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Risk management scenarios in response to rising inequality: investment and mitigation

01 December 2022 Riskonet

Considering new research on the effects of inequality, leading risk management company Riskonet Africa has warned that businesses need to reassess their approach to the risks of civil unrest.

A recent report from PwC warned that increasing inequality in South Africa is a ticking time bomb that will undoubtedly lead to civil unrest. The report stated that unless businesses act swiftly by accelerating investment into socio-economic development interventions, they are at major risk of operational and strategic disruptions.

“However, business cannot assume the responsibility of the state as regards income grants, which means that alternative and effective programs to address inequality are needed” says Volker von Widdern, Principal of Strategic Risk at Riskonet Africa.

“From a humanitarian perspective, the private sector has responded with multiple initiatives to ensure that those living in desperate situations have access to ways to build a viable livelihood,” says Von Widdern. “From a risk perspective, businesses will incur massive financial losses if further civil unrest disrupts operations, and we need to take action or prepare to suffer huge financial losses” he adds.

One of the best sources of positive leverage is education – this is where business can make targeted initiatives in their communities and employee bases to upskill these stakeholders and generate further employment opportunities.

Von Widdern explains that businesses will usually exclude civil unrest from its top residual risks because of the assumption that these losses are covered by the South African Special Risks Insurance Association (SASRIA).

However, based on the KZN riots of 2021, we saw that SASRIA’s capacity was inadequate. “It’s doubtful that the government will continue to bail out state institutions in the context of worsening economic factors we’ll likely face in the coming years,” says Von Widdern. The maximum cover limit of R500M available from Sasria is likely to decrease should another period of unrest occur.

So, what can businesses do from a risk perspective? “PTS cover secured from international markets will become increasingly expensive and inaccessible as the civil unrest develops,” Von Widdern explains. “Risk analysis should be done based on limited insurability of civil unrest. This will identify various exposures in the value chains and initiate prioritised responses to the exposures to civil unrest.”

“Risk management seeks to reduce the exposure to negative outcomes of uncertain future events,” he adds. “From a proactive perspective, risk assessments should include more of what failed in KZN in 2021, such as: Improved intelligence, faster and more substantial deployment of security resources and better physical access control and protection of stores.”

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