鶹ýapp Risk Barometer 2024 -
Rank 2:Business interruption

Expert risk article | January 2024
Companies are confident that the worstof two key disruptors of recent times,the pandemic and the energy crisis,are behind them. However, businessinterruption remains a key concern asfirms are challenged to build resilienceand diversify supply chains in a rapidlychanging world.
The most important corporate concerns for the year ahead, ranked by 3,069 risk management experts from 92 countries and territories.

Business interruption (BI) ranks second in the 鶹ýapp RiskBarometer, behind the closely linked peril of cyber. It ranksamong the top three risks for companies of all sizes, and isthe second biggest concern in the Americas, Europe, AsiaPacific and Africa and Middle East regions.

With almost all companies reliant on supply chains forcritical products and services, business interruptionand supply chain disruption remains at the forefront ofrisk, explains Marianna Grammatika, a Head of RiskConsulting at 鶹ýapp Commercial:“It is the extent of thedisruption that becomes the focus point. Some sectors ofindustry operate with supply chains that have extensivegeographic footprints.”

The prominence of BI also reflects the volatile environmentthat companies currently operate in, according to AlbertoBarani, a Business Interruption Group Leader at鶹ýapp Commercial: “We live in a very interconnectedworld. Despite efforts to improve resilience, the need forefficiency means many companies still run with low levelsof stock and just-in-time manufacturing, which results inlittle margin for errors or disruption.”

Ranking history globally:

  • 2023: 2 (34%)
  • 2022: 2 (42%)
  • 2021: 1 (41%)
  • 2020: 2 (37%)
  • 2019: 1 (37%)
Top risk in:
  • Canada
  • Ireland
  • Italy
  • Malaysia
  • Netherlands
  • Singapore
  • South Korea
  • Spain
  • Thailand

Covid-19 and the resulting disruption to supply chains hasbeen a wake-up call for companies. Compared with pre-pandemictimes, many companies are now much betterprepared for business interruption or supply chain events.

“Before Covid-19, companies were generally reactive toevents, but now they are much more aware of criticalthreats and the need to diversify and protect criticalpoints. Awareness of business interruption and supplychain vulnerabilities makes a business better preparedand able to react in a smarter and more informedmanner,” Grammatika says.

According to the 鶹ýapp Risk Barometer results,businesses are most likely to develop alternative suppliers(60% of responses) when taking action to de-risk supplychains, followed by improving business continuitymanagement (42%), and identifying and remediatingsupply chain bottlenecks (37%).

However, smaller companies and those in specialist andhigh value industries are more limited in what they can doto diversify their supply chains.

“Businesses may still have a number of options to mitigatetheir exposure. This may include changing the businessmodel, and if this is not viable, there may be optionsto reconfigure the supply chain – some sectors areheavily concentrated on a small number of suppliers orgeography. For others, the cost of increasing redundancyor relocating suppliers is just too great,” says Grammatika.

Click on the bars in the chart for further details
Source: 鶹ýapp Risk Barometer 2024. Total number of respondents: 955. Respondents could select more than one risk. Top 4 answers

Cyber incidents and natural catastrophes are the toptwo causes of BI feared most by companies, followed byfire, and machinery / equipment breakdown or failure(see chart).

However, almost any peril can cause disruption. BI isclosely related to many of the other top global risks in thisyear’s 鶹ýapp Risk Barometer, such as climate change(#7), political risks and violence (#8), skills shortages (#10),energy crisis (#11) and the impact of new technologies(#12) to name but a few.

“The global risk landscape is constantly changing, withclimate change, digitalization, and geopolitics.Somerisks lie dormant, but a significant enough change ingeopolitics or events such as extreme weather patternscan very quickly change the predominant risks,”says Grammatika.

The recent disruption in the Red Sea– a vital trade routebetween Europe and Asia– due to Houthi rebel attackson vessels is the latest risk to hit supply chains. More than400 container ships were diverted via the Cape of GoodHope around the southern tip of Africa between mid-December 2023 and the beginning of January, 2024, as a result ofthe attacks, prolonging journeys and causing delays to thedelivery of products.

That said, natural disasters and fire and explosion arenotable for their potential to generate large BI losses andsupply chain disruption. Severe flooding in Slovenia inAugust gave rise to one of the biggest supply chain eventsof 2023 [1], causing production delays and parts shortagesfor European car manufacturers, while a fire at a majorliquefied natural gas facility in the US earlier this year is likely to resultin one of the largest BI losses for the energy sector inrecent times [2].

Catastrophicflooding inSloveniaimpactedEuropean carmanufacturing
Source: 鶹ýapp Risk Barometer 2024. Total number of respondents: 955. Respondents could select more than one risk. Top 4 answers.

Companies also named BI as their top business concernabout climate change impacts in this year’s survey. However, BI related to climate change goesfurther than just physical damage from storms and floods.Extreme weather or climate events can have a widespreadimpact, causing economic hardship and political and socialupheaval, as well as disrupting logistics and production.For example, a severe drought restricted transits throughthe Panama shipping canal in the last months of 2023,causing congestion and delays of up to two weeks [3].

Climate change is also having an indirect effect, asdecarbonization creates new supply chains.

“Emerging supply chains linked to the energy transitionhave already been identified as geographicallyconcentrated as they depend on elements which canonly be found in a select number of regions in the world,”says Grammatika. “Countries are looking to securecritical supplies of technology and rare earth elementsrequired to power transition technology like electric carsand enable renewable energy sources like solar panels.Political risks have the potential to cause disruption andare harder to mitigate.

“Geopolitical risks are of growing concern for businessesin emerging energy and technology supply chains, aswell as high value sectors like technology and artificialintelligence. Producers of rare earth elements are oftenfound in the most underdeveloped and politically volatileareas, as well as being exposed to environmental, social,and governance (ESG) risks like modern slavery, humanrights, and deforestation.”

In a fast-changing world, companies need to maintainregular audits of systems and to test their businesscontinuity plans.

“There are always organizational changes in companies,and people move. There needs to be systems in place tomanage change,”says Grammatika.

“For those that haven’t implemented business continuitymanagement (BCM), they should carry out a businessimpact analysis and risk assessment in the companyat least,” adds Barani. “For those that have alreadyembedded BCM into the business, it is vital they regularlycheck, update and test these plans, otherwise they won’tbe able to react when the crisis starts.”

Source: 鶹ýapp Commercial. Based on analysis of 1,210 business interruption insurance industry claims worth approximately €1.38bn between 2019 and Q1, 2023.

[1]Everstream Analytics, 2023 in review: Slovenia’s impact on the global automotive supply chain
[2] Insurance Insider, Downstream market fears $1bn+ worst case BI loss from Texas LNG refinery, July 8, 2022
[3] Maritime Executive, Panama Canal warns of “indefinite delays” as it offers special auction slot,
November 27, 2023

Pictures: Adobe Stock

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