Allianz Risk Barometer 2023 -
Rank 2: Business interruption

Despite positive moves to diversify business models and supply chains since the pandemic, businesses continue to experience significant disruption around the world. Covid-19 came as a massive shock, creating global shortages, delays and higher prices, while the war in Ukraine triggered an energy crisis, turbocharging inflation.

Given the current 'permacrisis', business interruption and supply chain disruption (BI) ranks as the second top risk in this year's Allianz Risk Barometer (34% of responses), second only to cyber risk, with which it is closely interlinked and separated by only a few votes.

Indeed a number of BI-related risks have climbed this year's rankings, reflecting the economic and political consequences of the pandemic and war in Ukraine. The energy crisis is a new entrant to the 2023 survey, while concerns for macroeoconomic developments, political risks, shortages of labor and criticial infrastructure failure all increased this year. However, pandemic plunged down the list of concerns as vaccines saw an end to lockdowns and restrictions in most major markets. The exception? China sees pandemic risk rise year-on-year (from #9 to #3) - the only country in the survey to see this trend - following its recent easing of long-in-place restrictions.

Despite dropping in the rankings year-on-year, natural catastrophes and climate change remain major concerns for businesses. In a year that included Hurricane Ian, one of the most powerful storms recorded in the US, and record-breaking heatwaves, droughts and winter storms around the world, these perils still rank in the top seven global risks with storms, floods and extreme weather events at #3 when it comes to the most concerning triggers for BI.

It comes as little surprise that BI and supply chain risks dominate this year’s Allianz Risk Barometer, according to Marianna Grammatika, a Regional Head of Risk Consulting at AGCS. “Business interruption will always be a foremost concern given it is closely linked to profits and revenues and because business models are vulnerable to the geopolitical landscape. Lean supply chains are not always as good value as they appear and there can be a very high dependence on single geopolitical regions such as China for example for active pharmaceutical ingredients to processed lithium used in batteries, or Russia for energy.

“The biggest issue is whether organizations have the ability to transform their supply chain with local reinvestments for example or partners in safer geopolitical regions.”

2023 is likely to be another heightened year for BI and supply chain disruption, as companies navigate uncertain geopolitical, economic and climate risks, as well as long-term transformations, namely digitalization and decarbonization, according to Georgi Pachov, Head of Portfolio Steering & Pricing at AGCS.

“Businesses are now more vulnerable following recent macro-economic turmoil and the war in Ukraine, which triggered shortages and price increases in energy, food and certain raw materials. The conflict added further pressure to supply chains already struggling with post-pandemic disruption, such as shortages in semi-conductors, which have yet to fully recover.

“How the war in Ukraine evolves, whether it ends or escalates, will have a severe impact on potential disruptions going forward. A number of countries, industries and companies have not yet found sustainable alternative sources for certain raw materials, while there is no easy solution for the energy crisis in the medium term.”

As well as ranking as the fourth top risk globally, the energy crisis is the second most concerning cause of interruption (35%) for companies, given its potential to cause further widespread disruption. The skyrocketing cost of energy has forced some energy-intensive industries to temporarily cut production, find energy efficiencies, or move production to alternative locations. The resulting shortages threaten to cause supply disruption across a number of critical industries, including food, agriculture, chemicals, pharmaceuticals, construction and manufacturing, forcing companies to seek alternatives or cheaper sources of ingredients and raw materials.

Some industries, such as chemicals, fertilizers, glass, and aluminum manufacturing, can be reliant on a single source of energy – Russian gas in the case of many European countries – and are therefore vulnerable to disruption to energy supply or price increases.

“Because the energy crisis is affecting upstream energy-intensive industries, the repercussions are also felt further down the value chain,” says Grammatika. These industries produce key intermediates which are then processed downstream.

With war in Ukraine and growing tensions elsewhere around the world, political risks and violence jumps three places to #10 overall in this year’s Allianz Risk Barometer. Such events can also be a significant cause of BI.

“The war in Ukraine has been an eye-opener,” says Pachov. “With many companies and supply chains dependent on energy, raw materials and goods from Russia and Ukraine, this has demonstrated how a conflict can result in shortages and price increases. The situation has raised awareness of the need to be more sophisticated in understanding which components and materials are critical and where they are sourced, as well as how to secure them.”

The combination of the war in Ukraine and Covid-19 has caused economic and financial market volatility, which looks set to continue into 2023. High inflation, and efforts by central banks to tame it, together with an energy crisis, have resulted in a cost-of-living crisis and the threat of recession. Inflation is a particular concern and has a direct relationship to the cost of BI, although this varies by industry sector.

“Inflation will affect business interruption exposures, especially in sectors that derive revenues from commodities or products that are seeing the biggest inflationary impact,” says Pachov. “Conversely, companies’ BI values may fall in sectors that are seeing reduced demand or squeezed margins in a high-inflation environment.”

The threat of recession is another likely source of disruption in 2023, with potential for supplier failure and insolvency, which is a particular concern for companies with single or limited critical suppliers. According to Allianz Trade, global business insolvencies are likely to rise significantly in 2023.

“Recession and inflation are a big source of uncertainty for companies, and a potential source of business interruption. Following the pandemic, some companies ramped up investment to meet the surge in demand. Now, if we see a recession and there is no market they might be in trouble, and this could have a huge impact in certain sectors, with a risk of supplier insolvency,” says Pachov.

The rising cost of living will also lead to an increased risk of disruption from strikes, riots and civil unrest in 2023: “Such events can disrupt industry, infrastructure and public services, affecting the ability of workers to get to work, as well as affecting production levels and transport,” Pachov concludes.