diff erence.

He said: “Claims arising from business interruption could be a signifi cant driver of the overall insured loss. Home and busi-ness owners who have planned for fl ooding will be better equipped to deal with the disruption and damage.

“Policyholders continually aff ected by fl ooding – even those not in traditional fl ood plains – should consider taking [preven-tive] action on their properties to help mitigate and prevent damage caused by fl ooding.”

Irrespective of whether the volatility of the European winter is increasing, fi rms should be proactively preparing for the worst-case scenarios according to FM Global vice-president manager of global services Nicholas Batten.

“It should come as no surprise that fi res still burn, rivers and oceans still fl ood and hurricanes and tornadoes still hurl debris – all with the potential to cause huge amounts of damage.”

“If I see a trend, it’s the industry’s continued approach that these types of losses are considered the norm – when, the major-ity is preventable.”

Batten added: “Organisations today should start with the worst-case scenario and work their way backwards. Ultimately, businesses or individuals purchase insurance because they believe they may need to make a claim.  

“So, partner with an insurance company that can help you prevent the loss from occurring. Ensure the insurance company can honour its promise to pay and it is fi nancially sound. Make sure the policy terms and conditions are suffi cient – not only at the corporate level but globally.” SR

‘It is too early to tell whether the weather will aff ect insurers’ results for next year’Mohammad Khan PwC

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