Avoid risks today, and tomorrow will
never arrive. (Can business really do that?)
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
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
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
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
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
- Understand and monitor the complex and changing
relationships between systemic risks
- Identify opportunities within emerging trends or
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. A copy of the report
can be found at www.weforum.org.
Kemper is The Council’s vice president of Industry