What are the risks facing companies this year?

31.01.2023

WHAT ARE THE RISKS FACING COMPANIES THIS YEAR?

The macroeconomic development of the country (40%), the interruption of business activity (31%) and the energy crisis (31%) are the three biggest risks facing Bulgarian business this year. This is according to the 12th annual study of key business risks around the world, based on the opinion of more than 2,700 experts from 94 countries, including CEOs, managers, brokers and insurance experts, of Allianz Global Corporate & Specialty (AGCS).

For domestic companies, the unstable political environment, the crisis in Ukraine, financial policy and rising prices are among the most worrying factors affecting business. Cyberattacks in the country are also not neglected, climbing 5 positions up the ranking and in 2023 already occupying 4th place (9th place in 2022). A new risk for companies is also appearing on the Bulgarian scene, namely theft, fraud and corruption (9% of respondents, position No.10).

"For the second year in a row, the Allianz Risk Barometer shows that companies are most concerned about growing cyber threats and business disruption. At the same time, they identify inflation, the impending recession and the energy crisis as immediate threats to their business. Companies in Europe and in particular in the US are worried about the current "permacrisis" arising from the effects of the pandemic, the economic and political impact of the ongoing fighting in Ukraine. This is a stress test for the sustainability of any company," summarizes AGCS CEO Joachim Müller.

For the second year in a row, cyber threats and business interruption are among the top concerns for companies globally (both with 34% of all responses). However, macroeconomic indicators such as inflation, instability of financial markets and the looming recession climb by 7 points in this year's edition as well and occupy the 3rd position. A new factor also appears on the scene, namely the impact of the energy crisis, which occupies the 4th position in the ranking among 22% of the respondents. All this is due to the global economic and political consequences of Covid-19 and the military actions in Ukraine.

These pressures require immediate and decisive action by companies. This explains why factors such as natural disasters (from #3 to #6), climate change (from #6 to #7), and pandemics (after vaccines contributed to the end of restrictions (from #4 to #13)) fall by down several positions in the 2023 report. Political risks and violence are back in the top 10 global risks, taking 10th place, while the lack of skilled labor rises to No. 8 in the ranking. Changes in legislation and regulations remain a key risk and retain their No. 5 position, while the potential threat of fires and explosions drops two places to No. 9.

Cyber incidents

Cyber incidents, such as IT outages, ransomware attacks or data breaches, have been identified as the biggest risk to businesses globally for the second year in a row - the first time this has happened. In 19 different countries, including Canada, France, Japan, India and Great Britain, it is listed as the greatest danger. It's also the risk that small companies with annual revenue of $250 million are most worried about.

“For many companies, the cyber threat is still higher than ever and cyber insurance claims remain high. Large companies are used to being targeted, and those with proper cyber defenses are able to fend off most attacks effectively. Observations show that more and more small and medium-sized companies are also affected. However, they tend to underestimate their vulnerability and need to continually invest in strengthening their cyber controls,” said Shanille Williams, AGCS Board Member and Corporate Chief Insurance Officer responsible for cyber insurance.

The frequency of attacks remains high in 2023. The average cost of a data breach is an all-time high of $4.35 million, expected to exceed $5 million in 2023. The conflict in Ukraine and the wider geopolitical tensions raise the risk of a large-scale cyber attack by sponsored individuals. In addition, there is also a growing shortage of cybersecurity professionals, which is a challenge when it comes to improving security.

According to the survey, business interruption, ranked No. 2, remains one of the biggest risks in 2023 as many business models are vulnerable to sudden shocks and changes, which in turn impact profits and revenues. of the companies. Business interruption is the #1 risk in countries such as Brazil, Germany, Mexico, the Netherlands, Singapore, South Korea, Sweden and the US.

Cybercrime (45% of respondents) was cited as the main reason for business interruption, followed by the energy crisis (35%) and natural disasters (31%). Ever-rising energy costs have forced many companies to use energy resources more efficiently, move their production to alternative locations, or even consider a temporary shutdown. The resulting shortage threatens to disrupt supplies in a number of critical industries in Europe, incl. in food, agriculture, pharmaceuticals, etc., although warm winter conditions on the continent and stabilization of gas prices are helping to ease the energy situation.

A possible global recession is another likely source of disruption in 2023, with the potential for supply failures and insolvency, which is particularly worrisome for companies with single or limited critical suppliers. According to Allianz Trade, business insolvency on a global scale is likely to increase significantly in 2023: +19%.

Macroeconomic malaise

Macroeconomic developments - inflation and instability in economic and financial markets - ranked as the third biggest risk for companies globally in 2023 according to 25% of respondents (up from #10 in 2022). For the first time in 10 years, this risk appears in the top three. The three main economic zones - the US, China and Europe - are in crisis mode at the same time, albeit for different reasons, according to Allianz Research, which predicts a recession in Europe and the US in 2023.

Inflation is one of the main causes of concern because it eats away at the cost structure and profit margins of many businesses. Like the real economy, financial markets face a difficult year as central banks drain excess liquidity system-wide and trading volumes decline, even in historically liquid markets.

"2023 will be a year of challenges. Economically, it is likely to be a year to remember for many households and companies. However, there is no reason to despair," says Ludovic Subran, Chief Economist at Allianz. "On the one hand, the turnaround in interest rates is helping millions of savers. The medium-term outlook is also much better, despite – or rather because of – the energy crisis. The consequences, beyond the expected recession in 2023, are already becoming clear: a forced transformation of the economy in the direction of decarbonization, as well as an increased awareness of risk in society, strengthening social and economic sustainability."

Increases and decreases in risks

A new factor that appears in the ranking for the first time and occupies the 4th position with as much as 22% is the energy crisis. Some industries in European countries, such as the production of chemicals, fertilizers, glass and aluminum, can rely on only one source of energy - Russian gas, making them vulnerable to price increases or interruptions in energy supplies. If such core industries struggle to survive, the consequences will inevitably be felt further down the value chain in other sectors. According to Allianz Trade, the energy crisis will remain the biggest shock to profitability, especially for European countries. At current levels, energy prices would destroy the profits of most non-financial corporations as pricing power erodes amid slowing demand.

Driven by 2022 being another year of upheaval with conflict and civil unrest, political risks and violence are a new factor in the report, ranking 10th (13%). In addition, companies are also concerned about increasing disruption from strikes, riots and civil unrest as the cost of living crisis grows in many countries.

Despite the drop in the ranking year-on-year, natural disasters (19%) and climate change (17%) also remain top concerns for businesses. In a year that included Hurricane Ian, one of the most powerful storms on record in the US, record increases in temperatures, droughts and winter storms around the world and more than $100 billion in insured losses, they still rank in the top seven global risks.