Key Issues Currently Reflected in the Risk Selection
The impact of COVID-19 varies widely across Asia, making it difficult to generalize risk. In many countries, tourism contributes up to 10 percent of GDP, which may explain why business interruption and economic recovery are the two highest-ranked risks.
GDP growth in the second half of 2021 is expected to be down compared with last year. This is against a backdrop of regulatory changes under President Xi Jinping, including restructuring and regulating the Chinese tech sector and adding requirements to house Chinese data in China. These and other high-profile changes likely pushed accelerated rates of change in market factors to number 5.
In addition, COVID-19 has exposed the fragility of global supply chains. To mitigate this risk, more companies are looking to move manufacturing closer to their markets, which may prompt a downturn in Asian production. Respondents expect supply chain risk to drop to number 18 in the future, so respondents likely see this risk as temporary and have confidence Asia is positioned to remain a key production hub in the future.
Workforce shortage, at number 19, and failure to attract and retain talent, at number 13, are pressing risks, although they didn’t rise to the top 10. Hospitality, construction, technology, finance, pharmaceuticals and life sciences are competing aggressively for talent, resulting in increased hiring costs and, ultimately, higher prices to customers. In Singapore, which relies heavily on imported labor, worker costs have risen up to 50 percent. Meanwhile, border closures have disrupted both the inflow of workers into Asia and shipping operations, in some cases stranding crews. And many expatriates have left Asia, especially Singapore and Hong Kong, to return home to their families.
Increasing competition (number six now and in the future) and failure to innovate/meet customer needs (number 14 now and moving up to number seven) are tightly connected with talent risks. Talent-related issues including the workplace of the future and global mobility are part and parcel with the top-ranked risks.
Climate change ranks at number 23 and is expected to rise to number 11 in three years; however, extreme weather events are occurring regularly in Asia. The region still relies heavily on coal, but the potential of the energy transition to address climate change isn’t garnering significant attention — even as activist investor initiatives seek to redirect investments at scale to improve environmental, social and governance (ESG) outcomes.
Rising healthcare costs ranks at number 51, rising slightly to number 48 in three years; however, these costs are starting to spike as patients seek nonessential treatments they had deferred during the pandemic. We expect healthcare costs to escalate for all age cohorts, and the long-term effects of COVID-19 are unknown; thus, this is an underrated risk.
Personal liability for directors and officers (D&O) ranks at number 42, yet interest from company boards and C-suite executives in D&O insurance has never been higher. With a recent sharp increase in litigation and regulatory investigations following 20 years of rate reductions, the D&O market is now undergoing an extreme correction. Asian businesses with U.S. listings have borne the brunt of rate volatility and capacity crunches. The impact has been especially acute for companies with U.S. IPO aspirations; for those using special purpose acquisition companies (SPACs), the challenge cannot be overstated.
Future Challenges and How Organizations Can Address Them
Capital investments in Asia and the region’s growth potential are tightly linked to questions about long-term economic recovery from the COVID-19 crisis and the full resumption of business activity. Asia is confronting a long list of daunting challenges, including slow vaccine rollouts; delayed infrastructure projects; delayed M&A deals, especially those involving private equity and real estate funds that want to physically inspect assets; aviation and hospitality industries damaged to the point of bankruptcy; container shipment shortages; chip shortages; workforce shortages and movement restrictions; the relocation of manufacturing out of Asia; and increasing ESG pressure.
Companies need to fully map the risks to their businesses and establish their appetite and tolerance for risk. This will give them the tools to prioritize investments broadly and improve decision making to balance growth and protection. This is true not just for physical, tangible assets, but also for human capital and intangible assets. Traditional risk transfer solutions don’t offer protection for all risks identified in the survey; companies will have to look for alternative solutions depending on risk appetite. Clients can use data and analytics to help inform decisions, extrapolating from historical data to support decisions.
Engaging stakeholders from across the business is also vital in making decisions about risk. The most successful companies have a chief risk officer (CRO) and elevate risk to the board’s agenda. Many CROs are now broadening their range of risk responsibilities to also include environmental, social and governance topics.
Finally, organizations need to meet the challenges associated with attracting, retaining and engaging talent, because this risk has critical knock-on effects for myriad other risks.
Current Top 10 Risks
Predicted Future Risks