Mitigating the Top 5 Emerging Risks in the Engineering Industry

From simplifying everyday life with ingenious innovations to making monumental advancements in technology, healthcare, infrastructure, and energy, the global $1  trillion engineering industry has been at the forefront of human progress. In the face of geopolitical insecurity, technological transformation & climate change, engineering industries are continually having to transform their ways of working, making them vulnerable to new threats, and amplifying their exposure to novel & diverse risk profiles.

Different industries within engineering face various threats, but here are some common, newer areas of risk, and advice on how enterprises and organisations can mitigate them effectively.

In engineering fields related to construction projects, cyberattacks can cause considerable harm

Cyber risks

With the focus on Artificial Intelligence (AI) and a shift towards automation, business processes, manufacturing capabilities, and operational efficiencies are increasingly being handled by technology. This exposes organisations to the very real and dangerous threat of cyberattacks, whether for data, information, or to control or manipulate processes.

In engineering fields related to construction projects, cyberattacks can cause considerable harm like equipment damage, loss of good faith, expensive delays, and legal battles.

Irrespective of size or scope, organisations are increasingly understanding how they are vulnerable in the digital space, and the significant costs associated with their susceptibility to cyber threats. Findings from Willis Towers Watson’s Construction Risk Index showed that construction executives cited cyberattacks and privacy breaches, resulting from the industry’s adoption of new technologies, among their top 10 risks.

How to minimise or mitigate risk exposure

Investing in protection and detection software is the first and most obvious step. Unfortunately, it is often considered the only step. Along with system-based protection like data encryption, Multi-Factor Authentication (MFA), user privileges and regular audit & process reviews, organisations should also have an incident response plan in place and regularly test their systems for flaws.

Technology, however, is always only as good as the people who use it. The Willis Towers Watson 2017-18 Reported Cyber Claims Index revealed that 61% of insurance claims filed were attributed to human risk, so adequate employee education and training is perhaps the most critically important element of a cyber resilience plan. The Cybersecurity Imperative Study also showed that 87% of executives cited untrained staff as the greatest cyber risk to their business.

Cyber resilience training does not stop with employees. External agents such as suppliers and contractors must adhere to internal policies and procedures, and due diligence should be undertaken before contracting with a third party that has access to sensitive data or privileged information.

As always, if a risk cannot be eliminated, it can potentially be transferred. A cyber extension on general insurance coverages can screen and protect organisations from the most significant risks. In addition to ongoing risk mitigation, risk managers should regularly review their insurance policy documents to ensure that there are no gaps in coverage that could leave their firm exposed.

Climate change

With each passing year, the threat of climate change-related incidents increases. As governments race to achieve their targets and objectives set out in the Paris Agreement, the engineering industry is also having to change its methods to ensure compliance with the government’s ever-growing and changing demands.

Engineering companies and their clients, mainly within the construction and manufacturing sectors, have to meet an increasing number of standards and requirements set out by governments, as well as keep up with their constantly-evolving policies and regulations.

Another transformation comes with larger risk exposure. This relates to the long-term change and adaptation the natural environment imposes on business models and project development, since large engineering challenges are, by nature, dependent on weather exposure, resource availability, and geological conditions among others.

assess how climate risk could financially impact business models

How to minimise or mitigate risk exposure

The first step would be to assess how climate risk could financially impact business models and then frame various scenarios based on well-established risk modelling techniques. Historical catastrophe models are effective as they take into account past losses not only from one organisation, but other similar ones as well, and determine a percentage-based likelihood of the reoccurrence of comparable claims. Once the risk exposure is understood, insurance pricing and reinsurance structuring, if applicable, will allow businesses to quantify how much risk they deem fit to transfer or retain.

Warranties

Engineering organisations are heavily dependent on infrastructure projects. Whether it’s a city’s main highway or a purpose-built, state-of-the-art, high-security lab, excellent infrastructure is vital to the growth, development, and overall well-being of society. Historical infrastructure projects are always subject to becoming obsolete through new technology or legislation, or even due to existing projects that are no longer financially viable to maintain.

Depreciation is always expected. But the trouble begins when policy and regulatory changes are not taken into account. For example, the weight and quantity of commercial vehicles have increased dramatically over the last 50 years, which is when many of the existing roads and bridges would have been built. Hence, they are now facing a speed of deterioration that is faster than expected but may not be accounted for in the warranties offered by the engineering firm that originally consulted on the project.

How to minimise or mitigate risk exposure

There are complex liability exposures associated with infrastructure projects. They go beyond property damage to various legal complexities, reputational damage issues, and possibly extend to corporate manslaughter cases. A thorough study of all existing assets, their intended capacity, and their current & potential future usage gives organisations and governments a clearer picture of what exposures to expect, and to what extent they need insurance to cover these evolving risks.

Energy sources

Renewable energy sources are garnering more interest than ever before. Significant shifts are taking place in the transport and manufacturing sectors with the use of clean energy sources and production becoming commonplace. Massive research and development departments and the subsequent large investments are a growing cause for concern among organisations and regulators alike, as many methods of generating renewable energy are as yet unproven to be cleaner than traditional fuels or even as effective. This growing risk exposure must be taken into consideration as it has significant repercussions on operations and revenue in both the near and long term.

In the case of traditional fossil fuel production, the risks associated are primarily due to geopolitical fluctuations, extraction & transport errors, and security risks. With both assets and employees based in some of the most remote parts of the world, energy producers have been left to navigate precarious political tensions, emerging security threats, and increasingly daring investment & operations risks.

Climate change reforms also greatly impact the energy sector with government targets pressuring companies and consumers to adopt non-traditional energy sources. Fundamental changes are being implemented on a global scale, and the energy sector needs to reassess its business model to cater to a post-oil-dependent world.

Many of the emerging exposures in the energy sector are unprecedented

How to minimise or mitigate risk exposure

From transition risk to litigation, the energy sector has to act fast to mitigate its increasing risk exposure that is a result of unstable geopolitical situations, insecure international supply chains, declining consumer demand, cyber risk exposures, and more.

Many of the emerging exposures in the energy sector are unprecedented but by anticipating and planning for them in advance, the engineering industry can plan to mitigate, transfer and manage them effectively.

Intellectual property

Often overlooked, intellectual property theft is a real issue for the engineering sector. From the duplication of automation & processes to blueprint & design theft, organisations build their entire businesses on intellectual property.

Most companies recognise the value of their intellectual property, but often do not seriously consider intellectual property when discussing their risk management strategy. The financial impact of intellectual property litigation is substantial, and while a 2018 Willis Towers Watson survey found that 50% of companies agree that intellectual property litigation costs could have a material impact on their business,  only 10% purchase insurance for it.

Financial safeguards against intellectual property are essential for the engineering sector

How to minimise or mitigate risk exposure

As with every risk management process, the first step is to calculate how much your intellectual property is worth to the company. Ownership of intellectual property and any trade secrets or patents should be clear and defined, to adequately quantify the risk, assess available risk transfer methods, and monitor relevant exposures.

Financial safeguards against intellectual property are essential for the engineering sector as intellectual property rights can create more exposure than is commonly perceived.

The engineering sector is heavily dependent on the development of technology and research, and as a result, defining and protecting ownership rights are essential. In a continually changing landscape, risk management remains an intensive and essential tool for business longevity. With the right mitigation tools and risk transfer protocols, the industry will continue to be well placed to do what it does best, and that is to solve some of the world’s largest problems.

Sources:

https://www.willistowerswatson.com/en-AE/Insights/2019/01/power-and-renewable-en ergy-market-review-2019-ready-and-waiting

https://www.willistowerswatson.com/en-AE/Insights/2019/05/7-key-geopolitical-drivers-impacting-the-energy-industry

https://www.willistowerswatson.com/en-AE/Insights/2019/05/geopolitical-instability-tur ning-up-the-heat-on-the-energy-industry

https://www.willistowerswatson.com/en-AE/Insights/2019/01/power-and-renewable-en ergy-market-review-2019-ready-and-waiting

https://www.willistowerswatson.com/en-AE/Insights/2018/07/global-intellectual-proper ty-litigation-risk-research-report

https://www.willistowerswatson.com/en-AE/Insights/2019/03/managing-cyber-risk-in-t he-construction-sector

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https://www.willistowerswatson.com/en-AE/Insights/2018/11/ageing-infrastructure-mor e-than-a-bump-in-the-road

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