"COVID Trio" Exposures Speak to the Interconnectedness of Major Risks

Having seen the impacts of the COVID-19 pandemic for more than a year, it's little surprise that businesses' views of the top risks they're facing are clearly shaped by the coronavirus crisis.

Ranking at the top of the most important global business risks for 2021 in this year's Allianz Risk Barometer are business interruption, pandemic outbreak, and cyber incidents. Indeed, this year's Risk Barometer report identifies the three exposures as the "COVID Trio."

Business interruption—including supply chain disruption—is cited as the top risk by 41 percent of those surveyed for this year's barometer, with the peril rising to the top spot from number 2 in 2020. Pandemic was chosen by 40 percent of those surveyed as the most important risk, jumping from number 17 last year. And 40 percent of those surveyed singled out cyber incidents, with the risk slipping 2 spots from the top spot in 2020.

Rounding out the top 10 risks, in order, in this year's Allianz Risk Barometer are market developments, changes in legislation and regulation, natural catastrophes, fire or explosion, macroeconomic developments, climate change and increasing weather volatility, and political risks and violence.

This year's Allianz Risk Barometer survey included a record 2,769 respondents from 92 countries and territories across 22 industry sectors questioned in October and November. It also included a survey of risk consultants, underwriters, senior managers, and claims experts in the corporate insurance segment of Allianz Global Corporate & Specialty and other Allianz entities.

In discussing the "COVID Trio," Allianz notes that in the pandemic environment, business interruption, pandemic, and cyber incidents are interrelated risks. As with other interlinked risks in the Allianz Risk Barometer, the three perils speak to growing vulnerabilities and uncertainty in a highly globalized and connected world, in which events can quickly move from local to global impacts.

"Looking forward, the pandemic shows companies need to prepare for a wider range of business interruption triggers and extreme events than previously," the report says. "Building greater resilience in supply chains and business models will be critical for managing future exposures."

Allianz notes that business interruption has been the top risk 7 times in its past 10 Risk Barometers, while cyber risk has regularly been ranked in the top 3 exposures in recent years.

While individual companies and, on occasion, entire business sectors have suffered large business interruption events previously, the COVID-19 pandemic is the first catastrophic event to hit a modern globalized and interconnected economy, the Allianz report says. "The world has changed fundamentally over recent decades, and this has led to accumulations of risks and new loss triggers," Allianz says.

The pandemic's business interruption impacts have elevated the topic of business interruption from a risk management issue to a board room concern in many organizations, according to the Allianz report, as businesses look to create more resilient supply chains and find ways to address uninsurable risks.

"COVID-19 is a reminder that not all perils are insurable, and that risk management and business continuity planning play a critical role in helping businesses survive extreme events," the Allianz Risk Barometer report says.

The report notes that the pandemic has demonstrated that extreme business interruption events aren't just theoretical but a real possibility. And, it suggests, such perils as environmental or natural disasters, other disease outbreaks, a large-scale cyber attack or blackout, or even a solar storm could trigger large-scale business interruptions in the future.

The increased push to digitalization and remote working prompted by the pandemic further heightens future business interruption risks, according to the Allianz Risk Barometer report.

The report notes that even before the pandemic, society and businesses were growing increasingly reliant on technology, a trend that's now likely to accelerate. The COVID-19 pandemic will likely spark a period of innovation and market disruption, accelerating the adoption of technology, Allianz says.

That growing reliance on technology coupled with cyber risks is cause for concern, according to the Risk Barometer report. "Technology is a double-edged sword for business interruption," the report says. "While it can be a useful tool for business continuity, for example by switching to remote working and process monitoring or online sales and servicing, it also brings new risks."

While the digitalization of supply chains might reduce the frequency of business interruption events by increasing supply chain transparency, it could result in more serious disruptions due to a cyber attack or a failure of the underlying technology, the report says.

The pandemic may have opened a "Pandora's box" of cyber risks, the report suggests, with possible black swan events linked to such occurrences as major cloud outages.

Despite the business interruption exposure created by increased digitalization and the threat of cyber attacks, it remains essential to address traditional causes of business interruptions, the Allianz Risk Barometer report cautions.

Natural catastrophes, extreme weather events, and fire remain the most common causes of business interruption for many industries, the report says, and remain the biggest threats to manufacturing and industrial plants and equipment.

To that end, improving business continuity programs and building more resilient supply chains are critical to reducing business interruption exposures, Allianz says. Indeed, according to the Allianz Risk Barometer survey, improving business continuity management is the main action companies are taking to reduce supply chain risk and make them more resilient to pandemic risk, cited by 62 percent of survey respondents.

"Business continuity planning has come into sharp focus during the pandemic," the Allianz report says. "Many companies found their plans were quickly overwhelmed by the fast pace of the pandemic and changes in public health measures. However, many were also quick to set up 'war rooms' or dedicated COVID-19 response committees that brought together key corporate functions and senior management."

Going forward, as they prepare for extreme business interruption events, businesses will need to consider a broader range of possible scenarios than they do currently, according to the Risk Barometer report. "Identifying and understanding potential 'black swan' events will be challenging, but the key to survival will be the ability for businesses to respond quickly," the report says.