Lloyds Risk Index 2011

LLoyds
RIsK INdEX
2011
Featuring content by
%
$499m or less 51.0%
$500m to $999m 14.9%
$1bn to $4.999bn 17.1%
$5bn to $9.999bn 5.4%
$10bn or more 11.6%
%
Board member 8.5%
CEO/President/Managing director 52.7%
CFO/Treasurer/Comptroller 15.6%
CRO/Chief risk ofcer 3.8%
CIO/Technology director 5.7%
Chief compliance ofcer 0.6%
Other C-level executive 13.1%
REspoNdENt pRoFILEs
WHICH OF THE FOLLOWING
DESCRIBES YOUR JOB TITLE?
IN WHAT REGION ARE YOU PERSONALLY BASED?
WHAT IS YOUR
PRIMARY INDUSTRY?
WHAT IS YOUR COMPANYS ANNUAL
GLOBAL REVENUE IN US DOLLARS?
North America
27%
Europe
35%
Asia-Pacic
27%
Rest of
the World
11%
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%
Lloyds Risk Index 2011
Foreword by Richard Ward, Chief Executive, Lloyds 02
Executive summary of ndings from the Economist Intelligence Unit (EIU) 03
Loss of customers 10
Talent and skills shortages 11
Reputational risk 13
Currency uctuation 13
Changing legislation 14
Political, crime and security risks 16
Environmental risks a balancing act for business 19
The selective invisibility of natural hazards 20
An increased appreciation of risk 24
Conclusion 26
Appendix and methodology 27
coNtENts
the top
fve risks
mind the
(reality) gap
Risk awareness
rises in the east
01 02 03
Introduction
conclusions
01
FoREwoRd by dR RIchaRd waRd
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 Lloyds, in
collaboration with the Economist Intelligence
Unit (EIU), published its rst global survey
1

on risk attitudes amongst business leaders.
Two years later, global economies remain in
a state of ux, with growing debate on how
long it will take to play out, as we see with
the current political and sovereign debt crisis.
This second Lloyds Risk Index, based on a
survey of global business leaders by the EIU,
shows that their perceptions of risks have
evolved signicantly 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 ndings.
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.
RIsK awaRENEss RIsEs IN thE East
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-Pacic respondents
is signicant, 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-Pacic
has had direct recent experience, but across all
ve 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.
REaLIty aNd pERcEptIoN at odds
Business leaders have scored themselves
as more than adequately prepared for 48
out of the 50 risks. For Lloyds, 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 Lloyds Risk Index in 2013.
DR RICHARD WARD
Chief Executive
Lloyds
The last two years have
thrown the world into
economic and political
turmoil from which it
has yet to emerge.
FoREwoRd
02
INtRoductIoN
about thIs EXEcutIvE summaRy
The aim of this executive summary, based
on ndings and analysis from the EIU and
commissioned by Lloyds, is to assess corporate
risk priorities and attitudes around the world.
The ndings 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-Pacic (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,
Lloyds 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
ve 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
nancial 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 nancial 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 efciently manage external factors in
this context. Meanwhile, Asias 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
worlds boardrooms, a signicant 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 executives risk priority
list can be considered in terms of a potential
critical point of failure for business; some
signicant changes in the risk landscape over
the past two years reect 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.
EIu EXEcutIvE summaRy
Prepared by the Economist Intelligence
Unit for Lloyds of London*
The combination of
global shocks through
increasingly interlinked and
interdependent systems
has raised the threat levels
of risk across the board.
* 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.
03
70%
27% 3%
are about
the same
are better prepared
are not well
prepared
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 ve 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 nds 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 (dened 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 nancial 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.
Chart 1
compared to two years ago, how are you
prepared for risks to your business and
operations?
EIu executive summary
continued
04
introduction
table 1. overall risks, 2011 versus 2009 *
2011
Priority
Rank overall Risks
2011
priority
score
2011
preparedness
score
2009
Priority
Score
2009
Preparedness
Score
1 busINEss aNd stRatEgIc RIsK 7.3 7.1 6.5 6.0
2 EcoNomIc, REguLatoRy aNd maRKEt RIsK 7.2 6.5 6.8 5.8
3 poLItIcaL, cRImE aNd sEcuRIty RIsK 5.4 6.5 4.9 5.1
4 ENvIRoNmENtaL aNd hEaLth RIsK 5.0 6.1 4.0 5.1
5 NatuRaL hazaRd RIsK 4.2 5.5 3.9 5.4
* The survey conducted in 2009 offered respondents a list of 41 risks. The 2011 Lloyds Risk Index updated this list to reect 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.
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 ve
are all economic risks: currency uctuation,
changing legislation, cost and availability of
credit, price of material inputs and ination.
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 prole
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 reecting
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.
05
6.2
6.2
5.8
5.6
5.6
5.5
5.4
5.4
5.4
5.4
5.3
5.3
5.2
5.2
5.2
5.2
5.2
5.1
5.1
5.0
4.9
4.9
4.8
4.7
4.6
6.3
5.9
6.6
5.9
5.4
6.4
5.7
5.5
6.6
5.6
6.1
6.0
5.5
6.1
5.7
6.1
6.3
6.0
6.2
5.4
5.9
5.4
6.1
5.7
5.2
0 1 2 3 4 5 6 7
Business
Business
Business
Economic
Economic
Economic
Economic
Economic
Business
Economic
Business
Political
Economic
Business
Economic
Political
Political
Economic
Political
Economic
Business
Economic
Business
Environmental
Economic
1 Loss of customers/Cancelled orders
2 Talentandskillsshortages(includingsuccessionrisk)
3 Reputational risk
4 Currency fluctuation
5 Changing legislation
6 Cost and availability of credit
7 Price of material inputs
8 Inflation
9 Corporate liability
10 Excessively strict regulation
11 Rapid technological changes
12 Cyber attacks (malicious)
13 High taxation
14 Failed investment
15 Major asset price volatility
16 Theft of assets/Intellectual Property
17 Fraud and corruption
18 Interest rate change
19 Cyber risks (non-malicious)
20 Poor/incomplete regulation
21 Critical infrastructure failure
22 Government spending cuts
23 Supply chain failure
24 Pollution/environmental liability
25 Sovereign debt
Priority Preparedness
Risk
Score out of 10
continued
Chart 2
individual risks, priority and preparedness scores 2011
06
introduction
4.6
4.6
4.5
4.5
4.4
4.2
4.1
4.0
3.9
3.9
3.9
3.9
3.8
3.7
3.6
3.6
3.6
3.4
3.3
3.3
3.2
3.0
2.8
2.6
2.4
5.4
6.2
5.8
6.2
5.2
5.8
4.8
4.7
5.6
4.9
5.0
5.1
5.1
5.1
4.8
4.7
5.2
5.2
4.5
4.8
4.5
4.4
4.3
3.8
4.0
0 1 2 3 4 5 6 7
Economic
Environmental
Business
Business
Environmental
Political
Environmental
Environmental
Political
Environmental
Political
Environmental
Environmental
Political
Environmental
Environmental
Natural
Political
Natural
Political
Natural
Natural
Natural
Natural
Natural
26 Increased protectionism
27 Industrial/workplace accident
28 Energy security
29 Insolvency risk
30 Demographicshift(egageingpopulation,youthemigration)
31 Strikes and industrial action
32 Climate change
33 Pandemic
34 Piracy
35 Water scarcity
36 Terrorism
37 Urbanisation
38 Population growth
39 Riots and civil commotion
40 Food security
41 Harmful effects of new technology
42 Flooding
43 Expropriation of assets
44 Earthquake (including tsunami)
45 Abrupt regime change
46 Windstorm (eg hurricane, cyclone, typhoon)
47 Drought
48 Threats to biodiversity
49 Impact of space weather (eg solar flares)
50 Volcanic eruption (including ash)
Risk
Score out of 10

07
Loss of customers is seen by businesses
as the leading risk.
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 signicant 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.
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 decit 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-Pacic
region. In our survey, 70% and 60% of
respondents from the Asia-Pacic 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.
The top economic risk priorities
have become more sophisticated.
The uncertainty that dominates global business
is reected 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 eurozones
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 ination 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 uctuations 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 ination, on
their businesses. Linked to this is the price of
material inputs, which have risen substantially
in priority in our survey rankings.
continued
There is an imbalance between
East and West.
When exploring the main themes emerging
from our survey, signicant regional and sector
disparities emerge. There is a signicant
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-Pacic
is a lack of condence 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 regions 3.5 billion consumers still
provide a massive growth opportunity.
08
introduction
thE top FIvE RIsKs
01
Loss of customers 10
Talent and skills shortages 11
Reputational risk 13
Currency uctuation 13
Changing legislation 14
09
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 uctuation
and insolvency risk.
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 uctuation does, however, remain
a serious cause for concern, moving from
number two to number four.
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.
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 reected in the rise of reputational risk from
nine in 2009 to number three in 2011.
Other notable changes include the increased
weighting given to the cost of materials from
17 in 2009 to seventh today, reecting the
major price hikes of commodities including
energy and many raw materials.
1.
Loss of
customers
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.
There are multiple reasons for this loss of
consumers. Western governments have
prioritised the need to drive down their decits
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
ination, making products more expensive to
buy. Faced with the triple factors of static or
falling incomes, rising ination 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 condent about the future. In
September 2011, consumer condence across
much of the West was weak; in Italy
2
it was the
worst for three years, France
3
registered the
weakest level since February 2009 and US
4

levels stagnated near a two-year low.
Pensions and savings income have been eroded,
cutting spending power. The spreading debt crisis
of the PIIGS (Portugal, Italy, Ireland, Greece and
Spain) is affecting global stock markets from
NewYork to London and dramatically reducing
the worlds wealth. According to research
by the Federal Reserve Bank SanFrancisco
5
,
the nancial crisis has wiped out 25% of the
USs net worth and the crisis of the euro may
mean Europe fares even worse.
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. Its estimated, that China has over 10
million Small and Medium-sized Enterprises
(SMEs)
6
and nancial 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.
top FIvE RIsKs 2011
thE top FIvE RIsKs
10 sEctIoN one
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 insufciently prepared for, begs many
questions. In a time of business consolidation
and record unemployment, the pool of surplus
available talent should, in theory, be signicant.
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 elds
7
, 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 aeld as Canada
8
. 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
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 nding. However,
respondents across all sectors agree this
is a signicant 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
Lloyds, have started programmes to recruit
raw talent and train them to ensure an
expert and innovative future workforce.
thE gERmaNs havE a woRd FoR It
FachKRFtEmaNgEL
According to Lloyds general representative for
Germany, BurkardvonSiegfried, the impact of
the talent crunch in Germany is now becoming
acute; there is even a specic term for it,
Fachkrftemangel. The problem is particularly
severe in the engineering, medical and IT elds,
vonSiegfried 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
result in a search for the best by the rms
that survive. These companies survive
by streamlining their processes to ensure
their competitiveness in world markets,
and qualications 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
initiative
9
to support business transfers.
11
asia-
pacific
%
north
america
%
europe
%
rest
of the
world
%
asia-
pacific
%
north
america
%
europe
%
rest
of the
world
%
Priority
1 Very high
2
3
4
5 Very low
Preparedness
1 Very well prepared
2
3
4
5 Not at all prepared
24.1
45.9
21.8
6.8
1.5
21.8
26.3 27.8
21.8
2.3
11.0
33.8 29.4
16.2
9.6
10.6
37.9 35.6
12.9
3.0
13.5
28.7 33.3
19.9
4.7
11.6
30.8
39.5
14.5
3.5
31.5
27.8 29.6
9.3
1.9
1.9
42.6
37.0
16.7
1.9
asia-
pacific
%
north
america
%
europe
%
rest
of the
world
%
asia-
pacific
%
north
america
%
europe
%
rest
of the
world
%
Priority
1 Very high
2
3
4
5 Very low
Preparedness
2
3
4
24.1
45.9
21.8
6.8
1.5
21.8
26.3 27.8
21.8
2.3
11.0
33.8 29.4
16.2
9.6
10.6
37.9 35.6
12.9
3.0
13.5
28.7 33.3
19.9
4.7
11.6
30.8
39.5
14.5
3.5
31.5
27.8 29.6
9.3
1.9
1.9
42.6
37.0
16.7
1.9
asia-
pacific
%
north
america
%
europe
%
rest
of the
world
%
asia-
pacific
%
north
america
%
europe
%
rest
of the
world
%
Priority
1 Very high
2
3
4
5 Very low
Preparedness
2
3
4
24.1
45.9
21.8
6.8
1.5
21.8
26.3 27.8
21.8
2.3
11.0
33.8 29.4
16.2
9.6
10.6
37.9 35.6
12.9
3.0
13.5
28.7 33.3
19.9
4.7
11.6
30.8
39.5
14.5
3.5
31.5
27.8 29.6
9.3
1.9
1.9
42.6
37.0
16.7
1.9
asia-
pacific
%
north
america
%
europe
%
rest
of the
world
%
asia-
pacific
%
north
america
%
europe
%
rest
of the
world
%
Priority
1 Very high
2
3
4
5 Very low
Preparedness
2
3
4
24.1
45.9
21.8
6.8
1.5
21.8
26.3 27.8
21.8
2.3
11.0
33.8 29.4
16.2
9.6
10.6
37.9 35.6
12.9
3.0
13.5
28.7 33.3
19.9
4.7
11.6
30.8
39.5
14.5
3.5
31.5
27.8 29.6
9.3
1.9
1.9
42.6
37.0
16.7
1.9
asia-
pacific
%
north
america
%
europe
%
rest
of the
world
%
asia-
pacific
%
north
america
%
europe
%
rest
of the
world
%
Priority
1 Very high
2
3
4
5 Very low
Preparedness
2
3
4
24.1
45.9
21.8
6.8
1.5
21.8
26.3 27.8
21.8
2.3
11.0
33.8 29.4
16.2
9.6
10.6
37.9 35.6
12.9
3.0
13.5
28.7 33.3
19.9
4.7
11.6
30.8
39.5
14.5
3.5
31.5
27.8 29.6
9.3
1.9
1.9
42.6
37.0
16.7
1.9
asia-
pacific
%
north
america
%
europe
%
rest
of the
world
%
asia-
pacific
%
north
america
%
europe
%
rest
of the
world
%
Priority
1 Very high
2
3
4
5 Very low
Preparedness
2
3
4
24.1
45.9
21.8
6.8
1.5
21.8
26.3 27.8
21.8
2.3
11.0
33.8 29.4
16.2
9.6
10.6
37.9 35.6
12.9
3.0
13.5
28.7 33.3
19.9
4.7
11.6
30.8
39.5
14.5
3.5
31.5
27.8 29.6
9.3
1.9
1.9
42.6
37.0
16.7
1.9
asia-
pacific
%
north
america
%
europe
%
rest
of the
world
%
asia-
pacific
%
north
america
%
europe
%
rest
of the
world
%
Priority
1 Very high
2
3
4
5 Very low
Preparedness
2
3
4
24.1
45.9
21.8
6.8
1.5
21.8
26.3 27.8
21.8
2.3
11.0
33.8 29.4
16.2
9.6
10.6
37.9 35.6
12.9
3.0
13.5
28.7 33.3
19.9
4.7
11.6
30.8
39.5
14.5
3.5
31.5
27.8 29.6
9.3
1.9
1.9
42.6
37.0
16.7
1.9
asia-
pacific
%
north
america
%
europe
%
rest
of the
world
%
asia-
pacific
%
north
america
%
europe
%
rest
of the
world
%
Priority
1 Very high
2
3
4
5 Very low
Preparedness
2
3
4
24.1
45.9
21.8
6.8
1.5
21.8
26.3 27.8
21.8
2.3
11.0
33.8 29.4
16.2
9.6
10.6
37.9 35.6
12.9
3.0
13.5
28.7 33.3
19.9
4.7
11.6
30.8
39.5
14.5
3.5
31.5
27.8 29.6
9.3
1.9
1.9
42.6
37.0
16.7
1.9
asia-
pacific
%
north
america
%
europe
%
rest
of the
world
%
asia-
pacific
%
north
america
%
europe
%
rest
of the
world
%
Priority
1 Very high
2
3
4
5 Very low
Preparedness
2
3
4
24.1
45.9
21.8
6.8
1.5
21.8
26.3 27.8
21.8
2.3
11.0
33.8 29.4
16.2
9.6
10.6
37.9 35.6
12.9
3.0
13.5
28.7 33.3
19.9
4.7
11.6
30.8
39.5
14.5
3.5
31.5
27.8 29.6
9.3
1.9
1.9
42.6
37.0
16.7
1.9
thE JapaNEsE EXpERIENcE KEEpINg
up wIth a chaNgINg woRLd oRdER
Japans 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 wasnt 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.
In the meantime, the West has moved on in
terms of entering international markets. Mergers
and acquisitions activity has risen considerably
and Japan, while well capitalised for this type
of expansion, nds itself at a disadvantage
11
.
As Lloyds Japanese representative,
IainFerguson notes this presents obvious
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.
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,
Presidents and Directors have, until recently,
enjoyed a fairly ceremonial existence but as
the personal liability of directors becomes a
real issue, they are now under pressure to
improve their skill sets from shareholders
asking how their capital is being used to
fund international expansion.
the top fve risks
continued
Chart 3
talent and skills shortages priority and preparedness by regioN
12
sEctIoN one
4.
currency
Fluctuation
The number two priority given overall to
currency uctuation in our 2009 survey was
virtually universal geographically, in 2011 it
was included in the top ve 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 nished products, had every reason
to fear exchange rate uctuation 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 worlds highest savings
rate and unlocking some of the more than
$350bn
14
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 signicant, 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.
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 disasters 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 study
12
of the worlds 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.
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 signicant reputational
risk, as well as operational uncertainty and
higher security costs, as many international
companies operating in Nigeria
13
have
discovered.
The Index shows that businesses believe
they are, if anything, actually over-prepared
to deal with reputational risk, scoring the
preparedness at6.6 against a priority score
of5.8. 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 conrm
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 ight 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.
13
5.
changing
legislation
The global nancial crisis has provided a
major legislative response. For the banking
industry, the capital requirements of BaselII
have been added to by the provisions of
BaselIII 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 BaselIII and
subsequent requirements are implemented
consistently across all countries.
The requirements of SolvencyII, 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
nancial 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 regulation
15
,
driving nancial services to countries with
lower capital requirements and lighter corporate
tax regimes.
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
nancial services, including the creation
of a Financial Stability Oversight Council
and a Federal Insurance Ofce to oversee
nancial 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 metals
16
. 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.
Chinas growing resolve to tackle its status
as the worlds biggest polluter presents
opportunities for a range of waste and
other environmental businesses. It also
serves as a warning that business practices
which worsen Chinas environmental health
are less likely to be tolerated in the future.
the top fve risks
continued
14
sEctIoN one
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
02
15
0 1 2 3 4 5 6 7
Overall
Cyber attacks (malicious)
Theft of assets/intellectual property
Fraud and corruption
Cyber risk (non-malicious)
Strikes/industrial action
Piracy
Terrorism
Riots and civil commotion
Expropriation of assets
Abrupt regime change
Score out of 10
Preparedness
Priority
5.4
5.3
5.2
5.2
5.1
4.2
3.9
3.9
3.7
3.4
3.3
6.5
6.0
6.1
6.3
6.2
5.8
5.6
5.0
5.1
5.2
4.8
mINd thE (REaLIty) gap
Risks from three of the ve 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.
mINd thE (REaLIty) gap
Chart 4
political, crime and security risk priority and preparedness scores
poLItIcaL, cRImE aNd sEcuRIty RIsKs
16 sEctIoN two
energy and
natural
resources
financial
services
other
industries
it and
technology
manufacturing professional
services
healthcare,
pharmaand
biotech
Priority
Preparedness
6.6
7.4
6.0
6.5
5.6
6.4
5.3
6.4
5.2
6.6
4.4
6.3
3.2
6.8
5.4
6.5
global
Score out of 10
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 nancial 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.
Chart 5
political risk priority and preparedness scores by industry
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 total
17
.
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.
17
FacINg up to thE cybER thREat
While many types of risk may be industry or
regionally specic, 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 Americas top ve 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, Pzer,
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 alone
18
.
mind the (reality) gap
continued
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 years
19
. 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 Lloyds 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 2011 RaNK 2009 Ranking
cybER attacKs (maLIcIous) 12 Cyber attacks rated 20
thEFt oF assEts/ INtELLEctuaL pRopERty 16 18
FRaud aNd coRRuptIoN 17 15
cybER RIsK (NoN-maLIcIous) 19 Cyber attacks rated 20
stRIKEs aNd INdustRIaL actIoN 31 28
pIRacy 34 27
tERRoRIsm 36 31
RIots aNd cIvIL commotIoN 39 38
EXpRopRIatIoN oF assEts 43 35
abRupt REgImE chaNgE 45 40
* In 2009 there were 41 risks whereas in 2011 there were 50.
18
sEctIoN two
6.1
5.6
5.6
6.5
7.3
5.2 5.8
5.0 6.0
4.7 7.3
4.4 5.8
4.1 5.3
GLOBAL
manufacturing
energy and natural resources
financial services
other industries
healthcare, pharma and biotech
professional services
IT and technology
5.0
Score out of 10
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 nes. 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 Lloyds report,
Chart 6
Environmental risk priority and
preparedness scores by industry
table 4. environmental risks, 2011 ranking versus 2009* ranking
Environmental Risk 2011 Ranking 2009 Ranking
poLLutIoN/ENvIRoNmENtaL LIabILIty 24 29
INdustRIaL/woRKpLacE accIdENt 27 25
dEmogRaphIc shIFt (Eg agEINg popuLatIoN, youth EmIgRatIoN) 30 Not available
cLImatE chaNgE 32 33
paNdEmIc 33 34
watER scaRcIty 35 Not available
uRbaNIsatIoN 37 Not available
popuLatIoN gRowth 38 Not available
Food sEcuRIty 40 Not available
haRmFuL EFFEcts oF NEw tEchNoLogy (Eg NaNotEchNoLogy, EmF) 41 Not available
* In 2009 there were 41 risks whereas in 2011 there were 50.
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 Lloyds 2011 report,
Drilling in extreme environments
21
, 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.
19
2010
2011
2010
2011
* Alabama, Mississippi, Missouri
^ Mississippi
# Texas
Belgium, France, Germany, Portugal, Spain
continued
RUSSIA
Heatwave,
Forest Fires
PAKISTAN
Floods
INDONESIA
Earthquake
& Tsunami
JAPAN
Earthquake,
Tsunami
US
*
Tornadoes
TURKEY
Earthquake
HORN
OFAFRICA
Droughts
PAKISTAN
Earthquake
CANADA
Slave Lake
Wildres
US
#
Wildres
SRI LANKA
Floods
THAILAND
Floods
BURMA
Earthquake
AUSTRALIA
Floods
AUSTRALIA
Floods,
Cyclone Yasi
NEWZEALAND
Earthquake
CHILE
Earthquake
BRAZIL
Floods,
Mudslides
ICELAND
Volcano
EUROPE
Windstorm
Xynthia
CHINA
Earthquake
Chart 7
2010and2011globalnaturalhazards
THESELECTIVEINVISIBILITY
OFNATURALHAZARDS
In the two years since Lloyds last undertook
its risk survey, and despite all objective evidence
to the contrary, natural hazards still remain at
the bottom of the Index.
2010 saw major earthquakes strike Haiti, Chile,
China and Indonesia. It saw devastating oods
in Pakistan and Australia, fatal heatwaves and
forest res in Russia and the eruption of Icelands
Eyjafjalljkull volcano, grounding ights across
Northern Europe and NorthAmerica. 2011
proved no better, with oods in Brazil, SriLanka
and Australia, earthquakes in NewZealand,
Japan and Turkey and tornadoes and hurricanes
in NorthAmerica.
Even before the 2011 hurricane season ended,
the amount paid out by insurers for the rst
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 industry
22
.
NEWZEALAND
Earthquake
US
^
Flooding
US
Hurricane
Irene
GULFOF
MEXICO
Tropical
StormLee
HAITI
Earthquake
MEXICO
Earthquake
20
21
SECTION two
GLOBAL
4.3
GLOBAL
5.5
Priority
Preparedness
NORTH
america
4.1
REST OF
the world
4.7
REST OF
the world
4.9
EUROPE
3.4
ASIA-
pacific
5.4
ASIA-
pacific
5.8
NORTH
america
6.5
EUROPE
4.7
Score out of 10
0 1 2 3 4 5 6 7
energy and natural resources
financial services
other industries
manufacturing
global
it and technology
professional services
healthcare, pharma and biotech
Score out of 10
Preparedness
Priority
4.3
5.2
4.7
4.6
4.1
3.5
3.3
3.1
5.5
6.2
5.4
5.7
5.4
4.5
5.1
5.9
continued
Chart 8
Natural hazard risks priority and preparedness scores by industry
Chart 9
Natural hazards risk priority and preparedness scores by region
When it comes to natural hazards, what happens
in Japan doesnt stay in Japan. Globalisation and
extended supply chains mean that a Japanese
tsunami can close a car factory in the UK
a fact reected by the launch of new nuclear
business interruption cover by Lloyds broker
Willis after Fukushima. The interconnectedness
of global trade means ooding, drought,
windstorms and earthquakes have an immediate
effect on supply chains as well as longer-tail
impacts on a countrys 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 sufcient warning of
the severity of the LAquila earthquake in 2009
23
.
The nal verdict will be awaited keenly by both
the scientic 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.
22 sEctIoN two
RIsK awaRENEss
RIsEs IN thE East
03
An escalated appreciation of risk 24
23
0 1 2 3 4 5 6 7 8
Currency fluctuation
Inflation
Lossofcustomers/cancelledorders
Reputational risk
Talent and skills shortages
Score out of 10
Preparedness
Priority
7.1
6.5
6.4
6.3
6.2
6.1
6.2
5.9
6.7
7.1
business
economic
political
environmental
natural
global north
america
europe asia-
pacific
rest of
the world
Preparedness
Priority
7.3
7.2
5.4
5.0
4.3
7.1
6.5
6.5
6.1
5.5
7.1
7.2
4.8
4.5
4.1
6.9
6.5
6.7
6.3
6.5
7.0
7.2
5.0
4.5
3.4
6.9
6.4
6.2
5.9
4.7
7.7
7.3
6.1
6.0
5.4
7.3
6.8
6.8
6.6
5.8
7.9
7.3
6.9
5.2
4.7
7.3
6.3
6.4
5.1
4.9 Score out of 10
RIsK awaRENEss
RIsEs IN thE East
Chart 10
top 5 priority and preparedness scores asia-pacifc
Chart 11
comparison of risk category scores by region
aN EscaLatEd appREcIatIoN oF RIsK
Business leaders in the Asia-Pacic region have
signicantly raised their assessment of the
seriousness of all ve 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 6.0today.
While these rises tell a clear story of a region
increasingly recognising risk, the Index ndings
also show a signicant disparity between the
scores given to top risks by European and
North American respondents and those given
by respondents in the Asia-Pacic 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-Pacic 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
fth by Asia-Pacic respondents, they give it
a higher score of 6.2.
24
section three
7.7
7.3
6.1
5.4
6.0
4.3
4.7
5.0
6.6
6.5
Business economic political environmental natural
2011
2009
Score out of 10
Concern about talent and skills shortages, in
particular, is considerably higher in Asia-Pacic
than in the other regions of the world. 70% of
Asia-Pacic 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-Pacics 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 worlds regions.
Having experienced a devastating year of
natural catastrophes, its not surprising that
the Asia-Pacic 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
$100bn
24
, 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-pacifc
25
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 condence, 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.
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 oods 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.
Is it credible that so many
boards across the world
are adequately prepared
for climate change,
another volcanic ash cloud
or a major earthquake?
coNcLusIoN
26
conclusion
appENdIX
aNNEX 1:
2009 RIsKs
> Cost and availability of credit
> Currency uctuation
> 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
2011 RIsKs
> Loss of customers/Cancelled orders
> Talent and skills shortages
(including succession risk)
> Reputational risk
> Changing legislation
> Ination
> Excessively strict regulation
> Rapid technological changes
> Cyber attacks (malicious)
> High taxation
> Failed investment
> Theft of assets/Intellectual Property
> Interest rate change
> Cyber risks (non-malicious)
> Poor/Incomplete regulation
> Critical infrastructure failure
> Government spending cuts
> Pollution/Environmental liability
> Sovereign debt
> Increased protectionism
> 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
> Food security
> Harmful effects of new technology
> Flooding
> Earthquake (including tsunami)
> Windstorm (eg hurricane, cyclone, typhoon)
> Drought
> Threats to biodiversity
> Impact of space weather (eg solar ares)
> Volcanic eruption (including ash)
27
appendix
continued
dIREctLy compaRabLE RIsKs
2009 aNd 2011
> Drought
> Energy security
> Excessively strict regulation
> Failed investment
> Flooding
> Increasing protectionism
> Insolvency risk
> Pandemic
> Piracy
> Poor/Incomplete regulation
> Rapid technological change
> Reputational risk
> Terrorism
> Theft of assets/Intellectual property
> Windstorm (eg hurricane, cyclone,
typhoon)
NEw RIsKs FoR 2011
> Changing legislation
> Critical infrastructure failure
> Demographic shift
(egageing population, youth emigration)
> Food security
> Government spending cuts
> Harmful effects of new technology
(egnanotechnology, EMF)
> High taxation
> Impact of space weather (egsolar ares)
> Ination
> Population growth
> Sovereign debt
> Threats to biodiversity and conservation
affecting our operations
> Urbanisation
> Volcanic eruption (includingash)
> Water scarcity
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 denitions 2011 risk defnitions
Abrupt interest rate change Interest rate change
Cancelled orders Loss of customers/cancelled orders (amalgamated)
Climate change (impact on business) Climate change
Cyber attacks Cyber attacks (malicious)
Cyber risk (non-malicious)
Earthquake Earthquake (including tsunami)
Loss of customers Loss of customers/cancelled orders (amalgamated)
Pollution (caused by business) Pollution/environmental liability
Strikes Strikes and industrial action
Succession risk Talent and skills shortages, including succession risk (amalgamated)
Talent and skills shortage Talent and skills shortages, including succession risk (amalgamated)
mEthodoLogy
The Lloyds 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 ve, 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.
28
appendix
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
Risk
0 1 2 3 4 5 6 7 8 Score out of 10
1 Talent and skills shortage (including succession risk)
3 Inflation
4 Loss of customers/cancelled orders
5 Reputational risk
16 Theft of assets/intellectual property
17 High taxation
21 Energy security
25 Demographic shift (eg ageing population, youth emigration)
26 Sovereign debt
27 Climate change
28 Cyber risk (non-malicious)
30 Water scarcity
31 Pandemic
32 Urbanisation
33 Piracy
34 Insolvency risk
35 Terrorism
37 Food security
38 Flooding
42 Harmful effects of new technology (eg nanotechnology, EMF)
46 Drought
48 Threats to biodiversity and conservation affecting our operations
Chart 13
top 50 priority risk scores in 2011 asia-pacifc
aNNEX 2:
29
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
Risk
0 1 2 3 4 5 6 7 8 Score out of 10
6 High taxation
7 Reputational risk
8 Failed investment
11 Inflation
17 Sovereign debt
24 Insolvency risk
30 Energy security
32 Climate change
33 Pandemic
34 Piracy
36 Urbanisation
37 Terrorism
38 Water scarcity
43 Food security
44 Flooding
48 Drought
appendix
continued
Chart 14
top 50 priority risk scores in 2011 europe
30
appendix
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
Risk
0 1 2 3 4 5 6 7 8 Score out of 10
5 Reputational risk
8 Inflation
9 Failed investment
18 Energy security
20 High taxation
28 Water scarcity
29 Urbanisation
30 Climate change
32 Insolvency risk
34 Food security
37 Terrorism
38 Pandemic
39 Flooding
41 Sovereign debt
43 Piracy
45 Earthquake (inc. tsunami)
46 Drought
Chart 15
top 50 priority risk scores in 2011 Rest of the world
31
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
Risk
0 1 2 3 4 5 6 7 8 Score out of 10
2 Reputational risk
15 High taxation
16 Inflation
27 Sovereign debt
29 Insolvency risk
30 Energy security
34 Piracy
35 Pandemic
36 Terrorism
37 Climate change
39 Water scarcity
40 Flooding
41 Food security
42 Urbanisation
44 Drought
Chart 16
top 50 priority risk scores in 2011 north america
appendix
continued
32 risk index 2011
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
Risk
0 1 2 3 4 5 6 7 8 Score out of 10
1 Reputational risk
7 Insolvency risk
9 Failed investment
14 Piracy
18 Energy security
23 High taxation
27 Inflation
32 Urbanisation
35 Sovereign debt
36 Terrorism
37 Pandemic
38 Climate change
40 Water scarcity
41 Food security
43 Flooding
47 Drought
Chart 17
top 50 preparedness scores in 2011 asia-pacifc
33
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
Risk
0 1 2 3 4 5 6 7 8 Score out of 10
1 Reputational risk
6 Insolvency risk
18 Energy security
24 High taxation
27 Inflation
28 Piracy
30 Sovereign debt
32 Urbanisation
36 Flooding
37 Food security
38 Climate change
39 Water scarcity
40 Terrorism
41 Pandemic
47 Drought
Chart 18
top 50 preparedness scores in 2011 europe
appendix
continued
34 risk index 2011
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
Risk
0 1 2 3 4 5 6 7 8 Score out of 10
3 Reputational risk
8 Failed investment
11 Energy security
18 Insolvency risk
25 Inflation
26 Piracy
27 High taxation
30 Sovereign debt
31 Flooding
33 Terrorism
34 Food security
38 Urbanisation
40 Water scarcity
43 Drought
44 Climate change
47 Pandemic
Chart 19
top 50 preparedness scores in 2011 rest of the world
35
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
Risk
0 1 2 3 4 5 6 7 8 Score out of 10
2 Reputational risk
5 Cyber risks (non-malicious)
7 Insolvency risk
20 Energy security
21 Flooding
25 Inflation
26 Piracy
31 High taxation
32 Sovereign debt
35 Urbanisation
39 Water scarcity
41 Terrorism
42 Drought
43 Climate change
46 Pandemic
48 Food security
appendix
continued
Chart 20
top 50 preparedness scores in 2011 north america
36
appendix
Disclaimer
Except for the Executive Summary (pages 3-8), which was written by the Economist Intelligence Unit (EIU), the Lloyds Risk Index has been prepared by Lloyds
based upon the results of a survey carried out for Lloyds by the EIU in August 2011 and is published for general information purposes only. While care has been
taken in producing this document, Lloyds 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.
REFERENcEs:
1. Lloyds 360 Risk Insight. Global Business Leader Survey:
Risk Priorities and preparedness. www.lloyds.com
2. ISAE Italian Index of Consumer Condence, October2011
3. Insee Index of business condence, September2011
4. Conference Board sentiment index, September2011
5. Federal Reserve Bank San Francisco Economic Letter,
January2010
6. Chinese Ministry of Industry and Information Technology,
August2010
7. www.theengineer.co.uk, March2011
8. Dan Karpenchuk, ABC Australia, May2011
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, March2011,
www.chinadaily.com.cn
15. Financial Markets Law Committee, October2011,
www.fmlc.org
16. China.org.cn, June2011
17. BBC, August2011, Insurance Daily, August2011,
www.insurancedaily.co.uk
18. Symantec Internet Security Threat Report Volume 16,
Sept2011
19. PwC Information Security Breaches Survey 2010,
www.pwc.co.uk
20. Lloyds and RAND, Litigation and business:
transatlantic trends, 2008, www.lloyds.com
21. Lloyds, AndrewRees, 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-half-
year-natural-catastrophe-review-usa_en.pdf
23. Scientists in the dock, The Economist, September2011
24. RMS (www.rms.com), EQECAT (www.eqecat.com) and
AIR Worldwide (www.air-worldwide.com) estimates,
April2011
REFERENcEs
37
Lloyds One Lime Street London EC3M 7HA Telephone +44 (0)20 7327 1000 Fax +44 (0)20 7626 2389 www.lloyds.com

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