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  From the report
Home
Preface
Executive Summary
The Global Risks Landscape 2010
Fiscal Crises and Unemployment
Underinvestment in Infrastructure
Chronic Diseases
Risks to Keep on the Radar
Managing Global Risks
Conclusion
Processes and Definitions
Global Risks Barometer 2010
Contributors and Acknowledgements
  Global Risks 2010
    In collaboration with Citi, Marsh & McLennan Companies (MMC)
    Swiss Re, Wharton School Risk Center, Zurich Financial Services
Global Risks 2010 Home

Managing Global Risks: Understanding Systemic
Vulnerabilities
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Click here for the full Risks Interconnection Map (RIM) 2010.

Developing a Holistic Approach to Risk Management at National Level

The financial crisis of 2008 and ensuing global recession in 2009 served as a further reminder that countries need to establish integrated approaches to risk management. Instead of focusing on company-level risks alone, governments are taking steps towards establishing bodies that would monitor systemic risks to avoid a reoccurrence of the crisis. Adopting such an integrated approach to risk management, including beyond economic and financial threats, could take it to the next level. Governments could coordinate their agencies with a prioritized national risk landscape and liaise with counterparts abroad in a more systematic and proactive manner.

The concept of the Country Risk Officer (CRO) was introduced in Global Risks 2007 and elaborated in the subsequent editions of the publication. Given the multiplicity of risks that a country faces, from natural catastrophes or pandemic scares to terrorist attacks, there is a strong case to be made for the creation of a single point of contact and coordination for the responses to such risk events. The role, which could be performed by an individual or a committee, would also be responsible for analysing and quantifying risks, prioritizing mitigation measures and implementing programmes to adapt to the threats that these risks present.

Recent events have proven why a country should have overview of the risks it faces not only within its borders but also at the international level. Here too, a country risk officer would be in a position to liaise with colleagues in other countries and create a risk monitoring network that could serve as part of an early warning system for severe risks. The same facilities and network could be used to share and develop common frameworks to track issues and look for weak signals and emerging risks. The Country Risk Officer (CRO) would complement the kinds of macroprudential supervision that countries are currently discussing, helping towards making those nations more resilient to financial shocks and future crises.

Given the still fragile economic environment and the pressures on national budgets, it is more important than ever that a country considers what can be done to prevent, where possible, extraneous shocks or at least to be able to manage and finance their implications. One example already operating is in the area of finance for disaster risk. Financing can be arranged after the event by redirecting funds from the budget, by borrowing or by increasing taxes. Or funds can be secured in advance through tools such as parametric or index-based insurance. A recent successful example of how governments can do this is the "Multi-Cat" (multiple catastrophes) transaction that the Mexican government signed with the World Bank. Working together with Swiss Re, the World Bank has developed a programme that enables governments to transfer the burden of economic costs from natural catastrophes to the capital markets.

By including such pre-event funding instruments in the overall disaster risk financing mix, countries could be in a position to reduce their financial exposure to natural catastrophe risk and reduce the potential burden for government budgets in the case of a major event. Here too a CRO could play an important role, taking a holistic approach to risk before events occur and ultimately reducing the risk burden to society. Not only can this help a nation financially, but it would also have an important function in reassuring the population, its neighbours and its investors that a country is appropriately prepared for a disaster.

How corporations can apply the findings of Global Risks 2010

Global Risks 2010 provides a framework for companies to develop insights into systemic risks in the mid- to long-term planning horizon. In general, corporations face challenges in obtaining, interpreting and applying information about systemic or "emerging" risks. The report enables corporations to:

Test assumptions in underlying strategic plans and capital investments
Understand and monitor the complex and changing interrelationships between systemic risks
Identify emerging opportunities within the emerging trends or events

Corporations must continuously make decisions based on long-term perspectives to secure profitable growth. These include strategic decisions relating to new market entry, mergers, acquisitions and divestitures, joint ventures and partnerships, and capital investments. Today most corporations, large or small, are participating in the global economy and their decisions are taken against an ever-changing backdrop of influences that are external to the organization itself - macroeconomic factors, regulatory change, geopolitical upheaval, technological and product innovation, and sustainability issues. To succeed in this complex environment, corporations must develop processes to understand how these uncertain events might impact their organizations and supply chains, current competitors, potential new market entrants and the governments in the jurisdictions in which they operate.

Taking the long-term view
External and emerging risks pose challenges to most risk assessment and risk management programmes for a number of reasons. Typically, risk is considered in terms of "impact and likelihood" based on internal consensus, often involving very little external or expert input. Corporate risk assessments rarely consider a time frame beyond two to three years, or explicitly examine the long-term volatility introduced by risks to strategies with a five to 10 year execution horizon. Decision-making is further skewed by necessary focus on the reporting of short-term results and known or recent risks affecting the current period.

A portfolio of decisions to deal with uncertainty
Further, research shows that relatively few companies effectively apply tools, such as scenario analysis, or effectively integrate risk data into long-term strategic planning. Historically, management would provide business units with prescribed scenarios and the business units would calibrate responses for each scenario. Today, the scenarios are more varied and the range of uncertainty within a scenario markedly increased. To respond, management must adjust the planning process to ensure it explicitly factors in this increased uncertainty. Indeed, strategy setting must be viewed as the optimization of a portfolio of decisions based on a set of scenarios that reflect uncertainty.

Opportunities in complexity
Global Risks 2010 emphasizes that the interconnections among risks can help management teams challenge themselves to develop a more robust scenarios. The report's tools, such as the Global Risks Barometer and Risk Interconnections Map (RIM) highlight the trends and connections between emerging risks and underlying drivers in risk volatility. Taken together, these insights can help broaden the scope of trends that are considered and help management question the long-term underpinnings and assumptions about their supply chains and the competitive landscape.

As noted above, corporations must assess how risks might directly or indirectly affect the organization as a participant in a globally competitive marketplace and as a member of a global supply chain. This information must be factored into planning scenarios. The report's focus on the changing risk landscape can also be used to identify emerging opportunities in markets or sources that could provide the corporation with a competitive edge.

It has become a truism to note that all corporations now operate in a global economy. Reports, such as the Global Risks reports, provide corporate management with valuable long-term, external insights into the events that might impact the success of strategic plans, the performance of the overall supply chain and the emerging opportunities embedded in a complex, interconnected global economy.