Lloyd's Risk Index 2013

TOP FIVE RISKS

High taxation is now seen as the number one threat to global business according to the third Lloyd’s Risk Index. The survey also suggests executives are focusing on more pressing problems including cyber-attacks and increased material costs, rather than longer-term strategic decisions.

1. High taxation

      • The risk of high taxation is now the overall biggest risk facing businesses, nudging loss of customers/ cancelled orders off the top spot it held in 2011.
      • Since 2011, the perception of how (and where) global corporations pay their taxes has become an issue of corporate ethics as much as economics.
      • From the US Senate’s investigations into Microsoft and Apple to the grilling given to Google, Starbucks and Amazon by the UK’s Public Accounts Committee, the past two years have seen perceptions of corporate tax avoidance become reputational poison.
      • 2. Loss of Customers
        • In virtually every region of the world, business leaders feel underprepared to deal with the fundamental risk that too few consumers are willing or able to buy their products.
        • Latin America, perhaps reflecting the suddenness of its GDP downgrades, shows the highest gap between priority at 7.7 and preparedness at 6.3, followed closely by Europe with a priority score of 6.4 and a preparedness score of 5.4. Asia-Pacific business leaders show a rough equivalence between priority and preparedness at 6.0 and 5.9 respectively.
        • Interestingly, only the US bucks the trend, feeling marginally more prepared for the risk than the priority given to the risk itself. It may be that the hat trick of the recent avoidance of the ‘fiscal cliff’, massive state stimulus and steadily improving employment figures are starting to influence consumer confidence.
        • 3. Cyber risk
          • Cyber risk has moved from position 12 (malicious) and 19 (non-malicious) in 2011 to the world’s number three risk overall. It appears that businesses across the world have encountered a partial reality check about the degree of cyber risk. Their sense of preparedness to deal with the level of risk, however, still appears remarkably complacent.
          • The number of incidents attributed to state-sponsored hacking and revenge attacks by ‘hacktivist’ networks is growing. So, too, are the costs of cyber breaches. A 2012 study by the Ponemon Institute3 found that the average annualised cost for 56 benchmarked organisations was US$8.9 million a year, up from US$8.4 million in 2011, with a range from US$1.4 million to a staggering US$46 million per year, per company. The most costly cybercrimes involved malicious code, denial of service and web-based attacks.
          • 4. Price of material inputs
            • The cost of many raw materials is hitting companies’ bottom lines across the world and as a result, the cost of material inputs as a risk to businesses has climbed from the number seven overall priority risk in 2011 to number four today.
            • Some inputs are costly because of their scarcity or concentration in one region. The stranglehold by some countries on geographically specific commodities, such as China’s rare earth metals, is being challenged as more recently emerging economies start investigating their own resources.
            • In May 2013, for example, Malawi announced the start of a US$20m exploration project for gas and rare earth metals, and the Indian government is responding to growing domestic pressure to increase extraction of its own natural resources.
            • But it is in the field of energy that the ownership of resources is likely to have the highest impact on countries’ economies and domestic businesses. The 2011 Fukushima nuclear disaster saw a retreat from nuclear power by some states, including Germany and Japan, and a resurgence in oil and gas production and imports in others. Natural gas prices in Europe were five times those in the US, while in Asia they were over eight times as high.
            • Imminent concerns about ‘peak oil’ have been mitigated by the emergence of ‘unconventional’ gas and oil sources (eg tar sands and shale gas), particularly in the US and Canada. Critics of these methods argue this is making it easier for governments and businesses to stall investment in renewable energy sources, such as offshore, wind and solar.
            • In the West, calls for investment to develop future energy supplies are being stifled by the reluctance of cash-strapped governments and businesses alike to invest, a position helped by the current depressed business demand.
            • 5. Excessively strict regulation
              • The risk of excessively strict regulation has moved from number ten position overall in 2011 to number five in 2013. UK-domiciled financial services have been among the most vocal in warning about the impact of regulation proposed in the wake of the financial crash, but it’s an anxiety shared by business leaders across the world.
              • While the media focus in Europe is largely on financial regulation, in other world regions regulatory pressure is increasingly targeting environmental risks.