Jason Disborough

Local economic conditions have trumped regulatory and legislative policies as the most prominent risk facing Australian businesses in 2014/2015, according to Aon’s most recent Australian Risk Survey.

Regulatory and legislative change, the top risk identified last year (2013/2014), still represents a key concern for business leaders across the region, ranking second in this year’s results. However, downbeat growth and inflation forecasts have elevated concerns of domestic economic slowdown as an obstacle to business growth and recovery.

The survey, now in its 13^th year, spans a sample size of 579 C-Suite Executives and Risk Managers, is the most comprehensive to date, and provides meaningful risk management insights on 15 industry segments (with a detailed overview of six industry sectors, including  energy, power, mining, health, construction and real estate).

Top 10 Risks to Australian Businesses:

1. Local Economic Conditions
2. Regulatory and Legislative change
3. Brand and Image
4. Increasing Competition
5. Global Economic Conditions
6. People Risk
7. Human Resources
8. Business Interruption and Supply Chain Risk
9. Property Damage
10. Corporate Governance

The survey draws a strong parallel to findings over the last two years, with 80 per cent of risk concerns centred on diminishing business confidence and political and regulatory uncertainty. As ‘brand and image’, ‘increasing competition’ and ‘global economic conditions’ round out the top five risk concerns, it is clear that an inability to grow underscores this year’s risk concern rankings.

“Local economic conditions have been on an upward trajectory through the top ten risks over the last number of years. However, its top position this year signifies a critical need for organisations to identify and confront local economic threats in order to achieve sustainable growth and better compete on a global scale,” said Jason Disborough, Managing Director – Global & Corporate, Aon Risk Solutions.

“While the current state of the market presents a very real challenge to Australian businesses, it also presents an opportunity for insurers to innovate around these soft risks, a provision currently deficient in the Australian market,” he added.

According to the report, Australian businesses currently maintain a good level of preparedness against risk. ‘People risk’ and ‘human resources,’ risk currently occupy positions six and seven in the top 10. This confirms the endurance of an industry-wide ‘war for talent’, renewing emphasis on the challenges of attracting and retaining a committed and knowledgeable talent pool as an organisational risk.

Of noticeable importance, business interruption and supply chain risk, as well as property damage and corporate governance mark new entrants in this year’s top 10 risks. These results indicate a greater need for organisations to invest in structures and procedures designed to protect both physical and organisational assets.

The risks facing Australian businesses broadly align with those identified globally via other Aon risk surveys in other geographies; although the survey identified two primary differences. Significantly, where cyber security continues to be a key concern in other countries, only 13 per cent of risk managers identified it as a significant risk in Australia. Similarly, terrorism remains relatively overlooked, indicating that Australian companies consider themselves less susceptible in comparison to their international counterparts.

“Changing trading conditions, the weakening of the Australian dollar and the evolving political landscape, aligned with relatively high unemployment and an ongoing skills gap in some of Australia’s most pertinent industry sectors, have presented a challenging risk environment for organisations to try and manage” comments Mr. Disborough.

“It is, therefore, more critical than ever for organisations to develop efficient and effective risk management solutions, while remaining flexible and responsive to changes in both the local and global economy. Without such support it will be impossible for Australian industries to innovate successfully to overcome such challenges,” he concluded.

About Aon’s 2014/2015 Australian Risk Survey

Aon’s 2014/2015 Australian Risk Survey collates 13 years of risk insight to provide a deeper understanding of today’s key risk concerns. In doing this, it provides Australian organisations with a snapshot of how their risk management practices measure up against industry peers and competitors, and can be used as a tool to help predict and manage their risk profiles more effectively.

The primary objective of this survey is to provide assistance to those working in risk management functions in assessing how their organisation manages risk compared to others, and to measure the costs incurred in delivering a risk management and financing strategy.

The report provides insights and analytics on:

• Key risk concerns
• Risk management trends and strategies
• Insurance market trends
• Total Cost of Insurable Risk (TCOIR)

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Jason Disborough

Aon has announced the launch of Connect, an online destination created to facilitate and elevate conversations about risk.

The online location will house up-to-the minute content from subject matter experts, delivering industry insights for the evolving risk landscape.

Following extensive research with over 200 stakeholders from the Australian business community, Connect was developed in order to meet the needs and interests of organisations across the country. Connect will deliver insights specifically tailored for individual industries, providing access to information about the latest emerging risk issues and intelligence about the way peers manage risk.

Jason Disborough, Managing Director – Global & Corporate, Aon Risk Solutions, said the Connect program was launched in order to meet the business community’s appetite for local, industry-specific risk insights.

“We spent months speaking to Australian organisations about the challenges they face when it comes to sourcing information about risk,” Mr Disborough said. “Connect is an industry leading initiative that will allow us to effectively deliver relevant thought-leadership content to local businesses. All materials on Connect will be tailored to assist business leaders in having more meaningful and informed conversations about risk.”

Connect aims to facilitate conversations between business leaders and risk experts, through both webinars and small, intimate roundtable events. The site will also host additional content, including news articles, research and industry reports, insurance market updates, and case studies.

In preparation for its launch, Connect already houses a range of materials, including insights on cyber, extortion and hostage crises and weather risks; business case studies; and industry reports for a range of sectors, including energy, healthcare and construction. In the coming weeks, Connect will host its first webinar on extortion and hostage risks, focusing on learnings drawn from the recent Sydney siege.

While currently offering insights from Aon risk subject matter experts, Mr Disborough said Connect will eventually host contributions from a range of business partners.

“This is not an exercise in branded marketing. Our vision is for Connect to become an online conversation channel for subject matter experts in relation to risk – irrespective of the company they work for – and those who want to find out more information,” Mr Disborough said.

Connect can be accessed via an online, password protected location. Interested individuals can apply for membership by visiting www.connect-aon.com.au.

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Capital inflows affecting insurance markets: Aon

“An influx of capital from non-traditional sources is contributing to increased market capacity, lower premiums, and effectively enhancing competition in the global insurance industry.”

Commenting on insurance markets in 2013, Jason Disborough, Managing Director, Global, for Aon Risk Solutions, global provider of risk management, insurance and reinsurance brokerage, said that the market conditions that increased competition between insurers and lowered premiums across the board this year was likely to continue into 2014.

Mr Disborough said that increased capital flows into the industry from non-traditional sources has resulted in a convergence of traditional and non-traditional capital, translating into excess capacity which insurers have been unable to absorb through organic growth.

“Funds are flowing into the insurance sector from major pension and hedge funds as well as family trusts in a way we haven’t seen in the past,” he explained. “In the current low interest rate environment, these investors are seeking alternative sources of return. In addition, they have been willing to accept lower rates of return than have been usual in the industry. Because their investment has the potential to dwarf traditional sources of capital, it has the ability to fundamentally change market dynamics.”

Softening market conditions and increasing capacity have seen premiums fall almost across the board, with downward pressure on rates being experienced even in some of the poorer performing product classes.

Mr Disborough said that while this was great news for insured’s, it continues to present real challenges for insurers.

“Many are no longer able to rely on growth from their existing book of business, and need to look at new ways of maintaining profitability,” he explained.

James Baum, Managing Director of Broking & Chief Broking Officer, Pacific for Aon, also had some comments on the industry response to these changing financial dynamics, pointing out that when market conditions are challenging, it behoves insurers to innovate in order to maintain growth. And, he said, there are some key areas calling out for innovation in Australia.

“Australia is lagging behind the rest of the world in a number of areas. Network security and cyber risk, for example, have been seen as ‘emerging’ risks for far too long. The fact of the matter is that these risks are here now, and require a better and more coherent response from Australian insurers.”

Mr Baum went on to comment on the link between the themes emerging from Aon’s 2012/13 Australasian Risk Survey and the identifiable trends in insurance markets in 2013.

“Insurance exists to mitigate risk but at the same time, it is clearly not possible to insure against all risks,” he said. “We saw this very much reflected in the Aon risk survey. The number one risks identified by Australasian corporates, namely ‘brand and image’, and the ‘market environment’, are not risks that insurers can comprehensively address in the short to medium term.”

On the other hand, business interruption and human resources, which were ranked three and five respectively, are areas where insurance can offer real protection, and where insured’s and insurers alike need to concentrate their risk mitigation efforts.

“Workers Compensation, for example, is the single biggest insurance expense faced by businesses, so it’s no surprise that it ranked as the fifth highest risk concern. It really needs to be monitored and managed well on an ongoing basis.”

Mr Disborough concluded by looking forward to 2014, saying that he did not expect general economic conditions to pick up significantly, at least in the short term, and that alternative capital flowing into insurance markets would continue to keep competition alive and well.

“All in all, insurers and reinsurers alike are facing challenging times ahead, not just because of the ongoing impacts of natural catastrophes, but also due to less favourable operating conditions. On the other hand, their customer’s Total Cost of Insurable Risk will continue to benefit,” he said.

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It seems that forewarned is far from forearmed for Australian organisations, which have ranked uncertainty due to regulatory change as one of their ‘top three’ risk concerns. And for the banking and finance sector, regulatory risk is the number one worry, ranking even higher than risks relating to the economy and brand and image.

“In a year where changing legislation has affected all sectors, it’s not unsurprising that many businesses are concerned that they’re not adequately prepared for change or are unsure about what its effects – intended and otherwise might be,” said Jason Disborough, Managing Director, Global for Aon Risk Solutions. “Certainly in 2013 we’ve seen far greater apprehension about risks associated with regulation than in previous years.”

The risk rankings are drawn from Aon’s 2012/13 Australasian Risk Survey, the findings of which were released last month.

Mr Disborough cited change and uncertainty around the Carbon Tax, the Minerals Resource Rent Tax, Occupational Health and Safety (OHS) Harmonisation legislation as well as major amendments to the Privacy Act as likely to be causing some level of indecision.

However it is the banking and finance sector that’s really expressing concern about regulatory-based risk. In addition to the as-yet unknown effects of the new OHS and Carbon Tax regimes, the sector is likely to be more materially affected by privacy law amendments than many others. At the same time, it is grappling with major changes flowing from the Future of Financial Advice (FoFA) reforms and the advent of the new Stronger Super superannuation regime.

The fact that a potential change of government may see some – or all – of the new legislation either reversed or delayed, serves only to further muddy an already murky legislative landscape.

Given the level of concern, Mr Disborough said it came as a surprise to see that many organisations were not as prepared as they might otherwise be for the upcoming changes. He offered preparedness for the new superannuation regime as one example.

“As well as significantly affecting the industry itself, changes to superannuation touch on every employer and every working Australian,” he said. “However, according to the recent Aon Hewitt Superannuation Pulse Survey released earlier this year, some 58% of businesses had not decided how they would respond to the changes even beyond 1 July 2013 when the first of them came into effect.”

Mr Disborough pointed out that, while it is the ‘unknowns’ that are among the biggest risk triggers, not having effective risk management systems in place exacerbates the situation.

“Not knowing what you intend to do in any given situation is a risk in itself,” he said.

However, companies are not being helped by the global climate of uncertainty.

“There’s something of a Catch 22 at work here,” he said. “The recent weakness in the global economy has caused companies to focus more than ever on minimising operating costs. Using effective risk mitigation and risk transfer techniques can help reduce costs. However uncertainty about the effect of legislation reduces companies’ ability to do this.”

By way of example, he cited changes to OHS legislation.

“Although the harmonised approach has been adopted in all states except Western Australia and Victoria, the full implications for directors, officers and operations in regard to a range of issues, including penalties and fines, are still unknown. It’s the unknowns that are key concerns for organisations trying to plan, resource and put systems to support compliance in place.”

Mr Disborough concluded by saying that while businesses are understandably concerned with the uncertainties, they can have more control than they may believe – if they take the right action. And, on a positive note, many companies are.

“We were heartened to see that most organisations continue to increase their investment in risk management and mitigation. There is a proven correlation between advanced risk maturity and the ability to add shareholder value, and companies need to understand this, especially in this climate” he said.

“Preparedness is key,” he said. “In fact it is the only way to face uncertainty head on.”

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Assessing risk: Aon’s 2012/13 Australasian Risk Survey

Rapid moves in technology and climate change pose a whole new set of challenges

An evolving understanding of a significantly changed operating landscape is leading to changes both in the way organisations define risk – and the way they address it.  In global terms, Australian and New Zealand companies are ahead of the pack, taking a more structured approach to tackling a growing number of issues than many of their international counterparts.

These are just a few of the deeper findings of the eleventh annual survey involved 133 Australian and New Zealand companies across 19 industries. And a number of its findings demonstrate a focus on entirely new risks.

“It is highly interesting to see how innovation, or a lack thereof and technology systems failure have now entered the top 10 risk concerns for Australasian organisations,” said Jason Disborough, Managing Director, Global, for Aon Risk Solutions Australia.

“In an economic environment where organisations are fighting for growth, we are seeing that a general ability to adapt and respond strategically to change are more critical than ever.”

Mr Disborough went on to cite a host of new challenges arising from changed technological, regulatory and environmental factors that barely even made it onto the risk landscape a few years ago.

“Technology has brought with it an enormous change in the way we do business – which translates directly to a whole new set of risks that we are only just beginning to grapple with, for example,” he said.

Even aside from the impact of technology-fuelled social media on brand and image – which ranked as the number one concern in the Australasian survey – other major technology-related issues such as lack of innovation, technology or system failure and lack of technology infrastructure to support business needs, are all creeping into the top 20 concerns – and some much higher.

Mr Disborough said that, given these technology-based concerns, Aon was surprised to see that Cyber Risk did not make the top 20 rankings – especially in the face of upcoming privacy and other legislative change likely to call into question the integrity of many organisations’ information management systems.

“I think it’s fair to say on the basis of our own research and consultancy that many organisations are underdone when it comes to cyber risk. We expect a growing move to address this once there’s greater awareness of the practical impact of privacy laws and how they mesh with new technology such as cloud-based systems,” he said.

Liability issues arising from other forms of regulation are also playing an increasing role in reshaping the risk landscape.

“Risks for company directors are almost unrecognisable from what they were 10 years ago, with sanctions from fines through to incarceration now on the table for a range of breaches across numerous areas, in particular occupational health and safety,” Mr Disborough added.

He also flagged that while the higher ranking of natural disasters as a risk was understandable due to events such as the Christchurch earthquakes, and floods and bushfires fires in many parts of Australia, these may well continue to grow alongside concerns about climate change and its ultimate long term impact on our living and working environments.

While there are undoubtedly significant challenges ahead, the survey showed that, in global terms, Australian and New Zealand companies are increasingly well placed to address them.

“It’s heartening to see that despite strong economic headwinds, Australasian organisations continued to increase their investment in risk management and risk mitigation at above global averages,” he said.

“This year, for example, 70% of organisations surveyed reported that they have a formal risk management or insurance department, which is 10% higher than last year’s survey, and 12% higher than the global average of 58%,” he explained.

Mr Disborough also pointed out that research shows a positive correlation between advanced risk maturity and the ability to add greater shareholder value for organisations. A separate study conducted by the Wharton School of Business and Aon from 2010–2012, identified that those organisations with the highest Risk Maturity Rating (5.0 – Advanced) exhibited a stock price volatility 50 percent lower than the group of organisations with the lowest Risk Maturity Rating (1.0).

Mr Disborough concluded by saying that the aim of the survey had always been to provide Aon clients with deeper insights into risk management and risk financing trends.

“The fact that the survey continues to uncover new risks really reinforces the need to remain vigilant and open to the broader implications of the rapidly changing environment in which we operate.”

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