Risk Management 4.0 Shields Against Volatile Risks

Why insurers should partially block out the past and why forward-looking companies should take charge of their future – because one thing is certain: Nowadays, risk management is more in demand than ever. 

Whenever insurers decide whether to provide coverage for specific risks, they turn towards the client’s past claims experience. That is how the first insurance came into being hundreds of years ago, and the same principle is still applied today.

When negotiating annual renewals insurers turn towards the client’s claims history and include it in their new offer. If an insurer backs out of a contract with a particular sector or an insurance line, it’s because negative experiences with claims in the past have earned him no money. Similarly, any required risk improvement measures also derive from past claims experience.

In times when risks develop gradually at a slow pace, this principle of assessing the past claims history works quite well. Insurers know what to expect, they consider and calculate appropriate provisions, set prices accordingly and include these in their conditions.

What happens if the risk landscape changes in a snap or new risks seem to appear out of nowhere? 

The steps insurers then take are best explained by looking at the recent cyber insurance examples. The pandemic boosted digitisation and in turn, changed the cyber risk landscape. In response, prices skyrocketed, capacities were reduced, levels of excess increased, risk dialogues became even more laborious and new demands were made. Some businesses received no offer at all for their cyber insurance, and some insurers publicly questioned the future of the product. Many reacted in an almost panic-stricken manner.

Would such radical measures also have been taken if there were no pandemic? We doubt it. Cyber risks were on the rise even before the pandemic and were treated as an accumulation risk.

But why should insurers block out some of the past in such cases? 

It’s quite simple: insurers react as quickly as risks change, but so do businesses. If you ask the management of a company whether it would prefer ”no damage” over “full damage cover”, the reply would be “no damage” in 99% of the cases. That is why investments in cyber security have been stepped up in many companies over the past months. At least now all management levels are highly aware of the topic. The quality of risk has improved considerably as a result.

Unfortunately, some international insurance groups struggle with a moderate approach as loss events affect them globally. The countermeasures they take (in their panic) often tend to be overkill for the individual company. But it is precisely the responsibility of industrial insurance to balance this volatility. Insurers should rather stay calm, work hand in hand with their business clients and moderately shape and make the changes needed to manage the risk landscape. This builds trust – and customer loyalty.

There’s a need for Risk Management 4.0 

Businesses are cautioned to not only rely on industrial insurers as some, to date insurable risks, could suffer the same fate as cyber insurance. Just think about climate change or coverage against natural disasters. Besides, there are many – often new – risks which cannot be insured and which change just as rapidly.

Industrial companies must increasingly come to grips with future risks, strengthen their risk management in the process and place it at the top of their agenda. This, however, means more than just implementing the risk improvement measures which insurers impose upon them – something which almost all market players have propagated at an inflationary level, and which only addresses the past. It is rather a matter of defining future risk changes, determining their possible consequences for one’s company and preparing accordingly – a forward-looking risk management 4.0, so to speak.

A partner who not only focuses on mere risk transfers but acts as a risk adviser, who sends out the right signals and provides expertise through a know-how pool can create real added value for industrial companies. By working in tandem with clients the insurance partner can help to meaningfully shape the future in an ever more complex, interconnected, and fast-moving world.

Andreas Schmitt

Vorstand Risiko- und Versicherungstechnik

T +43 664 962 40 11

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”The World Is in Big Trouble.“

Our CEO Georg Winter shares his views on why geopolitical transformation is our focus this year and why it exacerbates existing risks and causes new risks to emerge.

Secretary-General António Guterres made this statement at the General Assembly of the United Nations on 20th September 2022 in New York.

We are undergoing times of permanent change, which many refer to as systemic transformation or multiple crises strung together. This change takes place in different fields and segments. They, in turn, are interlinked at various levels. HORIZON’s risk-oriented approach aims to define and outline the key areas of change affecting your company. In doing so, we take a close look at the systemic influences of ecological, geopolitical, technological and social transformation on your company’s risk landscape.

The 4 Risk Changers

The 4 Risk Changers

These transformation processes are very dynamic, they are often interdependent and thus characterised as complex processes. They also result in systemic risks. Managing them requires much more than traditional methods of risk management.

In terms of risk management, we refer to these systemic risks as “risk changers” that directly affect companies and categorise them as follows:

  • “Environment in danger” for ecological,
  • “Beyond globalisation” for geopolitical,
  • “Digital transition” for technological and
  • “Social disruption” for social transformation.

HORIZON – “Risk Thought » Fast Forward” is our platform for so-called risk thought leadership. It is based on our vision to detect the impact of these risk changers at an early stage and introduce risk management solutions that boost our clients’ resilience.

How do the 4 Risk Changers affect companies?

Companies are exposed to various kinds of risks. At the same time, systemic transformation exacerbates existing risks and causes new risks to emerge. These primary risks have a direct bearing on companies.

 How do the 4 Risk Changers affect companies?

Primary risks – Transformation leads to direct exposure

Ecological risks
When we look at climate change, we refer to climate risks. They are apparent in form of a changed or an increased exposure to natural disasters, such as floods, storms, hail as well as heat, drought or a rising sea level. As far as companies are concerned, these risks can cause anything from material damages to disruptions of transport routes, in energy, or raw material supplies.
Geopolitical risks
Geopolitical change, characterised by an economic bloc having been established between the USA and China, has put free world trade to the test. It also shows, by looking at Russia’s invasion of Ukraine, just how quickly a system conflict, which we thought had been settled between the democratic and autocratic world, can be reignited. All that, exacerbated by global events, like the Covid-19 pandemic, puts pressure on the availability of energy resources, disrupts supply chains and leads to a global wave of price hikes that challenge governments, businesses, and the civilian population alike.
Technological risks
Technological change has resulted in an over-dependence on data, software and IT infrastructure. All are targets of a rapid increase of cyber threats all over the world and are thus one of the biggest threats of the 21st century.
Social risks
The growing divide between rich and poor, the lack of equal opportunities regarding age, ethnic background and nationality, gender and gender identity, physical and mental abilities, religion and ideology, sexual orientation and identity as well as social backgrounds increases social tensions. The Club of Rome deems equality and justice as part of the ideal solution for a liveable future.

Companies cannot shirk their responsibility in this regard. For instance, social issues are becoming more and more important as we are facing an inevitable demographic change that has already resulted in a systemic shortages on the job market.
The interdependency of these systemic risks is best demonstrated by the war in Ukraine: From a geopolitical point of view, it has led to an energy crisis. In terms of technology, it has led to an increasing number of cyber threats. On top of that, well-targeted campaigns are aimed at splitting society and disturbing social peace in our Western world. From an ecological perspective, however, there is hope that our efforts to reduce carbon dioxide emissions can finally be carried through.
Systemic change – Primary and secondary risks

Systemic change - Primary and secondary risks

Secondary risks – Adaption creates new chances and challenges

Besides these primary transformation risks, which affect companies as “pure risks” from the outside, systemic change leads to secondary transformation risks that are “speculative”. They derive from companies’ adapted business models that were developed in response to the systemic change and comprise both risks and opportunities.
Ecological adaption
In the fight against climate change, many companies have decarbonised their processes or have developed sustainable products. Saving resources and taking advantage of new opportunities are key focal points. However, new products and processes lead to new risks that must be identified at an early stage.
Geopolitical adaption
As a result of the geopolitical change, companies had to explore new markets and new sources for raw materials and find new ways of attracting both customers and suppliers, while keeping a watchful eye on possible dangers. Although the currently rising energy prices still paint a different picture, supply chains can be shortened through nearshoring. This could very well result in a wave of reindustrialisation in Europe.  
Technological adaption
Technological change enables us to pursue totally new paths. While the automation and digitisation of value chains is gaining importance, the full potential of mergers, transparency, big data, and metadata remains to be exploited. Manufacturers of previously traditional products and services are becoming system providers, goods are being replaced by data, and machines by platforms.
Social adaption
In the past, humans used to be regarded as resources. Now, humans with all their resources take centre stage. The concept of Industry 5.0. does exactly that. It places the human being at the centre to promote and foster diversity, different talents, and activities. Many companies have already initiated a transformation process because employees nowadays attach more importance on meaningful work. They believe that they can make a difference when it comes to resilience and sustainability.

Beyond globalisation – Geopolitical transformation in the spotlight

The upcoming release of HORIZON will concentrate on the geopolitical transformation and therefore looks at all its challenges from various angles.
New political world order
Does the war in Ukraine show us the dramatic face of a new political world order and how does this conflict at the very centre of Eastern Europe disrupt our economic basis?
How will the global trend of bloc formation between democratic and autocratic countries influence companies’ global business activities in the future?
What is the risk of technology being abused as an instrument of power and how could this affect companies?
How will the increasing conflict between the USA and China influence global economic relations?

Energy crisis
Blackout and a cold winter – how can we prepare for a total outage?
Will the current shortage of natural resources ruin Europe’s industry or will an ambitious energy transition turn Europe into a role model for a green global economy?

Supply chain dilemma
Will the geopolitical transformation result in a new era of offshoring, or will regional supply chains and increasing investments in circular economy boost independence and resilience?
How will China´s rise continue – considering its growing regional influence along the new silk road – and what will be the effect of its strategy of isolation as a result of its zero-tolerance pandemic policy?
Is the conflict over Taiwan’s independence a ticking time bomb for the global economy?

Loss of wealth
Will double-digit price increases lead to a decreased standard of living over the long term?
Does high inflation increase the risk of social riots in Europe?
How do these circumstances influence people’s work-life balance and their work attitude?
What does a new wave of migration mean for European companies and their DE&I (Diversity, Equity, and Inclusion) agenda?
It is indeed a difficult and challenging situation that raises many most pressing questions. We need to discuss them, their impact on the transformation of the risk landscape as well as possible solution scenarios.
Stay tuned!

Georg Winter


T +43 664 962 39 06

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Natural Gas Seems to Be the New Gold: Interview With Michael Kolb


Michael Kolb, Board Member at Acredia, Austria’s leading credit insurer, talks with Lisbeth Lorenz, our Group Practice Leader, about the political effects of the energy crisis and the macroeconomic situation of the former Yugoslavian countries. 

On top of the already acute crises, new blocs are emerging between the EU and USA on the one side and Russia and China on the other side, exacerbating the threatening situation from both sides. Do we need to fear that countries such as Hungary or Turkey will be caught in the middle?
The accelerated formation of blocs poses a huge challenge to both Turkey and Hungary. Turkey relies heavily on Russia for its import of energy, while being one of the largest investors in Ukraine at the same time. Reconciling both interests will be difficult. The situation in Hungary is slightly simpler. While Hungary imports about 8.2% of its goods from China, its largest trading partner in terms of import and export is Germany. Besides that, the basis of Hungary’s economy is more stable than that of Turkey as the country is heading towards a balance of payments crisis. 

From a credit insurance point of view Serbia presents itself as an interesting market. The country is not clearly positioned between Russia and Europe and has recently approached both the IMF and the UAE for financial support. How do you assess the current situation? In which direction will the pendulum swing?
That is difficult to predict. Fact is that the political situation has somewhat stabilised over the last years – with positive effects on the economy. While Serbia strives to become part of the EU, the Kosovo conflict remains unresolved.

We currently find ourselves in the middle of a crisis cocktail: war, inflation, energy crisis, climate catastrophe, nuclear threats, pandemic, cyber war, blackout – we are facing all these issues at the same time. What is your opinion on this crisis mix by looking at Austria on the one side and CEE countries on the other side?
Global crises such as a war, the pandemic or climate change affect all of Europe. The real question is: How resilient are the individual nations? There is a strong economic interdependence between the European countries. For example, should Germany slide into a recession, this would have great implications for Austria, the Czech Republic, Croatia, Slovenia, and Poland.
The market failures in the energy sector appear to have a positive side effect – a boost for the energy transition. Are the CEE countries well positioned for this, given the fact that most of them rely heavily on Russian gas? How will it affect the competitiveness of the individual countries? Is there a difference between EU and non-EU countries?
Natural gas seems to be the new gold. In view of the complexity of the problem, collaborating countries are at an advantage. In terms of the energy transition, a recent World Economic Forum study shows that the countries in the CEE region have varying positions. On the one side are the role models with Croatia, Slovenia, Hungary, Slovakia, and the Czech Republic. They have the necessary capital, the technologies required to tackle the transition as well as an open access to the market. On the other side there are Montenegro, Serbia, and Moldova. These countries come in last in terms of the willingness to transform.


Acredia is responsible for the former Yugoslavian countries which experienced vastly different developments. How would you rank the macroeconomic outlook of these countries? Where do opportunities outweigh risks and vice versa? (A question that also applies to the CEE region)
There are opportunities in almost all countries. When it comes to risks, however, there are huge differences. Our experts have assessed the individual differences in the current Country Risk Report published by Allianz Trade:

A positive business environment exists in Croatia and Slovenia, with political stability and manageable economic risks (B2 and BB2 respectively). Both countries though are struggling with high national debt and unemployment. Especially Croatia’s tourism was hard hit by lockdowns during the pandemic. Joining the European Monetary Union on 1st January 2023 could boost economic activity.

Serbia also demonstrates a moderate risk level (B2). Companies benefit from an economic growth potential, a stable currency and strong national demand. On the downside, there is poor infrastructure, a perceived high level of corruption as well as a high level of foreign debt.

The risks in Macedonia are slightly higher (C2). However, the country enjoys good relationships with the EU and a relatively low inflation rate. Unfortunately, the implementation of much needed economic reforms is sluggish, and the rate of both unemployment and foreign debt is high.

We find a more delicate situation in Bosnia and Herzegovina due to the country’s high political risk (D3). The economic environment is weak and characterised by poverty and unemployment. On the positive side, the exchange rate is stable and the country’s inflation rate is low.

The EU candidate Montenegro currently poses the biggest risk for companies (D4). Despite a strong growth potential in tourism, the economy is unstable. There is a perceived high level of corruption and foreign debt has been high for years.

About Acredia
Acredia, Austria’s leading credit insurer, is a subsidiary of the Oesterreichische Kontrollbank AG and Euler Hermes AG. As per 31st December 2021, Acredia’s total liabilities amounted to EUR 29 billion and the solvency ratio was at 268.5%.

Lisbeth Lorenz

Group Practice Leader Credit & Political Risk

T +43 664 883 805 12


Michael Kolb

Board Member at Acredia

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Erne Fittings Relies on ‘The Safe Connection’

For Erne Fittings, the world’s leading supplier of butt-weld fittings, “the safe connection” is more than just a slogan: Passion and perfectionism are put into its safe pipe fittings for permanent welds. Every safe connection is also a strong pillar of success in risk and supply chain management and a solid foundation that Erne relies on during today’s multiple crises.

What did we learn from supply chains? Single sourcing is dangerous because being heavily dependent on only one supplier does not enable companies to spread the supply risk. The Covid-19 pandemic has also demonstrated that the single-sourcing effect on supply chains can also be caused by a dependency on several suppliers from only one country.

In China, President Xi Jinping’s Zero-Covid approach brought a sudden halt to entire regions of this huge country. Nothing works anymore, no one leaves their home, nobody works or produces things, and no one exports or imports.

We’re all in the same boat

Container ship crews – mostly Asian – were no longer allowed to board or leave a vessel. Container ports came to a standstill, and the entire cycle of transporting and shipping goods was bogged down – until today.
Lockdowns which blocked the global economy ensued. As the restart did not take place simultaneously, the world economy struggled to restore its rhythm. Add to that the war, following Russia’s invasion of Ukraine. While Ukraine has become the main supplier of raw materials and intermediate goods for many industry sectors, the Western world saw itself forced to act by imposing sanctions on Russia.

Sanctions, not only harm Russia’s economy in the medium and long term but which negatively impact the energy supply chains of the Western world in the short term.

The day when Erne’s world stood still 

In March 2020, the world woke up to a pandemic. A scenario that caught virtually every country and every business unprepared and unaware – Erne Fittings was no exception.

Our customers supply products and services to pipeline engineering and construction companies, so-called EPC companies that are active in the energy industry all over the world, providing products needed to plan and erect ready-to-use plants. They focus on power plants in the oil, gas, nuclear, and district heating sector as well as on hydrogen plants, given the agenda for decarbonisation.

With the onset of the energy crisis and the plunging oil price almost all our clients brought their projects to a sudden halt. New projects in the pipeline were stopped as well or no longer pursued. Our suppliers were forced to either reduce their production or cease it altogether. The market came to a standstill overnight. The pandemic, however, also demonstrated that costs alone were not the only decision-making criteria for management. While laying off staff may have reduced staff costs in the short term, this decision would have been toxic as soon as operations were resumed. The same applies to supply chain management.

Even though today, three years later, multiple crises – a seemingly never-ending pandemic, a geopolitical apocalypse, the energy transition against the backdrop of the climate crisis – present an array of new challenges, Erne Fittings is on track and fit for the future with its strategic and enterprise risk management:

Erne is fit for the future

  • Our supply chain and procurement management is based on long-term and trustworthy partnerships. What matters most are sustainability aspects, quality, and delivery capabilities, not prices. The safe connection is an essential technical and an equally important human factor for our success. 
  • Procurement difficulties and the increasing cost pressure forced us to streamline our product portfolio. We optimised our entire supply chain and grasped new opportunities as we strongly believe that in the midst of every crisis lies great opportunity. We knew that the world would once again need pipe fittings and that we needed to be ready for this day, being leaner, more efficient, and more productive. Our plan worked. At Erne, we optimally positioned ourselves for our clients’ changed needs and behaviour patterns in turbulent times. Today, more than ever, we are both customer and supplier of choice.
  • We realised quickly that the high volatility in prices in our business sector changed the behaviour of our customers. While the quantities ordered are smaller, the order intervals have become shorter and more frequent. We adjusted our supply chain accordingly and optimised our production processes. Our state-of-the-art high-bay storage now plays an even bigger role. It enables us to ensure faster deliveries to our customers, despite all the adversities in procurement markets.
  • Today’s turbulent times have shown us once again just how important trust and sound relationships are for a well-oiled supply chain. In many cases, it was not the availability of materials that caused problems. Rising costs for both raw materials and energy led to higher purchase prices and in turn to higher levels of receivables while quantities either remained unchanged or were lowered. Credit insurances, however, could no longer provide adequate cover. It came down to a matter of trust – trust that all the goods that were ordered could be paid as well, even though the insurance only provided partial cover. Erne has built up this trust with suppliers and banking partners over the past 120 years. The sold trust basis paid off time and again during the crisis.
  • Our strategy to pursue a close proximity to customers in Eastern Saudi Arabia served Erne Fittings Middle East Co. Ltd as an effective instrument to manage the supply chain in this important market – reshoring from our customers’ point of view, if you like. Erne Fittings Middle East now manufactures and provides local customers with the entire product portfolio of carbon steel elbows. Aramco, the world’s largest oil producing company, honoured our colleagues’ efforts with the “LOCAL MANUFACTURERS QUALITY EXCELLENCE AWARD 2021“ – a wonderful acknowledgement bestowed upon Erne Fittings Middle East in February 2022.
  •  Erne is more than ready to tackle the energy transition. We are the first company to have received a TÜV Süd certification for our hydrogen-compatible fittings. The 100 percent hydrogen compatibility allows us to be a first mover in this sector as well and a reliable partner for our customers.
  •  A lot still needs to be done to make the energy transition work. The current crisis forces Western economies to rethink and reposition their energy policies. To be independent of oil and gas, we must quickly build new facilities, such as LNG terminals or gas pipelines. Our biggest risk, however, is the required interim supply of gas which we need to manufacture the products that will ensure our energy supply of the future.

Turbulent times require thorough planning and a carefully thought-out course of action. Securing raw materials and energy on the supply side for the long term, although customer demand indicates smaller volumes delivered faster in shorter cycles, is a business risk and a challenge for the entire supply chain. A mere mathematical calculation of the risk is in this case not good enough as all players in our market rely and depend on each other like never before. Longstanding, personal and trustworthy relationships have become an essential element of our risk management. The same applies to our customers, our suppliers as well as our partners, such as banks and insurance. What we cannot influence is the geopolitical risk and with it the level of uncertainty that we feel in the global economy. This has drastically increased over the last five years.

About Erne Fittings GmbH

Erne Fittings, founded in 1920 in Vorarlberg, Austria’s most Western province, is the world’s leading manufacturer of top-notch butt-weld fittings for the approved market, focusing on the energy industry. Erne Fittings employs about 350 people at its production facilities in Schlins, Mürzzuschlag (Austria) and Jubail (Saudi Arabia) and achieves an annual turnover of about EUR 70 million.

Bernd Klemisch

Member of the Executive Board and CFO
Erne Fittings GmbH

T+43 5524 501 102  

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Supply Chain Risk Management in the Food and Agriculture Sector – Keeping Flexibility and Financial Resilience

Supply Chain Risk Management in the Food and Agriculture Sector - Keeping Flexibility and Financial Resilience

One of the key questions nowadays is how to stay agile in an ever-changing supplier and customer environment? In other words: How to get the right product to the right customer at the right time in the right place while continuing to be profitable, environmentally and socially compliant?

COVID, the war in Ukraine, the gas crisis and more have exposed the fragility of many industries.  Our food supply chain is no exception. What does the future hold for us and are we ready to successfully face new challenges? The more immediate question we have to ask ourselves is: “How can we increase flexibility and financial resilience in an ever-changing economical and geopolitical environment?” Let’s take a closer look at this issue and how to better deal with it:

Sustainability in the Food Supply Chain

The Food and Agriculture Organization of the United Nations defines the food supply chain as consisting of all stakeholders who participate in the coordinated production and value-adding activities that are needed to make food products.

Food Supply Chain

Source of the chart: https://www.fao.org/3/ca8308en/ca8308en.pdf

The food supply chain covers agricultural upstream and downstream sectors from the supply of agricultural inputs (such as seeds, fertilisers, feeds, medicines or equipment) to production, post-harvest handling, processing, transportation, marketing, distribution, and retailing.  
A sustainable food supply chain:

  • should be profitable throughout all its stages (economic sustainability),
  • has broad-based benefits for society (social sustainability),
  • has a positive or neutral impact on the natural environment (environmental sustainability).

Spotlight on Supply Chain Disruption Risk Management

The recent agitation in societies caused by COVID-19, Russia’s aggression in Ukraine, the gas crises, climate change, etc., have prompted governments and corporations to pay more attention to supply chain disruption risk management. This is due to its obvious negative consequences, such as loss of net profit and increased costs for restoring supplies to normal.

The complexity of the supply chain requires that risks be grouped as follows:

  • Supply Risks: Impacts inbound supply, implying that a supply chain cannot meet the demand in terms of quantity and quality of parts and finished goods (supply disruption).  
  • Demand Risks: Impacts elements of the outbound supply chain where the extent or the fluctuation of the demand is unexpected (demand disruption).  
  • Operational Risks: Impacts elements within a supply chain, impairing its ability to supply services, parts, or finished goods within the standard requirements of time, cost, and quality. Transportation disruptions are one of the most considerable operational risks.
Risk in global supply chains

Source of the chart:  https://transportgeography.org/contents/chapter9/transportation-and-disasters/supply-chain-risks/

In order to effectively manage the risk of disruptions in the supply chain, special risk management procedures should be implemented in companies:

Step 1: Assess the risks (suppliers, buyers, weather-related events, foreign economic instability, raw material shortages, blackouts, military actions, actions of the government, social unrest, etc.)

Step 2: Quantify the risks (likelihood and severity, risk mapping)

Step 3:  Build a response plan to contingencies (“If X happens, then we will respond with Y.”) and define roles and responsibilities in this action plan.

Step 4: Develop a supply chain continuity plan (determine critical and major suppliers and logistics routes, qualify alternative suppliers and shipments)

Step 5: Further monitor supply chain risks, carry out supply chain continuity plan modifications and reporting

The vessel, blocking the Suez Canal in 2021

The vessel, blocking the Suez Canal in 2021

Stay Agile in the Food Supply Chain   

One of the key questions nowadays is how to stay agile in an ever-changing supplier and customer environment? In other words: How to get the right product to the right customer at the right time in the right place while continuing to be profitable, environmentally and socially compliant?

Here are some practical key points and ideas for increasing the flexibility of the food supply chains:

  • Go digital wherever possible: collect, process and display in-time data
  • Ensure optimum levels of visibility and transparency across the organization by providing more information to optimise operations 
  • Automate the less time-consuming manual processes
  • Hold extra inventory
  • Make shorter-term plans 
  • Reduce the variety of products
  • Switch to new packaging – smart packaging, large multi-serving formats, modular packaging solutions
  • Buy from domestic or local suppliers where possible to increase the ability to transport goods in an efficient and cost-effective manner
  • Establish and foster solid relationships with strategic suppliers.

Insurance – Key Element to Counteract Food Supply Chain Disruptions  

Insurance is a tool that limits financial losses when a risk has become reality and has disrupted the supply chain, resulting in a loss of net profit, an increase in its mitigation costs and contractual penalties.
As a rule, standard property insurance covers business interruptions, caused by physical damage to the enterprise or physical damage to its suppliers or buyers (extended coverage).   In any case, it should also contain an “on-site element”, i.e. the damage should arise at the site of the party specified in the insurance contract.
In order to partially fill this gap, clients are advised to consider investing in special tailor-made solutions, such as combined stock-throughput and trade disruption coverage or parametric insurance.
Combined stock-throughput and trade disruption covers the entire value chain: from the delivery of goods from suppliers, through their processing at the insured party’s premises, to their delivery to buyers, including both transit and storage periods. A stock-throughput placement provides compensation for material damage to the transported or stored property.
The additional trade disruption insurance covers loss of net profit, increased expenses and contractual penalties resulting from direct damage to property and unexpected events that impacted on logistics and/or happened to goods along the way (fire, lightning or explosion, natural disasters, blockage of waterways, harbours, airport, roads or railways; breakdown of a vessel; confiscation, expropriation, deprivation, embargoes; sanctions; political interference; strikes, riots and civil commotion, terrorism border closures; or other triggers subject to the agreement of underwriters). 
Parametric insurance insures a specific weather or statistical parameter, which should correlate well with the quantity or quality of the goods one buys or sells. For example, to produce a planned amount of vegetable oil, an oil-crushing plant needs seeds to be processed. The factory relies on farmers who grow such crops. In the event of a drought, there will be a shortage of harvested seeds, which, in turn, results in a reduced production of vegetable oil. To mitigate and balance such losses, the oil crushing plant will be insured against soil moisture deficiency (drought index) or an area yield index. The insurance contract is triggered when the insured index reaches a certain value.

Maksym Shylov

Group Practice Leader
Food & Agriculture

T +48 22 39 33 211

Chojnacki Jacek

Jacek Chojnacki

Dyrektor Regionu Food & Agri
Broker Ubezpieczeniowy

T  +48 609 600 960

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End of International Coverage for Russia / Belarus / Ukraine?

End of International Coverage for Russia / Belarus / Ukraine?

In the negotiations taking place on contract renewal, it has turned out that the international insurance industry is no longer willing to agree on coverage for Russia and Belarus, and the options for coverage in Ukraine are also very limited.

Since it began, the Russian aggression against Ukraine has led to numerous economic changes, the scope of which still cannot be fully assessed. Keywords such as energy crisis, inflation, stagflation or even recession dominate international reporting, lectures and discussions. The insurance industry’s core business was affected by the consequences of the war from the start. In the beginning, there was the withdrawal of “Western” reinsurers from the Russian market, followed by the self-isolation of the Russian insurance market and the interruption of cross-border payment flows due to the declaration of martial law in Ukraine.

Both markets – Belarus plays a subordinate role here given the low level of international trade and investments – were thus isolated, but insurance cover was still available locally, albeit with significantly reduced capacities, especially in Ukraine. It was therefore reassuring that international insurance programs were honoured during their remaining contract period in 2022 and coverage was provided for all three states involved in the war via the Financial Interest Clause of the master contract.

Territorial exclusion is an issue during insurance contract renewal

In the negotiations taking place on contract renewal, it has turned out that the international insurance industry is no longer willing to agree on coverage for Russia and Belarus, and the options for coverage in Ukraine are also very limited. It is, of course, the first time in decades that a war involving a major power is taking place that is being opposed and indirectly fought by other major powers, and this is probably the reason why insurers have not only focused on the exclusions of coverage briefly described below in connection with war and the imposition of sanctions but introduce a territorial exclusion for Russia, Belarus and Ukraine. This attitude is unique and must therefore be examined critically at this point. The exclusion clause, as also acknowledged by reinsurers, represents the last link in a three-part exclusion chain, a simple solution that avoids any discussion concerning a risk located in one of the countries.

Traditional: the War Exclusion Clause

Let us now take a closer look at this three-part set of exclusions.

The traditional precaution of the insurer against having to pay claims which would by frequency and amount destroy any insurance portfolio and might lead to a serious threat to the continued existence of the insurance company is the war exclusion anchored in the General Conditions, above all for property and liability insurance, although differently defined. In fire insurance (including business interruption!), the clause says that “damage caused by the direct or indirect effect of acts of war … including all acts of violence by states …” as well as “all military or official measures connected with the acts mentioned …” are not covered.

According to a newer definition, liability insurance does not provide insurance cover “for damage caused by acts of violence by states or against states and their bodies, acts of violence by political and terrorist organizations, …”. Both definitions are therefore very broad and general and will be checked by the insurer in the event of a claim in Ukraine and, if necessary, applied to decline payment of a claim. However, the burden of proof lies with the insurer – despite the contrary, contestable definition in property insurance that can sometimes be found. In any case, the insurer is protected against claims for war damage.

Sanctions prohibit insurance in certain areas

After the war broke out, the EU as well as the US and UK, responded with economic sanctions against Russia, specially designated Russian citizens and entities. The eight packages of sanctions of the EU now in existence are related to export and import restrictions for precisely named goods recorded in lists. Compliance with the sanctions is binding for legal and natural persons within the EU, disregarding them or circumventing the EU is a punishable offence. It follows that no insurance cover can be granted for sanctioned persons, organizations and goods, including their production, trade with them and transport.

In recent years – long before the war in Ukraine – insurers have therefore formulated sanctions clauses that exclude coverage for activities and goods subject to sanctions. The insurers’ exposure is thus further reduced since some sectors and products are now subject to sanctions for Russia. However, it must also be emphasized that the EU has expressly stated that there must be no product sanctions for food, sanitary articles, medicines and other products of humanitarian need. Although sanctions intend to affect the Russian economy, they should not contribute to punishing innocent citizens. It is therefore expected in the dialogue between insurance customers and insurers that the sanction clause will be checked for its specific applicability in individual cases when the insurance contract is concluded or in the case of a claim.

Territorial exclusion reduces the value of the International program

These two clauses, which are justified and allow an examination of the individual case and represent at least some protection of the insured if a claim is not due to war or in connection with sanctions, are now accompanied by territorial exclusion as a third clause. Its application means that the insurer no longer has to deal in any way with risks, contracts or claims in any of the countries concerned. It is therefore an a priori refusal of cover, which has only seldom been seen in this form up to now. It has not even been applied to the famous “rogue states”.

Insurance lawyers will object here that there is no obligation to contract in industrial insurance and that the insurance company can refuse to assume a risk at any time. The legal provisions on the increase in risk even suggest that an insurer does not have to assume a risk that it considers to be high. This is correct, but for reasons of fairness alone, an insurer who is willing to insure known risks worldwide as part of an international insurance program should not start excluding individual countries. If such an example catches on, it’s not far to the erosion of the insurance program, when other countries that are problematic for whatever reason, like China, Iran and whoever, are put on the exclusion list.

Another often-heard argument for this exclusion is compliance: it is not appropriate to continue to support the Russian economy and this also applies to insurance and reinsurance. As with other measures, however, the one who ultimately suffers is not the warring state of Russia, but the policyholder who has gone to the countries of Eastern Europe with his activities. He is now told that he can insure his risks locally, which is a very weak alternative given the limited capacities in Russia or the scarcity of insurance sums in Ukraine. Comparable to accepting a high degree of underinsurance.

Individual solutions required

Nevertheless, we are confident that in individual cases it will be possible to obtain coverage in the country of the master treaty when it comes to risks with a humanitarian context, when the risk locations are not directly in war-affected areas of Ukraine, when the volume of insurance in one of the states concerned is small compared to the rest of the world, when transports between third countries involving one of the three states have to be insured, etc. It is worthwhile to negotiate with the insurance industry on an individual basis, at least to arrive at a compromise solution, such as coverage with a review clause in the event of a clear escalation of the war.

Andreas Krebs

Andreas Krebs

Head of Insurance Mediation Services

T +43 5 0404 229

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State-sponsored Cyber-Attacks: A Tool of Modern Warfare

Cyber War – State-sponsored Cyber Attacks Against Companies: A Tool of Modern Warfare

Helen Evert, Practice Leader at GrECo Estonia, shares insights about the pitfalls of cyber-attacks and how the small nation of Estonia successfully steels itself against attacks.  

In April 2007, the government of Estonia relocated the bronze soldier statue of Tallin, a Soviet-era monument. After two long nights of riots and lootings, the first state-sponsored cyber-attack against the websites of Estonian organizations took place. Targets included the parliament, banks, ministries, newspapers, and broadcasting corporations.

On 24th February 2022, Russia invaded Ukraine. Yet, Russian cyber-attacks against Ukrainian organisations and companies started much earlier. They increased ever since the illegal annexation of Crimea in 2014.
It, therefore, comes as no surprise that Estonian public institutions and its private sector once became the targets of extensive cyber-attacks in August 2022 after another war monument from the Soviet era – a T-34 tank – was removed from the border city of Narva. Except in a few cases, most websites though remained up and running after the attack and only some private media companies were temporarily offline.

Why are companies being targeted?

State-sponsored cyber-attacks usually have three goals – exploiting infrastructure weaknesses, gathering information or skimming off money to recover losses from sanctions. Such attacks are politically motivated, the targets can be identified at first sight, and they may change over time.

Companies have become favourite targets of such cyberwar attacks. Directly attacking a government or military system is far more complex and requires the attacker to use more resources. Companies are often less protected and provide hackers with an easy entry point into a country.

State-sponsored hackers often wait a long time undetected in corporate systems. This makes it difficult to manage the threat they pose. Removing it is an even bigger challenge. Once companies have been hit, they often require technical assistance from experts or national safety authorities.

Attackers like to focus on public service providers, supply infrastructure and infrastructure companies where they can cause a significant disruption by taking the target offline (gas, electricity, water, telecommunication, IT technology and Internet, the medical sector, transport, waste management, educational institutions).
Local government agencies, valuable brands and brand-name companies as well as those with sensitive data or high asset values in intellectual property are also preferred targets.

Cyber-attacks are on the rise

In the future, wars will become more frequent, more physical, and more high-tech. Everything can be used as a weapon – spreading false information, causing a stock market crash, diminishing currency credibility, launching and conducting a smear campaign or organizing a cyber-attack.

State-sponsored attacks can be anything, from simple DDoS attacks to massive disruptions of supply chains.
In 2021, the group behind the SolarWinds Hack, known as Nobelium and linked to the Russian foreign intelligence service SVR, targeted about 140 organisations, each an integral part of the global IT supply chain.

According to Microsoft experts, the actions taken by Nobelium support the notion that Russia tries to gain long-term, systematic access to numerous points along the technology supply chain to install a surveillance mechanism and monitor targets – now or in the future – that could be of interest to the Russian government. Furthermore, state-sponsored hacker groups have devoted themselves to cybercrime, using cyber-attacks as a good and relatively risk-free source of income once they have stolen sensitive data from their victims.

Why did the Russian cyber-attacks have hardly any effect on Estonia?

In Europe, Estonia has become a front-runner in digitization. The country has even been nicknamed “e-Estonia”. There are good reasons why the recent cyber-attacks seemed to have gone unnoticed and were largely ineffective. Apart from a few short and insignificant exceptions, websites remained up and running the entire day. The attack did not result in substantial losses, nor did it cause any inconveniences in the provision of national digital service.

Besides, the massive attacks back in 2007 showed Estonians just how important cyber security is. Being a neighbour to a hostile country, comprehensive surveillance and defence mechanisms against all kinds of attacks, whether physical or in cyberspace, has become essential.

During the last couple of years, cyber-attacks launched at public institutions and media companies in Estonia were the order of the day. After Russia attacked Ukraine on 24th February 2022, Estonian state-owned enterprises and private companies registered a significant rise in (attempted) attacks. Hence, IT security is on top of the country’s agenda and increased investments in cyber security on part of the government have thus done much to minimize the impact of cyber-attacks.

RIA is the national IT authority responsible for cyber security. Some 1,000 state employees protect Estonian cyberspace. They are backed by a highly developed IT system that automatically fends off intruders. Highly motivated computer scientists who would support their country in the event of an emergency and ensure up-to-date expertise act as a volunteer IT fire department.

Estonia aims to retain its lead in cyber security. In doing so, the country received support from NATO which operates a cyber defence centre in Tallinn. Simulated cyber-attacks are in the pipeline for training purposes.
Companies managing and operating critical infrastructure are also obliged to continuously improve their cyber protection by implementing best practices.

Cyberwar should not be taken lightly. Who will be the next target?

Cyber-attacks are part of an information war and are often used as a reaction to the political decisions made by a government. Cyber-attacks on key trade routes between Europe and Asia, in regions of armed conflicts or those against strategic targets, have spiked during the last few years. It is often hard to predict which targets are next on the list of cyber-warriors. However, it is safe to say that state-organised attacks, preying on political instability or a social divide, are set to increase.

Given their geopolitical situation, the Baltic States are constantly threatened by cyber-attacks. The same thought applies to allies and countries that express negative views about Russia, its allies, and the ongoing war.

Helen Evert

Practice Leader Liability & Financial Lines – Estonia

T +372 5824 3096

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‘Putting all your eggs in one basket is just not good enough’

Interview with Georg Knill

Jürgen Spari, GrECo‘s Regional Manager in Styria, Austria, spoke to Georg Knill, President of the Federation of Austrian Industries (IV), about the challenges of the energy transition for the industrial sector and the impact of the Russia-Ukraine conflict on domestic companies.

Industries in Austria are challenged by the change towards renewable energy. Do you regard the energy crisis, fuelled by the war in Ukraine, as a threat to our domestic industry and its climate targets or as an opportunity to accelerate technological developments or even fast-track change?

Knill: The war in Ukraine has made our dependency on Russian Gas painfully obvious. If the gas supply from Russia were to be stopped from one day to the next, we would experience a catastrophe of unknown dimension because our industry and our entire economy need natural gas – now, and for many years to come. The process of transformation to reach the climate and energy targets in 2030 and 2040 is already underway but will take quite some time. The current uncertainty regarding the supply of energy increased peoples’ awareness and in turn accelerated some processes. We must also understand that the resources that are now being used to tackle the crisis can later possibly not be used as an investment for the transformation.

Let’s look at supply chains. What do the current crisis and the impact of the war in Ukraine teach the industrial sector? Which measures should be taken to counteract disruptions in supply and value chains? Is nearshoring an option?

Knill: Austria’s participation in world trade is decisive for our wealth, prosperity, and employment because our export rate makes up 59% of our GDP. International trade has not only fully recovered after 2020, the first year of the pandemic, but it was also higher in 2021 than in 2019 – just like Austria’s foreign trade. Globalisation is still part of the game.

However, we require more diversification among trading partners – putting all your eggs in one basket is just not good enough. We learned that from the COVID-19 pandemic, and we see it again with the effects of the war in Ukraine. This, however, should not put an end to globalisation. On the contrary, it should be an appeal to our trading partners to choose wisely and with strategic foresight. This would require additional EU trade agreements like Mercosur or agreements with Australia or the USA. While nearshoring may be feasible for some sectors, it depends on many different factors: the industry sector itself, the individual company, the availability of raw materials or the workforce.

Given today’s multiple challenges and – apparently – increasingly frequent crises, the resilience of industries is permanently put under the microscope. Companies seem to be subject to a constant process of transformation. Which possible crises or risks do you think many industries be facing in future, and which strategies would best prepare companies for this rising uncertainty?

Knill: As I see it, there are currently three central challenges for people and businesses in Europe and Austria.

First, there is Russia’s brutally aggressive war against Ukraine and the ensuing humanitarian catastrophe. Besides the social consequences, we now increasingly see and feel the economic consequences in Europe. The volatile supply of energy is one direct consequence of the war because Putin uses energy exports to put pressure on the Western world, and this spreads uncertainty and instability in Europe. We, therefore, need a pragmatic approach and we need to focus on a fossil transitional strategy. We already see the first signs – following our continued criticism – in the connection of the Haidach gas storage, in restarting operations in the decommissioned coal-fired power station Mellach, and in securing OMV’s supply capacities with 40 TWh.

Secondly, the current skills shortage is gradually turning into a labour shortage. The number of open jobs in the manufacturing sector has almost quadrupled over the last ten years. This requires a comprehensive strategy on part of our federal government, addressing the need for skilled employees and migration while realising the full potential available on the job market.

Third, Austria and Europe are challenged to master the green and digital transformation in the years to come – a huge opportunity for us all. The current crises will accelerate this change and spur us on. For example, the COVID-19 pandemic has undoubtedly added thrust to digitisation. For many sectors, it was like a crash course in digital transformation. Notwithstanding that, we have a long way ahead of us if we want Austria to become a competitive digital business location. A new study conducted by the IV and Accenture mirrors this conclusion: 33.3% of large companies use analyses and forecasts based on data or rely on business models. At the same time, less than half of the small and medium-sized companies do the same. Therefore, there is not only a need for more digital action among small and medium-sized businesses but among the big players as well. Europe is losing ground against the USA and Asia, especially when it comes to future-oriented key digital technologies.

How significant is holistic risk management for industrial companies? 

Knill: The industrial sector lives with change and uses the crisis as an opportunity to grow, move forward and put new ideas into practice. We have proven these capabilities time and again in the past and continue to do so every single day. Risks and challenges are growing, yet so do opportunities. To make the most out of them, we will need it all: society, politics as well as our economy with all its variety and diversity, from large industrial companies down to one-man businesses.

Georg Knill has been President of the Federation of Austrian Industries since June 2020. He started his professional career at Knill Group in 1993, has been active as managing partner, has held other management responsibilities, and currently chairs the supervisory board of Rosendahl Nextrom GmbH. 

KNILL Group is a globally active group of companies, owned the Knill family and led by the brothers Christian and Georg Knill in the 12th generation. The head offices of the Austrian Group are in Weiz in Styria. KNILL Energy Group provides components and systems for the global energy industry, focusing on energy transmission and distribution. KNILL Technology develops and produces customised manufacturing solutions for the battery, cable and wire, and fibre optic industry. Some 2,230 employees in 29 companies and in 17 countries achieve a Group turnover of about 336 million EUR.

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More Creative Thinking to Solve Complex Problems

“To achieve the possible, we must attempt the impossible again and again.”
 (Hermann Hesse).

Back in the 15th century, Leonardo da Vinci thought out what was considered impossible. He drew up plans for flying machines, automata and robots – things that turned into reality only centuries later.

Is there a willingness in today’s Europe to think out the impossible once again to create new possibilities? The necessity certainly exists as crises, wars and catastrophes call for more creative thinking to help solve complex problems. Corporate intellectual property, international networks of think tanks, knowledge pools using data bases and digital platforms, and if-then functional processes on a meta level are just some of the buzzwords that spring to mind.

What happens if the risk landscape changes in a snap or new risks seem to appear out of nowhere? 

The steps insurers then take are best explained by looking at the recent cyber insurance examples. The pandemic boosted digitisation and in turn, changed the cyber risk landscape. In response, prices skyrocketed, capacities were reduced, levels of excess increased, risk dialogues became even more laborious and new demands were made. Some businesses received no offer at all for their cyber insurance, and some insurers publicly questioned the future of the product. Many reacted in an almost panic-stricken manner.

Would such radical measures also have been taken if there were no pandemic? We doubt it. Cyber risks were on the rise even before the pandemic and were treated as an accumulation risk.

EU: New Horizons

“Horizon Europe 22 – 27“ is the European Innovation Council’s ambitious EU programme to strengthen science and technology through research funding, aiming at a competitive position on the world market while taking climate protection into account. Some 95 billion EUR have been earmarked for this EU-wide research and innovation programme.

Given the necessity to rethink the future – also in light of environmental protection – and better safeguard it against new crises, this is a drop in the ocean. To name a reference value: Europe’s NATO countries have budgeted about 400 billion EUR for military expenditure. Looking at the “Horizon Europe” expenditure, every EU citizen contributes an amount of about 59 cents every day.

However, to develop real sustainable solutions in research and innovation, a tenfold investment would be required. A paradigm shift would mark the first step, starting with primary school children as they will be the main decision makers in thirty years. They should be motivated not to wait for outside help, but to take action themselves.

What is called for are more playful methods of school education to convey problem-solving skills, the promotion of tax-deductible university and non-university research, and our will to elect politicians who are willing to make unpopular decisions and who demonstrate a broad horizon. When it comes to constructively meeting challenges, many parts of our society are helpless. A recent tweet read “Who hates this government as much as I do?” – many commented that their hate was even greater. Only a few replied by saying something like “Go into politics and show us that you can do better”.

Supply chain disruptions

All over the world, uncertainty prevails. Disruptions of local supply chains in 2015 have cost Europe about 50 billion EUR. Since then, economic turbulences due to trade restrictions and protectionism, driven, among other things, by increasing geopolitical instability – such as Russia’s despicable war with Ukraine as well as its impact – the climate crisis, the COVID-19 pandemic as well as strikes in the transport sector as a result of inflation, have been exacerbated and will surely cost many times more each year than back in 2015.

The impact of just one factor becomes visible by looking at soaring container freight rates since the pandemic: These rates have, at times, increased tenfold. Reasons being a global container shortage and disruptions in subsequent shipping caused by temporary port closures in China, to name an example. Given the sustained high container freight rates, we may notice a shift in the flow of goods. Those goods that were cheaply produced in China, yet were subject to costly transport, could perhaps be produced in Europe and cost less in the end – provided the required raw materials and resources are readily available. A polluting transport of goods en route to their finishing processes could be reduced at the same time.

Disrupted supply chains also have a negative impact on JIT deliveries, ensuing in production downtimes and financial losses. Some businesses have responded by reactivating vacant storage facilities or building new ones to ensure they have an adequate supply of raw materials at hand for processing.

Technologies of the future

Action must be taken in the face of these turbulences while exploiting every possibility provided by available instruments: RPA, IOT, analytics and digital collaboration. Managers must keep their fingers on the pulse of time and implement the next steps in line with current digital and technological developments, including blockchains and other open sources, smart logistics and Physical Internet, drones, connected cars as well as self-driving vehicles, e.g. van and straddle carriers used in port areas. Today’s key decision makers will have to deal with the transport technologies of the future, such as platooning or hyperloops, and follow in the footsteps of Leonardo da Vinci.

Transcontinental infrastructure networks

China and many other states as well as institutional investors have poured large sums of money into the New Silk Road – on land (Silk Road Economic Belt) and sea (Maritime Silk Road) – enabling the establishment of new intercontinental trade and infrastructure networks between China and other Asian countries, Africa and Europe. Once completed, the project will have an impact on more than half of the world’s population and about 40% of global trade.

The speed with which the project has moved forward over the last 10 years since its start is best demonstrated by a small-scale example in land transport, a much smaller portion of the New Silk Road: in 2013 some 80 container trains from China Railway Express Co. used it en route to Europe, in 2020 this number grew to 12,400.
China also invests heavily in European infrastructure, especially in ports in the South, Piraeus or Triest. Travelling times to these ports are shorter than to those situated along the North Sea. Given recent geopolitical upheavals – and looking at the situation with Russia and resultant traffic and transport complications – warnings are increasingly raised against an over-dependency on China. There is also criticism being levelled against the fact that countries and communities receiving financial support may fall into a debt trap. The EU is also troubled by bilateral agreements between China and European countries. This could accelerate a split within the EU.

What could be more appropriate for the EU than to redirect the focus on itself? In the medium and long term, nearshoring instead of offshoring could be a solution. Despite differing views on various issues in individual countries, Europe has some undeniable advantages over other states and other continents: less cultural and work ethical differences, easier ways of collaborations due to geographical proximity, hardly any differences in time zones, shorter travel distances, etc.

With Trans-European Networks (TEN) to accelerate developments and shape the European domestic markets, the EU significantly contributes to economic and social solidarity. Streamlining the infrastructure of transport systems through the Trans-European Transport Network (TEN-T) as well as the energy and telecommunication sectors are its key drivers.

TEN-T aims at implementing and developing a Europe-wide network of railway lines, roads, inland waterways, maritime shipping routes, ports, airports and railroad terminals and improve their environmental compatibility. The ultimate objective is to close gaps, remove bottlenecks and technical barriers, as well as to strengthen social, economic and territorial cohesion in the EU.  In light of the global political (and economic) landscape, pushing forward with efficient, well connected and environmentally friendly infrastructure in terms of TEN will be key for competitiveness, growth, job creation and the wealth of EU countries. It will also help make the EU less dependent on countries that trample on human rights, employ other value systems in terms of business ethics, and ignore environmental protection. In turn, this also means not to move forward with globalisation at all costs but to ensure healthy economic growth and stability in Europe.

3D printing – a game changer?

3D printing could become a gamechanger. It is already used for medical protheses, toys, shoes, clothing as well as for cars and even for houses recently. 3D printing is a fascinating technology for large automotive companies as they manufacture cars in large quantities. Car bodies and individual parts can already be produced through 3D printing. The recently launched Mercedes Vision EQXX is an electric vehicle that features numerous 3D printed parts – with obvious advantages: if raw materials are readily available, prefabricated parts no longer need to be transported over great distances, making them more environmentally friendly while costs are saved and production times shortened.

In summary: The rapidly changing geopolitical situation, the climate crisis, the COVID-19 pandemic and many other factors have made it necessary to rethink the world, and Europe. New technologies are partially both cause and result of these rapid changes that are taking place and will still take place.

Securing new risks // Protection from new risks

Whereas some existing risks will take a backseat, new and unknown risks will arise often unexpectedly. Protection against these risks will be the key to ensuring the economic survival of many businesses. There is only one good solution: collaborate with an insurance broker who thinks ahead and thinks the impossible: GrECo – matter of trust!

Otmar Tuma

Advisor Transportation & Logistics

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The Winter is coming: Can renewables break dependence on Russian gas?

One thing is clear – Europe needs to cover gas demand with alternative sources. The EU energy security is compromised if there is no diversification to cover Russian gas imports.

One thing is clear – Europe needs to cover gas demand with alternative sources. The EU energy security is compromised if there is no diversification to cover Russian gas imports. EU gas imports account for over 1,500 TWh and need to be switched into an alternative source.

Energy security concerns are sparking lively debates not only in the politicians’ offices, boardrooms, and conferences. This topic has made its way to family dinner tables, parties, and pubs. There are wild stories to be heard with opinions being polarised and swaying in both directions. Although it may seem that we are facing the impossible task of shifting from fossil fuels to renewable energy sources, public polls actually show a high degree of consent (9 out of 10 Europeans agree) regarding the EU’s energy policy priorities to ensure secure, clean, and affordable energy for all Europeans, according to a new Eurobarometer survey published by the European Commission.
The main questions are evolving around the feasibility of energy transition and the corresponding timeline. It is not a matter of if, but how and when. Our Energy, Power & Mining team looked closer into this issue.
As of March 2022, 85% of the EU gas demand was imported. Thereof 34% came from Russia and only 17% from Norway. The dependency on Russian gas has grown significantly within the EU, some countries being fully dependent on the single source, as the diagram below indicates.

Source: GlobalData, Eurostat

Over 30% of the imported Russian gas is being used for power and heat generation, and an additional 25% is used by the residential sector followed by industrial production with 21%. It is hardly a surprise that Russia’s ability to weaponise energy only accelerated pressure on consumer prices, global supply chains and the labour market.

The road towards alternative energy sources

One thing is clear – Europe needs to cover gas demand with alternative sources. The EU energy security is compromised if there is no diversification to cover Russian gas imports. EU gas imports account for over 1,500 TWh and need to be switched into an alternative source.
The International Energy Agency (IEA) has elaborated a 10-point plan for Europe. The plan is divided into 4 major action fields as follows:

Gas oriented actions

  • No new gas supply contracts with Russia (15 bcm contracts to expire by the end of 2022, and 40 bcm by the end of the decade.)
  • Replace Russian gas with gas from alternative sources (30 bcm from other countries)
  • Minimum gas storage obligations to enhance market resilience (higher injection will add to gas demand and push up the prices.)

Energy efficiency oriented  actions

  • Speed up the replacement of gas boilers with heat pumps (reduces gas use for heating by an additional 2 bcm in a year)
  • Accelerate energy efficiency improvements in buildings and industry (reduces gas consumption for heat by an additional 2 bcm a year)
  • Encourage a temporary thermostat adjustment by consumers (reduce gas consumption by 10 bcm a year(!))

Renewables oriented actions

  • Accelerate the deployment of wind and solar projects (could bring the gas use by 6 bcm)
  • Maximise generation from existing low-emission sources such as bioenergy and nuclear (can bring 70 TWh reducing 13 bcm of gas use in electricity)

Market oriented actions

  • Enact short-terms measures to shelter vulnerable electricity consumers from high prices
  • Step up efforts to diversify and decarbonise sources of power system flexibility

Research shows that the successful implementation of the plan can eliminate the demand for Russian gas by 2030. The renewable share of Energy has been growing steadily since 2004 currently reaching 23%. Hydrogen is perceived as a support to the gas sector. Renewable Energy Directives (RED) are assessing the possibility of installing blending obligations for increasing the sustainability of the European gas system from currently 1% to 20%, but not without major grid and infrastructure adjustments.

Apart from reducing the dependency on Russian gas, which now seems possible, there are various other aspects of the energy transition to consider as well. But for the moment, keep calm and follow the plan. So far so good.

What about the risks?

We read and hear surprisingly little about the uncertainties, unknowns, and associated project risks of such undertaking. Known unknowns are what drive many scientific experiments, business intelligence and data analytics and refer to information whose existence is someone aware of but does not possess. They can also represent potential risks. They can also represent potential risks. Far worse are the unknown unknowns, pieces of unidentified information, or “things  we do not know that we don’t know”.

The plan addresses several items, which carry inherent limitations in their nature and can, therefore, be considered severe project risks. For example, selling and installing 30 million heat pumps in the shortest term possible is a challenge even without limited manufacturing capacity globally, supply chain pressure and logistical difficulties.
Accelerating renewable energy generation capacity (EU requires over 900 TWh additional capacity by 2030) seems extremely unlikely for the reasons mentioned above and impossible without the addition of new manufacturing facilities, ideally closer to home, and not overseas. This means that technical and technological sacrifices will need to be made to accomplish the colossal task in a very short period. Furthermore, new personnel must be hired and trained to a very high standard demanded by the ever-increasing complexity of the renewable generation machinery (especially wind turbines). The recent crises caused by post-COVID shortages of staff in European road transport and air travel industries demonstrate just how difficult is to mobilise and ensure the supply of qualified labour to meet the demands of the green energy business.
Also, the grid, gas transport and storage infrastructure will require more than a major overhaul to adopt hydrogen blending due to the physical and chemical properties of hydrogen (highly corrosive, existing networks were not built with that in mind).
Lastly, it would be interesting to read the estimates of the capital expenditure required to upgrade the entire EU’s transmission and distribution grid systems to accommodate the change of topology coming from the replacement of a small number of centrally dispatched generation assets (located near the largest industrial electricity users) by a large number of distributed renewable sources located across the entire continent and in the neighbouring seas.
Until then, Europe will have to keep its coal-fired plants going (for example, Germany has already initiated a legal proceeding to abolish the prohibition of operating thermal coal plants beyond 2022-23).
Besides, 2030 is still 7.5 years away, yet the winter will be upon us in just a few months.

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Zviadi Vardosanidze

Group Practice Leader Energy, Power and Mining

T +43 664 962 39 04