Top Global Business Risks and Their Effects on the Insurance Industry
Earlier this year, international corporate insurance carrier Allianz Global Corporate & Speciality (AGCS) released their 12th annual Allianz Risk Barometer. The survey takes a look at the top global business risks according to data from over 2700 respondents spanning 94 different countries and territories. Respondents include Allianz customers, brokers and industry trade organizations, risk consultants, underwriters, senior managers, and claims experts, among other risk management professionals.
So what are today’s business leaders most concerned about? Unsurprisingly, the pandemic and resulting supply chain shortages, delays, and high inflation had a big influence on current risk outlook. Macroeconomic developments ranked third for top business risks for 2023, pushing climate change and natural disasters further down the list. And for the second year in a row, cyber incidents and business interruptions took first and second. Both the energy crisis and political risks and violence were new to the list this year, coming in at No. 3 and No. 10, respectively. The top 10 global business risks for 2023 according to the survey are as follows:
- Cyber incidents (34 percent of respondents)
- Business interruption (34 percent of respondents)
- Macroeconomic developments (25 percent of respondents)
- Energy crisis (22 percent of respondents)
- Changes in legislation and regulation (19 percent of respondents)
- Natural catastrophes (19 percent of respondents)
- Climate change (17 percent of respondents)
- Shortage of skilled workforce (14 percent of respondents)
- Fire, explosion (14 percent of respondents)
- Political risks and violence (13 percent of respondents)
While the purpose of insurance is to help individuals and businesses manage risks like these, the industry is not safe itself from the consequences of these threats. Let’s take a look at three of the top ten risks, their impact on the insurance industry, and how industry leaders might respond.
1. Cyber incidents
As the No. 1 risk two years in a row, we have to start with cyber incidents. The definition of a cyber incident is broad and includes everything from IT outages to ransomware attacks to data breaches. With many industries adopting digital solutions as a consequence of pandemic-related shut downs, cyber crime is currently at an all-time high. This, coupled with the growing shortage of cyber security professionals, leaves business leaders facing an increased possibility of an attack.
Not only can a cyber incident result in significant expenses and business interruption, but it can also cause reputational damage as affected and potential customers take their business elsewhere. Much of the threat comes from cyber criminals finding newer, faster ways to breach standard security defenses. While companies of all sizes are susceptible to cyber incidents, small to midsize companies that lack modern cyber security technology are often low-hanging fruit for hackers.
Cyber incident risk through an insurance lens
Data is the bread and butter of the insurance industry. Insurance companies typically house data for their clients, producers, and employees ranging from names, addresses, and birthdays to Social Security numbers, credit card information, and health history. For a large number of organizations, this information lives online, often in unstructured formats like emails and spreadsheets.
Carriers that fail to protect their data risk falling victim to a cyber attack. Most people hear the words cyber attack and immediately think of identity theft. While this is a very real, very serious consequence, it’s only the tip of the iceberg when it comes to the negative effects of a cyber breach. If a hacker infiltrates your insurance organization, you also risk:
- Public exposure of proprietary information
- Data manipulation
- Data loss
- Financial loss
- Ransom
- Business interruption
- Reputational harm
- Regulatory action
How can insurance professionals prepare to meet the risk of a cyber attack?
In the time it takes to beef up your cybersecurity defenses, hackers are beefing up their own knowledge and skills for bypassing them. The best defense against a cyber attack is to adopt a holistic approach to cyber security that ensures your technology, your people, and your partners are prepared for an attack.
Technology – Keeping your hardware and software up to date is imperative to preventing a cyber attack. No matter how progressive your agency, carrier, or MGA/MGU is when it comes to cyber security, outdated technology can open you up to vulnerabilities. For the tech-savvy organizations that operate across multiple connected platforms and devices, zero-trust architecture like multi-factor authentication has become a standard practice.
People – Humans make mistakes. Your people are vital to the success of your insurance organization, but they are also one of your biggest cybersecurity liabilities. But, with consistent training, your people can become a strong defense against cyber attacks. Make sure you inform employees about any possible threats and equip them with the resources and knowledge they need to help prevent an attack.
Partners – The success of your insurance organization’s data security also depends on the security and preparedness of any down- or upstream partners you work with, as well as any third-party vendors or software you use. As a best practice, you should periodically validate the cyber security of your partners and software vendors, to make sure they are up to your standards.
Remember, following this three-pronged approach to cyber security won’t decrease your chances of a cyber attack, but it can strengthen your defenses and decrease any resulting losses. If your insurance organization is subject to a cyber security attack, understand that you may be required by federal law to report the incident.
2. Macroeconomic developments
Three years after the initial outbreak, the pandemic is still having rippling effects on the global economy. These effects plus supply chain disruptions, geopolitical turmoil, an increased frequency and severity of natural disasters, and skyrocketing inflation rates are forcing individuals and businesses across all industries to cut spending over fear of an impending recession.
As a result, companies across multiple industries are struggling to remain profitable and global insolvencies are expected to rise by 19 percent in 2023. Considering these factors, it’s not so surprising that macroeconomic developments ranked high on this year’s risk barometer.
How macroeconomic developments are affecting the insurance industry
While you may have heard the industry described as “recession-proof”, insurance is not actually immune to the effects of market changes like high inflation. In response to economic uncertainty, the insurance industry is currently experiencing ongoing hard-market conditions including increased premiums, stricter underwriting guidelines, and reduced risk capacity all in an effort to avoid insolvency.
In fact, the insurance industry is currently facing the hardest market in a generation with rising inflation putting significant pressure on the P&C market in particular. Higher construction materials and labor costs are driving claims costs through the roof, leading insurers to pay out more money than they are receiving in premiums. And with an increased frequency and severity of natural disasters, even common solvency safety nets like reinsurance and CAT bonds are being pushed to their limits.
How can the insurance industry respond to macroeconomic development risk?
With costs rising across the board due to inflation, insurance agencies and carriers need to find ways to reduce operational costs and continue on the path toward profitability and away from insolvency. One area for improvement – operational efficiency.
Manual processes like filling out forms and tracking down license renewals by hand drive workflow inefficiency by taking employees away from more revenue generating tasks and chipping aways at an organization’s bottom line. Automating these tasks frees agents and staff up, allowing them to put more time into helping clients and building stronger partner relationships.
3. Shortage of skilled workforce
Coming in at No. 8 on the risk barometer is the shortage of talent that many industries are currently facing. As a result of the pandemic, a large number of workers opted for early retirement. While the increased cost of living has some retirees returning to the workforce, a significant number of job openings remain unfilled.
Attracting and retaining top talent is proving a challenge across the globe with the aviation, engineering, construction, and professional services sectors taking some of the biggest hits. Many point to the shift in employee expectations as a result of the pandemic as a driving factor of this issue. Employees now expect more from their employers in terms of health and safety, benefits, flexible hours, and remote work options.
How the talent crisis is affecting the insurance industry
The insurance industry is no stranger to the talent shortage. In fact, we’ve written about it one or two times already. Although you may be tired of hearing about it, it’s still a very real problem with very real implications for the future of the industry.
Like it or not, insurance is being hit hard by the labor shortage. The problem is mainly due to the mass amount of insurance professionals who are reaching retirement age and leaving the workforce. Replacing these individuals is proving difficult, especially with a younger generation that lacks both industry knowledge and interest.
Bridging the insurance industry talent gap
When it comes to handling the talent crisis, insurance organizations can lean into a couple of different strategies. One option is simply to put more responsibility on remaining employees. However, this is only a short-term solution and we doubt your employees will respond well to the increased workload. A better solution would be a combination of attracting younger talent and transforming your talent strategy.
Appeal to the younger generation – In order to fill the talent gap, insurance experts will need to find ways to attract millennials and Gen Zers to the industry. A large piece of the puzzle will be convincing these younger generations that a career in insurance is worth it.
A lot of young people still think of the industry as rigid and old fashioned. Show potential applicants that isn’t the case by offering a more comprehensive benefits package, including options for remote work and mental health resources. You can also appeal to a generation of digital natives by implementing modern technology solutions to make the workload more exciting and fulfilling and less boring and tedious.
Upskill current talent – If hiring new talent is proving too challenging or costly, look no further than your current workforce. Rather than searching for new people to fill gaps, agencies can upskill their back-office workers to take on more meaningful roles by offloading their tedious, manual work to an automated solution. Once employees are no longer stuck manually entering and re-entering data, they’ll have more time to develop the skills needed to fill open positions.
Each of the top 10 global business risks of 2023 has the ability to cause serious disruption to the insurance industry. It’s important that insurance leaders are aware of these risks and feel prepared to meet them head on. One common thread in mitigating risks including the three we discussed in detail and many others on the risk barometer is to update your agency, carrier, or MGA/MGU’s tech stack to include modern and automated solutions.
Want to know how AgentSync can help your carriers, agencies, or MGA/MGUs mitigate risks like producer and variable lines broker compliance management and more? Watch a demo today!