Allianz: business interruptions remain major concern

Business interruptions remain a major concern as companies are challenged to build resilience and diversify their supply chains in a rapidly changing world. In the Allianz Risk Barometer 2024, interruptions rank second only to the closely linked danger of cyber incidents. Business interruptions are also in the top three risks for companies of all sizes and is the second biggest concern in the Americas, Europe, Asia-Pacific, and Africa and the Middle East.

As almost all companies depend on supply chains for critical products and services, business interruption and supply chain disruption remain very important risk factors, states Marianna Grammatika, Head of Risk Consulting at Allianz Commercial. The extent of the interruption is the decisive factor. “Some industry sectors operate supply chains that have vast geographical footprints.”

The prominent role of business interruptions in the new Allianz Risk Barometer also reflects the volatile environment in which companies currently operate, according to Alberto Barani, Business Interruption Group Leader at Allianz Commercial. “We live in a highly interconnected world. Despite efforts to improve resilience, the need for efficiency means that many companies still operate with low inventory levels and just-in-time production, resulting in little margin for error or disruption.”

Companies better prepared

According to Allianz, since the coronavirus pandemic, companies are much better prepared for business interruptions or supply chain events. “Before COVID-19, companies generally had a wait-and-see attitude. Now they are much more aware of critical threats and the need to diversify and protect critical points. If a company is aware of business disruptions and supply chain vulnerabilities, it is better prepared and can respond more smartly and more knowledgeably,” Grammatika says.

The Allianz Risk Barometer shows that companies are most likely to seek alternative suppliers when taking action to reduce risk in their supply chains (60% of responses), followed by improving business continuity management (42%) and identifying and resolving supply chain bottlenecks (37%). However, smaller companies and those in specialized and high-value sectors are more limited in what they can do to diversify their supply chains.

“Companies still have a number of options to reduce their exposure to risk. These may include changing the business model. If this is not feasible, there may be options to reconfigure the supply chain; some sectors are highly concentrated on a small number of suppliers or locations. For others, the cost of increasing redundancies or relocating suppliers is just too high,” Grammatika claims.

Main causes of business interruptions

Cyber incidents and natural disasters are the business disruptions companies fear most, followed by fire and machinery/equipment failures. However, almost any hazard can cause disruptions. Business disruptions are closely linked to many of the other top global risks in this year’s Allianz Risk Barometer, such as climate change (in 7^th place), political risks and violence (8th), skills shortages (10th), energy crisis (11th) and the impact of new technologies (12th), to name but a few.

“The global risk landscape is constantly changing due to climate change, digitalization and geopolitics. Some risks are dormant, but a significant change in geopolitics or events such as extreme weather patterns can very quickly change the predominant risks,” Grammatika continues.

The recent trouble caused by Houthi rebels’ attacks on ships in the Red Sea is the latest risk affecting supply chains. More than 400 container ships were diverted through the southern tip of Africa between mid-December 2023 and early January 2024 as a result of attacks on this key trade route between Europe and Asia. As a result, journeys took longer and product deliveries were delayed.

But natural disasters, fires and explosions can also lead to major losses due to business interruptions and supply chain disruption. Severe flooding in Slovenia in August, for example, led to one of the biggest supply chain disruptions of 2023, resulting in production delays and parts shortages for European carmakers. And a fire at a major liquefied natural gas plant in the US earlier this year is likely to amount to one of the biggest interruption-related losses for the energy sector in recent times.

Emerging risks

Companies in this year’s survey also cited business interruption as their biggest business concern in the face of climate change impacts. However, business interruptions related to climate change go beyond physical damage from storms and floods. Extreme weather or climate events can have a widespread impact, causing economic hardship and political and social unrest, as well as disrupting logistics and production. For example, a severe drought restricted transit through the Panama Canal in the final months of 2023, causing congestion and delays of up to two weeks.

Climate change also has an indirect effect, as decarbonization creates new supply chains. “Emerging supply chains related to the energy transition have already been labelled as geographically concentrated because they rely on elements that can only be found in a select few regions of the world,” Grammatika states. According to her, countries are looking for critical stocks of the technology and rare Earth materials needed to enable transitional technology and renewable energy sources. However, political risks can also cause disruptions and are more difficult to mitigate.

“Geopolitical risks are a growing concern for companies in supply chains for emerging energy and technology, as well as high-value sectors such as technology and artificial intelligence. Producers of rare Earth materials are often located in the most underdeveloped and politically unstable areas and are exposed to environmental, social and governance (ESG) risks such as modern slavery, human rights and deforestation.”

Testing business continuity plans

In a fast-changing world, companies also need to conduct regular audits of systems and test their business continuity plans. Grammatika: “There are always organizational changes in companies. There have to be systems in place to manage those changes.” Those who have not yet implemented business continuity management (BCM) should at least conduct a business impact analysis and risk assessment in the company, Barani adds. “For those who have already BCM embedded in the business, it is vital that they regularly review, update and test these plans, otherwise they will not be able to respond if a crisis breaks out.”