- February 2, 2024
IMA India’s CFO Forum Highlights Aon’s Survey on Risk & Supply Chain Disruptions
In conversation with Saurabh Verma; President & Head of Sales, Strategic Accounts Management & Japan Global Solutions; Aon India Insurance.
With the interlinkages that now exist within the global economic architecture, political and economic events tend to play out across borders. As things stand, several risks are likely to materialise over the medium term. These include commodity price jumps, supply-chain disruptions, rising nationalism, and much more. At a recent session of the India CFO Forum in Delhi, Saurabh Verma President & Head of Sales, Strategic Accounts Management & Japan Global Solutions at Aon India, took us through the findings of Aon’s global risk management survey. This paper summarises key takeaways, combining the survey inputs of 3,000 CFOs with insights gathered during the ensuing discussions with IMA Forum members.
Assessments of risk conducted at different points will produce differing results. Over time, there may be shifts in the perceived threat emanating from each type of risk; equally, new risks may arise. Aon’s survey this year highlighted some key risks that were barely on any business’s radar just 3-4 years ago. Currently, CFOs regard four types of risks above all else: cyber-attacks and data breaches; business interruption (owing to natural disasters, political unrest, pandemics, etc.); failure to attract and retain talent; and failure to innovate or meet customer needs. Other key risks include:
2.Product liability or recall
3.Rapidly changing markets
4.Supply chain or distribution failure
5.Personal liability applicable to directors and officers
Some risks can be either restricted to, or exacerbated in, certain sectors and geographies. Some instances include:
Product recall and the personal liability for decisions are serious considerations. The stringency of liability laws varies by country, and Indian businesses operating abroad must be prepared for the risk of class-action lawsuits. Occasionally, OEM manufacturers assume unlimited liability to win contracts. However, in North America, where cars are often resold multiple times, this exposes executives to risk for many years, even if they are no longer affiliated with the business.
Geopolitical risks include not just wars but also bureaucratic hurdles like trade barriers, immigration rules etc. A company that signed tenders to open offices in Bangladesh and Sri Lanka agreed to specific dates for deliverables but later found it could not import the necessary materials from India or Europe, as this required a special license. In another case, a company establishing a new plant in Hyderabad had to import manufacturing lines from China that require installation by the vendor’s engineers to uphold the warrantee. A sour Sino-Indian relationship resulted in the non-issuance of visas and a 6-month project delay.
Climate change presents differing risks to different sectors. For instance, a large Indian consumer durables company was deeply affected by unpredictable weather conditions during the summer – made worse by back-to-back pandemic lockdowns. Businesses start planning months in advance to sell seasonal products like fans and heaters but fluctuating weather affects the market, disrupting everything from inventory to distribution.
To limit exposure to risk, business strategy must align with global policy changes. For instance, the hub-and-spoke strategy used by many foreign businesses in Asia is outdated and must be reconsidered. A tyre manufacturer based in China, which sold its goods in India, ignored warnings to prepare for regulatory changes. It suffered as a result of what was, in hindsight, a highly predictable risk. In contrast, a global electronics giant knew that there would be some losses from managing India’s increasingly protectionist rules. It decided, however, that a complete loss of access to the Indian market posed a much greater risk than the short-term costs associated with protectionism.
Insurance covers most business risks – from the simplest to the most complex. But it is important to be thorough when selecting an insurance policy. The OEM mentioned above, for instance, should have had both, an airtight contract and an airtight insurance policy in place. However, wider coverage comes with a bigger price tag, and it is important to weigh likely costs against benefits. Some end up under-insuring themselves. For example, a manufacturer that had insured itself against natural disasters got hit by a cyclone – and still ended up paying out-of-pocket. Unwittingly, its policy covered only a fraction of the loss. In some cases, insurance companies fail to update their coverage. A policy that covers cyber-risk, for instance, will be useless if its terms and conditions have not been updated to reflect an evolving cyber-threat landscape.
However, at times, even companies that have bought adequate coverage find it hard to get their claims settled. The amount of documentation, follow-up and associated costs required, led one large manufacturing company to enforce a global practice of not claiming for damages under USD 10 million. It is such experiences that might drive companies to under-insure themselves. A possible work-around is to familiarise all stakeholders with the claims process and to keep documentation ready in advance, so that claims can be filed immediately after an incident.
The contents of this paper are based on discussions of the India CFO Forum in Delhi with Saurabh Verma; President & Head of Sales, Strategic Accounts Management & Japan Global Solutions; Aon India Insurance in December 2023. The views expressed may not be those of IMA India.
This paper is available on the Knowledge Centre of the IMA website. Additionally, a podcast version is available here and can be heard on the podcast platform of your choice.