Navigating the evolving risks in the real estate and hospitality industries
- Insurance must be viewed within the wider context of enterprise risk management, encompassing risk mitigation measures that reduce the threat to people and property, says Edward Farrelly of Marsh
Recent events in Hong Kong have highlighted risks arising from social unrest. Property owners in affected areas are undoubtedly reviewing their insurance coverage, particularly “SRCC” clauses, relating to strikes, riots and civil commotion. This will generally cover property damage and public liability under these situations.
However, insured parties can also be affected by what happens in their immediate surroundings, as businesses around Admiralty can testify. Even with minor damage or a complete lack of physical impact, large losses of revenue can be incurred. Non-damage business interruption insurance policies can therefore be an important consideration for a business. Certain risks, such as loss of attraction, are not normally covered by traditional insurance, but they can be supplemented through innovative solutions.
All of this points to a need for companies to know their real risks, and adequately put measures in place to protect themselves and their stakeholders. Real estate owners, managers and occupiers must become aware of the risk presented not only by social unrest, but also political violence and terrorism. Offices, shopping malls, and hotels in prime areas of Hong Kong attract high profile tenants and generate high volumes of foot traffic, increasing the risk profile.
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Generally speaking Hong Kong is perceived to be a safe and welcoming city, both on a personal level – witness the number of tourists – and also in terms of doing business.
The Lloyds City Risk Index (the LCRI) reinforces this view. To measure the potential financial impact of catastrophes, the LCRI estimates cities’ GDP at risk. In 2018 it categorised Hong Kong as being only moderately at risk, ranking it 51st out of 279 cities globally. That said, “moderate risk” does not mean “no risk” and we should not become complacent.
Further, according to the World Economic Forum’s executive opinion survey, published in 2018, economic and technological concerns such as asset bubbles, cyber-attacks, and data fraud/theft were among the top concerns with respect to doing business in Hong Kong. The asset bubble concern reflects, among other things, high residential house prices and a large proportion of the population being priced out of the market. This was recently highlighted by Paul Chan, the Financial Secretary, when he issued a housing affordability warning for Hong Kong.
Social instability was another area of concern highlighted by the World Economic Forum’s study. While the root causes may be diverse, real estate can be a contributing factor if the younger population is excluded from the property market. Income inequality will rise and exacerbate the risk of unrest. At the other end of the generational spectrum, inadequate pension provision among the population, coupled with lower birth rates and longer life expectancy, also point to future social stressors.
Changes in the political landscape across the globe have polarised opinions and attitudes, leading to a greater prevalence of populism and hate rhetoric. Society is now more connected than ever and extremists are leveraging the spread of social media for recruitment, faster mobilisation, and more radicalisation.
Recent atrocities in Sri Lanka and New Zealand spotlight the terrible impact wrought by terrorists. These threats, and the risks they pose, are evolving to become less predictable but more tangible as terrorists seek to extract maximum exposure and notoriety from their attacks on international targets.
With respect to terrorism, attacks are rare, but they are sudden, often occurring without warning, and their impact can be devastating. Beyond the emotional and physical damage, they can interrupt business operations, leading to significant loss of revenue and plummeting confidence in a brand or institution.
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Real estate companies and hotels cannot eliminate these threats, and insurance alone is not sufficient to adequately protect a company. However, companies can take steps to reduce risks, contain the damage caused to people and property, and accelerate recovery.
Proactive risk control should therefore be implemented to protect the interests of clients, guests, shareholders, partners, and employees. This is best achieved through a formal enterprise risk management process embedded into an organisation. Its job is to identify hazards and manage the associated risks. For this process, it is essential that risks are understood and prioritised and appropriate resources are effectively allocated.
To develop such a programme, the risk appetite of an organisation must be ascertained to define, quantify, and understand the business’ risk tolerance. After factoring in risk mitigation initiatives, an objective assessment should be held to identify how much risk to retain or transfer through risk finance measures.
The most appropriate insurance programme for a business will provide the best financial return. Traditional terrorism insurance is triggered by damage to property and requires the motive of an attack to be ideological, political, or religious in nature. However, as the nature of attacks evolve and active assailant attacks become more prevalent, many cases of such violent acts may not be covered by existing policies. It is, therefore, highly advisable that companies review their existing insurance to ensure that active assailant events are covered, either by extension or by a stand-alone policy.
Insurance is something that is purchased in the hope that it is never needed. However, we cannot become too complacent, with the increase in disruptive activities occurring over the past few years. It must be viewed within the wider context of enterprise risk management, encompassing effective risk mitigation measures that reduce the threat to people and property.
Edward Farrelly is senior vice president, real estate industry leader Asia at Marsh
