1. Risk in review
Rethinking risk management
for new market realities
March 2012
Setting the right risk
culture and aligning
strategy to risk imperatives
are essential to success in
today’s new risk era.

2. Table of contents
The heart of the matter 2
Rethinking risk management for
new market realities
An in-depth discussion 4
A time of reckoning for risk management
2011: A year in review 5
2012: The risks ahead 11
Key risks by region 19
What this means for your business 26
Coping with the new realities
Risks management imperatives for 2012 32

3. To respond to this new era of risk, forward-looking companies
in 2011 continued to shift their risk management focus in
several fundamental ways: from internal to external, from
operational to strategic, and from bottom-up to top-down.
The heart of the matter
Rethinking risk In 2011, economic turmoil, political
upheavals, and ripple effects from
natural disasters converged with
to the fore in today’s new marketplace—
for example, risks from new social media
and digital technology, competition from
lie ahead for companies, drawing on
the findings from our survey of global
executives and in-depth interviews
management for advancing globalization and rapid
technological advances to create a riskier
marketplace of complexity, unpredictable
emerging markets, and the supply and
demand of global talent. In this new
risk era, corporate boards and senior
with corporate leaders and risk experts
across a range of industries. The final
section of our report examines the risk
new market realities events, and sudden change.
To respond to this new era of risk,
management have a crucial role to play.
This report examines the state of global
management approaches and tools that
will help companies better cope with the
forces of exogenous change over the next
forward-looking companies in 2011 risk in 2011 and looks at how it might
year and beyond.
continued to shift their risk management evolve through 2012 and beyond. The
focus in several fundamental ways: from first section of the report provides an
internal to external, from operational overview of how 2011 marked a year of
to strategic, and from bottom-up to reckoning for many risk management
top-down. As corporate leaders began leaders, as they began to acknowledge
to recognize the far-reaching impact how the financial crisis and subsequent
of these risks on their businesses, recession had irreversibly altered the
they installed new risk management global marketplace and the ways to think
organizational structures and processes about risk. The second section examines
that leveraged corporate resources the top strategic and regional risks that
and vital information, and integrated
risk management across corporate
functions. Some put in place a new breed
of more strategic, collaborative, and
business-savvy risk management leaders. Study methodology
Discouraged by the failure of traditional
This study is based on results from a survey of more than 1,000 executives
risk and forecasting approaches, a bevy
and risk management leaders with businesses worldwide, carried out in
of companies also adopted innovative
November 2011. The sample covered a broad range of companies, including
techniques such as scenario analysis,
listed entities (71% of the group) and privately owned organizations. Almost
predictive indicators, and reverse
60% of the sample was based in the United States, but there was a broad
stress-testing to challenge conventional
geographic spread reflecting the global economy, including 450 respondents
thinking and better prepare themselves
from overseas markets. Just under one quarter of the participants represented
to deal with unexpected events.
companies with annual revenues of less than US$1 billion and just over one
In 2012 and the years that follow, third of participants had revenues between US$1 billion and US$5 billion.
creating an effective approach to More than 9% of respondents worked for companies with annual revenues
managing the ever-widening risk of more than US$50 billion. To understand the statistical trends and gain a
landscape remains a work in progress. qualitative perspective, we also conducted in-depth personal interviews with
Many organizations are still struggling CFOs and risk management leaders from a range of organizations.
to improve their overall management
of risk, whether that means identifying
the risks that matter most or finding
effective ways to link their strategy with
the day-to-day handling of business risks.
Companies are scrambling to fix weak
links in their system, often stemming
from non-traditional risks that have risen
The heart of the matter 3

4. When global trade, financial markets, and supply chains are
inextricably linked, risks can come swiftly and unexpectedly,
with far-reaching ramifications.
An in-depth discussion
A time of reckoning for 2011: A year in review
In 2011, it became increasingly clear
Coping with global
complexity
In March 2011, the devastating Tohoku
earthquake and tsunami in Japan
illustrated today’s new operating reality:
risk management that forces unleashed during the global Complexity is itself a dynamic concept, When global trade, financial markets,
financial and economic crisis of 2008– embracing the interconnectedness of and supply chains are inextricably linked,
2009 had irreversibly altered the terrain organizations and networks and fraught risks can manifest themselves swiftly
of the global marketplace. Even for with the difficulties of understanding and unexpectedly, with far-reaching
those executives who had held out hope, interactions and their secondary effects. ramifications. Taking into account its
it became undeniable that the global It includes factors such as global supply full toll, the disaster in Japan was one of
economy was not going to bounce back as networks, technology, and mutating the world’s costliest, with the economic
it had done during other recessions. This geopolitical borders. “The complexity losses estimated at well above $1 trillion.
time was different: The world economy of the risks that businesses encounter The disaster not only hurt profits at
was going through structural change, today poses unique challenges,” says the big automakers and manufacturers
with the center of gravity shifting Ken Coy, who leads PwC’s US Risk in Japan, but also impacted far-flung
from West to East. Globalization and Assurance—Governance, Risk, and multinational retailers, some of which
technology had created more intricate Compliance practice. “Key components reported large losses from disruptions in
linkages that could cause risks to arise of the risks—and interrelationships with production and sales. It also sent tremors
more suddenly and reverberate around other external risks—are not always through world currency and equity
the world. Over the course of 2011, apparent. As a result, companies grapple markets, causing massive unexpected
corporate leaders grew to accept these with how to best understand, evaluate, losses for banks, insurers, and financial
new market realities, and realized that and respond to those risks.” investors.
this new era of global uncertainty and For companies with a linear view of As a result, PwC’s 15th annual Global
complexity called for a fresh approach to risk, this can create significant hurdles. CEO Survey revealed that US CEOs are
risk management.
Figure 1. Which of the following events directly affected your company financially?
anchor 1 Which of the following events, if any, have triggered specific changes to your strategy,
risk management, or operational planning?
56%
The ongoing sovereign debt crisis in Europe
45%
29%
The March 2011 earthquake and nuclear crisis in Japan
24%
21%
Other significant external disruption over the past year
16%
21%
Political upheaval in Arab economies in 2011
15%
10%
Volcanic ash cloud over Europe in 2010 5%
Lack of a global climate change agreement in 7%
Copenhagen and Cancún, December 2009 and 2010 7%
21%
Don’t know/refused 29%
Financially affected
Changed strategy/risk management/operational planning
Base: All respondents (1,258)
Source: PwC, 15th Annual Global CEO Survey, 2012
4 Risk in review An in-depth discussion 5

5. anchor 2
slightly less optimistic than they were it was facing were systemic and deep- tools for assessing and managing risks,
Figure 2. The convergence of emerging and developed market risk
in 2011, and 80% of CEOs globally are rooted, and would stir greater political from new hedging instruments offered Throughout the year, Euromoney provides country risk survey rankings based on a weighted range of political, economic, and structural
concerned about uncertain or volatile uncertainty, social unrest, and regulatory by banks to internal scenario models and criteria, as evaluated by more than 250 participating economists worldwide. The ratings evaluate investment risk and are useful for anyone
economic growth. As Figure 1 shows, tinkering. early-warning systems. interested in gauging a country’s “riskiness” relative to that of other countries. In Euromoney’s December 2011 country risk survey, an
the debt crisis in Europe as well as the increasing number of emerging market economies ranked alongside or even above major industrial economies.
In fact, the year saw another long- “Part of what we’ve been dealing with for The following is a partial list. The higher the Euromoney country risk (ECR) score, the lower the perceived riskiness.
earthquake in Japan had a direct impact
held belief turned on its head, as risks the past few years in a more intensified
on a significant number of organizations.
in emerging markets were no longer way is responding and adjusting our
Singapore* 88.51%
necessarily higher than those in the systems to the passage of federal
Canada 84.70%
developing world (see Figure 2). In healthcare reform,” says Mark Chaney,
Rising risk awareness Hong Kong 83.68%
the most recent country risk survey chief financial officer at regional health
Against this backdrop, it is not surprising Germany 82.12%
conducted by Euromoney, in December insurance group CareFirst Blue Cross
that the majority of surveyed executives United States 76.28%
2011, a few emerging market economies Blue Shield. “We have been putting in
believe that risks are increasing. As Taiwan* 76.19%
(Singapore, Taiwan, Chile, and Qatar) place a range of systems and tools, from
Kanwardeep Ahluwalia, managing France 76.10%
were favorably ranked as relatively low new financial modeling and scenario
director of financial risk with Swiss Re, Chile* 75.24%
risk, alongside or even above the United development to more and more education
observes, ever-faster communications UK 75.20%
States, United Kingdom, Japan, and at our board level, which then filters
Qatar* 73.20%
and instant transmission may create France. Meanwhile, major developed down to our audit committee.”
Belgium 72.27%
an additional potential dimension of economies such as the Eurozone’s debt-
According to one chief risk officer of Slovenia* 71.66%
complexity via the very perception burdened Italy, Greece, and Spain were
a leading global industrial products Czech Rep* 71.07%
that risks have increased. Some of this rated as riskier than emerging market
company, the biggest risk in 2011 was the Slovak Rep* 70.37%
perceived increase in risk may stem economies such as South Korea and
impact of global market developments Japan 69.83%
from the fact that events and changes Saudi Arabia. (Greece’s ranking has
on operations. “We really saw a lot South Korea* 69.27%
that were once ever-present but dropped particularly steeply since the
of disruption in the marketplace, Kuwait* 68.44%
unknowable are transitioning into onset of the Eurozone crisis in early 2010,
particularly from the EU.” The EU Poland* 67.19%
known risks. “We have a heightened falling from 33rd in March of that year to
disruption not only affected consumption UAE* 66.13%
awareness of global risks today, thanks 115th in December 2011, and continuing
in Europe, but had a secondary effect on Saudi Arabia* 63.58%
to better education and faster, broader to land in the bottom tier of Euromoney’s
inventory and trade flows. Italy 63.28%
communications,” Mr. Ahluwalia says, rankings as this paper went to press.)
Malaysia* 63.18%
“but perhaps we feel risk is growing This trend provides a further sign of the
Brazil* 62.93%
simply because we know more.” improving performance and declining
Spain 62.27%
In 2011, executives saw that riskiness of emerging market economies
China* 61.77%
macroeconomic and financial volatility— relative to major developed economies.
Mexico* 58.69%
and even the potential for severe Ireland 58.18%
financial and economic disruption
Greater focus on India 54.47%
from the Eurozone debt crisis—would Russia 53.07%
continue to dominate the corporate risk external events
Greece 33.91%
agenda. Faced with such uncertainty, During times of tumultuous change, in an
companies held on to cash as they environment of complexity, exogenous Emerging markets Developed markets
pondered an overriding worry that the risks can become more pronounced Source: Euromoney Country Risk (www.euromoneycountryrisk.com)
industrial market downturn might be and difficult to predict. So in 2011, risk
far from over, and that the recession management leaders began shifting their
of 2008–2009 might be just a prelude focus from managing internal risks to
to a bigger economic shock to follow. devising internal responses to external
There would be no simple fixes for the events (e.g., economic shocks and
ballooning debt and economic weakness regulatory change). They explored how
in the industrialized world. The woes they could put to work new, sophisticated
6 Risk in review An in-depth discussion 7

6. Pushed partly by regulators, boards of directors have become
more engaged with risk issues and have been seeking to improve
their ability to define and communicate a clear, organization-
wide risk appetite.
About two thirds of executives surveyed with risk issues and have been seeking challenge for risk management going model outside the financial sector, the functions. In fact, PwC’s forthcoming
see the unpredictability of external to improve their ability to define and forward. “But,” he adds, “a key way board new CROs are being given the ability 2012 State of the Internal Audit Profession
events as a source of growing risk. communicate a clear, organization- members are becoming better informed to have a real impact on both business Study shows that companies that have
Many examples in 2011 underscored wide risk appetite. “It is good that, about risks and their management is decisions and operations, if they see the best handle on risk have internal
how recognizing and even embracing overall, the profile of risk management through the cross-pollination of ideas something they don’t like.” audit functions that go beyond simply
unpredictability can help companies be has been raised in recent years,” says that occurs when a board member sits providing assurance over financial
At one US industrial products company,
more imaginative in their risk planning Jason Pett, a partner in PwC’s US Risk on two or more other companies’ boards controls, by providing stakeholders with
the CRO was appointed to the position
and therefore more resilient the next Assurance practice and the firm’s US across different industry sectors.” a point of view and recommendations on
last year and is now responsible for
time the unexpected occurs. But this Internal Audit Services leader. But, he how to mitigate risk.
expanding her company’s comprehensive
type of risk-related thinking is not easy. argues, the challenge is to move from An organizational response risk management practices to establish Enterprise integration is critical to
“Adaptability of the organization is an essentially reactive risk management
Two other significant trends in 2011 a more integrated, enterprise-wide eliminating silos and giving executives
critical,” says Dean Simone, leader of philosophy to a proactive mindset that
were the shift from an operational to approach (see “Case study: The rise of a more holistic view of the potential
PwC’s US Risk Assurance practice. “It’s anticipates coming risks and helps
a strategic risk perspective and the the chief risk officer,” page 10). “I report threats to their organizations. It also
no longer a question of just reacting when position an organization for new threats
elevation of the chief risk officer role, to the CEO to empower the function enables CROs to include non-traditional
something has happened, but rather and opportunities. “Instead of simply
which in previous years had largely to knock down silos and allow for an functions like human resources in the
preparing for fundamental changes asking yourself what might go wrong,
been found at financial services firms. opportunity to challenge assumptions, risk dialogue. As Ken Coy notes, “Being
in the business that may be needed in imagine figuring out what needs to
This new C-suite role requires a new question actions, and make sure that one able to look across your organization can
response to external developments.” go right so as to ensure that systems,
kind of risk manager, who is strategic, organization is talking to another,” give you perspectives that you might not
processes, and management focus are
collaborative, and business-focused. she says. otherwise have—and that can broaden
aligned to achieve successful outcomes
From bottom-up to “In the consumer products and services your visibility.”
for the company’s strategy in the face of a To manage risks, a growing number
top-down variety of possible situations and external sectors, we’ve seen a lot of clients of organizations took steps in 2011 to
scenarios.” formalize the CRO role,” notes Ron integrate risk management systems
Because of the speed and intensity of Kinghorn. “While typically a different across corporate departments and
external events—and their potential Barry Ward, CFO of insurer Fidelity &
to undermine corporate performance Guaranty Life, says his company, now
and even long-term survival—C-suites in private equity ownership after it was
and boards have begun pressing for spun out of Old Mutual in 2011, has
more effective ways to manage looming enhanced the role of the board: “We
strategic risks and black swans. “The reassigned the risk owners and moved “I report to the CEO to empower the function to knock down
speed of change has been greatly the governance of risk from the audit silos and allow for an opportunity to challenge assumptions,
facilitated through technological committee to the board. At least once a
advances,” says PwC’s Ken Coy. “Reacting year, we’ll spend an entire board meeting question actions, and make sure that one organization is
isn’t necessarily enough to successfully talking about risk, and it is a continuing talking to another.”
manage risk; companies need to item at each regular meeting.”
react faster than their competition.” — CRO of an industrial products company
But clearly, not all companies have
Consequently, in 2011 a growing number
embraced such an approach. “In general,
of organizations shifted their risk
the risk dialogue between boards and
management orientation from bottom-up
the most senior management is still
to top-down, calling for more senior
constrained,” says Ron Kinghorn,
management and board involvement.
an advisory partner with PwC’s
Pushed partly by regulators, boards of Governance, Risk, and Compliance
directors have become more engaged practice, describing this as a particular
8 Risk in review An in-depth discussion 9

7. With high unemployment, 2012: The risks ahead advantage, and survive to fight another
anchor risk Case study: The rise of the chief risk officer day,” he says.
officer
Outside financial services, relatively few companies have embraced risk rising financial insecurity, The realignment of the global In fact, some companies have adopted
management as a way of doing business or making strategic decisions. One marketplace will continue unabated the concept of “reverse stress-testing,” in
and escalating social in 2012, and bring with it attendant
exception is a large industrial products manufacturer in North America, which executives prepare for scenarios
which recently appointed a chief risk officer and thereby became a pioneer of problems across many of the dangers. A strong message from the that could significantly disrupt their
risk management techniques in its industry. survey is that this uncertainty is creating business. As noted in a recently released
world’s markets, nearly 60% new challenges for companies. “You can’t PwC paper, Black Swans Turn Grey:
How has the appointment changed the way the company manages risk? of executives see regulatory predict everything and you can’t afford to The Transformation of Risk (January
According to a company spokesman, the company’s matrix organization mitigate every risk,” says Jason Pett, “so
risk as a major threat to their 2012), this approach “effectively accepts
structure has contributed to the CRO position being well received by all the what do you do? What contingency plans that it is no longer possible to forecast
operating units, re-invigorating the company’s risk management approach. business in the year ahead. do you make?” events themselves, and instead focuses
Because the CRO reports to the CEO, this sends a signal to the rest of the
Ken Coy likens the problem facing on managing their knock-on effects or
organization that it is legitimate for the risk function to knock down silos
executives to that of a fighter pilot, who consequences.”
and challenge thinking in different parts of the organization. The company
is moving from a bottom-up risk system to a top-down approach that must continually identify potential Executives identified a number of
begins with strong support from the board and radiates downward into the threats, understand his or her options, key risks for 2012, most of them a
operating units. decide on a course of action, and act continuation of trends already seen in
quickly. “Executives need to have 2011: economic uncertainty, greater
The company faces multiple risk challenges, some of which are generic processes in place to identify these regulation, intensifying competition, and
(e.g., cyber-security and market modelling to determine customer needs challenges early so the organization financial volatility.
and attitudes) and others that are specific to the industrial manufacturing can respond quickly, have a first-mover
industry. Last year was a tough one, dominated by the economic wobbles
in the Eurozone and also by competitive forces from emerging markets.
Demand for raw materials and the need to manage exposures via hedging Figure 3. Please rate how critical all of the risks are likely to be over the next 18 months.
has been a big preoccupation for the company in recent years, but dialogue Percentage of respondents who selected “high” or “very high” risk
is intensifying about making more systematic use of futures markets to
undertake a more dynamic and opportunistic approach to hedging price
Economic uncertainty 76%
volatility. A lot of effort is going into simply communicating better among the
Competition 63%
company’s operating units so that decisions are more considered and better
Regulations and government policies
Regulations & government 62%
understood by a broader management group.
Financial market 60%
Talent &
Talent and labor 57%
Data privacy and security
Data privacy & 56%
Commercial market shifts 54%
Reputation and brand 52%
Large program risks 47%
New product introductions 46%
Disruptive technologies 41%
Mergers, acquisitions, and JVs
Merger, acquisitions & 41%
Fraud & ethics
Fraud and ethics 40%
Business continuity 39%
Government spending and taxation
Government spending & 39%
Energy &
Energy and commodity costs/prices 39%
Geopolitical risks 31%
International trade and payments
International trade & 21%
Crime &
Crime and terrorism 16%
Public infrastructure 15%
10 Risk in review An in-depth discussion 11

8. Intensifying economic The top risk focus, irrespective of one’s wielding increasing influence on happen very quickly can change the what’s going to happen in 2014 is much
uncertainty industry, should be where the economy is economic, commercial, and financial whole business model, or your potential less certain, and we have developed a
going, stresses CareFirst’s Mark Chaney: developments and policy outcomes. opportunities—or at least your upside in range of scenarios for our business that
Reflecting concerns about further “For certain types of companies, it’s Many of these influences and outcomes some countries,” explains Ron Kinghorn. range from a somewhat positive to a very
economic deterioration, economic hard to separate what’s going on around cannot be easily foreseen. negative outlook.”
uncertainty tops the list as the biggest Several executives noted that the United
the world versus what’s going on in this
perceived threat to companies in 2012, States (home base to more than half of With such challenges at home and
country. For those who have portfolios
all organizations surveyed) could face abroad, it is not surprising that three
as ranked by 73% of those surveyed. that need to be invested, I think the Increasing regulations
considerable political change following quarters of surveyed organizations
The increasing risk of more defaults capital markets concern a lot of us.” Unfair competitive advantages in some presidential and congressional elections operating in the financial and healthcare
in Europe and a possible breakup “We are quite aware of the risk that regions—such as trade barriers and this coming November. Although the sectors consider regulatory change
of the Eurozone currency union could there could be a global depression,” other protectionist measures—can political outcome could result in a among their most critical risks. And as
put local economies in freefall, cause says of Swiss Re’s Mr. Ahluwalia. “As also pose a threat to organizations lessening of regulatory pressure in the more and more companies build up their
severe financial disruption with global we look forward, while there is ongoing seeking to compete in the global market United States, the period leading up to presence in emerging markets, they are
ramifications, and trigger another nasty uncertainty around the Eurozone and a arena. For example, China’s industrial the elections will likely lead to further more exposed to regulatory actions that
worldwide recession. The US economy justifiable feeling that risk is increasing, manufacturing companies command a disruption and uncertainty. may not always be stable, predictable,
is also a worry, particularly given for Swiss Re that is an opportunity as dominant niche in the global market, but, and transparent. In the energy sector, for
the uncertainties inherent in an For now, US executives anticipate
well as something requiring constant says one executive, that’s because China example, 62% of surveyed organizations
election year. increasing local regulations, and many
vigilance.” “has erected artificial barriers in its own cited changes in regulations and
believe that regulatory changes will
While all organizations expressed market to help them gain an edge against government policy as a top risk. Shifts
The global economic shift to emerging be the single biggest risk over the next
significant concerns about economic competitors.” in government policies and regulatory
markets also brings with it inherent risks. year and beyond. In particular, massive
conditions, some industries are With high unemployment, rising changes can make companies operating
As noted in PwC’s recent paper Resilient changes in healthcare policies and
more exposed than others. Given the financial insecurity, and escalating social in oil, gas, and other extraction
Growth: Making the Most of Opportunities financial regulations could present
inextricable links between the economy problems across many of the world’s industries vulnerable to expropriation
Away from Home, “The success of major obstacles for US companies. “Early
and financial markets, it is not surprising markets, nearly 60% of executives and other geopolitical risks.
companies that have set up operations implementation of federal healthcare
that financial institutions see economic and done well in a country whose GDP see regulatory risk as a major threat reform in the United States has not had
uncertainty as a critical risk (77%). growth is approaching double digits can to their business in the year ahead. “A too many unexpected consequences or
Companies in the industrial products prove enticing to latecomers. But any lot of regulatory movements that can effects,” says CareFirst’s Chaney. “But
sector are almost equally concerned given market, no matter the attractions,
(at 74%), though their worries likely may be a poor fit for companies from a
skew more toward reduced customer particular sector, from a certain home Figure 4: What are the top drivers of increasing risk?
demand, higher costs, and other effects country or with a particular strategy.” Percentage citing response by sector
of economic volatility. New, fast-growing markets have been
Increasing regulations 78% 58% 45% 70% 54%
Proliferating technology 34% 20% 55% 35% 33%
Structural economic change 50% 57% 48% 38% 49%
Changing market needs 43% 42% 49% 31% 56%
New corporate competition 13% 15% 26% 14% 21%
Adverse publicity/open source web 13% 12% 11% 30% 12%
Political leadership/change 20% 30% 16% 38% 19%
Financial services Industrial products* TICE** Health services Retail and consumer
* Industrial products includes the automotive and energy sectors, as well as utilities
** Technology, information, communications, and entertainment
12 Risk in review An in-depth discussion 13

9. Figure 5. Credit conditions for loans to businesses Renewed financial volatility wary of the impact of currency volatility markets—especially from the East.
due to the heightened uncertainty. “Many “Lower operating costs, evolving business
Because of the havoc economic events
of our products are sold and priced in models, advances in technology, and
% balance can play on capital and currency markets,
Euros,” says one executive, “and many of the ease of global trade have enabled
nearly 60% of executives in our survey
120 Spain our inputs are priced in US dollars, so the emerging markets to grow and take
Portugal cited financial volatility as a paramount
impact of the Eurozone turmoil has a big market share from industries once
Eurozone risk. Above all, executives worldwide
100
Tightening
Italy
impact on us as a firm.” thought to be insulated from such
worry that failure of European
disruptive competition,” says Ken Coy.
policymakers to solve the Eurozone debt
“In this new climate, risk functions
80 crisis could reach a stage that leads to Growing competition need to be agile with regard to how
disorderly defaults, the abandonment of
The majority of executives we surveyed they identify and respond to risks.”
the Euro by one or more EU members, or,
60 (63%) told us that as trade barriers fall Emerging market companies may be
at its worst, the demise of the currency
and globalization grows, competition will better placed to win over new customers
union entirely. Under these scenarios,
continue to heat up. Across all industries, in other emerging and developing
40 interbank markets could freeze up the
organizations are facing increased global countries, where much of the future
way they did during the global financial
competition at home and abroad. As one market opportunity will come. These
20 crisis in September 2008, following
executive told us, “In a global world, organizations may have a competitive
the collapse of Lehman Brothers. This
everyone wants to play in someone else’s edge in accessing these fast-growth
could usher in a wrenching global credit
0 backyard.” markets, thanks to their familiarity with
crunch and a period of extreme financial
digital technology, business practices,
volatility. The rise of the digital economy is adding
and marketing strategies tailored to
-20 to the competitive pressures. With
Banking and other financial services these lower-income environments.
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 the Internet entering a second phase
firms, at the center of the storm in the For examples, look to telecom and
dominated by mobile devices and cloud
Source: Oxford Economics Eurozone, are particularly vulnerable information and communications
computing, the barriers to market entry
to threats from financial volatility. More technology providers such as ZTE
have fallen in many industries, and
than three quarters of the firms surveyed and Huawei, both of which have won
business models and customer loyalties
in this sector consider financial volatility significant market share in India, Russia,
are changing swiftly. Validating this
as a serious risk. Not surprisingly, capital- and other emerging markets thanks
trend, our study showed that some
intensive sectors, such as industrial not only to their lower operating costs
73% of technology, information,
manufacturing, view financial volatility but also to a focused effort to provide
communications, and entertainment
as a major risk in the year ahead. specialized customer service.
(TICE) companies consider increased
According to company CFO Barry Ward, competition among the most critical risks “Business has become so globally
Fidelity & Guaranty Life “remains keenly they expect to face over the next year. diverse,” says Microsoft CFO Peter Klein,
focused on the credit risk that we have This figure is even higher (75%) in the “that it is an ongoing challenge to scale
in our investment portfolio. We have retail and consumer goods sector. this with different cultures and operating
continued to de-risk our portfolio to models—and develop the tools and
And as the use of new technology
reduce the investment risk and increase technologies to adjust to the continued
leapfrogs in the developing world,
asset liquidity.” global diversification.”
Western executives worry that the
Even if a full-blown crisis is avoided in new, well-positioned contenders
the Eurozone, risk managers remain will be coming from emerging
14 Risk in review An in-depth discussion 15

10. Data privacy and Indeed, senior executives are Figure 6. How well does your organization currently manage each of these risks?
security threats increasingly concerned this year about Percentage of respondents who rate their organization “well” or “very well”
data privacy and security (the 56%
The pervasive use of the Internet and response represents a huge jump from
social media will catapult data privacy the 28% who cited this as a critical
and security risks to a higher perch on Financial market 71%
risk in 2011) and reputation and brand
the risk agenda, according to 56% of Reputation and brand 65%
(52% in 2012, up from just 25%). This is
executives we surveyed. Relegated to Fraud and ethics 65%
particularly true of financial institutions,
Competition 64%
information technology (IT) in the past, with nearly two thirds of surveyed
Regulations and government policies 62%
data privacy and security risk is gaining financial institutions naming data Data privacy and security 57%
further prominence as a strategic threat, privacy and security among the highest Business continuity 57%
and vastly increased attention from risks they face going forward. Obvious Commercial market shifts 55%
executives and risk managers. “As the areas of concern faced by banks, insurers, Economic uncertainty 53%
globe becomes more interconnected, our and other financial services firms include Crime and terrorism 51%
customers are demanding an increased risks related to protecting client data Energy and commodity costs/prices 51%
focus on data security, the cloud, and potential vulnerabilities to cyber New product introductions 50%
regulatory data, and the financial costs threats, and the threat of reputational Mergers, acquisitions, and JVs 49%
of risk management,” says Microsoft’s damage should a breach occur. “Security Government spending and taxation 48%
Peter Klein. and reputation are linked phenomena,” International trade and payments 47%
As companies embrace the cloud and says Jason Pett. “In a data-driven world, Talent and labor 45%
install new IT infrastructure, protection it’s vital that you can defend yourself, Large program risks 44%
of sensitive customer and financial whether that means dealing with direct Disruptive technologies 43%
data will need to become an art form. attacks that can impact your operational Geopolitical risks 40%
“We know there will be a cost impact, performance and perhaps eventually Public infrastructure 34%
and there are obvious security issues damage your brand, or attacks aimed at
for many companies,” says PwC’s Dean obtaining confidential corporate data or
Simone, “but the unknown impact of private consumer data, both of which can
cloud computing is one of the biggest also damage your reputation and brand.”
challenges facing business in the In the health services sector, data
coming years.” privacy and security are among the top
Meanwhile, the growing use of social concerns (at 63%), possibly representing
media and mobile devices introduces a concerns over the cost of compliance.
higher threat of reputational damage, This risk is becoming amplified as
misuse of customer data, and IT security healthcare organizations increasingly
breaches. Companies need to find the exchange sensitive personal data and
right balance between openness and information using mobile technology
control. “We are exploring the use of and other Internet-based technologies.
social media as a way to communicate In the United States, the Department of
with interested communities,” says Barry Health and Human Services responded
Ward of Fidelity & Guaranty Life, “but we last year to a number of serious cases
acknowledge the need for risk controls of breaches in patient data privacy by
over any social media strategy.” tightening its oversight and imposing
fines on healthcare providers that did not
adequately protect patient data privacy.
16 Risk in review An in-depth discussion 17