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World Economic Forum: Reality check

Turns out, we are our brother's keeper

By Michael J. Moody, MBA, ARM

"We live in the most complex, interdependent and interconnected era in history—a reality we know as the hyper-connected world. Yet efforts to rebuild confidence and restore growth remain vulnerable to looming political and economic shocks." So starts the ominous annual report from the World Economic Forum. The forum, which has been meeting for more than 40 years, provides a thought provoking report on the macro view of worldwide risks. The information provided in the report is of value to any business person; however, it should be considered required reading for any risk management professional.

Report highlights

The report points out that the world is more at risk with each passing year due to persistent economic weakness which impedes our ability to tackle environmental challenges—weather extremes brought on by greenhouse gases. The report identifies wealth gaps and "chronic fiscal imbalances" as the top two most prevalent world-wide risks. Additionally, if that were not bad enough, it "reflects a slightly more pessimistic outlook overall for the coming 10 years," based on the comments of the 1,000-plus experts who were interviewed for the report.

Among the 50-some risks examined, here are three major risks that the experts from industry, government and academia say are causes for concern.

Economy and environment. There are "a number of urgent socioeconomic risks which are delaying efforts at climate control," the report notes. As a result of these risks, "many countries and communities are reluctant to begin working on long-term threats like extreme weather events." The report suggests that "situations like these can be put off for only so long, and then there is no going back."

Digital wildfires. The impact of new technologies on society is always difficult to predict. This has certainly been the case with the abundance of information that is literally at our fingertips and the growing number of citizen journalists, thanks to social media. While new technology has typically been beneficial, it can also provide volatile and unpredictable consequences. Digital wildfires, as exemplified by the social media "coverage" of the events associated with the Arab Spring are causing traditional media to lose their status as information gatekeepers and at this point, it is not clear how this will shake out.

Health and hubris. Some might consider this as a good news/bad news situation. Without question "huge strides forward in health" are occurring. "However, in its wake, it is leaving the world dangerously complacent." This situation is occurring "as the rising resistance to antibiotics could push the health system beyond its tipping point." Additionally, the "hyper-connected world allows pandemics to spread" much more rapidly. As time goes, on the "connection between antibiotic resistance" and chronic disease will be difficult to avoid and even harder to resolve."

The forum has also developed a special report on national resiliency. They note that the report can be used as the groundwork for developing country resilience ratings. Those ratings could then be utilized to help benchmark the progress of each country. The report goes on to say that in a perfect world, global risks are met with global responses, but of course reality is something quite different. Reality frequently comes from system shocks and catastrophic events. And due in large part to the interconnectivity of the world communities, one nation's failure to address the global risk can have a ripple effect on others. Thus the ability and resilience to withstand, adopt and recover from the shocks has become all the more critical.

The special report is organized around two major issues: global risks that are expressed at the national level, and the fact that no country alone can prevent their occurrences.

In order to assess and evaluate a nation's resilience to global risk, the report examines three types of risk that both private and public organizations face:

1. Preventable risk—such as breakdowns in processes and/or human error.

2. Strategic risks—which are undertaken voluntarily after weighing them against potential rewards.

3. External risks—which are those risks that are beyond one's capacity to influence or control

The report notes that preventable risk and strategic risk can be approached through traditional risk management methods—focusing on organizational culture and compliance with regulatory, industry and institutional directives. However, external risk will most likely have to be approached by cultivating resilience. The report authors note that the word "resilience" is used by various disciplines and thus has several different meanings. With regard to the report, however, resilient countries are those that can adapt to changing contexts, withstand sudden shocks and recover to a desired level of equilibrium, while preserving the continuity of their operations.

The authors of the report suggest the time is now to create a system that provides a national resilience rating. They say that in order to complete this effort, each country must establish a "country risk officer" whose job it would be to develop the country's rating. Development of such an approach will allow interested parties to have needed benchmarking information. It would also provide data so that a balance could be struck between resilience and other goals, and identify areas that may require further investigation. In order to assist organizations in this endeavor, the forum has built a "Resilience Practice Exchange." The Exchange is designed to provide information about available, practical actions that leaders can take in the short run to tackle these issues.

Moving forward

While the Global Risk Report discusses a number of topics that a risk manager may think don't warrant his or her attention, nothing could be further from the truth. Today's approach to risk management has moved far beyond the boundaries of traditional risk management that existed 10 years ago. Today, enterprise risk management must take a more global view of risk and the Global Risk Report is an excellent starting point. Many risk professionals will be surprised at the interconnectivity of risk and the effects it can have on their organizations.

One of the encouraging things about the report is the active participation and representation from the insurance community. Key contributions are made by Marsh McLennan Companies, Swiss Reinsurance Company, Zürich Insurance Group, and Wharton Center for Risk Management, University of Pennsylvania. It is good to see such significant involvement by the insurance industry to such critical, long-term problems. There's an old saying that goes something like, "If you're not part of the solution, you're part of the problem." It is heartening that a number of high-profile insurance organizations recognize the value of this important work and are part of the solution. Involvement by these organizations should not go unnoticed.

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