The global financial and economic crisis has caused a fundamental reassessment of risk. In the early years of this decade, when the pricing of risk was at an historic low in credit markets, and finance was cheap and easily accessible, companies around the world pursued increasingly bold strategies. Mergers and acquisitions grew in scale and ambition, financed by high levels of leverage, and corporates expanded their geographical and market reach to take advantage of the boom.

Since late 2007, the contraction of credit in financial markets and the subsequent economic downturn has had a dramatic impact on corporate confidence. Across the full range of regions and industries, companies are postponing investment, cutting costs and retrenching into core markets. In the most general terms, they are reining in their risk appetite, and paying closer attention to the way in which risks are identified, assessed and mitigated. For risk managers, these are highly demanding times: after a period of years when they were viewed as nay sayers intent on applying the brakes to corporate strategy, they are now taking centre stage as senior executives apply a more stringent risk filter to their activities and seek to demonstrate that they have undertaken a full assessment of the threats that they face.

At a time of major upheaval in the global economy, it is crucial to maintain an understanding of how perceptions of risk are changing and the extent to which companies are prepared to manage these risks. Senior executives in the world’s leading organisations must not only navigate their way successfully through uncertain times, but they must also take the kind of calculated risks that are necessary for growth.

To explore these issues, Lloyd’s commissioned the Economist Intelligence Unit to conduct a survey of more than 570 board-level executives from around the world. The findings of this research offer a comprehensive picture of the risk environment for corporate executives and risk managers.
As well as providing a snapshot of the current risk concerns of global business leaders, Lloyd’s will use this survey to help populate a Lloyd’s 360 Risk Map. This interactive online map, to be launched in early 2010, will display emerging risk hotspots and changing levels of risk around the world. It will also provide the latest information and news on emerging risk. Lloyd’s intention is to conduct this risk survey of global executives annually, so that it can track changes in executives’ risk priorities and preparedness in different regions of the world and identify key trends on the Risk Map.

In this report, we examine how executives from nine global regions perceive the current risk environment. More specifically we investigate their risk priorities and the extent to which they feel prepared to deal with these risks. We also explore how local context and attitudes are shaping risk management around the world.

Key findings of this research include the following:

• Companies are retreating from risk-taking as the global economic downturn continues to bite. The combination of a synchronised global downturn and financial crisis has had a dramatic impact on the willingness of companies to take risks in order to grow their business. While companies may be prevented from implementing strategic initiatives because of a lack of affordable credit, the survey suggests that, more generally, there is an aversion to activities that could have a negative impact on earnings in the short- and medium-term. More than half of companies globally say they have reduced their appetite for risk, compared with one year ago, whereas less than one in five indicate that their appetite for risk has increased. Manufacturing companies are most likely to say they plan to reduce appetite for risk, with 60% indicating that they will do this, followed by 59% of financial services companies and 57% of information technology firms. Looking at the results by region, respondents from Russia, Eastern Europe and Latin America are most inclined to have reduced their appetite for risk.
• The economy is currently dominating the risk management agenda. With many companies around the world currently preoccupied with survival, it is understandable that fears about the economy will be foremost in the minds of senior executives. Among the top ten global risk priorities, all of the risks are either directly or indirectly related to the economy. The cost and availability of credit leads the list, followed by currency fluctuation, insolvency risk, loss of customers, major asset price volatility, cancelled orders and the risk of excessively strict regulation. All of these concerns can be directly attributed to the current economic crisis. Corporate liability and reputational risk can, arguably, be viewed as indirectly linked to the financial crisis, whereas project delivery risk will in many cases be directly related, given the reduced margin for error under which more cash-strapped companies are operating.
• Companies feel less prepared to deal with exogenous risks. The risks in our survey can be divided into two main categories: ‘internal risks’ that fall within the walls of the company, which can be controlled by executives, and ‘exogenous risks’, relating to external factors over which managers have only limited, indirect control. Reputational risk and corporate liability, for example, can be termed as internal risks, which boards can mitigate by using insurance or improving management in some way. Other risks, such as the insolvency of customers, or the cost and availability of credit, can be called exogenous risks because they cannot be mitigated directly using insurance or management. In general, survey respondents are much less prepared to deal with exogenous than internal risks. That such a gapshould exist in the case of many of these risks is not surprising. Given the difficulty of taking control of these risks, however,companies must find indirect ways of managing their impact through strategic and operational planning.
• Environmental and natural hazard risks are seen aslow priority. The extent to which macroeconomic factors have taken over the risk management agenda raises the question of whether companies are sidelining other, vital risks in their efforts to navigate their businesses through the current economic downturn. Certainly, the dominance of economic risks means that the overall categories of ‘environmental and health risk’ and ‘natural hazard risk’ are relatively low on the priority list. Although respondents claim that they are well prepared to manage these categories, their low priority suggests that there may be gaps emerging in the ability of companies to withstand some longer term and ‘tail risks’.
• Executives in all regions share similar priorities when it comes to the economy and business strategy, but there is greater divergence in other risk categories.The overall categories of ‘economic, regulatory and market risk’ and ‘business and strategic risk’ are given broadly similar priority ratings across the regions, but there is greater divergence when it comes to ‘political, crime and security risk’ and ‘environmental and health risk’. In general, less developed markets are more likely to give a high priority rating to political, crime and security risk, or environmental and health risk. For example, respondents in China and South-East Asia assign aconsiderably higher priority to environmental and health risk than those in other regions of the world, whereas those from Latin America, the Middle East and North Africa are most concerned about political, crime and security risk. Meanwhile,respondents from China are least concerned about political, crime and security risk.