Businesses are being urged to consider changing exposures in a more volatile world.(source: Lloyd’s 0f London)
Swiss Re’s head of economic research and consultancy Dr Kurt Karl has predicted that in the year 2025 eight of the world’s ten megacities will be in emerging markets. His presentation was one of several tackling the challenges presented by international growth at a seminar hosted by Aon Risk Solutions in London in March.
The macroeconomic shift of the global economy eastwards, with the emerging market’s share growing to 50% by 2025, will be a “gamechanger” Dr Karl suggested. “The growing global population of emerging markets includes a Chinese middle class which will have tremendous purchasing power in the future.”
As consumers become more affluent, their expenditure on luxury goods such as mobile phones and cars increases. Middle class consumers not only demand more products, they also demand more sophisticated products, explained Dr Karl.
In addition, tomorrow’s densely populated megacities presents several challenges and require significant energy and infrastructure investment.
Over 90% of global energy demand growth is expected to come from emerging markets in the future, led by China, according to Dr Karl’s presentation. The Asian Development Bank estimates at least $8trn in infrastructure investment is needed for Asia to sustain its economic growth.
“With rapid urbanisation, particularly in emerging markets, we are seeing increasing concentrations of people, property and assets frequently in catastrophe-exposed areas, ” points out Lloyd’s manager of emerging risks and research Neil Smith. “This is both a risk and a potential opportunity for insurers.”
“Rapid urbanisation is placing an increasing burden on all forms of infrastructure in cities in emerging markets and energy, food and water supplies are all likely to come under significant pressure, ” he continues. “This could lead to major risks for communities and businesses in these cities, particularly if these pressures lead to civil and political unrest.”
Megatrends and the business environment
According to Aon Risk Solutions managing director, global clients, Alan Reid, emerging market growth, urbanisation, energy demands and resource scarcity are all megatrends that will present new and emerging risks for businesses now and in the future. “Both the scale and variety of threats to our clients’ businesses are growing, ” he explains. “Therefore there is greater scrutiny of the mitigation strategies they have to put in place.
“I don’t think it’s acceptable for clients to say, ‘I wasn’t expecting that’, ” he continues. “The state of preparedness is important. No stakeholder could be critical of a company being unfortunate to be impacted by a natural catastrophe, but if they don’t have a mitigation strategy they will be harshly dealt with by their stakeholders.”
Speakers at the seminar looked at a broad range of topics from the impact of the Eurozone, to terrorism and political disorder, to brand challenges and to operational and supply chain risks. They urged businesses to consider how an increasingly globalised and volatile world could impact their respective organisations.
“Traditionally people have been very focused on primary risks which directly impact their business. For example ‘We make products and this is our product factory. What are the risks associated with the factory?’” explains Reid. “Where we’re talking to clients a lot more is saying you need to consider this secondary risk – risks that on the face of it happen to others – but have a direct impact on your own business.”
“Managing those becomes much harder, ” he adds. “It’s much easier to protect your own factory than to respond to a major disruption which is at the port you use to send the goods from your factory, so there is a greater focus needed on these secondary risks.”
Questioning the underlying risk
Recent events have demonstrated how interconnected and often fragile the global business environment now is.
Floods in Thailand in 2011, which inundated several large business parks and factories, caused supply chain disruption that affected motor, electronics and high tech sectors. The cost of computer hard drives more than doubled as manufacturers were unable to maintain supplies of component parts.
While the magnitude and wide-reaching disruption from this event came as a surprise to many, insurers are not shying away from underwriting such risks, explains Reid.
“The issue for insurers continues to be one of information and understanding, ” he says. “What we have seen as a broker in response to events like the Thai floods is that insurers aren’t walking away from clients but they’re certainly becoming more demanding of clients in terms of the information that they require.”
“As companies expand internationally there is an increased demand from their insurers that they understand the risks they face and that they articulate to insurers what mitigation strategies they are putting in place.”