Lloyd's 2011 Risk Index - Lloyd's of London

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Lloyd’s

RISK INDEX 2011

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REspoNdENt pRoFILEs WHICH OF THE FOLLOWING DESCRIBES YOUR JOB TITLE?

WHAT IS YOUR COMPANY’S ANNUAL GLOBAL REVENUE IN US DOLLARS?

%

% Board member CEO/President/Managing director CFO/Treasurer/Comptroller CRO/Chief risk officer CIO/Technology director Chief compliance officer Other C-level executive

8.5% 52.7% 15.6% 3.8% 5.7% 0.6% 13.1%

51.0% 14.9% 17.1% 5.4% 11.6%

$499m or less $500m to $999m $1bn to $4.999bn $5bn to $9.999bn $10bn or more

IN WHAT REGION ARE YOU PERSONALLY BASED?

North America

Europe

27%

35% Asia-Pacific

27% Rest of the World

11%

Lloyd’s

Risk Index 2011

WHAT IS YOUR PRIMARY INDUSTRY? Financial services

18.6%

Professional services

13.2%

Manufacturing

10.4%

IT and technology

9.8%

Energy and natural resources

8.6%

Healthcare, pharmaceuticals and biotechnology

4.8%

Entertainment, media and publishing

4.4%

Construction and real estate

4.2%

Retailing

3.2%

Consumer goods

3.0%

Agriculture and agribusiness

2.6%

Chemicals

2.6%

Education

2.6%

Telecommunications

2.6%

Transportation, travel and tourism

2.6%

Aerospace/Defense

1.8%

Government/Public sector

1.8%

Logistics and distribution

1.8%

Automotive

1.6%

01

coNtENts Introduction Foreword by Richard Ward, Chief Executive, Lloyd’s

02

Executive summary of findings from the Economist Intelligence Unit (EIU)

03

01

02

the top five risks

03

mind the (reality) gap

Risk awareness rises in the east

Loss of customers

10

Political, crime and security risks

Talent and skills shortages

11

Environmental risks – a balancing act for business 19

16

Reputational risk

13

The selective invisibility of natural hazards

Currency fluctuation

13

Changing legislation

14

20

conclusions Conclusion

26

Appendix and methodology

27

Lloyd’s

Risk Index 2011

An increased appreciation of risk

24

02

INTRODUCTION

foreword Foreword by DR Richard Ward

Risk awareness rises in the East

In 2009 much of the world held its breath as we watched banks fail, high street businesses collapse and the damaging impact of the credit crunch on the ‘real economy’. It was in that highly charged context that Lloyd’s, in collaboration with the Economist Intelligence Unit (EIU), published its first global survey1 on risk attitudes amongst business leaders.

Fascinating too, is the speed at which risk awareness in the East has grown. The rise in the scores given across all categories of risk, compared to 2009, by Asia-Pacific respondents is significant, as is the increase in levels of business preparedness to deal with them. Interestingly, these greater scores do not apply only to natural hazards, of which Asia-Pacific has had direct recent experience, but across all five categories of risk surveyed. This awareness presents both risks and opportunities for domestic and international business, as the new world balance of economic and political power shifts.

Two years later, global economies remain in a state of flux, with growing debate on how long it will take to play out, as we see with the current political and sovereign debt crisis.

The last two years have thrown the world into economic and political turmoil from which it has yet to emerge.

This second Lloyd’s Risk Index, based on a survey of global business leaders by the EIU, shows that their perceptions of risks have evolved significantly in the intervening two years. In all regions of the world, across all sectors, business leaders now perceive the world as an inherently riskier place. As we look at these changing priorities in more detail in this report, three key strands emerge from the findings.

From Credit Crunch to talent crunch There has been a change in emphasis in business risk rankings. In 2011, businesses are less concerned about the availability of credit and more worried about the loss of customers and orders created by a new age of austerity in the West. More surprising is the way that the risk posed by talent and skills shortages has shot up the list to become the second highest priority for businesses. There are a number of theories as to why this move from credit crunch to talent crunch has occurred, some of which we outline in this report. We hope it will encourage debate about how businesses can manage this escalating risk more effectively.

Lloyd’s

Risk Index 2011

Reality and perception at odds Business leaders have scored themselves as more than adequately prepared for 48 out of the 50 risks. For Lloyd’s, and for the insurance industry as a whole, the fact that this ‘preparedness gap’ exists for only two of the listed risks, compared to eight in 2009 is interesting. I welcome any increase in the implementation of formal risk systems, but businesses also need to recognise such systems cannot anticipate so-called ‘black swan’ events. When it comes to risk management planning businesses need to increasingly think the unthinkable in order to identify all their vulnerabilities and minimise them. In the last two years, the world has been thrown into economic and political turmoil from which it has yet to emerge. It will be intriguing to see the impact on business attitudes over the next two years, when we publish the third Lloyd’s Risk Index in 2013. DR RICHARD WARD Chief Executive Lloyd’s

03

EIU executive summary Prepared by the Economist Intelligence Unit for Lloyd’s of London*

The combination of global shocks through increasingly interlinked and interdependent systems has raised the threat levels of risk across the board.

About this executive summary The aim of this executive summary, based on findings and analysis from the EIU and commissioned by Lloyd’s, is to assess corporate risk priorities and attitudes around the world. The findings are based on a global survey of over 500 C-suite and Board level executives conducted in August 2011. Survey respondents were distributed across Europe (35%), North America (27%) and Asia-Pacific (27%), with the rest of the world comprising about 11%. Financial services provided the largest number of respondents at 19%, followed by professional services at 13%, manufacturing at 10% and technology at 10%. The remaining 48% of respondents represent a wide range of other industries. Around half of respondents represent corporations with annual revenues of over $500m. In this summary, we examine some of the over-arching trends and themes emerging from the 2011 survey. We also identify major shifts from the 2009 survey and report, Lloyd’s 360 Risk Insight: Risk Priorities and Preparedness. We would like to thank the respondents who took the time to participate in the survey.

Methodology The survey examined attitudes to risk across five key categories: >> >> >> >> >>

Business and strategic risk Economic, regulatory and market risk Political, crime and security risk Environmental and health risk, and Natural hazard risk.

Respondents to the survey were asked to rate both the overall risk category and a series of key risks within each category against their corporate risk priorities and degree of preparedness to manage those risks. A score was calculated for each where zero represents the lowest level of priority or preparedness and ten represents the highest. Some new risks have been added to the 2011 survey from the 2009 version. These enable us to explore in greater detail the role of government, demographic forces, and global resource issues such as food security and water scarcity, all of which we believe will give a more complete picture of corporate risk priorities in 2011.

In this summary, we identify the key risk areas by looking thematically at the overall risk ratings, the top risks and the biggest changes from 2009. We also examine the survey results through a regional lens for the biggest differences in relation to current economic, political and commercial operating contexts.

Summary of Insights Three years on from the start of the worst financial crisis for more than a generation, there is still uncertainty about the future. Will we manage to avoid a double-dip recession and emerge into a period of growth? If we do, will it be strong growth, or a prolonged period of slow progress, as many economies are currently experiencing? How can businesses manage risk in this environment? The financial crisis has undoubtedly reduced global economic resilience and, as the World Bank argues in its 2011 report on the macroeconomic risk landscape, the combination of global shocks through increasingly interlinked and interdependent systems has raised the threat level of risks across the board. Economies in many developed countries are weighed down with debt and face years of sluggish growth, and may lack the agility required to efficiently manage external factors in this context. Meanwhile, Asia’s 3.5 billion consumers and dynamic market environment may provide a massive growth opportunity. A number of interesting insights and consistent themes can be seen emerging from the survey. There is a greater sense of preparedness to address risk across the world’s boardrooms, a significant global disparity across the entire risk arena between East and West and a heightened sense of priority across all risk categories. Anything high on an executive’s risk priority list can be considered in terms of a potential critical point of failure for business; some significant changes in the risk landscape over the past two years reflect new critical points of failure, such as risk of talent shortages. Yet, while executives’ attitudes to risk do not suggest they are anticipating a new era of growth, their leading concern – that they will lose customers – shows that fear of a double-dip recession is high up in their thinking. Uncertainty is still the issue of the day.

* The EIU bears sole responsibility for the content of this executive summary. The EIU editorial team executed the online survey, conducted the analysis and wrote this summary.

Lloyd’s

Risk Index 2011

04

introduction

EIu executive summary continued

KEy INsIghts aNd thEmEs All overall risk priorities are notably higher than two years ago, with Asia leading the way. While risk priorities generally increased across all five risk categories globally, the East drove this increase with an average overall priority score increase of 26% since 2009, compared with only 4% in Europe and North America. The global imbalance between high and low growth economies is no doubt driving the regional disparities. But the notable overall increases are likely to be a combination of this and other factors, including the state of longer-term economic uncertainty in the current business environment. The survey suggests that the discipline of risk management has also become more important, and this is demonstrated in many practical ways. Businesses feel distinctly better prepared to manage risks to their business and operations than they did two years ago. Our survey finds that a strong sense of preparedness prevails in boardrooms around the world. More than 70% of survey respondents report that their company is better prepared to manage business and operational risks than they were two years ago, and fewer than 3% say they are less prepared. This is a markedly different result from our 2009 survey, when we found ‘preparedness gaps’ (defined as risks where the preparedness score was not as high as the priority score), in eight out of 41 individual risks, compared with only two out of 50 in 2011. One should not ignore the fact that, for many companies, there will be a difference between actually being prepared and simply believing that they are prepared. But in view of the severity of financial and natural disasters over the past three years, and the rise in practical risk management measures internally, perhaps executives themselves have re-calibrated, for the better, what it means to be prepared.

Lloyd’s

Risk Index 2011

Chart 1

compared to two years ago, how are you prepared for risks to your business and operations?

70% are better prepared

27% are about the same

3% are not well prepared

05

Overall business and strategic risks, as well as economic, regulatory and market risks, still dominate risk priorities globally. Although business and strategic risks overall edged past economic, regulatory and market risks for the top priority spot this year, the scores for both were high (7.3 and 7.2 respectively). There are some regional differences in whether one or the other of these risk categories is seen as the top priority, but it is important to recognise that globally, the top three risks are all business and strategic risks: loss of customers and orders, talent and skills shortages and reputational risks. Meanwhile, the next five are all economic risks: currency fluctuation, changing legislation, cost and availability of credit, price of material inputs and inflation.

Environmental and natural hazards are seen as lower priorities overall. Risks concerning natural hazards, and longer-term environmental trends such as climate change, still tend to be of lower and less immediate concern to board-level executives. ‘Black swan events’, which have a relatively small probability but a high impact, tend to be low on our survey respondents’ list of priorities. Despite the relatively high profile of global issues such as food security and water scarcity, these are also perceived to be a low priority, as are demographic factors – although there are notable regional differences. What is also particularly interesting this year, is that environmental and health risks increased in priority by the greatest amount, despite still remaining at a moderate risk priority level overall. Pollution and environmental liability is the top risk in this category, probably reflecting the anticipated costs of increased regulation. The companies which may be hit hardest by these costs are those with operations in countries such as China, where environmental regulations are currently well behind those in the West, but are likely to catch up quickly.

Table 1. Overall risks, 2011 versus 2009 * 2011 Priority Rank Overall Risks

1 2 3 4 5

Business and strategic risk Economic, regulatory and market risk Political, crime and security risk Environmental and health risk Natural hazard risk

2011 2011 Priority Preparedness Score Score

7.3 7.2 5.4 5.0 4.2

7.1 6.5 6.5 6.1 5.5

2009 Priority Score

2009 Preparedness Score

6.5 6.8 4.9 4.0 3.9

6.0 5.8 5.1 5.1 5.4

* The survey conducted in 2009 offered respondents a list of 41 risks. The 2011 Lloyd’s Risk Index updated this list to reflect the current risk environment by removing some of these risks and adding others. A full list of these removals and additions can be found in the Appendix. This means that the 2009 and 2011 rankings are not statistically directly comparable, although they do offer an insight into changes in both perceptions of risk priority and preparedness over the last two years.

Lloyd’s

Risk Index 2011

06

introduction

EIU executive summary continued

Chart 2

individual risks, priority and preparedness scores 2011 Risk

1 Loss of customers/Cancelled orders

Business

6.2 6.3

2 Talent and skills shortages (including succession risk)

Business

6.2 5.9

3 Reputational risk

Business

5.8 6.6

4 Currency fluctuation

Economic

5.6 5.9

5 Changing legislation

Economic

5.6 5.4

6 Cost and availability of credit

Economic

5.5 6.4

7 Price of material inputs

Economic

5.4 5.7

8 Inflation

Economic

5.4 5.5

9 Corporate liability

Business

5.4 6.6

10 Excessively strict regulation

Economic

5.4 5.6

11 Rapid technological changes

Business

5.3 6.1

12 Cyber attacks (malicious)

Political

5.3 6.0

13 High taxation

Economic

5.2 5.5

14 Failed investment

Business

5.2 6.1

15 Major asset price volatility

Economic

5.2 5.7

16 Theft of assets/Intellectual Property

Political

5.2 6.1

17 Fraud and corruption

Political

5.2 6.3

18 Interest rate change

Economic

5.1 6.0

19 Cyber risks (non-malicious)

Political

5.1 6.2

20 Poor/incomplete regulation

Economic

5.0 5.4

21 Critical infrastructure failure

Business

4.9 5.9

22 Government spending cuts

Economic

4.9 5.4

23 Supply chain failure

Business

4.8 6.1

24 Pollution/environmental liability

Environmental

4.7 5.7

25 Sovereign debt

Economic

4.6 5.2 0

Score – out of 10

Priority

Lloyd’s

Preparedness

Risk Index 2011

1

2

3

4

5

6

7

07

Risk

26 Increased protectionism

Economic

4.6 5.4

27 Industrial/workplace accident

Environmental

4.6 6.2

28 Energy security

Business

4.5 5.8

29 Insolvency risk

Business

4.5 6.2

30 Demographic shift (eg ageing population, youth emigration)

Environmental

4.4 5.2

31 Strikes and industrial action

Political

4.2 5.8

32 Climate change

Environmental

4.1 4.8

33 Pandemic

Environmental

4.0 4.7

34 Piracy

Political

3.9 5.6

35 Water scarcity

Environmental

3.9 4.9

36 Terrorism

Political

3.9 5.0

37 Urbanisation

Environmental

3.9 5.1

38 Population growth

Environmental

3.8 5.1

39 Riots and civil commotion

Political

3.7 5.1

40 Food security

Environmental

3.6 4.8

41 Harmful effects of new technology

Environmental

3.6 4.7

42 Flooding

Natural

3.6 5.2

43 Expropriation of assets

Political

3.4 5.2

44 Earthquake (including tsunami)

Natural

3.3 4.5

45 Abrupt regime change

Political

3.3 4.8

46 Windstorm (eg hurricane, cyclone, typhoon)

Natural

3.2 4.5

47 Drought

Natural

3.0 4.4

48 Threats to biodiversity

Natural

2.8 4.3

49 Impact of space weather (eg solar flares)

Natural

2.6 3.8

50 Volcanic eruption (including ash)

Natural

2.4 4.0 0

Score – out of 10

Priority

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Preparedness

Risk Index 2011

1

2

3

4

5

6

7

08

introduction

EIU executive summary continued

Loss of customers is seen by businesses as the leading risk.

The top economic risk priorities have become more sophisticated.

There is an imbalance between East and West.

During times of economic uncertainty, sensitivity to losing customers becomes a critical point of failure for businesses. In Asia, for example, where the economy is dominated by tradable goods, sensitivity to losing customers is more abrupt; businesses in this region were hard hit in 2008, but recovered quickly in the following year – a relatively quick recovery is possible in a goods-dominated market. In the West, where services comprise a significant portion of the economy, companies continue to look for new market opportunities, particularly in regions where the cost of capital has gone down. The survey suggests that companies understand that the most successful strategy for shoring up against the threat of recession is to attract and retain customers.

The uncertainty that dominates global business is reflected in the economic risk priorities of the respondents to our survey. A good deal of the uncertainty is likely to be caused by an expectation that regional current events may escalate to cause bigger, global problems. There are very real threats to the eurozone’s economic stability, for example, as problems have spread from Ireland and Greece to Italy, Spain and France. Meanwhile, there is ongoing uncertainty caused by the downgrading of the US credit rating in August of this year, and also concern that inflation may escalate in the East unless exchange rates are carefully managed. Survival was certainly the theme of 2008-2009, when cost and availability of credit and currency fluctuations were the top two global risk priorities. These are still in the top ten, but the picture is now more complicated. Corporate leaders also recognise the critical role of policy such as legislation and exchange rate policy and its impact on inflation, on their businesses. Linked to this is the price of material inputs, which have risen substantially in priority in our survey rankings.

When exploring the main themes emerging from our survey, significant regional and sector disparities emerge. There is a significant imbalance in the consumer sector, where Asia, particularly China, is faring very well and Europe and the US are struggling. Certainly, one of the key challenges for policymakers at this time is to make allowances for the ways in which other regions will manage their own economic policies. In the US and Europe, emerging from recession, or avoiding a double-dip recession, has not typically been consumer-led in the past, but stimulated by government policy, as well as innovation, particularly in technology. One of the developments we may be seeing in the higher risk scores across Asia-Pacific is a lack of confidence that they will continue to be able to achieve the kind of growth generated in the past. Their export opportunities are shrinking and many are looking to more dynamic markets closer to home as being more promising sources of long-term growth. And the region’s 3.5 billion consumers still provide a massive growth opportunity.

Risk of talent shortage has escalated dramatically. The risk of talent and skill shortages rose from a relatively lowly 22nd ranked priority in 2009 to 2nd in 2011, and companies feel relatively less able to manage this risk. A number of pressures are likely to have driven this shift, including demographic (China, for example, has a large population of young and old people, but a deficit of working-age, professional workers), competitive (including the need for innovation and entrepreneurship to help lead the West out of recession) and productivity (doing more with less). The search for talent is also much more acute in the Asia-Pacific region. In our survey, 70% and 60% of respondents from the Asia-Pacific region and the rest of the world respectively, rated talent as high or very high priority, compared to only 42% and 45% of respondents in Europe and North America respectively.

Lloyd’s

Risk Index 2011

09

01

thE top FIvE RIsKs Loss of customers

10

Talent and skills shortages

11

Reputational risk

13

Currency fluctuation

13

Changing legislation

14

Lloyd’s

Risk Index 2011

10

SECTION one

the top five risks Then and now – what has changed? In 2009, the top three risks prioritised by business leaders were direct responses to the liquidity crisis which began in 2008 – the cost and availability of credit, currency fluctuation and insolvency risk.

TOP FIVE RISKS 2011

1. Loss of Customers

Two years later, as governments, businesses and individuals have started to tighten their belts and deal with their debts, the availability of credit has dropped from the number one risk to number six, replaced by loss of customers and orders as businesses’ primary concern. Currency fluctuation does, however, remain a serious cause for concern, moving from number two to number four.

The last two years have seen major reputational crises, such as Deepwater Horizon and recalls by car manufacturers, particularly in Europe and the US and their impact on the bottom line is reflected in the rise of reputational risk from nine in 2009 to number three in 2011.

Businesses are generally much better capitalised than they were two years ago. From concern about the availability of credit, business leaders are now facing an even more fundamental risk; the evaporation of those wanting – or able – to buy.

of the PIIGS (Portugal, Italy, Ireland, Greece and Spain) is affecting global stock markets from New York to London and dramatically reducing the world’s wealth. According to research by the Federal Reserve Bank San Francisco5, the financial crisis has wiped out 25% of the US’s net worth and the crisis of the euro may mean Europe fares even worse.

There are multiple reasons for this loss of consumers. Western governments have prioritised the need to drive down their deficits and are cutting back both on investment and public services – as customers they are retrenching. At the same time, the high cost of many materials and of energy is driving up inflation, making products more expensive to buy. Faced with the triple factors of static or falling incomes, rising inflation and widespread job insecurity, consumers in North America and Europe are paying down their debts, buying less and buying more cheaply when they do. Nor are they confident about the future. In September 2011, consumer confidence across much of the West was weak; in Italy 2 it was the worst for three years, France3 registered the weakest level since February 2009 and US4 levels stagnated near a two-year low. Pensions and savings income have been eroded, cutting spending power. The spreading debt crisis

Lloyd’s

The risk posed by ‘talent and skills shortages’ has shot up the Index since 2009, rising from a mid-list ranking in 2009 to number two today. More optimistically, the biggest reduction in priority has been ‘insolvency’, which has dropped from third place in 2009 to just 29 in 2011.

Risk Index 2011

Other notable changes include the increased weighting given to the cost of materials from 17 in 2009 to seventh today, reflecting the major price hikes of commodities including energy and many raw materials.

Emerging economies such as India and China are changing focus as they deal with the dual issues of reduced international demand and encouraging domestic consumption. These growing markets present huge opportunities for domestic and international companies alike. It’s estimated, that China has over 10 million Small and Medium-sized Enterprises (SME’s)6 and financial services, for example, currently have low market penetration. Against a background of dwindling demand for goods and services, supply chain failures or reputational damage can mean the difference between business survival or collapse. As margins are increasingly squeezed, mitigating against these types of risks has become more important than ever.

11

2. Talent and skills shortages

The prioritisation of ‘talent and skills shortages’ as the number two risk facing businesses, and one of only two risks which respondents felt they were insufficiently prepared for, begs many questions. In a time of business consolidation and record unemployment, the pool of surplus available talent should, in theory, be significant. And yet, at the very top of organisations, there is huge anxiety about the suitability of available staff for the roles required. Severe skills shortages, for example, are being reported as a growing risk in the North Sea oil fields7, with frequent staff movement as companies poach staff from each other. The Australian mining industry, suffering cycles of interstate poaching, is now running regular job fairs as far afield as Canada8. Poaching from a dwindling pool of suitable staff is not a sustainable strategy. Concern over talent or skills shortages could be the result of a number of factors. The retirement of the ‘baby boomers’ in the West is taking a whole tier of well-educated and experienced staff out of the job market. It may also be that the booming market trends of the last 20 years have led to an executive level

The Germans have a word for it – ‘Fachkräftemangel’ According to Lloyd’s general representative for Germany, Burkard von Siegfried, the impact of the ‘talent crunch’ in Germany is now becoming acute; there is even a specific term for it, ‘Fachkräftemangel.’ “The problem is particularly severe in the engineering, medical and IT fields”, von Siegfried notes, “with their intensive training and high drop out rates.” As a result, Germany is increasingly seeking foreign expertise. Economic recessions, he believes, tend to

Lloyd’s

Risk Index 2011

skilled in expanding market share, rather than a more forensic model for steering businesses through challenging times. It may be that ever-expanding markets made it easy for businesses to thrive with an existing skill set. The Index does not give us all the answers and there is inevitably a degree of speculation about the causes behind this finding. However, respondents across all sectors agree this is a significant and widespread problem. The resulting business risks could include everything from poor product development to inappropriate risk management strategies. Many sectors are waking up to this risk and taking action. Some IT companies, for example, are undertaking audits to identify staff at risk of being poached and targeting packages for retention. But prevention is just part of the solution and many industries are investing in a process to identify and train the talent they need from scratch. Parts of the insurance industry, including Lloyd’s, have started programmes to recruit raw talent and train them to ensure an expert and innovative future workforce.

result in a search for the best by the firms that survive. “These companies survive by streamlining their processes to ensure their competitiveness in world markets, and qualifications needed at these levels are increasingly high.” But Germany is also a country which traditionally has a strong SME sector and, as thousands of owners retire each year, owner succession problems are acute. In response, the German government and other stakeholders have started an initiative9 to support business transfers.

12

SECTION one

the top five risks continued

The Japanese experience – keeping up with a changing world order

problems, “The domestic skill set to manage mergers and acquisitions, particularly on an international stage, is very light. As the move by Japanese businesses to invest further into overseas markets grows, there is increasing pressure on the number of people available to recruit to run these businesses.”

Japan’s talent and skills shortages, on the other hand, have their roots in a very different crisis. In the ‘lost decades’ that characterised its domestic economy from the late 1980s through the 2000s, despite a strong export market, Japan focused on delivering domestic growth. It wasn’t until the impact of ongoing demographic changes – an ageing population and low birth rates – were understood, that this focus began to change. In 2009, the Japanese economy contracted by over 6%, with consumer prices declining by 1.4% in 2009. In 2010 consumer prices declined by a further 0.7%10. By then, Japan Inc had recognised the need to seek growth internationally.

The risk management landscape of Japan is also changing. As more Japanese companies become involved in overseas trading or buy overseas assets, they are having to improve their understanding of international standards and, in some cases, adopt them. The small pool of risk and compliance staff in Japan are in high demand as a result.

Ferguson also highlights the changing culture of Japanese boardrooms, “Chairmen, In the meantime, the West has moved on in Presidents and Directors have, until recently, terms of entering international markets. Mergers enjoyed a fairly ceremonial existence but as and acquisitions activity has risen considerably the personal liability of directors becomes a and Japan, while well capitalised for this type real issue, they are now under pressure to 11 of expansion, finds itself at a disadvantage . improve their skill sets from shareholders Priority Preparedness As Lloyd’s Japanese representative, asking how their capital is being used to 1 Very high 1 Very well prepared 2 2 Iain Ferguson notes this presents obvious fund international expansion.”

Chart 3

3 4 5 Very low Priority 1 Very high Priority 2 1 Very high 3 2 4 3 5 Very low 4 13.5 5 Very low Preparedness 1 Very well prepared 2 3 4 5 13.5 Not at all prepared

3 4 5 Not at all prepared Preparedness 1 Very well prepared Preparedness 2 1 Very well prepared 3 2 4 3 5 Not at all prepared 4 1.9 5 Not at all prepared 31.5

talent and Skills shortages – priority and preparedness by regioN 6.8

1.5

9.6

4.7

11.0

24.1

19.9 Priority 1 Very high 2 3 4 5 Very low 19.9

16.2 21.8

asiapacific 6.8 1.5 %

6.8

1.5

21.8

asiapacific asia% pacific 2.39.6

21.8

24.1

% 21.8 16.2

north america 9.6 16.2

24.1 45.9

29.4 16.2

11.0 21.8 45.9

12.9 29.4

45.9

29.4

north asia1.5 america pacific 6.82.3

c

%

%

21.8

24.1

21.8

2.3

21.8 26.3 33.8

21.8 45.921.8 27.8 29.4

% 12.9

27.8

10.6

%

27.8

26.3

35.6

26.3

35.6

north america

c

12.9 12.9 35.6

asiapacific asia% asiapacific pacific 3.0

21.8

11.0

%

24.1

9.6

north america north % america 4.7 3.0 % 19.9

35.6

33.8

21.8

%

9.3 29.6

28.7

europe 13.5

33.8 6.8 6.8

% 11.6

14.5 33.3 1.5 33.3 1.5

% 3.5 9.3

1.9 11.6 28.7

37.9

europe 29.4

21.8 21.8

39.5

27.8

16.7

28.7

30.8

1.9

rest of the rest world of the % 1.9 1.9 world

21.8

of the rest world

33.8 of the % europe

% 42.6 3.0

30.8

%

37.0

33.8 world % 2.3

10.6

%

10.6

27.8

26.3

35.6

26.3

35.6

Priority 1 Very high 2 3 31.5 4 31.5 27.8 5 Very low

14.5

27.8

3.5 37.9 37.9

north america

%

27.8

21.8 14.5 14.5 28.7

3.5 12.9 3.5

45.93.0 11.6

35.6

% 29.4

10.6

north europe america % % europe % asiapacific 35.6 30.8

11.626.3 39.5 %

16.7

16.7

26.3

30.8

% 37.0 37.0

rest of the world

37.0

3.5

euro

28.7 %

33.3 11.6

27.8 42.6 42.6

10.6 rest europe of the % rest world of the % world north % 1.9 1.9 america 39.5 37.9

%

39.5

1.9

12.9

35.6

%

37.9

1.9

4. 19.9

27.8

33.8 1.9 14.5 1.9

16.7 3.0

30.8

39.5

31.5

1.99.6

11.6 29.6

2.3

21.8

21.8

1.9

% of the 29.6 world

28.7

13.5

31.5

11.0 rest 31.5europe of the % rest world of the % world north % rest america33.3 33.8 29.6 27.8

28.7

33.3

4.7

1.9 19.9

9.3

%

Priority 1 Very h 2 3 4 5 Very lo

4 5 Not at all prepared

9.3

north9.3 24.1 america16.2

Risk Index 2011 26.3

11.0

13.5

europe

%

Lloyd’s

9.6 13.5

45.9 pacific 29.4 33.3 %

27.8

asiapacific

Priority 1 Very high Priority 2 Very high 1 3 2 4 3 5 Very low 4

Preparedness 1 Very well prepared Preparedness 2 1 Very well prepared Preparedness 3 2 1 Very well prepared 3 4 2 4 3 5 Not at all prepared 5 Not at all prepared

5 Very low

% 16.7 29.6 27.8 42.6 6.8 1.5 4.7 9.6 29.6 24.1 27.8 11.0 19.9 16.2 4.7 9.6 rest 11.0 21.8 19.9 of the 4.7 1.9 1.9 13.5 1.5 6.8 world 19.9 16.7 %asianorth 42.6 pacific 1.9 1.9 europe america % north 16.7 % 21.8 27.8 42.6 % europe 37.0 america rest % asia%

31.5

21.8 37.0 rest 12.9 3.0 10.6 21.8 of the12.9 33.8 33.3 world asia% asianorth pacific pacific america % asianorth 30.8% % pacific 37.0 america

3.0 12.9

24.1

39.5 2.3 39.5 2.3

37.9

%

9.3

13.5

%

10.6

% 14.5

rest of the 1.9 world

europe

2.3 21.8

4.7

4.7

rest north 16.2 24.1 of the europe 9.6 europe america 21.8 3.5 world 3.0 % % 16.2 11.0 10.6 11.6 % 14.5 % 21.8 asia3.5 3.0 11.6 16.2 10.6 pacific asia14.5 29.6 30.8 % 33.3 28.7 pacific 39.5 37.9 north % europe america % north north % 45.9 29.4 america3.5 america europe % 45.9 1.9 1.929.4

45.9

37.9

%

19.9 33.3

33.8

%

26.3

11.0

europe

9.3

3.5 14.5

30.8euro %

42.6 37.9

39.5

13

3. Reputational Risk

In 2009 reputational risk was ranked ninth, in 2011 it comes third. The intervening two years have seen the unfolding of a reputational crisis in many countries. While politicians, bankers and ratings agencies have all come under severe scrutiny, business has not escaped criticism either. From recalls by car manufacturers in the US, Europe and China to the Deepwater Horizon disaster’s impact on BP market value, to the drop in the price of Research In Motion, makers of Blackberry shares, awareness of the impact of reputation on the bottom line is growing. A 2010 study12 of the world’s 1,000 largest companies found 80% of companies lose more than 20% of their value at least once in a 5-year period because of a major reputational event. Business fails to protect itself from reputational damage at its peril.

4. Currency Fluctuation

The number two priority given overall to currency fluctuation in our 2009 survey was virtually universal geographically, in 2011 it was included in the top five risks of all regions apart from North America. Export-led countries such as India and China, particularly in industries heavily reliant on importing raw materials and exporting finished products, had every reason to fear exchange rate fluctuation as a brake on sustainability and growth. In the face of the subsequent slowdown in orders from Europe and North America, China is increasingly investing in its own infrastructure and encouraging greater domestic consumer spending. It now has the world’s highest savings rate and unlocking some of the more than $350bn14 current account surplus will encourage Chinese manufacturers to prioritise supplying domestic markets. Reducing this domestic savings surplus means a corresponding reduction in buying foreign government debt; the implications for the exchange rates of other countries could be significant, including higher interest rates on national bonds globally. Interestingly, however, China demonstrated little enthusiasm for buying European debt during the 2011 crisis in the eurozone.

Lloyd’s

Risk Index 2011

Certain business practices can themselves directly increase the likelihood of reputational risk. Operating in new territories without a thorough understanding of local geopolitical tensions can carry significant reputational risk, as well as operational uncertainty and higher security costs, as many international companies operating in Nigeria13 have discovered. The Index shows that businesses believe they are, if anything, actually over-prepared to deal with reputational risk, scoring the preparedness at 6.6 against a priority score of 5.8. At a time when the reputation of companies is becoming of greater importance to consumers, and therefore to shareholders, it will be interesting to see if events confirm this degree of optimism.

This crisis has proved deeply destabilising. In Europe and the US, the plummeting values of the euro and the dollar caused a flight to the Swiss franc, forcing the Swiss National Bank to peg its value to that of the euro in September 2011. The write down of Greek debt in the Autumn of 2011 was compounded by the crisis in Italy which saw yields on one-year government bonds break the 8% mark in November. The Prime Ministers of both countries became casualities of the crisis and 2011 ends with speculation that the eurozone may not survive in its current form. Given the volatility of global markets, low yields in safe havens appear increasingly likely to be the investments of choice for governments and corporate investors, for the foreseeable future. Investment yields will be increasingly inadequate to subsidise unsustainable businesses.

14

SECTION one

the top five risks continued

5. Changing legislation

The global financial crisis has provided a major legislative response. For the banking industry, the capital requirements of Basel II have been added to by the provisions of Basel III due for full implementation in 2019. At an international level, G20 leaders are taking steps to give the Financial Stability Board greater power and strengthen its monitoring function to ensure Basel III and subsequent requirements are implemented consistently across all countries. The requirements of Solvency II, aimed at the European insurance industry, which may well have played a part in increasing risk awareness in Europe, are currently likely to be fully implemented in 2014. Switzerland and Japan are being assessed for equivalence alongside Bermuda. Despite the G20 drive for global parity of much financial regulation, there is a move towards regulatory protectionism; with different countries keen to promote their own regime as more business friendly than those of potential competitors. Businesses in the City of London, for example, have pointed out the economic risks of disproportionate European regulation15, driving financial services to countries with lower capital requirements and lighter corporate tax regimes.

Lloyd’s

Risk Index 2011

In the US, the Dodd-Frank (Wall Street Reform and Consumer Protection) Act, introduced in July 2010 has overhauled the previous agency oversight system for financial services, including the creation of a Financial Stability Oversight Council and a Federal Insurance Office to oversee financial institutions. In addition to this layer of supervision, accountability and reporting standards have been raised. In the East, too, emerging economies are tackling their problems with more regulation. At the start of 2011, China announced the acceleration of plans to control pollution caused by heavy metals16. Vice-Environment Protection Minister, Li Ganjie, has warned he will shut down the operations of multinational companies that try to conceal their creation of environmental hazards. In April 2011, the China Ministry of Transportation issued additional regulations for ship owners in Chinese waters covering water, oil waste and sludge disposal. China’s growing resolve to tackle its status as the world’s biggest polluter presents opportunities for a range of waste and other environmental businesses. It also serves as a warning that business practices which worsen China’s environmental health are less likely to be tolerated in the future.

15

02

mINd thE (REaLIty) gap Political, crime and security risks

16

Environmental risks – a balancing act for business

19

The ‘selective invisibility’ of natural hazards

20

Lloyd’s

Risk Index 2011

16

SECTION two

mind the (reality) gap Mind the (reality) gap Risks from three of the five categories do not feature at all in the Index top ten; these are ‘political, crime and security’, ‘environmental and health’ and ‘natural hazard’. Indeed, natural hazard risks are exclusively found in the bottom ten of the Index. In focusing so much on the most visible and regularly encountered types of risk, are businesses making themselves more vulnerable to statistically rarer but, potentially, more dangerous risk? Some of these low probability, high impact events are the ones which actually have the power to devastate businesses, but their lower frequency means businesses may be less likely to focus on them.

Political, Crime and Security risks Chart 4

political, crime and security risk priority and preparedness scores Overall

5.4 6.5

Cyber attacks (malicious)

5.3 6.0

Theft of assets/intellectual property

5.2 6.1

Fraud and corruption

5.2 6.3

Cyber risk (non-malicious)

5.1 6.2

Strikes/industrial action

4.2 5.8

Piracy

3.9 5.6

Terrorism

3.9 5.0

Riots and civil commotion

3.7 5.1

Expropriation of assets

3.4 5.2

Priority

Abrupt regime change

3.3 4.8

Preparedness

Score – out of 10

Lloyd’s

0

1

2

3

4

5

6

Risk Index 2011

7

17

uNREst acRoss thE gLobE The 2009 survey put the risk of abrupt regime change at 40 out of 41, riots and civil commotion at 38 and terrorism at 31. The Arab Spring of 2011, which ousted regimes in Tunisia, Egypt and Libya and created fuelled growing opposition to regimes in Syria, Yemen, Bahrain and other Middle Eastern states is changing the political landscape of the region and has helped drive oil prices upwards temporarily. Yet the Index shows the perception of the risk of abrupt regime change has, if anything, dropped slightly down the list. The deepening financial crisis in the eurozone has seen public protests and strikes in Greece, Spain and Italy. Although not directly attributed to the economic downturn, in the UK looting and rioting erupted in major cities during the summer.

Other risks are also contributing to the likelihood of unrest. Sovereign debt (which came in fairly low down the Index at number 25) leads directly to volatile markets and low investment yields, while civil unrest leads to business continuity disruption and property damage. The Association of British Insurers, for example, estimate that the claims for the UK riots will top £200m, with bills for compensation adding at least another £133m to that total17. The growing sovereign debt crises of many European states will take years to fully resolve – continued austerity measures, which have already demonstrably led to unrest, seem likely. Despite this, riots and civil commotion only just escape the bottom ten of the Index, while strikes and industrial action come in at number 30 and sovereign debt at 25. More than ever, businesses need effective plans in place to protect their plant, infrastructure, property, staff and supply chains from the fallout of political, social and economic threat.

Chart 5

political risk priority and preparedness scores by industry

Priority

Preparedness

global

energy and natural resources

financial services

other industries

it and technology

manufacturing professional healthcare, services pharma and biotech

5.4

6.6 6.0 5.6 5.3 5.2

4.4

3.2

6.5 7.4 6.5 6.4 6.4 6.6 6.3 6.8 Score – out of 10

Lloyd’s

Risk Index 2011

18

SECTION two

mind the (reality) gap continued

Facing up to the cyber threat While many types of risk may be industry or regionally specific, cyber risk is universal. Yet its ranking in the overall Index at only 12 (malicious attacks) and 19 (non-malicious) appears relatively low given the frequency and potential impact of the risk. It is interesting, however, that this year the risk of malicious attacks did make it into North America’s top five risks. The evidence of the last two years is incontrovertible. So far, 2011 has seen the hacking of state networks from India to Brazil. For businesses, the incidence and frequency of data breaches have been even more unrelenting; Nintendo, CityGroup, Honda, Toshiba, Pfizer, Sony Playstation, Sega, Nokia, the Hong Kong Stock Exchange, Lockheed Martin and Google are just some of the known victims. Even the International Monetary Fund and Wiki-Leaks fell victim to hackers. The business costs of cyber breaches, whether malicious or otherwise, are mounting. Research published at the start of 2011 estimated global cyber crime is now costing businesses $114bn a year, $96bn of it in the US alone18.

The UK story may be typical of the problem. In 2010, a survey indicated that 90% of large businesses reported at least one cyber security incident in the previous two years19. Almost half of these businesses had increased their expenditure on information security, yet the number of breaches had more than doubled. Given the roll call of recent victims, even large businesses need to ask if they really understand the nature of the risk to which they are exposed. Are they, in fact, spending money on the right things? For smaller businesses the associated costs of a data breach could put their very sustainability at risk. Recognising this, in March 2011 Lloyd’s insurer Kiln and broker Lockton joined forces to provide cyber insurance to small and medium-sized online retailers. In a world where comparison sites now exist to help criminals select data theft software, cyber security threats have become ubiquitous. Technical solutions are needed that evolve more swiftly, together with improved reporting of breaches to help quantify the risk more accurately. In the interim, businesses should consider making the need to protect themselves and their customers a much greater priority.

Table 3. political, crime and security risks, 2011 ranking versus 2009* ranking Political, Crime and Security Risk Cyber attacks (malicious) Theft of assets/ Intellectual Property Fraud and corruption Cyber risk (non-malicious) Strikes and industrial action Piracy Terrorism Riots and civil commotion Expropriation of assets Abrupt regime change * In 2009 there were 41 risks whereas in 2011 there were 50.

Lloyd’s

Risk Index 2011

2011 RANK

2009 Ranking

12 16 17 19 31 34 36 39 43 45

Cyber attacks rated 20 18 15 Cyber attacks rated 20 28 27 31 38 35 40

19

Chart 6

Environmental risk priority and preparedness scores by industry Priority

Preparedness

GLOBAL

5.0

6.1

manufacturing

5.6

6.5

energy and natural resources

5.6

7.3

5.2

5.8

ENvIRoNmENtaL RIsKs – a baLaNcINg act FoR busINEss The last two years have provided ample evidence of the impact of environmental and related health risks. The contamination of the Alabama and Louisiana coastlines caused by the Deepwater Horizon disaster in 2010 is estimated to have cost BP up to $20bn in oil-spill fines. An explosion at the Japanese Fukushima nuclear plant in 2011 resulted in the evacuation of over 100,000 people and a 20km exclusion zone. These examples could hardly be starker and yet businesses barely registered a change in the priority ranking of ‘pollution and environmental liability’. That their preparedness scores were greater than their priority ranking may indicate a level of complacency around environmental risk. Aside from clean-up costs and compensation for affected communities, one of the emerging risks for Europe and other countries when it comes to environmental damage is the potential for US-style class actions. As the Lloyd’s report,

Litigation and business: transatlantic trends (2008)20 shows, there is a growing risk of ‘forum shopping’, where litigants choose the jurisdiction in which they launch their claim. Given that the risk of mass litigation varies across countries, businesses need to be fully aware of the rules and procedures governing class actions wherever they operate. Insurance for businesses and reinsurance for insurers is likely to play a much greater role as this trend develops and it becomes harder to predict where litigation may arise. New geographical frontiers of corporate liability are also opening up with the development, for example, of new, potentially riskier, means of energy production such as shale gas extraction and deep water drilling. The Lloyd’s 2011 report, Drilling in extreme environments21, highlights the emerging risks involved and ways in which these energy industry and insurers can work together to reduce the risks in operating in harsh environments, such as deep water and the Arctic.

financial services

table 4. environmental risks, 2011 ranking versus 2009* ranking Environmental Risk poLLutIoN/ENvIRoNmENtaL LIabILIty INdustRIaL/woRKpLacE accIdENt

other industries

dEmogRaphIc shIFt (Eg agEINg popuLatIoN, youth EmIgRatIoN) cLImatE chaNgE

5.0

6.0

paNdEmIc watER scaRcIty uRbaNIsatIoN popuLatIoN gRowth

healthcare, pharma and biotech

Food sEcuRIty haRmFuL EFFEcts oF NEw tEchNoLogy (Eg NaNotEchNoLogy, EmF) * In 2009 there were 41 risks whereas in 2011 there were 50.

4.7

7.3

professional services

4.4

5.8

4.1

5.3

IT and technology

Score – out of 10

Lloyd’s

Risk Index 2011

2011 Ranking

2009 Ranking

24 27 30 32 33 35 37 38 40 41

29 25 Not available 33 34 Not available Not available Not available Not available Not available

20

SECTION two

21

mind the (reality) gap continued

THE SELECTIVE INVISIBILITY OF NATURAL HAZARDS In the two years since Lloyd’s last undertook its risk survey, and despite all objective evidence to the contrary, natural hazards still remain at the bottom of the Index.

Chart 7

2010 and 2011 global natural hazards

2011

2010 saw major earthquakes strike Haiti, Chile, China and Indonesia. It saw devastating floods in Pakistan and Australia, fatal heatwaves and forest fires in Russia and the eruption of Iceland’s Eyjafjalljökull volcano, grounding flights across Northern Europe and North America. 2011 proved no better, with floods in Brazil, Sri Lanka and Australia, earthquakes in New Zealand, Japan and Turkey and tornadoes and hurricanes in North America.

2010

Even before the 2011 hurricane season ended, the amount paid out by insurers for the first six months of 2011 from natural catastrophes exceeded the total for the whole of 2010. It seems likely that 2011 will be the second most expensive year ever for the insurance industry22.

2011 2010

CANADA Slave Lake Wildfires

ICELAND Volcano

RUSSIA Heatwave, Forest Fires

CHINA Earthquake

US

*

Tornadoes

US #

US ^

US

EUROPE ¥

Hurricane Irene

Windstorm Xynthia

MEXICO Earthquake

Earthquake

Flooding

Wildfires

TURKEY

BURMA

JAPAN

Earthquake

Earthquake, Tsunami

HAITI GULF OF MEXICO

THAILAND

Earthquake

Floods

PAKISTAN Floods

HORN OF AFRICA

Tropical Storm Lee

Droughts

INDONESIA

PAKISTAN Earthquake

SRI LANKA

Earthquake & Tsunami

Floods

BRAZIL Floods, Mudslides

AUSTRALIA Floods

AUSTRALIA Floods, Cyclone Yasi

CHILE Earthquake

Lloyd’s

* Alabama, Mississippi, Missouri

# Texas

^ Mississippi

¥ Belgium, France, Germany, Portugal, Spain

Risk Index 2011

NEW ZEALAND Earthquake

NEW ZEALAND Earthquake

Lloyd’s

Risk Index 2011

22

sEctIoN two

mind the (reality) gap continued

When it comes to natural hazards, what happens in Japan doesn’t stay in Japan. Globalisation and extended supply chains mean that a Japanese tsunami can close a car factory in the UK – a fact reflected by the launch of new nuclear business interruption cover by Lloyd’s broker Willis after Fukushima. The interconnectedness of global trade means flooding, drought, windstorms and earthquakes have an immediate effect on supply chains as well as longer-tail impacts on a country’s debt infrastructure, import and export ability and even its political stability. Yet the Index shows Western business leaders continue to give the risks these hazards present low weightings. There is, perhaps, much greater scope for a more proactive partnership between science and planning models in managing the risks of natural hazards. In 2011, Italian scientists were

prosecuted for manslaughter by the Italian state for failing to provide sufficient warning of the severity of the L’Aquila earthquake in 200923. The final verdict will be awaited keenly by both the scientific community and by casualty and property insurers. It may be that the Western businesses approach to natural hazard risk still remains ‘out of sight, out of mind’. As the impacts of climate change accumulate, they may be failing to grasp the very real threats that natural catastrophes pose to business continuity. In the ongoing debate over whether climate change is man made or cyclical, businesses, planners and governments may be in danger of losing sight of the urgent need to prioritise mitigating against the effects of natural hazards.

Chart 8

Natural hazard risks priority and preparedness scores by industry global

4.3 5.5

energy and natural resources

5.2 6.2

financial services

4.7 5.4

other industries

4.6 5.7

manufacturing

4.1 5.4

it and technology

3.5 4.5

professional services

3.3 5.1

Priority

healthcare, pharma and biotech

3.1 5.9

Preparedness

0

Score – out of 10

1

2

3

4

5

6

7

Chart 9

Natural hazards risk priority and preparedness scores by region

EUROPE

3.4

REST OF the world

GLOBAL

4.7

4.3

REST OF the world

GLOBAL

EUROPE NORTH america

NORTH america

4.7

4.1 6.5

ASIApacific

5.8

ASIApacific

5.4

4.9

5.5 Priority Preparedness Score – out of 10

Lloyd’s

Risk Index 2011

23

03

RIsK awaRENEss RIsEs IN thE East An escalated appreciation of risk

Lloyd’s

24

Risk Index 2011

24

section three

Risk awareness rises in the East An escalated appreciation of risk Business leaders in the Asia-Pacific region have significantly raised their assessment of the seriousness of all five categories of risk since 2009. Business risks rise from a priority score of 6.5 in 2009 to 7.7 today, economic risks from 6.6 to 7.3, political risk from 5.0 to 6.1 and natural hazards from 4.3 to 5.4. The sharpest rise of all has been the perception of environmental risks, from 4.7 in 2009 to 6.0 today. While these rises tell a clear story of a region increasingly recognising risk, the Index findings also show a significant disparity between the scores given to top risks by European and North American respondents and those given by respondents in the Asia-Pacific region.

‘Loss of customers/cancelled orders’ is the number one risk for European and North American business leaders and the score they give it is 6.0 and 6.2 respectively. While the same risk ranks only fourth for Asia-Pacific respondents, they give it a score of 6.3. Similarly, while ‘reputational risk’ comes in as the second highest priority for North America it is given a score of 5.9. Despite this risk being placed fifth by Asia-Pacific respondents, they give it a higher score of 6.2.

Chart 10

top 5 priority and preparedness scores – Asia-pacific Talent and skills shortages

7.1 6.1

Currency fluctuation

6.5 6.2

Inflation

6.4 5.9

Loss of customers/cancelled orders

6.3 6.7

Priority

Reputational risk

6.2 7.1

Preparedness

0 1 2 3 4 5 6 7 8

Score – out of 10

Chart 11

Comparison of risk category scores by region

Lloyd’s

global

north america

europe

asiapacific

rest of the world

business

7.3 7.1

7.1 6.9

7.0 6.9

7.7 7.3

7.9 7.3

economic

7.2 6.5

7.2 6.5

7.2 6.4

7.3 6.8

7.3 6.3

political

5.4 6.5

4.8 6.7

5.0 6.2

6.1 6.8

6.9 6.4

environmental

5.0 6.1

4.5 6.3

4.5 5.9

6.0 6.6

5.2 5.1

natural

4.3 5.5

4.1 6.5

3.4 4.7

5.4 5.8

4.7 4.9

Risk Index 2011

Priority Preparedness Score – out of 10

25

Concern about talent and skills shortages, in particular, is considerably higher in Asia-Pacific than in the other regions of the world. 70% of Asia-Pacific respondents gave it a very high or high priority, against 42% for Europe, 45% for North America and 60% for the rest of the world. With this degree of priority, it is interesting that Asia-Pacific’s score for being ‘very’ or ‘well’ prepared against this risk is only 48%. This is the highest gap between priority and preparedness for this risk of any of the world’s regions. Having experienced a devastating year of natural catastrophes, it’s not surprising that the Asia-Pacific region gives the risk category ‘natural hazards’ the highest priority of all other world regions, with a score of 5.4. What is, perhaps, surprising is that respondents still believe they are slightly over-prepared for the risk at 5.8. Given that, for example, the claims made to the non-life insurance industry for damage caused by the Japanese earthquake and tsunami were $30bn and the total economic loss to the region has been estimated at nearer $100bn24, the belief in near-parity between risk priority and preparedness may be harder to justify.

Chart 12

overall risk categories priority scores 2011 versus 2009 – asia-pacific

Business

2011

2009

7.7 6.5

economic

political

environmental

natural

7.3

6.1 6.0

5.4

6.6

5.0

4.3

4.7

Score – out of 10

Lloyd’s

Risk Index 2011

26

conclusion

conclusion

Is it credible that so many boards across the world are adequately prepared for climate change, another volcanic ash cloud or a major earthquake?

By any standards, the two year period between 2009 and 2011 has been more than usually eventful. Exceptionally frequent and costly natural disasters, waves of political change across North Africa and the Middle East, and an escalating sovereign debt crisis in Europe have created new economic, political, environmental and social uncertainties. That the risk priorities of business leaders across the globe have changed is not surprising. What is more surprising is the general level of confidence, with some notable exceptions, that respondents show in their ability to deal with these risks. Whatever the trends or partial explanation, we come back to the fact that in 48 out of the 50 risks in the Index most respondents believe their preparedness for a particular risk outweighed its sense of priority. As a major international insurer we have to ask: do people feel better prepared, at least in part, because they have the option of insurance? It is interesting that levels of perceived preparedness increase in those areas where insurance is most readily available, such as natural hazards, and shrink in relation to areas where it is not, such as in preventing the loss of customers, eradicating sovereign debt or solving talent and skills shortages.

Lloyd’s

Risk Index 2011

Does the location of ‘insurable’ risks at the bottom of the Index suggest that the insurance industry is doing exactly what it aims to do – allowing the transfer of risks away from companies? If so, does this mean that insurers can congratulate themselves on a job well done? We believe this is premature. The wide take-up – in the West at least – of insurance to manage risks such as floods or earthquakes clearly has a positive impact on boards’ levels of preparedness. But neither insurers nor their clients can afford to be complacent about the risks presented by low probability – high impact events. Is it credible that so many boards across the world are adequately prepared for climate change, another volcanic ash cloud or a major earthquake? The terrible succession of events in Japan this year illustrates that, while insurance can help rebuild communities and infrastructure, it cannot stop our planet being battered by natural disasters. Nor, importantly, can it cover every eventuality. After the unfolding events of the last two years, businesses need to give much greater priority to planning carefully for the risks they cannot prevent, as well as being realistic about those they can.

27

appendix Annex 1: 2009 RISKS

2011 risks

>> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >>

>> Loss of customers/Cancelled orders >> Talent and skills shortages (including succession risk) >> Reputational risk >> Currency fluctuation >> Changing legislation >> Cost and availability of credit >> Price of material inputs >> Inflation >> Corporate liability >> Excessively strict regulation >> Rapid technological changes >> C yber attacks (malicious) >> High taxation >> Failed investment >> Major asset price volatility >> Theft of assets/Intellectual Property >> Fraud and corruption >> Interest rate change >> C yber risks (non-malicious) >> Poor/Incomplete regulation >> Critical infrastructure failure >> Government spending cuts >> Supply chain failure >> Pollution/Environmental liability >> Sovereign debt >> Increased protectionism >> Industrial/Workplace accident >> Energy security >> Insolvency risk >> Demographic shift (eg ageing population, youth emigration) >> Strikes and industrial action >> Climate change >> Pandemic >> Piracy >> Water scarcity >> Terrorism >> Urbanisation >> Population growth >> Riots and civil commotion >> Food security >> Harmful effects of new technology >> Flooding >> E xpropriation of assets >> Earthquake (including tsunami) >> Abrupt regime change >> Windstorm (eg hurricane, cyclone, typhoon) >> Drought >> Threats to biodiversity >> Impact of space weather (eg solar flares) >> Volcanic eruption (including ash)

Cost and availability of credit Currency fluctuation Insolvency risk Loss of customers Major asset price volatility Cancelled orders Risk of excessively strict regulation Corporate liability Reputational risk Project delivery risk Abrupt interest rate change Risk of poor/Incomplete regulation Increasing protectionism Failed investment Fraud and corruption Information security breach Price of material inputs Theft of assets/Intellectual property Rapid technological change Cyber attacks Workforce health Talent and skills shortages Supply chain failure Succession risk Industrial/Workplace accident Energy security Piracy Strikes Pollution (caused by business) Flooding Terrorism Currency inconvertibility Climate change (impact on business) Pandemic Expropriation of assets Earthquake Drought Riots and civil commotion Windstorm (eg hurricane or typhoon) Abrupt regime change Wildlife

Lloyd’s

Risk Index 2011

28

appendix

appendix continued

Directly comparable risks 2009 and 2011 >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >> >>

Abrupt regime change Corporate liability Cost and availability of credit Currency fluctuation Drought Energy security Excessively strict regulation Expropriation of assets Failed investment Flooding Fraud and corruption Increasing protectionism Industrial/Workplace accident Insolvency risk Major asset price volatility Pandemic Piracy Poor/Incomplete regulation Price of material inputs Rapid technological change Reputational risk Riots and civil commotion Supply chain failure Terrorism Theft of assets/Intellectual property Windstorm (eg hurricane, cyclone, typhoon)

New risks for 2011

Methodology

>> Changing legislation >> Critical infrastructure failure >> Demographic shift (eg ageing population, youth emigration) >> Food security >> Government spending cuts >> Harmful effects of new technology (eg nanotechnology, EMF) >> High taxation >> Impact of space weather (eg solar flares) >> Inflation >> Population growth >> Sovereign debt >> Threats to biodiversity and conservation affecting our operations >> Urbanisation >> Volcanic eruption (including ash) >> Water scarcity

The Lloyd’s Risk Index is based on results of a survey of 500 board level executives, carried out by the EIU in August 2011. Respondents rated, on a scale of one to five, how much of a priority each of the 50 risks will be to their business for the next year in the region they are based. On a similar scale they rated how prepared they expect their organisation will be to deal with that risk. Responses were converted to a one to ten index and averaged to calculate the priority and preparedness scores. The 2009 risk survey contained 41 risks and took place in March 2009. It surveyed 570 board level executives spread across major regions of the world.

Risks included in 2009 survey but removed for 2011 survey >> >> >> >> >>

Currency inconvertibility Information security breach Project delivery risk Wildlife Workforce health

Table 5. Risks which have changed for the 2011 survey 2009 risk definitions

2011 risk definitions

Abrupt interest rate change Cancelled orders Climate change (impact on business) Cyber attacks Earthquake Loss of customers Pollution (caused by business) Strikes Succession risk Talent and skills shortage

Interest rate change Loss of customers/cancelled orders (amalgamated) Climate change Cyber attacks (malicious) Cyber risk (non-malicious) Earthquake (including tsunami) Loss of customers/cancelled orders (amalgamated) Pollution/environmental liability Strikes and industrial action Talent and skills shortages, including succession risk (amalgamated) Talent and skills shortages, including succession risk (amalgamated)

Lloyd’s

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Annex 2: Chart 13

top 50 priority risk scores in 2011 – Asia-Pacific Risk

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Talent and skills shortage (including succession risk) Currency fluctuation Inflation Loss of customers/cancelled orders Reputational risk Fraud and corruption Changing legislation Interest rate change Corporate liability Excessively strict regulation Failed investment Price of material inputs Cost and availability of credit Poor/incomplete regulation Rapid technological changes Theft of assets/intellectual property High taxation Critical infrastructure failure Pollution/environmental liability Cyber attacks (malicious) Energy security Major asset price volatility Industrial/workplace accident Supply chain failure Demographic shift (eg ageing population, youth emigration) Sovereign debt Climate change Cyber risk (non-malicious) Increased protectionism Water scarcity Pandemic Urbanisation Piracy Insolvency risk Terrorism Government spending cuts Food security Flooding Earthquake (including tsunami) Population growth Strikes and industrial action Harmful effects of new technology (eg nanotechnology, EMF) Abrupt regime change Riots and civil commotion Expropriation of assets Drought Windstorm (eg hurricane, cyclone, typhoon) Threats to biodiversity and conservation affecting our operations Impact of space weather (eg solar flares) Volcanic eruption (including ash) 0

Score – out of 10

Lloyd’s

7.11 6.52 6.43 6.32 6.24 6.10 5.98 5.95 5.93 5.88 5.87 5.86 5.74 5.73 5.62 5.55 5.55 5.49 5.47 5.45 5.45 5.42 5.36 5.30 5.23 5.23 5.17 5.11 5.11 5.06 5.00 5.00 4.98 4.98 4.89 4.89 4.75 4.72 4.72 4.69 4.53 4.53 4.45 4.43 4.28 4.06 3.90 3.59 3.55 3.26

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appendix

appendix continued

Chart 14

top 50 priority risk scores in 2011 – europe Risk

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Loss of customers/cancelled orders Talent and skills shortage (including succession risk) Currency fluctuation Cost and availability of credit Changing legislation High taxation Reputational risk Failed investment Excessively strict regulation Corporate liability Inflation Price of material inputs Major asset price volatility Cyber attacks (malicious) Rapid technological changes Government spending cuts Sovereign debt Cyber risk (non-malicious) Theft of assets/intellectual property Fraud and corruption Interest rate change Critical infrastructure failure Poor/incomplete regulation Insolvency risk Supply chain failure Pollution/environmental liability Strikes and industrial action Industrial/workplace accident Increased protectionism Energy security Demographic shift (eg ageing population, youth emigration) Climate change Pandemic Piracy Riots and civil commotion Urbanisation Terrorism Water scarcity Population growth Expropriation of assets Harmful effects of new technology (eg nanotechnology, EMF) Abrupt regime change Food security Flooding Earthquake (including tsunami) Windstorm (eg hurricane, cyclone, typhoon) Threats to biodiversity and conservation affecting our operations Drought Volcanic eruption (including ash) Impact of space weather (eg solar flares) 0

Score – out of 10

Lloyd’s

6.00 5.66 5.53 5.34 5.33 5.20 5.18 5.12 5.12 5.06 5.01 4.99 4.97 4.94 4.94 4.90 4.88 4.82 4.80 4.77 4.69 4.57 4.56 4.56 4.54 4.32 4.32 4.26 4.22 4.12 3.95 3.73 3.68 3.55 3.45 3.45 3.40 3.28 3.16 3.13 3.06 3.01 2.99 2.91 2.59 2.57 2.49 2.38 2.27 2.24

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Chart 15

top 50 priority risk scores in 2011 – Rest of the world Risk

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Talent and skills shortage (including succession risk) Fraud and corruption Loss of customers/cancelled orders Currency fluctuation Reputational risk Price of material inputs Cost and availability of credit Inflation Failed investment Rapid technological changes Corporate liability Critical infrastructure failure Changing legislation Excessively strict regulation Supply chain failure Major asset price volatility Poor/incomplete regulation Energy security Cyber risk (non-malicious) High taxation Theft of assets/intellectual property Increased protectionism Cyber attacks (malicious) Interest rate change Pollution/environmental liability Industrial/workplace accident Riots and civil commotion Water scarcity Urbanisation Climate change Strikes and industrial action Insolvency risk Government spending cuts Food security Demographic shift (eg ageing population, youth emigration) Population growth Terrorism Pandemic Flooding Expropriation of assets Sovereign debt Harmful effects of new technology (eg nanotechnology, EMF) Piracy Abrupt regime change Earthquake (inc. tsunami) Drought Threats to biodiversity and conservation affecting our operations Windstorm (eg hurricane, cyclone, typhoon) Volcanic eruption (including ash) Impact of space weather (eg solar flares) 0

Score – out of 10

Lloyd’s

6.94 6.18 6.16 6.11 6.11 5.75 5.56 5.52 5.51 5.46 5.42 5.42 5.37 5.37 5.28 5.23 5.14 5.09 5.05 4.95 4.91 4.90 4.81 4.81 4.81 4.76 4.72 4.53 4.38 4.33 4.25 4.21 4.21 4.10 4.10 4.01 3.98 3.96 3.61 3.44 3.43 3.37 3.35 3.30 3.24 3.11 2.59 2.13 1.94 1.90

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risk index 2011

appendix continued

Chart 16

top 50 priority risk scores in 2011 – north america Risk

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Loss of customers/cancelled orders Reputational risk Changing legislation Cyber attacks (malicious) Price of material inputs Talent and skills shortage (including succession risk) Rapid technological changes Cost and availability of credit Corporate liability Theft of assets/intellectual property Major asset price volatility Cyber risk (non-malicious) Excessively strict regulation Government spending cuts High taxation Inflation Poor/incomplete regulation Interest rate change Currency fluctuation Supply chain failure Failed investment Critical infrastructure failure Increased protectionism Pollution/environmental liability Fraud and corruption Demographic shift (eg ageing population, youth emigration) Sovereign debt Industrial/workplace accident Insolvency risk Energy security Strikes and industrial action Population growth Windstorm (eg hurricane, cyclone, typhoon) Piracy Pandemic Terrorism Climate change Harmful effects of new technology (eg nanotechnology, EMF) Water scarcity Flooding Food security Urbanisation Earthquake (including tsunami) Drought Riots and civil commotion Expropriation of assets Threats to biodiversity and conservation affecting our operations Impact of space weather (eg solar flares) Abrupt regime change Volcanic eruption (including ash) 0

Score – out of 10

Lloyd’s

6.18 5.94 5.71 5.63 5.54 5.51 5.46 5.35 5.35 5.34 5.33 5.30 5.22 5.22 5.13 5.09 4.93 4.83 4.70 4.67 4.67 4.59 4.54 4.42 4.41 4.40 4.31 4.25 3.99 3.93 3.82 3.69 3.63 3.61 3.56 3.56 3.53 3.52 3.43 3.37 3.23 3.21 2.99 2.93 2.91 2.83 2.70 2.57 2.57 1.95

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Chart 17

top 50 preparedness scores in 2011 – asia-pacific Risk

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Reputational risk Corporate liability Industrial/workplace accident Loss of customers/cancelled orders Fraud and corruption Cost and availability of credit Insolvency risk Theft of assets/intellectual property Failed investment Rapid technological changes Pollution/environmental liability Supply chain failure Cyber attacks (malicious) Piracy Cyber risk (non-malicious) Critical infrastructure failure Currency fluctuation Energy security Talent and skills shortage (including succession risk) Demographic shift (eg ageing population, youth emigration) Interest rate change Increased protectionism High taxation Strikes and industrial action Government spending cuts Poor/incomplete regulation Inflation Major asset price volatility Population growth Excessively strict regulation Price of material inputs Urbanisation Changing legislation Expropriation of assets Sovereign debt Terrorism Pandemic Climate change Abrupt regime change Water scarcity Food security Riots and civil commotion Flooding Earthquake (including tsunami) Harmful effects of new technology (eg nanotechnology, EMF) Windstorm (eg hurricane, cyclone, typhoon) Drought Threats to biodiversity and conservation affecting our operations Volcanic eruption (including ash) Impact of space weather (eg solar flares) 0

Score – out of 10

Lloyd’s

7.06 6.89 6.73 6.67 6.60 6.48 6.48 6.45 6.35 6.35 6.35 6.31 6.28 6.26 6.23 6.22 6.15 6.09 6.09 6.07 6.05 6.00 6.00 6.00 5.98 5.91 5.90 5.86 5.81 5.76 5.76 5.73 5.70 5.70 5.68 5.66 5.57 5.51 5.51 5.47 5.38 5.38 5.32 5.19 5.19 4.74 4.70 4.62 4.36 4.34

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risk index 2011

appendix continued

Chart 18

top 50 preparedness scores in 2011 – europe Risk

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Reputational risk Corporate liability Cost and availability of credit Loss of customers/cancelled orders Cyber risk (non-malicious) Insolvency risk Fraud and corruption Industrial/workplace accident Cyber attacks (malicious) Failed investment Currency fluctuation Talent and skills shortage (including succession risk) Theft of assets/intellectual property Rapid technological changes Supply chain failure Interest rate change Critical infrastructure failure Energy security Pollution/environmental liability Strikes and industrial action Price of material inputs Excessively strict regulation Major asset price volatility High taxation Government spending cuts Changing legislation Inflation Piracy Increased protectionism Sovereign debt Poor/incomplete regulation Urbanisation Expropriation of assets Demographic shift (eg ageing population, youth emigration) Riots and civil commotion Flooding Food security Climate change Water scarcity Terrorism Pandemic Harmful effects of new technology (eg nanotechnology, EMF) Population growth Abrupt regime change Windstorm (eg hurricane, cyclone, typhoon) Threats to biodiversity and conservation affecting our operations Drought Earthquake (including tsunami) Volcanic eruption (including ash) Impact of space weather (eg solar flares) 0

Score – out of 10

Lloyd’s

6.26 6.17 6.13 6.11 6.10 6.09 5.94 5.90 5.90 5.86 5.83 5.81 5.81 5.80 5.80 5.75 5.67 5.54 5.54 5.52 5.52 5.45 5.38 5.25 5.25 5.23 5.09 5.09 4.85 4.81 4.78 4.75 4.69 4.68 4.54 4.52 4.51 4.49 4.48 4.47 4.46 4.46 4.38 4.26 3.92 3.85 3.71 3.68 3.65 3.33

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Chart 19

top 50 preparedness scores in 2011 – rest of the world Risk

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Cost and availability of credit Corporate liability Reputational risk Fraud and corruption Supply chain failure Interest rate change Loss of customers/cancelled orders Failed investment Critical infrastructure failure Industrial/workplace accident Energy security Theft of assets/intellectual property Rapid technological changes Cyber attacks (malicious) Major asset price volatility Price of material inputs Talent and skills shortage (including succession risk) Insolvency risk Cyber risk (non-malicious) Poor/incomplete regulation Strikes and industrial action Currency fluctuation Excessively strict regulation Changing legislation Inflation Piracy High taxation Increased protectionism Government spending cuts Sovereign debt Flooding Riots and civil commotion Terrorism Food security Population growth Expropriation of assets Pollution/environmental liability Urbanisation Earthquake (including tsunami) Water scarcity Abrupt regime change Demographic shift (eg ageing population, youth emigration) Drought Climate change Windstorm (eg hurricane, cyclone, typhoon) Harmful effects of new technology (eg nanotechnology, EMF) Pandemic Threats to biodiversity and conservation affecting our operations Volcanic eruption (including ash) Impact of space weather (eg solar flares) 0

Score – out of 10

Lloyd’s

6.81 6.79 6.76 6.60 6.34 6.20 6.16 6.11 5.88 5.87 5.83 5.79 5.74 5.69 5.65 5.65 5.65 5.65 5.61 5.60 5.58 5.46 5.46 5.46 5.37 5.37 5.23 5.05 5.05 5.00 4.86 4.81 4.54 4.43 4.41 4.39 4.38 4.33 4.31 4.10 4.06 4.04 3.84 3.61 3.58 3.56 3.27 3.21 2.69 2.27

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appendix

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Chart 20

top 50 preparedness scores in 2011 – north america Risk

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Corporate liability Reputational risk Cost and availability of credit Fraud and corruption Cyber risks (non-malicious) Rapid technological changes Insolvency risk Cyber attacks (malicious) Interest rate change Theft of assets/intellectual property Strikes and industrial action Loss of customers/cancelled orders Industrial/workplace accident Major asset price volatility Supply chain failure Failed investment Talent and skills shortage (including succession risk) Currency fluctuation Pollution/environmental liability Energy security Flooding Critical infrastructure failure Price of material inputs Excessively strict regulation Inflation Piracy Expropriation of assets Poor/incomplete regulation Increased protectionism Population growth High taxation Sovereign debt Riots and civil commotion Demographic shift (eg ageing population, youth emigration) Urbanisation Windstorm (eg hurricane, cyclone, typhoon) Government spending cuts Changing legislation Water scarcity Abrupt regime change Terrorism Drought Climate change Earthquake (including tsunami) Harmful effects of new technology (eg nanotechnology, EMF) Pandemic Threats to biodiversity and conservation affecting our operations Food security Volcanic eruption (including ash) Impact of space weather (eg solar flares) 0

Score – out of 10

Lloyd’s

6.67 6.52 6.42 6.41 6.41 6.38 6.21 6.17 6.15 6.15 6.15 6.15 6.11 6.07 6.06 6.01 6.00 6.00 5.98 5.97 5.93 5.91 5.88 5.81 5.72 5.69 5.65 5.60 5.58 5.55 5.53 5.47 5.47 5.47 5.40 5.32 5.28 5.26 5.25 5.23 5.22 5.13 5.10 5.04 5.00 4.90 4.87 4.85 4.53 4.44

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references References: 1. Lloyd’s 360 Risk Insight. ‘Global Business Leader Survey: Risk Priorities and preparedness’. www.lloyds.com 2. ISAE Italian Index of Consumer Confidence, October 2011 3. Insee Index of business confidence, September 2011 4. Conference Board sentiment index, September 2011 5. Federal Reserve Bank San Francisco Economic Letter, January 2010 6. Chinese Ministry of Industry and Information Technology, August 2010 7. www.theengineer.co.uk, March 2011 8. Dan Karpenchuk, ABC Australia, May 2011 9. nexxt.org 10. Andrew Monahan et al, Wall Street Journal, wsj.com, February 2011 11. Keidanren Growth Strategy 2011, www.keidanren.or.jp 12. Oxford Metrica Reputation Review, 2010 13. http://www.guardian.co.uk/business/2011/feb/03/ shell-nigeria-analysis-environmentalist-criticisms, http://www.globalsecurity.org/military/world/war/ nigeria-2.htm 14. Martin Feldstein, China Daily, March 2011, www.chinadaily.com.cn 15. Financial Markets Law Committee, October 2011, www.fmlc.org 16. China.org.cn, June 2011 17. BBC, August 2011, Insurance Daily, August 2011, www.insurancedaily.co.uk 18. Symantec Internet Security Threat Report Volume 16, Sept 2011 19. PwC Information Security Breaches Survey 2010, www.pwc.co.uk 20. Lloyd’s and RAND, Litigation and business: transatlantic trends, 2008, www.lloyds.com 21. Lloyd’s, Andrew Rees, David Sharp, Drilling in Extreme Environments, 2011, www.lloyds.com 22. Munich Re 2011 half-year natural catastrophe review, http://www.munichre.com/app_pages/www/@res/pdf/ media_relations/press_dossiers/hurricane/2011-halfyear-natural-catastrophe-review-usa_en.pdf 23. ‘Scientists in the dock’, The Economist, September 2011 24. RMS (www.rms.com), EQECAT (www.eqecat.com) and AIR Worldwide (www.air-worldwide.com) estimates, April 2011

Disclaimer Except for the Executive Summary (pages 3-8), which was written by the Economist Intelligence Unit (EIU), the Lloyd’s Risk Index has been prepared by Lloyd’s based upon the results of a survey carried out for Lloyd’s by the EIU in August 2011 and is published for general information purposes only. While care has been taken in producing this document, Lloyd’s does not make any representations or warranties as to its accuracy or completeness and accepts no responsibility or liability for any loss occasioned in reliance upon it.

Lloyd’s

Risk Index 2011

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