What is worrying Aussie businesses in 2020 and why

If 2020 has taught us anything, it’s that things are getting more unpredictable in the business world. Where we were once secure in our knowledge of what the risks were and where they lay, we now have no idea of what will be thrown at us or when.

In the recently released World Economic Forum’s survey Regional Risk for Doing Business 2020, the top five risks that Australian businesses felt were (in order):

  1. Cyber attacks
  2. Spread of infectious disease
  3. Fiscal crises
  4. Energy price shocks
  5. Extreme weather events.

Interestingly, the top three are intertwined to an extent – with one likely affecting the others.

Why are these things on the list?

So, what do I think about this list? In the past, I haven’t taken this survey too seriously because we address these factors with our clients anyway. But infectious disease at number two, that’s a new one.

Further, the fears around most of the list are media-driven, and yet Alleviate Risk isn’t witnessing or experiencing any broad pessimism across the economy. In fact, banks are even starting to make it a little easier to borrow money. Of course, the banks still prefer to lend to those who seem like more of a safe bet.

Now, while a pandemic was always a possibility, no one could have forecast its timing or magnitude with any precision. Nonetheless, all businesses should still have prepared for catastrophic upsets to their standard operations. That’s just good risk management.

For me, the current situation brings to mind the ‘presilience’ concept that risk expert Dr Gav Schneider has talked about for years. In simple terms, the concept states that the more effort you put into preventing and preparing for something bad to happen (regardless of how unlikely it is to happen), the more effective your response to recovery will be.

Given what 2020 has thrown at us, I can’t stress enough how important it is for businesses to be prepared for the probable sources of business upset in the future. So, let’s have a look at some of these risks in more detail.

Fiscal crises and the spread of infectious disease

These two risks largely go hand-in-hand given the pandemic triggered fears of a second GFC. At the best of times, I encourage businesses to be innovative and agile enough to change when things don’t go the way they should to minimise financial fallout.

However, when things do not go for the best, businesses must realise they can’t just sit back and rely on their insurance, because insurance isn’t as easy to come by as it once was.

Most insurance policies now are quite inflexible – largely the result of living in an increasingly unpredictable world. Why? One of my theories is that there’s so much more data available that the modelling used by insurers is becoming highly accurate.

This increased level of accuracy allows insurers (and their re-insurers) to reduce their exposure significantly. Risks they may have accepted in the past are, they now see, mathematically no longer worth taking on.

The businesses prone to presenting those risks now need to think about transferring them and/or finding ways to alleviate them as best they can. Some may choose to pass on costs to the end-user or to ‘self-insure’ – have enough money in the bank to cover the costs of an incident.

Making hay while the pandemic rolls on

Yes, there are sectors that haven’t suffered in the current conditions – such as postage, online retailers, alcohol retailers and food delivery providers, etc. They have actually thrived in the face of the pandemic and largely dodged the resulting financial fallout.

So, while it all looks good for them financially, how about their processes and general way of doing business? Yes, they have plenty of business, but can they cope with the increase in demand? Can they keep up with new, competing businesses that are well equipped to deal with these increases? These factors come into play at some point and this is where ‘presilience’ measures are needed.

Since about March this year, most businesses have been at action stations working out how to maintain operations throughout the pandemic. Many office-based businesses have had to implement a model where most of their staff work from home. That’s what I’ve done in my own business: my staff are rarely on-premises anymore.

As a risk manager, I already had a general ‘bug out’ plan in place prior to COVID-19. As such, our transition to work-from-home wasn’t disruptive. Unfortunately, this wasn’t the case for many.

I know that not all businesses can transfer their operations offsite, but they can still adapt to the changing situation. Cafes and restaurants are a perfect example. When lockdowns were enforced, dine-in service was off the table (pardon the pun). In response, the smart cafes and restaurants started offering take-away and delivery. They made the most of a dire situation.

Fears over cybersecurity

While financial ups and downs are a priority, the survey surprisingly found that cyber-attacks are the leading concern. I think there’s a good reason for this: with so many businesses now operating remotely, the opportunities for cybersecurity breaches have dramatically increased.

Ransomware is a particular concern for businesses that aren’t maintaining enough security in their systems. You’d be amazed at how often Alleviate Risk reviews a client’s systems to find that they aren’t up to scratch. The questions go like this:

Us: Do you back-up?
Client: Yes.
Us: Do you test your back-ups?
Client: I’ll check on that.
Us: Can we get a report of the last back-up you did?

When these tests are undertaken, things often get a little shaky. Most clients leave testing up to their IT people and when we ask for a report of the latest back-up, they admit they’ve never done one before. And when we review the report, the clients are shocked that the tests failed. They think they’re covered but their back-ups are losing data.

How to handle extreme weather

Extreme weather events came in at number five. Yes, they scare everyone, but perhaps that fear isn’t spurring people to undertake risk mitigation. For example, we’ve been told over and over that the 2020 Australian summer will feature La Nina weather patterns – rain, flooding, storms, wind and so on.

Businesses are hearing it, but they’re not doing anything about it. Everyone’s distracted by COVID-19, so no-one’s thinking about how to become resilient when wild weather rolls in.

Example: a few weeks ago, the Brisbane suburb of Springfield Lakes was hit with hailstones large enough to smash right through tiled rooves. Everyone was warned that La Nina would probably bring this sort of fury, but how many people made contingency plans?

These plans don’t need to be elaborate, they just need to exist and be effective. It can be as simple as asking “how will we get the kids home from school if there’s a hailstorm coming that could destroy the car?”

An unpredictable future doesn’t equal a powerless present

This year, 2020, has seen quite a few things reaching critical tipping points: disastrous bushfires, geopolitical turbulence in the US, increasing technological advancements and a series of weird weather events.

However, I argue all of these could have been predicted in general … if not in particular. And a general sense of the likelihoods is more than enough to go on when you’re mitigating your risks.

John Doyle, the CEO of global risk experts Marsh, has observed that the COVID-19 crisis has shone a spotlight on the topic of organisational resilience.
“As firms look to the future, they are matching their risk and resilience arrangements with a threat landscape marked by significant customer and workforce behavioural shifts,” Doyle says.

“To optimise recovery, organisations will need to build greater preparedness into their business models in order to be more resilient in the face of future disruptions.”

I couldn’t agree with this quote more. If 2020 has taught us anything, it’s that the global pandemic has exposed the fragility of the economy. In a lot of cases, it has given people a wake-up call and the realisation that perhaps their business is not as resilient as they thought.

Businesses need to think about alternative ways to manage risk or seek advice on how to mitigate the risk entirely.

Choosing what to do about the risks you know about – and the ones you don’t yet know about – isn’t always straightforward. At the very least, you should minimise your known-unknowns and unknown-unknowns. I mean, compare the cases: what can you do when you’re caught out by surprise versus what can you do if you’ve got a contingency plan?

Why are my insurance premiums going up?

“Is my insurer gouging me just because they can?” A lot of people have been asking this through 2019 as the effects of the insurance industry’s flip from a buyer’s market to a seller’s market has hit home.

The usual follow-up questions are something like: “What reason could my insurer have for increasing my premiums? My business hasn’t become any riskier!”

To give you an answer, there’s a few things to know about the current state of insurance:

  1. The insurance industry runs on multi-year price cycles: right now premiums are trending upwards.
  2. Natural disasters are increasingly less predictable both in occurrence and severity. This randomness combined with rising rebuilding costs, means insurers are paying larger claims more often.

For example, since August, roughly 700 buildings and 2 million hectares of countryside have been destroyed in bushfires nationwide. At the time of writing, there are still hundreds of bushfires ablaze across Australia. Further, if you cast your mind back, 2019 began with cyclones, hailstorms and widespread flooding.

The overall result for insurers? Difficult market conditions.

Insurers are like you and your business in that they transfer their risk by “buying insurance” for catastrophic events, like bushfires, where they’d have to pay out a lot of claims. This is called reinsurance. And reinsurance premiums are on the rise. This raises the operating costs for insurers, so insurers are passing on the price rises in response.

This article will look at how these factors are affecting your premiums and what you can do about it.

Insurers are feeling the squeeze too

A decade ago, the insurance market was hot: lots of providers and lots of capacity to take on risk – a buyer’s market. From the perspective of a business needing insurance, it was cheap and easy to transfer risk to a contract of insurance.

And so insurers were selling a lot of policies. As a result of the sheer number sold, the gross volume of claims also rose. I’m in no way implying that insurers are incompetent at estimating risk, just that a percentage of policies will always yield claims somewhere down the line. More policies, more claims.

This trend caused the market to slow and then gradually reverse. The wheel has now turned to the current situation where the reinsurers (the ones backing insurers) have tightened their criteria.

These industry heavyweights are getting pickier when it comes to who and what they insure. Some are leaving certain business sectors entirely.

As a result, insurers are facing higher operating costs and have fewer and pickier reinsurers to turn to. All of this is now combined with a generally lower risk appetite across the economy. Therefore, the insurance industry is now a seller’s market.

It means insurers are heavily scrutinising risks for exposure and pricing their premium models accordingly. In other words, if you have a high likelihood of making a claim, you’re going to be paying substantial premiums. Some are arguing this approach is, by far, a fairer way of pricing risks.

This is nonetheless bad news for anyone who is:

  1. Located in a high-risk area: For example, if you’re insuring a combustible structure in a bushfire-prone area, your premiums are going to be astronomical.
  2. In a high-risk business: Getting insurance for, say, a jumping castle business has always been difficult. These days, it’s almost impossible unless you have a broker who knows their stuff.
  3. Offering insurance services and advice: Brokers (such as myself) have a smaller pool of insurers to utilise. The competition is just not there anymore.

The good news in all this? The insurance industry is cyclical. While premium increases might be stinging you now, they won’t keep rising forever. Eventually, the buyer’s market of 10 years ago will return.

Caught short by natural disasters

I’m not getting into the climate change debate, but the fact is that insurers are paying out more on natural disaster claims these days. The 2019 bushfire season is now in its fifth straight month of devastation. And it’s fairly likely that 2020 will open with a cyclone or two.

While the overall number of natural disasters does not seem to be rising, their intensity has. And we certainly hear more about it all on the news and social media than ever before. Worse disasters and more coverage seems to be a global trend. What it means is instead of, say, three small fires generating 100 claims each, we get one big fire that generates 1000 claims.

It’s no surprise that insurers are analysing their risks carefully. To protect themselves while they do so, everyone in certain industries or who faces a certain type of risk has been painted with the same brush. I am already seeing people having problems insuring any properties above the 24th parallel – roughly Seventeen Seventy and north.

Of course, insurers have funds to cover natural disaster payouts. The problem is that they’ve been unprepared for the higher rate of claims per disaster. In turn, the reinsurers are pressuring insurers to increase premiums for customers.

To illustrate the pressure insurers are under to increase rates, a commercial insurer recently told me that their actuaries now say that if an insurer is winning more than 80 percent of the quotes they make to brokers, then their premium rates are too low.

Caught in the middle of all this, what’s an insurer to do? Do they:

  1. Raise premiums?
  2. Scrutinise exposures?
  3. Limit coverate?

Well, they’re doing all three at once.

What you can do about rising premiums

Being an insurance customer in a market dominated by these patterns can make you feel powerless, but there are things you can do if you change the way you approach risk.

Remember when I said that it used to be easy and cheap to transfer risk to insurers and that now you can’t do that? What you should now do instead is engage with your risks. Control them, monitor them, track them and then use your risk-mitigation regime as leverage to get a better result when insuring the risks you can’t handle.

If you don’t know how to do all this, then get help from someone who has specific risk-management qualifications. With hundreds of billions of dollars wrapped up in the insurance industry worldwide, you shouldn’t be surprised to find that risk management is a field of intense academic, scientific and economic research.

So look for people with bona fide qualifications.

Do it right and you won’t be paying to just insure your risks, you’ll be acting to alleviate your risks in the first place.

Here’s how I look at a business with my risk-mitigation hat on:

  1. Risk: Take a stock of every risk the business faces: operational, financial, economic, etc. Identify which risks can be mitigated.
  2. Reward: Once the areas of unnecessary risk exposure are found, begin mitigating them internally. This might mean you have to rejig your business model. This is actually a good thing, because it will make your business more robust.
  3. Repeat: The insurance industry’s conditions will change, so revisit your insurance strategy regularly. When you’re in a hardening market (like now) your job is to make your business more robust and appealing to a potential insurer. That is, to mitigate your risks and be able to prove it.

A risk professional can help you at each stage. Look to work with those who have real academic training and business experience.

There is also the option of doing nothing. However, we’ve seen premiums rise up to 400% in certain cases, so it’s virtually guaranteed you’ll be better off if you look at your options before your next bill … or worse, your next claim.

With your unmatched knowledge of your business and your risk-mitigation expert’s understanding of the wonderful world of insurance, together you’ll ensure you keep paying a fair price for the risks your business faces – no matter what the market does.

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