Rise of Covid-19 underlines need to urgently rethink risk-reward balance

The unwelcome arrival of coronavirus (Covid-19) has once again shown how essential it is for organisations of all types – private and public – to properly identify, assess, manage and transfer their critical risks.

The very fact that we have decided to launch this weekly update on the latest risk and insurance implications of the virus shows that the business and wider world really is not ready to cope with every risk that is thrown at it. A central entrepot is needed.

The systems that we have in place to cope with the seemingly ever-expanding range of risks faced by us all are not up to the task in a world where black swans seem to arrive uninvited more and more often.

The insurance market is also struggling to keep pace with the interconnected and potentially systemic nature of the latest risks that come with globalisation – whether they be triggered by disease, natural catastrophes caused by global warming, or cyber risk.

The three core risks noted are all connected of course. The world has changed radically in the past 20 years and we are all struggling to cope with that rapid pace of change.

The core problem it seems is that politicians, regulators and public and private organisations of all shapes and sizes the world over appear to have lost perspective and thus control over the basic risk-reward ratio that should govern all our lives.

The big warning signal came with the credit crisis, which showed that we are not as clever as we think we are.

The financial markets and all those who used them – corporate and individual –perceived a way of making a faster-than-ever buck by adopting new and exciting technologies that accelerated the pace of change immensely, offered huge new arbitrage opportunities and apparently also offered no risk.

This was rubbish of course, unless you were one of the very few individuals with the time, space, insight and resources to profit from the inevitable disaster that followed.

We all naively embraced the new way of working and living offered by the technology that ramped up the pace exponentially and left us all playing catch-up, working 12 hours a day to try and keep up with everyone else while those with the deepest pockets calmly waited for the disaster and the chance to make serious gains by shorting us all.

The supply chain debacle that we are now seeing unwind because of Covid-19 was equally well signposted by the Thai floods of 2011. But what have the world’s leading auto firms and others done to spread their risk since then? Very little it seems, other than concentrate their supply in Wuhan. Good move.

It appears that the same problem is now emerging with the supply of key medical equipment that health workers the world over need to help battle the virus. Some 40% of these products are apparently made in China, and many are concentrated in Wuhan and the surrounding area or dependent at least on transport through this region, a key logistics centre.

It seems, therefore, that there are so many risk management failings on numerous levels here that make it very difficult to comprehend.

From a macro level it appears that everyone – political and corporate – has meekly accepted that the ‘inevitable’ arrival of the global, interconnected economy needs to be accepted as just that – inevitable. And we better do everything to keep up or lose out. Hang the risks associated or don’t even consider them, because the short-term opportunity lost is too high.

Perhaps Covid-19, unlike the Thai floods, SARS and the credit crisis, will provide the wake-up call that the world needs to fundamentally reassess its risk appetite.

Maybe the fact that a disease such as Covid-19 does not actually dodge the rich, successful and powerful and focus on the poor, ill equipped and powerless will persuade the political representatives of the ‘masses’ to actually challenge those who have forced this economic and social pace change – led by the voracious and apparently unassailable tech giants – so rapidly in pursuit of ever-greater profits?

But this raises an even more fundamental point that will be difficult to swallow for most.

As with the pathetically slow realisation that stopping climate change is more important than tax cuts, Joe/Joanne Public will now take some persuading that changing his or her lifestyle for the greater good is worth the effort.

If being told that preventing future epidemics will mean more holidays at home than abroad in future is just as difficult as telling CEOs they will have to accept higher production and distribution costs by localising rather than globalising to reduce the long-term operational risk, then this is going to be a tough job for the risk management community.

But if it means saving the planet and humanity by doing so, surely it’s worth the effort?

Adrian