Seven risks to rule them all, part I

An understanding of the risk landscape and the interconnected nature of risk is essential for financial and risk adviser plying their trades in the 21st Century. There are many reports on the risk topic, often aimed at executive teams in the corporate sector, where the impact of any risk management failures are though to be greatest; but individuals and small, medium and micro-enterprises (SMMEs) can also benefit from the insights shared.

Peeling the risk onion

An example of such report is the Allianz Global Corporate and Speciality (AGCS) 2022 Global Risk Dialogue, which peels back the layers for various risks in a number of sectors . In this newsletter we reflect on the seven risks faced by firms in the technology and telecommunications sectors, with comment on how these risks might impact on South Africa’s advice-focused financial services providers (FSPs) and their clients. AGCS shortlisted these risks from its 2022 Allianz Risk Barometer, which was in turn informed by more than 2650 risk management experts operating in 89 countries and territories. Herewith the seven risk that rule the risk management environment in the technology and telecommunication context, with our spin on what it means for our readers. PS: this piece is quite lengthy, so we have split it into two parts. 

Risk one: cyber incidents

Nobody will be surprised that cyber incidents top the list of risk managers’ concerns. Over the past couple of months the local media has reported on significant breaches at credit bureau, Trans Union, and at pharmaceutical retailer Dis-chem, to name just two. In March 2022, Trans Union reported that it had been targeted by profit-driven cybercriminals who demanded millions of dollars for the return of stolen customer data, estimated to affect 54 million individuals. And around May, itweb.co.za reported that more than 3.6 million client records held by Dis-Chem had been “exposed” following a cyberattack. AGCS noted that the accelerated process of digitalisation in response to pandemic and lockdown had “enabled business activities to continue; but also increased entry points for cybercrime”. 

The lesson from the first theme is clear: the threat of cybercrime is pervasive and has the potential to affect clients across the board, from financial advice clients who transact online for personal financial services, to risk clients with multi-billion dollar annual revenues and global footprints. The cyber incidents theme presents opportunities for financial and risk advisers to develop and offer solutions that assist clients in the early detection and prevention of cyberattacks as well as offer financial protection should the unthinkable happen. “Cyber insurance claims have increased significantly over the past three years, driven by the rise of losses from external manipulation of systems, as well as the increased uptake in cyber insurance,” noted AGCS. Industrywide, the insurer saw a spike from 500 claims in 2018 to 1100 in 2021, with ransomware attacks standing out as a growing threat. 

Risk two: business interruption

Countless columns inches have been dedicated to the topic of business interruption (BI), with non-life insurers coming in for plenty of stick for their early position on paying out for pandemic-related infectious diseases claims during 2020 and 2021. Unfortunately for insureds, pandemic is not the only non-physical damage peril that might lead to severe business disruption losses. Writing in the Global Risk Dialogue, Jody Yee, Global Industry Solutions Director for Technology, Media and Telecoms at AGCS noted that “cyberattacks can cause widespread disruption [and that] BI-related costs accounted for around 60% of the value of cyber claims”. Think about that statement for a moment… And then consider how your client’s cyber and / or liability covers will perform following a cyber-related event, assuming they have any cover for such perils at all. 

There are also growing concerns about the non-life insurance sector’s ability to protect against BI and CBI claims that arise from cybercrime, pandemic and vulnerabilities in global supply chains. “Whether it was shortages in lumber or semiconductors, these [supply chain] chinks became all too apparent as companies faced up to their overreliance on critical suppliers; supply chain challenges can result in BI and CBI claims as a result of delayed components [while] liability for third-party risk could arise if lower quality components are used because of a shortage,” wrote Yee. Readers will again note the interconnected nature of risks, with the risk of a cyber incident interlinking with the risk of business interruption. Also, there is a clear crossover between cyber and liability cover, which can result in gaps in cover, especially on complex policies. 

Risk three: pandemic round two

The third risk under the microscope for part I of this article, is that of having to continue conducting business under the current pandemic, or during the outbreak of another pandemic. “The tech and telecoms sector has fared relatively well through Covid lockdowns, propelled by the world’s drive to digitise; the sector was [already] offering much-needed products and services, but that was not the only reason it weathered the storm … it was also buoyed by robust distribution chains,” wrote Yee. It is one thing to trade through pandemic as a massive retailer than can bring most of its functions in-house; but quite another for an SA-based SMME. 

Most local FSPs have figured out the best approach to trade through lockdown; and this writer believes it important that all firms conduct a review of these procedures should they have to be revisited. From a risk perspective, there needs to be an awareness of how the risk coverage environment has changed following pandemic. For example, most local non-life insurers have removed infectious disease and pandemic cover from their policies. And many more have changed their terms and conditions for CBI losses arising from disruptions at municipalities or electricity or water utilities, to name a few. SMMEs are going to have to figure out workarounds for risk transfer in these areas, while larger firms will be thinking about alternative risk transfer (ART) arrangements, including parametric solutions. 

Preparing for the worst

In the financial planning space, advisers and planners must make extra efforts to keep clients focused on the value in death, disability and dread disease cover as we move from a full blow COVID-19 pandemic scenario to a ‘softer’ endemic scenario. And the value of unbroken life cover cannot be stressed enough! This is especially true in a rising inflation and interest rate environment, where many households are looking for quick wins in reducing their monthly expenses. Thus ends part I of our look at how interconnected global risks can assist advisers and financial planners to help individual and SMME clients in South Africa. Keep your eyes peeled for part II which will touch on risks four through seven, coming soon. 

Writer’s thoughts: The evolution of risks, especially under the pandemic and cyber incident headings raise concerns about the ability of the insurance sectors to provide cover for the large losses that are flowing from more frequent loss events. Are you concerned that the country’s life and non-life insurers and reinsurers are leaving too many gaps in the cover offered to your individual and SMME clients? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.