Building broad resilience should be focus for risk management says WEF

In its eighth consecutive annual Global Risks Report, WEF surveyed over 1,000 risk experts in a bid to track the likelihood and impact of some 50 global risks. As with previous years, macro risks topped the rankings. Economic and financial risks—severe income disparity, chronic fiscal imbalances and major systemic financial failure—featured highest, followed by environmental risks such as climate change and water supply shortage. The top risks were largely unchanged from the previous Global Risks Report. Risks associated with rising levels of regulation, resource nationalisation and labour market imbalances recorded the biggest expected rise in impact over the next ten years.hideThreats from life sciences technology and population growth as well as unforeseen consequences of climate change mitigation were also considered more likely to be problematic than in the 2012 survey. WEF also drew attention to two emerging risks that are often overlooked—the growing resistance of bacteria to antibiotics and, secondly, digital wildfires, where misinformation spread on the internet causes havoc in the real world. Whilst the Global Risks Report 2013 does not present any big surprises in terms of top risks, it does raise some interesting issues and important messages for companies and their risk managers, said Chris McGloin, Vice President of Risk Management & Insurance at UK engineering group Invensys and Deputy Chair at risk management association Airmic. Of particular note, WEF emphasises the importance of building resilience, rather than just planning for any one particular event, he said. The organisation also reinforces some fundamental risk management messages, such as the importance of sharing information on risk and the need to invest now for the future, said Mr McGloin. For example, investment in infrastructure could alleviate natural catastrophe risks linked to climate change, while long-term investment in new antibiotics could avoid major problems in decades to come. While the risks that dominate the ranking have changed little, they are of growing concern, said David Cole, Chief Risk Officer at Zurich-based reinsurer Swiss Re, one of the insurers supporting the WEF. Almost all the 50 risks covered by the survey have been increasing in terms of expected impact and likelihood, he said. The report also highlights the interconnected nature of global risk, said Mr Cole. Some 529 correlations of different risks were identified, with critical systems failure, systemic financial risks, a failure of global governance, water supply crisis and failure of climate change adaption said to be the most systemically important. Awareness of these connections enables companies and governments to target key issues—such as building coastal protections in the face of increasing natural catastrophe losses, said Mr Cole. “The report aims to raise awareness of risk across society by increasing both public and private understanding of risk through the use of a common language,” said Mr Cole. “Awareness creates the opportunity to target investment and mitigation—and have a positive impact on the risks,” he said. Risk does not stop at a company’s front door. Other organisations will face the same risks, said Axel Lehmann, Chief Risk Officer of Zurich Insurance, another supporter of the report. Global risks also do not stop at national borders and therefore require international coordination, while private companies must invest in ERM and look to build resilience, he said. WEF, which has long promoted the creation of individual country risk managers, is now looking to promote the building of national resilience to global risks. The organisation plans a report that will help decision makers track the progress of building national resilience and identify where future investments are needed. Another key theme for WEF is the ability of mainly US and European countries to absorb major risks such as natural disasters and emerging risks such as ageing populations. Fiscal constraints on governments are likely to push an increasing amount of burden onto the private sector—and when combined with the threat of increasing environmental risks this makes for a dangerous mix, say WEF. However, fiscal constraints on governments will also give rise to opportunities for some companies—such as those involved with public private infrastructure partnerships and for risk-taking industries like insurance and finance, said John Drzik, Chief Executive of Oliver Wyman Group, part of Marsh & McLennan. Risks can be seen in a positive light and used to drive innovation, such as the need to find alternatives to antibiotics, said Mr Lehmann. Governments are now more receptive to new ideas and partnerships—risk transfer is not a territory that governments want to occupy, he said. Risks typically highlighted as key by risk managers, such as supply chain, business interruption and cyber, do not feature prominently in Global Risks Report 2013. You have to dig deep to find any reference to supply chain and cyber has dropped out of the top five. Instead, the report highlights macro risks that would appear to be beyond the control of individual companies. Macro risks identified by the report—such as those associated with water resource or food—may not be actionable by a company, but the knowledge of such risks should be in the background when thinking about commercial risk, said Julia Graham, Chief Risk Officer at UK law firm DLA Piper UK LLP. For example, fiscal instability—one the highest ranked risks in the report—is not a specific risk that would appear in most company’s risk registers, but it is a factor in the wider risk environment and may stimulate other risks, she explained. “The Global Risk Report contains high level strategic thinking that can be used when thinking about your own assessment of risk, said Ms Graham. “It shows the wide and often global scope of risk and looks at risk in a more strategic, aggregated and integrated way.” The report looks at risk in a wider context and over a longer timeframe than would be the case for most companies, said Mr McGloin. “It is a useful tool to get a sense of the big macro risks and understand how they may be interconnected and can influence more company-specific risks. But it is down to individual risk managers to interpret the macro risks in the report and make them relevant to their own organisation,” he said. Big headline-grabbing macro risks like those identified by WEF can potentially have significant financial consequences and affect a company’s ability to trade, said Richard Waterer, Head of Marsh Risk Consulting in the UK. Although such exposures can seem removed from the day-to-day risks faced by companies, they should be considered as the backdrop to a company’s risk profile, said Mr Waterer. Continual monitoring of a company’s exposure to risks such as economic downturn or climate change can change perception of day-to-day risks and lead to an adaption of risk appetite and an alternative risk management strategy, he said. “The management of risk is not necessarily all about risk reduction, it is also about understanding the nature and impact of exposures and considering alternative approaches to addressing them, such as business process re-engineering” said Mr Waterer. The findings of the Global Risks Report should be taken as a serious factor in a company’s risk analysis and used to identify strategic opportunities, said Mr Lehmann. For example, Zurich Insurance uses the study in risk profiling and to sharpen thinking and broaden perspectives on risk, he said. “The report is an opportunity for innovation. For example Zurich uses the information to develop new products and risk engineering techniques to address supply chain risks or cyber exposures,” says Mr Lehmann. Insurers could learn much from the study, said Ms Graham. “The report is supported by some fantastic companies in the insurance sector, but I would like to see insurers, reinsurers and brokers proactively use this research—there seems to be a disconnect between the research and what insurers do with it,” she said.

Building broad resilience should be focus for risk management says WEF

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