Tech Risks Threaten Supply Chain More Than Weather: Guy Carpenter

Technology failure and cyber attacks represent a greater threat to most organizations than adverse weather, fire and social unrest combined, according to a new report by Guy Carpenter.

The report, “Tomorrow Never Knows,” highlights critical emerging risks facing the insurance and reinsurance sector, focusing in particular on cyber risk, climate change and space risk. Other threats include pandemics and nanotechnology.

“It is critical that [companies] are prepared to anticipate and react to a rapidly changing and uncertain risk landscape,” says David Flandro, global head of business intelligence for Guy Carpenter, in a statement.

“We are observing the rise of many new risks as technological, economic and scientific advancements are made,” Flandro adds. “Only by analyzing and seeking to better understand these risks can we mitigate the element of surprise.”

Cyber Risk

Rapidly developing computer technology and the unrelenting evolution of cyber risks present some of the biggest challenges today. Liability from cyber attacks and threats to the data security of cloud computing and social media have become significant emerging risks for carriers.

Cyber attacks have reached alarming levels. With 2,644 incidents reported through mid-January 2013, 2012 more than doubled 2011, the previous highest year on record. And the true extent of attacks is likely to be far higher since around 20 percent of reported incidents did not disclose the number of records involved.

The immediate risks associated with a cyber attack can range from legal liability and computer security breaches to privacy breaches and reputational damage. A company may also be vulnerable to risks to their supply chain as a result of cyber threats, as technology has become a critical enabler of a supply chain’s operations.

While recent natural disasters such as floods, tornadoes and Superstorm Sandy emphasize the devastating power of Mother Nature, technology failures outpace adverse weather as the major force disrupting corporate supply chains. Cyber attacks now outstrip fire and social unrest, and if failure of service provider is added into the mix, these make up the majority of all supply chain disruptions, according to the Business Continuity Institute’s 2012 Supply Chain Resilience Survey.

Climate Change Risk

Climate change, global warming and the resulting landscape shift for meteorological perils is a growing area of concern for insurers and reinsurers. Based on consistent and scientifically defensible evidence, the Intergovernmental Panel on Climate Change (IPCC), a United Nations body for the assessment of climate change, has concluded that global warming over the last 50 years cannot be explained without “external radiative forcing.”

The most pervasive hazard of global warming is coastal flooding. According to the IPCC, a sea-level rise of at least 25-50 centimeters is expected by the end of the century. This is of great significance for coastal cities as well as to many inland areas of the world prone to flood.

Global warming is also impacting drought and wildfire patterns around the world, according to the IPCC. Areas that see diminished precipitation will face water shortages, as will areas that are supplied from glacial sources. Wildfires are another hazard imposed by drought conditions, and the IPCC has noted that the wildfire season in western regions of the U.S. has increased by about 78 days in the last three decades.

Space Risk

The most serious threat to high-value satellites and space infrastructures in the Earth’s orbit today is the risk of collision with other satellites or space debris.

As more satellites are sent into orbit to provide vital services and technology, such as global communications, air traffic control, weather forecasting and disaster management, the area is becoming increasingly cluttered. According to the U.S. Strategic Command’s Space Surveillance Network, more than 20,000 objects above 10 centimeters in size are currently orbiting Earth – only about 1,000 of which are active satellites. While the cost of insuring a satellite during launch has traditionally been higher than the cost to cover its life in orbit, this is likely to change.

Solar weather is another space-related risk that has the potential to cause huge disruption to infrastructure and businesses around the world. Major solar disturbances have the potential to cause significant losses and could ripple critical infrastructure and global supply chains would likely fail.