Why Are Business Leaders Feeling Less Confident When the Overall Risk Environment Hasn’t Changed?
There’s no doubt about it, according to a recent survey, the confidence of business leaders globally is slipping.
In a survey conducted in first quarter of 2019, CNA Hardy, CNA’s European subsidiary, found that overall, business leaders are hectored by increasing fears about reputation and other risks, even though the risk environment overall is objectively unchanged.
“Business confidence is a fickle thing,” said Dave Brosnan, the CEO of CNA Hardy.
“In the past, we have seen confidence remain robust even when the overall risk environment is deteriorating; or weaken even as risk perceptions dissipate. But right now, the picture could not be clearer. Confidence is on the slide in three out of the four regions we survey, even while risk perceptions hold broadly steady.”
In North America, CNA Hardy found that even though confidence levels have dropped five percentage points in the last six months, the U.S. and Canada are the second most confident region behind Asia-Pacific.
Here’s why: In the U.S., the unemployment rate is expected to continue to remain steady and inflation is under control. The gross domestic product in the U.S., meanwhile, is expected to grow at between 2% and 3%.
As far as the risk perceptions facing the U.S., over 80 percent of U.S. companies believe they operate in a moderate to high-risk environment.
Key risk concerns include economic and cyber risk, and due to the continuing trade tariff disputes between the U.S. and China, U.S. businesses are also experiencing an increase in supply chain risk concerns.
As a result, fewer businesses in both the U.S. and Canada are actively pursuing growing their talent and technology capabilities. In fact, the study found that North American companies are currently less comfortable putting capital at risk in what is perceived to be a high-risk operating environment.
But that’s not true elsewhere.
In Asia-Pacific, global confidence is soaring thanks in part to the region having some of the strongest performing economies. In addition, 60% of the world’s youth live in Asia-Pacific, which creates a market with a significant opportunity for growth.
As a world leader in terms of natural resource wealth, mined elements, agriculture and rare earth metals that are critical to today’s technologies, Asia-Pacific’s optimism is palpable. Asia-Pacific leaders are consistently downgrading their perception of economic risk, which is predicted to fall seven percentage points between May 2019 and May 2020.
As far as additional risks, the report found that supply chain risk concerns rose in Asia-Pacific in the last six months and currently reside behind economic, technology and cyber risk in order of most intense concern.
“Reputation risk does not exist in a vacuum. … By its very nature, reputation is a risk that is deeply interconnected with the operation of the business itself.” — Dave Brosnan, CEO, CNA Hardy
The survey also found that by May 2020, over a fifth of global business leaders predict that Asia-Pacific will be the region that has the greatest capacity to drive their growth, putting it ahead of the global pack.
The political and economic uncertainty that has resulted from Brexit continues to affect the confidence and risk of the UK and Europe. In fact, in the UK confidence levels are at an all-time low.
Consider this: In 2017, survey responses indicated that 71% of business leaders were confident that their businesses could grow and prosper. In this latest study, only 36% of business leaders are confident and that number is likely to fall thanks to the political uncertainty regarding Brexit. Likewise in Europe, only 50% of businesses leaders are confident.
As far as perceptions of risk, 83% of UK business leaders see high levels of risk. These executives expect that political and economic risks will continue to increase and remain top of mind. However in Europe, risk perceptions have fallen 11 percentage points since November 2018, with 65% of European companies believing they operate in a moderate to high-risk environment.
Cyber, technology and regulatory and compliance risks top the list of concerns for European business leaders. CNA Hardy believes the rise of regulatory and compliance risk in Europe is the result of the changing status of the UK-Europe relationship.
One interesting outcome of this survey indicates that reputation risk is growing faster among all regions studied. Up 29% globally, the reputation risk category is evidently top of mind for the multinational firms surveyed.
“Reputation risk does not exist in a vacuum,” Brosnan said.
“It arises as a consequence of a misstep somewhere in the business — potentially a product failure, service shortfall, technology fault or an error of judgment by management — leading to a governance failure. By its very nature, reputation is a risk that is deeply interconnected with the operation of the business itself.”
As a result of its survey, CNA Hardy predicts that as tangible and intangible risks abound, insurers, brokers and risk managers will need to need to evaluate current business systems, processes and assets in light of the interconnected risk within our global economy.
“Business today is becoming increasingly global, whatever the size of the enterprise,” Brosnan said.
“This means the insurance community will need to become more attuned to the challenges raised in terms of politics, economics, supply chain, regulatory compliance and cyber threats that flow seamlessly through and across continents.” &