Fear of reputational risk rises
As global, interconnected risk becomes a reality, reputational risk is rising and business confidence is on the slide, according to a new survey by CNA Hardy.
“Reputation risk has emerged as the new threat that stalks the corridors of power.”
The insurer’s 2019 Global Risk & Confidence Survey identified a clear east-west divide in terms of confidence. While optimism has fallen among executives leading European, UK and North American businesses, it continues to rise in Asia-Pacific.
Ongoing discussions regarding how the UK is to exit the EU are having a markedly negative impact on business confidence on both sides of the English Channel. In the UK, only 36 percent of leaders are confident in the ability of their firm to grow and prosper—a far cry from May 2017 when 71 percent of business leaders were confident.
Meanwhile, data for the whole of Europe show that only 50 percent are confident—a fall of almost one third in the past six months. In North America, confidence fell back 8 percent to 59 percent over the past six months as here, too, improving economic fundamentals continued to take a battering from economic and policy shocks.
Asia-Pacific is the only region where confidence has risen (up 23 percent to 65 percent) in the past six months, and where executives globally believe there is the greatest capacity to drive growth.
For business confidence, the UK remains bottom across all surveyed regions. The UK sees its biggest issue as economic (18 percent) above political, technology and cyber (all at 14 percent).
In Europe, economic risk also leads (16 percent), but shares the stage more evenly with cyber and technology (both at 13 percent). For the first time, however, regulatory and compliance risk rises into the top three in Europe and is ranked fourth in the UK. This strong showing reflects growing anxiety about the timing and manner of Brexit, which raises significant questions about how cross-border trade is to be administered.
Beyond domestic boundaries, business leaders in Europe see Asia-Pacific as their biggest foreign growth market. UK executives continue to believe that Europe has the greatest scope, even though that faith has declined rapidly in recent years.
“It is inevitable that the combination of political and economic volatility with regulatory uncertainty will drive reputational risk,” said Carl Day, vice president, property, marine and energy at CNA Hardy.
“Business leaders are at a point where forecasting is problematic, investment in business fundamentals is going on hold, and the risk of strategic missteps is rising. Interconnected risk is a feature of modern business life, and here we see it played out through the lens of a shifting UK-Europe relationship.”
Against this backdrop, the rate of investment in business fundamentals has fallen dramatically in the six months to May 2019, with investment in talent and research & development (R&D) among the hardest hit areas.
A shifting environment
Underpinning changes in business confidence is companies’ constant reassessment of the shifting risk environment. Globally, the percentage of business leaders who feel they operate in a moderate to high risk environment held broadly steady at 81 percent, with European business leaders the least risk-averse (65 percent) and North American the most (87 percent).
Globally, the report suggests, economic risk is the biggest concern both now and in 12 months’ time, followed by cyber and then tech risk. Economic risk—although remaining the most mentioned risk overall—is set to decline as political and reputational risk gain momentum.
The report suggests that reputation risk is growing faster than any other form of risk: up 29 percent globally, 33 percent in Europe and doubling in Asia-Pacific between May 2019 and May 2020.
Dave Brosnan, chief executive of CNA Hardy, said: “In an increasingly complex, tech-led, interconnected global economy, business leaders are being tested like never before.
“The result is that confidence has dipped, investment in business fundamentals is down across the board and reputation risk has emerged as the new threat that stalks the corridors of power.”
Businesses assessed for the survey were divided as to the most significant challenges they face when dealing with brand or reputation risk. Managing the logistical challenges—securing board buy-in and implementing a timely plan of action—were two of the highest ranked priorities.
Maintaining brand value was narrowly the top concern globally, with sentiment particularly marked in Asia-Pacific and North America.
All this could be good news for insurers on one level. CNA Hardy suggested there is significant appetite among its broker network and insureds for deeper discussion and insight around the drivers of boardroom risk and strategies for risk prevention and mitigation.
Brosnan added: “Reputation cover will become mainstream as boardroom risk is re-evaluated. In the same way the market has found a way to model the cost of non-physical damage business interruption claims as part of terror and political violence cover, we believe there is scope to model and mitigate the cost of managing reputation risk and the consequential damage to brand value caused by specific triggers.”
