Why are financial institutions particularly exposed?
Financial institutions and professional services firms are more likely to rank what we have termed ‘tech risk’ higher than any other sector. In the US in particular, 37% of companies in this sector rank this risk their top risk- a much higher proportion than any other industry. In the UK, it is marine and warehousing that has the highest proportion (31%) that ranks tech risk top.
Financial institutions face risk from misalignment between business and IT strategies, management decisions that increase the cost and complexity of the IT environment, and insufficient or mismatched talent. What’s more, mergers and acquisitions can hopelessly complicate the organisation’s IT environment, something that many management teams often fail to anticipate. Meanwhile, technology-driven start-ups and disruptive financial technology (“FinTech”) solutions are challenging the business models and processes at the core of many institutions, suggesting that technology risk holds strategic, financial, operational, regulatory, and reputational implications for the sector.
Marine and warehousing is similarly challenged - technology may become obsolete, disrupted, or uncompetitive, with legacy systems hindering agility - even as the pressures on supply chain management and rapid delivery have been exposed and exacerbated by the pandemic. UK companies may highlight this risk specifically because Brexit has placed even greater pressure on IT and documentation systems.
Legal and regulatory risk is inherent to investing in potentially disruptive technology research, development, and products.
Kenneth K. SuhFocus Group Leader – Cyber & Technology Claims, Beazley
Insurance is one industry that has yet to be massively disrupted by FinTech - but we can expect it to be. On the cyber front, you could imagine that Cloud providers with a good understanding of the data flows of their customers would be in a good position to enrich the data analytics around cyber security.
Alex Creswell, OBE Strategic Adviser, Beazley
Tech risk resilience is variable
In terms of resilience to the risk of failure to keep pace with technology, financial institutions feel well prepared to face the threat. Some 56% of US businesses feel very prepared for this risk, contrasting with only 37% in the UK. Real estate is a solid 50% feeling very prepared in both territories. In the US fully 60% of technology, media and telecoms businesses are confident on about their ability to deal with this risk - a much stronger showing than in the UK where just over a third (36%) feel equally bullish - in part reflecting a broader pattern of greater conservatism in UK vs US responses.
In large part, resilience to tech risk is bolstered through recognition that it takes money and talent to identify disruption before it happens so organisations are not left behind.
Bob WiceHead of Underwriting Management, Beazley
Money and talent underpin resilience
In both markets, those with lowest levels of confidence include public sector and education (30% in the UK feel very prepared to manage this risk, rising to 39% in the US) and hospitality (32% in the UK and 37% in the US).
Public sector and education may be long on talent but are generally poorly-funded compared to the private sector - particularly financial services and technology media and telecoms which have thrived through the pandemic and report relatively high levels of resilience. This may explain the substantial lag for public sector and educational institutions.
Shipping and warehousing firms likewise may lack the essential financial firepower to combat this risk. They operate on thin margins, yet their future relies on technology - including, robotics, RFID (radio frequency identification) and IOT (internet of things) for the efficient movement and tracing of goods in transit.
Healthcare and life science executives’ relative lack of confidence in their resilience to this risk may simply reflect the harsh reality that this is a sector which is transforming at warp speed. No matter how good the cashflow or how bright the PhDs, there is no guarantee that someone else won’t beat you to the punch.
Tech risk set to increase slightly
As we look ahead to 2022, tech risk, as we class it, becomes marginally more significant - ranked top by 27% of business leaders overall rather than 26% in 2021 as US businesses in particular become slightly more concerned.