A Global View of Risk

With its latest annual study, the World Economic Forum's Global Risk Network challenges executives to think more broadly about threats to their businesses.

Rather than viewing single risks in isolation, executives should try to better understand the connections among a host of global problems that could affect their businesses in the next decade, urged John Merkovsky, managing director of Marsh Risk Consulting, at the annual Risk and Insurance Management Society conference in Boston this week. Together with his colleague Brian Elowe, Merkovsky presented the results of the World Economic Forum’s Global Risk report for 2010, a study compiled by the forum’s Global Risk Network, a team of 200 risk experts from around the world.

Among the top risks the group identified for 2010 in its fifth annual report are further declines in asset prices, slowing growth in China, fiscal crises as various countries grapple with rising national debts, and the spread of chronic disease (see chart below). To qualify as a global risk, a threat must have the appropriate global scale, affect the public in some way, have an effect across industries, and meet a $10 billion threshold of materiality. The group categorized risks in five areas: societal, geopolitical, environmental, economic, and technological.

The spider-web nature of global risk emerged as a key theme in this year’s report, said Merkovsky. “The ongoing financial crisis has really increased the awareness of the interconnectivity of risk,” he said. “What started out as something that appeared to be a controllable situation in a defined part of the U.S. market turned out to have a huge impact.”

The risk of slow failures, or “creeping risk,” in areas such as population growth and potential natural-resource shortages was another major theme. Gaps in global governance, which Merkovsky characterized as “the lack of global structure, processes, and will to address global risks like climate change,” also ranked high on the list.

While some global risks may seem too large for a company to address or for a finance executive to plan for, one goal of the report is to broaden executives’ risk horizons, both in scope and in time frame, said Elowe. “We want to put developing risks on people’s radar screen,” he said. “And we want to encourage companies to look at macro risks, not just risks inside the company.”

Many companies look only two to three years out when considering potential business risks, noted Elowe, but by looking at more-distant threats, they may be able to position themselves much better than competitors who are using shorter-term plans. For example, after reading about the threats to the global water supply and the possibility of a future water shortage, one Marsh client recently changed the recipe for its product to use less water, he said.

Although some threats to business may seem outlandish or impossible to predict — such as the volcanic ash emanating from Iceland that shut down air traffic for a week — getting executives thinking about how their companies might react to similar situations can be a useful exercise, said Merkovsky. “No one planned for a volcanic ash plume,” he said. “But could you have planned for an event that made it impossible to move goods by plane from Germany to the U.S.?”

Taking a wide-ranging, long-term view of risk can not only help companies avoid major business disruptions, it can also position them to prosper, said Merkovsky. “Find opportunities in the complexity,” he urged. “Somebody’s going to win in a lot of these events because of their planning and their ability to be nimble.”

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