Destiny’s First Draft
The guardians of risk must manage
this global crisis without panic. Today, we mold the destiny of
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
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
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
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
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
Kemper is The Council’s vice
president of Industry Affairs.