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The guardians of risk must manage this global crisis without panic. Today, we mold the destiny of future generations.

By  Coletta Kemper

The financial crisis has brought home the lesson of just how risky the world is. The reach and scope of the crisis is global in its implications for government and society. How well we manage these risks will have consequences for years to come.

The insurance industry’s business is all about risk—identifying it, managing it and protecting people and assets against it. Each year members of our industry work with the World Economic Forum (WEF) to report on global risks facing the world. The supporters of the project—Marsh & McLennan Cos., Swiss Re, The Wharton School Risk Center and Zurich Financial—have made an ongoing commitment to study risks challenging our world and produce a report to help guide the public debate on the issues.

This year’s Global Risks 2009 looks at economic and other risks that could emerge as the financial crisis continues to unfold. The report is particularly timely as our governments weigh the pros and cons of different actions to cure the economic crisis and restore public and business confidence in the financial system.

The report says the outlook for most economies is grim. Markets remain volatile, liquidity is still illusive, unemployment is rising, and consumer and business confidence is at an all-time low. The authors warn that that interconnective nature of these risks makes them all the more potent. The danger is the tendency to panic and try to manage out of the crisis “without considering the broader, long-term consequences of today’s decision” on tomorrow. Another theme of this year’s report is the importance of a global response to mitigate longer-term risks, especially climate change and resources.

In addition to some ongoing challenges identified in earlier reports, this report adds a few new risks particularly pertinent to the discussion on the financial crisis. Two are the risk of over-regulation and the lack of a coordinated approach to regulation at the global level. They also include the risk of underinvestment in infrastructure, which the report says is “highly” interconnected with other economic, environmental and societal risks.

The report highlights a number of financial risks for 2009.

The fiscal positions of a number of developed countries— including the U.S., the UK, France, Italy, Spain and Australia—are deteriorating as the governments spend billions in an attempt to prop up their financial institutions and spur growth. This spending, coupled with rising health and pension costs threatens to worsen already precarious financial positions of some countries.

The slowdown in export demand from China has led to a substantial drop in the country’s overall growth. In turn, a decline in China’s growth rate will have a significant impact on the weakened global economy. While China’s economy is expected to have grown 7.5% in 2008, according to the World Bank, a sharp decline in its growth rate is highly intertwined with a falling U.S. dollar, energy and food price risks, as well as health risks. In addition, an economic slowdown has serious implications for social tensions within the country that could spill over to neighboring regions.

Asset price depreciation’s “vicious circle” remains unbroken. This includes falling assets, write-downs, deleveraging and pressure on financial institutions’ capital. This circle is spilling over into manufacturing, services and households around the world.

Deflation is more of a concern than inflation. The continued uncertainty in the financial sector, falling value of assets, high unemployment and other economic problems could create a deflationary spiral. The report warns about the tradeoff between short-term risk of deflation versus the long-term risk of inflation, which could result from the huge financial stimulus and growing public debt.

The study spends a chapter on the importance of global governance, which it says is the key to global stability and sustainability. The financial crisis exposed many of the gaps in global governance. But there are other challenges that will need world government cooperation and coordination, including climate change, food security, reduction of poverty and political instability.

The report is chockfull of thoughtful information for government and business. (Download a copy at www.weforum.org.)

Our new president is facing all these challenges. There will be considerable political pressure on President Obama to solve the short-term problems of the economy and let the future take care of itself. If history is a lesson, we know that the future is a result of actions and decisions we make today. As we engage in the debate on a still larger stimulus package, our future relations with China, our position on climate change and other issues, let’s hope we think about the long-term consequences of those decisions.

Business also needs to engage in better risk governance. Enterprise risk management should be a central part of any client’s business plan. CEOs need to ask what risks are out there that can kill their organization. If they can answer that, they have a far better chance of mitigating the impact.

Kemper is The Council’s vice president of Industry Affairs.

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