Looking back, 2017 was a year filled with natural disasters — hurricanes, floods, earthquakes and wildfires — as well as man-made risks such as the Manchester terror attack and the Grenfell Tower fire tragedy in the United Kingdom.
As the global economy becomes more intertwined, companies need to know which countries are best for doing business and which ones are the most risky. In addition, if you're already doing business in a particular country, you need to know what risks to anticipate in 2018.
One tool that risk managers can use is the 2018 FM Global Resilience Index, which ranks 130 countries and territories according to their enterprise resilience to disruptive events. It aggregates 12 drivers of resilience into three categories: economic, risk quality and supply chain as follows:
- Economic factors: Productivity (gross domestic product [GDP] per capita), political risk, oil intensity (a measure of a country's vulnerability to changes in oil prices and supply) and urbanization rate.
- Risk quality factors: A country's exposure to natural hazards, the quality of its natural hazard risk management, the quality of its fire risk management and its inherent cyber risk.
- Supply chain factors: Control of corruption, quality of infrastructure, quality of local suppliers and visibility of supply chain across a country.
Inherent cyber risk, urbanization rate and supply chain visibility were added as factors to the 2017 index. The first reflects a country's vulnerability to a cyber attack and its ability to recover. The second evaluates types of infrastructure that would be stressed following a natural disaster. The final driver reflects the ability to track and trace shipments across a country's supply chain.
The results of the index allow risk managers and other executives to develop additional insights that can better inform a company's international business strategy. Risk managers can use the index to prioritize where they should focus their risk management and investment efforts as well as decisions about where to locate new facilities.
Governments can also use the index to evaluate their country's attractiveness for foreign investment. For example, the index can help them determine where to invest in strengthening infrastructure or whether to adopt new standards to strengthen natural hazard and fire risk management.
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|Least resilient countries
At the bottom of the index are Haiti (ranked at 120), Venezuela (ranked at 129) and Nepal (ranked at 128). According to the report, Haiti is hampered significantly by its limited economic means and its complete exposure to natural hazards. While still recovering from Hurricane Matthew in 2016, the island suffered widespread destruction of homes and farms as a result of Hurricane Irma in 2017, even though Haiti wasn't hit directly.
In terms of natural disasters, Venezuela is vulnerable to wind and earthquakes; however, more significant is the “prevalent” corruption and its dependency on oil revenues for the country's economic wealth. Nepal is currently experiencing a high rate of urbanization, which the report notes can exacerbate businesses' risk of disruption and the ability to recover quickly.
Surprisingly, the Philippines dropped 14 places from the 2017 index, due primarily to an increase in the country's political risk, the report says. The main factor is the government's declaration of martial law in Mindanao and the ongoing war on terror. The Philippines also faced increased cyber risk, due in large part to the increase in the number of individuals with access to the Internet, up to 55% from 40%. At the same time, the increase reflects economic progress, according to the report.
|Most resilient countries
At the top of the index, Switzerland, Luxembourg and Sweden ranked first, second and third. Switzerland ranks in the top 10 for several reasons, the report says, including the quality of its infrastructure and local suppliers, its stable political situation and low corruption levels, and its economic productivity.
Luxembourg also received a high ranking based on its economic productivity, political stability, low levels of corruption and low exposure to natural hazards. The country has become more popular after the UK's vote to leave the European Union and the issues surrounding “Brexit.” As the report notes, this is key for financial institutions that would like to continue to offer services freely across the EU (“passporting” rights).
Sweden's ranking near the top of the index is based on its supply chain visibility, that is, the ability to track and trace consignments across the supply chain. In addition, the quality of its local suppliers and low levels of corruption factor heavily into the rankings.
The country that moved up the most in the rankings is Indonesia, climbing 19 places to rank 75 in the 2018 index. The increase is a result of what the report calls “impressive” reductions in political risk and corruption, reduced reliance on oil for economic productivity, and perceived improvements in the quality of the country's infrastructure and its local suppliers. With the largest economy in Southeast Asia, the report finds the biggest threat to Indonesia's enterprise resilience are exposure to natural hazards, combined with a high rate of urbanization, and relatively poor fire risk quality.
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|Key takeaways
One of the biggest surprises this year was the clear appearance of political risk and inherent cyber risk and affecting certain countries' standings within the Index, said Ronnie Gibson, FM Global's vice president of Innovation. “For example, France is a country familiar with political risk which has affected, to an extent, civil liberties within the country. This spilled over into a drop of 33 places in the cyber resilience dimension of this year's index from 68th to 101st of 130 regions. The drop reflected this deterioration in civil liberties within the country combined with a slight uptick in France's internet penetration. Combined, these forces increased the country's inherent cyber risk.”
Given the major cyber attacks in 2017, cyber risk continues to be top of mind for many business leaders, Gibson added, which the index can provide insight on for nearly 130 countries. “Likewise, the frequency of natural hazards worldwide is a top concern for many executives given the impact of Mother Nature in the past year. Additionally, the shift of manufacturing to densely urbanized, natural hazard-exposed areas with poorer quality infrastructure could create a perfect storm and new vulnerabilities for businesses. Countries' Index rankings bear watching, in each case.”
When asked about the key takeaways, Gibson noted that “Depending on your business and where you choose to operate, specific drivers of a country's resilience that underpin the index rankings will have more or less relevance. For lower ranked countries, it doesn't mean you don't do business there, but you go in with your eyes open in terms of the possible inherent risks.” The great benefit for users of the interactive online tool is that it is available at no cost, he says, and risk managers or other executives can use it to customize their focus based on the aspects of the index are most pertinent to their business models.
More information about the tool and the 2018 resilience index is available on FM Global's website.
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Rosalie Donlon
Rosalie Donlon is the editor in chief of ALM's insurance and tax publications, including NU Property & Casualty magazine and NU PropertyCasualty360.com. You can contact her at [email protected].
