A crisis has a way of riveting our attention to the present. Lately, we seem to be buffeted constantly by one crisis or another—whether it’s the financial crisis, the H1N1 flu threat, or earthquakes in Haiti and Chile.
When faced with a crisis, we quickly shift into survival mode and do the best we can to make it through. Like Scarlet O’Hara in Gone With the Wind, we put off thinking about the future—until tomorrow.
Now that the dust has settled a bit from the country’s economic upheaval, it’s time to face the future. The World Economic Forum, in collaboration with Citi, Marsh & McLennan, Swiss Re, Zurich Financial and the Wharton School Risk Center, has released its 2010 Global Risks Report, a scan of the economic, geopolitical, societal and other risks threatening to rock our world.
The report is a bit scary, but its purpose is to help business and government understand emerging risks and connect the dots between those that pose the most significant danger. For carriers, that means identifying potential future exposures and understanding how to underwrite those risks. For brokers, it means helping clients manage and mitigate exposures to their business through risk management strategies.
“Systemic risk” has emerged as the bugaboo of the financial crisis. The prevailing thought is that failure to recognize and manage systemic risk is what led to the fiscal collapse. The Forum defines systemic risk as “the potential loss or damage to an entire system as contrasted with the loss to a single unit of that system. Systemic risks are exacerbated by the interdependencies among the units often because of weak links in the system. The risks can be triggered by sudden events or built up over time with the impact often being large and possibly catastrophic.”
The global nature of the financial crisis has made us aware of just how susceptible our world systems are to systemic risk. A key premise of the Forum’s Global Risks work is that “global risks do not manifest themselves in isolation.” Regulators are right to focus on systemic risk in our financial system, but it is far more complicated than that. As the report notes, systemic risks are inherent to every system—not only the financial industry—and they are interconnected.
The report identifies three crosscutting issues. First, systemic risk increases as a result of interconnections among the risks. Managing and responding to these risks requires an integrated approach.
Second, “slow creeping risks” are the biggest threat facing the world today. These risks may not have the sudden, shocking impact of 9/11 or the Haitian earthquake, but the financial and societal impact can be severe. Risks such as global population growth, aging and the ensuing rise of consumption develop slowly over decades and may be underestimated, yet the implications for resources, energy, climate change, and fiscal policy are enormous.
Third is a gap in global governance to deal with the risks. The Forum questions whether there is the political will to put in place the necessary reforms considering the pressures on government, business and individuals to respond in the short term. The challenge is to improve coordination of macro-prudential supervision, effective climate and energy policies, and new mechanisms to protect resources and enhance overall security.
The report highlights a set of risks with the potential for widespread global impact with links to significant, long-term trends. The risks emerged before the fiscal crisis but have been exacerbated by its impact, largely because of constraints on resources and short-term policy thinking. These risks include: the fiscal crises and the social and political implications of high unemployment; underinvestment in infrastructure and the consequences for growth, resource scarcity and climate change; and the impact of chronic disease on developed and developing nations.
Other equally systemic risks on the radar screen include transnational crime and corruption, biodiversity loss, and cyber-vulnerability. These risks have a lower risk profile but should not be forgotten as long-term risks are assessed.
The report offers three suggestions to help corporations in short- and long-term planning:
- Test assumptions in underlying strategic plans and capital investments
- Understand and monitor the complex and changing relationships between systemic risks
- Identify opportunities within emerging trends or events.
The report urges corporations to continuously take the long-term view to “secure profitability.” The key is the collaboration between governments and institutions to identify and track risks, educate leaders and the public on the risks, and communicate the nature of the threats and strategies to manage and mitigate them.
The risks are real. The question is whether we have the vision and political will to look forward.