The World of Risk

25 February 2016

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Introduction

For those who followed the World Economic Forum in Davos, the week always provides a fascinating insight into the minds of our top business leaders and politicians.

From Brexit to China’s debt issues, migration to food shortage, oil price to climate change, the debates in the corridors centred around how to solve the important issues that threaten the stability of our economies and world security.

In this article I hope to give you a better understanding of the Risk, how these are interconnected throughout the globe, the consequences on our every day personal and business lives, and how as business leaders we have a   responsibility to drive necessary change.

Understanding risk

Risk is a complex and often misunderstood subject. By its very nature it is uncertain and for the majority of people they are probably only familiar with the disasters they hear about.

And the perception of risk can be very different depending on whom you talk to. The Challenger Shuttle disaster is a classic example of this when Ground Engineers assessed the risk at 100/1 but Management quantified this at 100,000/ 1.

But even the most successful companies are hard hit when they least expect it, and the outcome of risk events can have serious impact upon a company’s hard earned reputation, revenue and share price.

The hidden risks 

Tsunami, floods and terrorism, are normally the risks that come to mind. However there are global hidden risks that are gradually having major implications in the world we live in. Political and societal shift have a far wider impact than many might appreciate. For example,the growing gap between the wealthiest and poorest is dividing our societies,

Today 20% of the population use 75% of the world's resources.

and as populations grow, rents rise, people are pushed out and there is no getting away from how people are feeling. The Google Bus story is a great example of what would have been thought of as a success, but has had the complete opposite effect in San Francisco's Mission district.

People are beginning to vent their frustration and anger and Social Media / Internet is helping to accelorate revolts, with the ability for riots to fester very quickly. Disenfranchised individuals are being lured into crime and terrorism, and Governments are being overthrown.

1.4m people are migrating to cities every day.

And there were 50% more displaced individuals last year than during the whole of World War Two. Urbanisation risks overcrowding, more homelessness, disease, and once again crime in our towns.

Vegas will be history in less than 15 years unless they can find an intelligent and sustainable water alternative.

Water shortage, an issue we wouldn’t particularly identify with in the UK, is one of the top 3 Global concerns for businesses and Authorities. Venezuela's hydro plant could close in the very near future leaving 10 million citizens without electricity.

In many of the Western World countries, better living standards and fiscal changes elsewhere are tempting skilled workers to migrate overseas. And in the UK, as Technology advances, it is estimated that 5m traditional jobs will be taken away in the over the next 30 years. This termed often as the 'great decoupling' and poses a very real threat to unemployment, political and societal risk.

Emerging technologies also bring all sorts of new challenges that we'd never considered before, drones and driverless cars are examples which companies, and risk managers are trying to comprehend.

Managing risk

A recent EY study demonstrates that the top 20% of well risk managed companies perform 3 times better on EBITDA than the bottom 20%. Interestingly its research also revealed that 82% of institutional investors would pay a premium for strong risk managed businesses.

Planning is paramount to an organisation’s long term success. It is critical to understand a company’s priorities and strategy. A great illustration of how priorities are changing is that 20 years ago intangible assets represented 20% of the FTSE 100 companies’ balance sheets. Its is now 80% and the main focus is towards managing the risks that directly or indirectly affect Brand and Reputation.

History isn't always the lantern to future predictions however the advent of Big Data, new Regulation and Governance is leading to organisations being better equipped to recognise and deal with risk events. 

Driving change

60% of Global spending is through the Private Sector so why should we assume that Government has sole responsibility?

The bottom line is that we all have a duty to drive change. This year, the Paris Summit on Climate Change was a profound change in direction, and business leaders made a critical contribution to the agreement. The key to change, however begins with awareness of our surroundings, and secondly that we have a broader responsibility to society than simply our company’s bottom line.

Sources:

  • Association of British Insurers
  • Earnest & Young
  • BBC news online
  • World Economic Forum 

Phil Bower has over 25 years experience in underwriting, broking and claims management. He is Marketing and Development Manager at Sutton Winson Insurance Brokers & Risk Managers.

Categories: Commercial Insurance, Risk Management