Aon 2017 Global Risk Management Survey: Australian Perspectives
The Aon 2017 Global Risk Management Survey represents the responses of risk decision-makers in 33 industry sectors across more than 60 countries. Participants across all regions agree that reputation/brand, economic slowdown/slow recovery, and regulatory/legislative changes are Top 10 priorities, with most also including increasing competition, failure to innovate and cyber crime in that list.
In general, Australian businesses are in broad agreement with the global consensus on risk priorities, however they are more optimistic about the economic landscape and less confident of meeting consumer pressures to innovate. Strikingly, major project failure ranks as the sixth most pressing Australian business concern, yet it is only ranked 15th globally.
Following are some of the key Australian insights from the survey.
POLICYMAKING UNCERTAINTY THE NUMBER ONE RISK FOR AUSTRALIAN BUSINESS
Australian businesses view regulatory/legislative changes as their number one risk concern, whereas globally, it ranks at number four. This disparity in rankings may reflect not only the administrative and costly burdens on business imposed by regulators, but also a perceived lack of certainty in the current Australian regulatory environment.
While it is not uncommon for regulatory shifts to occur as the result of a new administration, the recent Australian experience of changes in political leadership mid-term (on both a federal and state level), as well as the presence of a Senate that can be both obstructionist and unpredictable, has made it even harder to forecast the direction of government policies. Over the past 12 months, regulatory/legislative changes have resulted in a loss of income for 21% of the Australian survey participants.
Recent industry-specific 'risk outlooks' conducted by Aon echo the acute nature of this risk. For example, in both the energy and power sectors, regulatory uncertainty is making it harder to attract investors to large scale new projects with long development lead times. Likewise, lack of clarity regarding the role of renewables, or the mechanisms for achieving carbon reduction policies, together with the prolonged ambiguity surrounding the future of the Australian Renewal Energy Agency, have had an adverse impact on these - and other - sectors.
As an uninsurable risk, the inevitability of regulatory/legislative change requires a top-of-mind approach by business across all industry sectors. This includes being aware of any mooted changes and being involved in the consultative process; having the right people and resources in place to manage the transition to a new regulatory environment; effectively communicating all regulatory change throughout the business.
MORE OPTIMISM ON THE ECONOMIC FRONT, BUT OTHER RISKS LOOM
Over the past few years, the end of the mining construction investment boom, coupled with a collapse in commodity prices, has led to a pervading sense of gloom about the resilience of the Australian economy.
However, steady economic growth fuelled in part by a surge in housing construction and government–backed infrastructure investment in road and rail, has strengthened business confidence and optimism. While economic slowdown/slow recovery ranks as the number one risk for business in Europe, and the number two risk globally, Australian survey respondents rank it as number eight, and see it as diminishing further in the short term.
In contrast, Australian businesses predict that failure to innovate/meet customer needs will become their number one risk in three years' time (currently number four), while increasing competition will remain at number three, and disruptive technologies/innovation will rise from number ten to number five. Two thirds of businesses indicate they have a formal plan in place (or have undertaken a review), regarding failure to innovate as well as disruptive technologies, while slightly more than 50% have done so for increasing competition risk.
A failure to address these three issues could provide serious financial challenges in the future, and jeopardise the good work Australia has done in avoiding many of the economic challenges faced by other advanced economies.
Responding to the disruption of a demand-led economy:
For the retail sector, the expected arrival of Amazon in the Australian marketplace delivers on all these three emerging threats, by providing increased competition from an innovative offering built on disruptive technologies.
Through utilising new approaches to service customers' requirements (and redefining value chains in the process), Amazon personifies the fourth industrial revolution, which realises the power and the potential of the internet and digital economies. The speed and impact of this disruption is accelerating, and with it are the risks of not responding and evolving to the new demand-led, rather than supply-driven, market dynamics.
There isn't one right approach to creating a response to disruption. Rather, it requires a portfolio approach, which engages both domestically and internationally for inspiration, talent and perspective, to fully respond to disruption and better meet evolving customer requirements.
MAJOR PROJECT FAILURE DEBUTS AT #6 IN AUSTRALIA, AND #15 GLOBALLY
One of the surprise findings of the survey is the high ranking given to major project failure, a new risk category, which the International Project Leadership Academy* estimates could cost the global economy hundreds of billions of dollars annually. Although ranked number 15 globally, Australian survey participants ranked it their sixth most pressing risk concern.
Major project failure has become an ever increasing risk in the Australian construction and infrastructure industry, current examples of which include the Royal Adelaide Hospital and Perth Children's Hospital (both long–delayed and over–budget). Likewise, delays and cost blow–outs have plagued several major energy projects off the coast of northwest Australia.
With the Federal Government committing $75 billion in critical infrastructure funding and financing over the next ten years, we are likely to see more competition from large overseas construction firms, the development of aggressive infrastructure timelines, and a competitive bidding process where the margin for error is minimal. All of these heighten the risk of project failure.
A 2016 study by the Gratton Institute found that cost overruns and delays in Australian transport infrastructure is largely due to three causes: premature announcements by governments (or would–be–governments) that include overly optimistic cost estimates; poor project management and contracting practices; and scope changes^.
Early engagement; ongoing monitoring:
The risk of major project failure highlights the importance of risk management at the early stages of engagement. This includes taking time to consult with the full project team, charting all the risks, and then figuring out where they align to insurance. In addition, a process of annual reviews can identify other issues that could potentially impact the project, enabling risk management strategies and insurances to be adjusted accordingly.
NEARLY ALL RISKS IMPACT BRAND AND REPUTATION
The interconnectivity of risks is strikingly evident in their potential to also cause damage to brand and reputation, which ranked as the second highest risk concern for Australian survey participants, and as the first, globally.
Brand and reputation has been a top five risk since the inception of the Aon Global Risk Management Survey in 2007. While cyber risk has added another reputational risk for businesses experiencing a data breach, technology itself has changed the news cycle and the traditional approach to reputation management, ensuring that brand and reputation will continue to remain a leading business risk concern.
The recent prevalence of class actions in Australia - not just securities class actions, which are in the minority - has heightened brand and reputation risk at a C–suite and board level. And in some cases, the impact on brand integrity can have a significant impact on the value of a business. (In September last year, when Yahoo disclosed a 2014 breach in which 500 million user accounts were hacked, Verizon reduced its bid for Yahoo by $1 billion.)
Risk identification and insurances responses:
Risk as a whole - and in particular brand and reputation risk - is inherently interconnected. Businesses need to address the interconnectivity of risk by focussing on their company's risk culture and risk maturity, rather than simply assessing risk through enterprise risk register models.
Although conventional insurance has shortcomings as a true risk transfer medium for brand and reputation risk, there is ample scope to align insurance protection with this exposure, and to provide a more compelling response via:
- Structured optimisation of:
- conventional insurance opportunities
- cyber insurance
- Consideration of emerging opportunities from the market which address components of brand and reputation risk specifically
- Bespoke alternative risk transfer opportunities
HOW AON CAN HELP
As leaders in risk management and insurance broking, Aon believes in the power of data and analytics, combined with expert insights, to provide clients with innovative solutions that help them manage volatility, reduce risk and realise opportunity.
Businesses need to make sure they are prepared and covered for potential risks. The 2017 Global Risk Management Survey encourages them to evaluate their current risk strategy and ensure that it is appropriate for their business. It is also crucial that businesses identify any gaps that they might need to address with regards to their approach to risk.
Through our partnership with York Butter Factory - the destination point and open innovation platform for Australia's most innovative technology start-ups - we are also able to assist our clients to tap into a rapidly growing start-up community and stay ahead of the disruptive forces of the fourth industrial revolution.
For help with developing and refining your businesses' risk management and risk financing strategies, please contact Aon today.
* Why Projects Fail, R. Goatham, http://calleam.com/WTPF/?page_id=2213
^ Cost overruns in transport infrastructure, Marion Terrill, Gratton Institute, October 2016 https://grattan.edu.au/wp-content/uploads/2016/10/878-Cost-overruns-on-transport-infrastructure.pdf