An Infinity of Risks

As I trudged my way through its 64 pages this week, it occurred to me that "Global Risks 2012," the new report from the World Economic Forum, should come with some sort of warning label. Honestly, keep this one away from the children, the clinically depressed or anyone less congenitally optimistic than Tim Tebow.

The report, now in its seventh edition, is a product of the WEF’s Risk Response Network in collaboration with Marsh & McLennan Cos., Swiss Re, Zurich Financial Services and the Wharton Center for Risk Management breaks down risk into five spheres: economic, environmental, geopolitical, societal and technological. For each sphere, the report identifies a center of gravity. For example, in the economic sphere, the center is "chronic fiscal imbalances, which has attendant risks including rapid inflation or deflation, and recurring liquidity crises.

Indeed, economic risks dominated the top of the list in terms of likelihood (fiscal imbalances, severe income disparity) as well as potential impact (imbalances, major systemic, financial failure, extreme volatility in energy and agriculture prices).

What I found particularly interesting/scary is the way risks from separate spheres often intersect or hybridize. For example , a financial risk, extreme volatility in energy and agriculture prices, lies at the intersection of the environmental center of gravity (greenhouse gas emissions) and societal (unsustainable population growth).

Elsewhere, technological risks amalgamated with geopolitical ones with historic ramifications. “The Arab Spring demonstrated the power of interconnected communications services to drive personal freedom, yet the same technology facilitated riots in London," said Steve Wilson, chief risk officer for General Insurance at Zurich. "Governments, societies and businesses need to better understand the interconnectivity of risk in today’s technologies if we are truly to reap the benefits they offer.”

So what do all these chimeras mean for insurers?

Erwann Michel-Kerjan, managing director of the Risk Management and Decision Processes Center at the Wharton School, and a contributor to the report, tells me that the cavalcade of extraordinary events the past decade: from 9/11 to disasters such as Hurricane Katrina, to the financial crisis, have impacted how risk management is practiced and, perhaps more importantly, perceived at the C-level and by corporate boards.

“What risk management ought to be is changing,” Michel-Kerjan says. “Risk Managers used to tell people what not to do.  What I really see emerging is risk managers whose expertise lies in working with others. We also see that more companies are creating a CRO position.”

Technology may have to help insurers get their arms around these risks as many have invested heavily in business intelligence and predictive analytics in recent years to augment the work of their actuaries and underwriters.  Nonetheless, even Michel-Kerjan, who has a background in mathematics and physics, says risk managers need to remain cognizant of the limitations of predictive models.  “We learned the hard way:  Should you trust your models? If you don’t have a model it is difficult. If you do have a model, don’t be blinded by it. By definition it is made up of assumptions.”

Bill Kenealy is a senior editor for Insurance Networking News.

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