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A risk-roadmap for greater broker intuition

10 February 2021 Gareth Stokes

Global business leaders will have to take hands with governments to respond to the myriad risks introduced by global pandemic; they will have to navigate job losses, the widening digital divide, disrupted social interactions and abrupt shifts in markets or face dire consequences and lost opportunities. This was among the warnings shared during the 19 January 2021 media launch of the WEF Global Risks Report 2021, now in its 16th edition. Børge Brende, President of the WEF, reminded members of the media that the risks facing the world were increasingly global and interconnected. “Risks are not confined by borders or categorisations. Covid-19 anywhere is Covid-19 everywhere, and the same can be said for climate change,” he said.

While politicians and A-list media prepare for their annual pilgrimage to Davos, Switzerland, to attend the WEF 2021 Annual Meeting, this hack had to satisfy himself with a Zoom invite to the press launch of the forum’s latest report, which is produced with support from multinational firms Marsh McLennan, SK Group and Zurich Insurance Group. The report assists global business leaders and risk managers to identify and position their businesses for risks that often play out over decades. This year it focuses on the risk environment in the context of an estimated 150 million global citizens falling into absolute poverty post-pandemic. 

Why should brokers and financial advisers care about global risks?

The global risk environment has a direct impact on every aspect of corporate and individual financial wellbeing. Any doubts you may have harboured over the relevance of risk preparedness should have been erased by the coronavirus pandemic that laid waste to much of 2020 and looks certain to continue unabated through 2021. You must be able to identify and respond to external risks to offer the best possible service to your clients. Remember, your job is not to predict future uncertain events; but to apply best practice when performing your advice duty. Financial advisers may, for example, prevent clients from making poor financial decisions during crises… And risk identification and mitigation are central to non-life insurance brokers’ roles. 

The top risks identified by the 2021 survey are ranked by likelihood, from the most likely to least likely events, and by impact, from highest to lowest. In 2021 the most likely risks include extreme weather, climate action failure, human environmental damage, infectious disease, biodiversity loss, digital power concentration, digital inequality, interstate relations fracture, cybersecurity failure and livelihood crises. Most of these risks are self-explanatory, but we will expand on some of them in this newsletter. The top impact risks include infectious disease, climate action failure, weapons of mass destruction, biodiversity loss, natural resource crises, human environmental damage, livelihood crises, extreme weather, debt crises and IT infrastructure breakdown. 

Saadia Zahidi, Managing Director, Centre for the New Economy and Society at the WEF, sketched the risk landscape over various timeframes. “The most imminent threats, those that are most likely in the next two years, include employment and livelihood crises, widespread youth disillusionment, digital inequality, economic stagnation, human-made environmental damage, the erosion of societal cohesion and terrorist attacks,” she said. This list should send shivers down the spine of any South African reader because we are already flirting with most, if not all, of these risks. 

Is the next dotcom bubble upon us?

Over a three to five year view, risks centre on asset bubbles, price instability, commodity shocks and debt crises as well as geopolitical risks due to interstate relations and conflict. One need only consider the crazy price-to-earnings ratio on the US S&P 500 share index to appreciate the disconnect between financial market valuations and the underlying economy. And few would argue that outperformers such as Tesla Inc and outliers like bitcoin are in bubble territory. Environmental risks come to the fore over five or 10 years. This longer time frame increases the likelihood of biodiversity loss, think deforestation of the Amazon basin, natural resource crises and climate action failure, among others. 

The pandemic has accelerated numerous trends that were beginning to establish at the end of 2019. “These shifts will continue to transform human interactions and livelihoods long after the pandemic passes,” said Peter Giger, Group Chief Risk Officer at Zurich. He noted that automation could displace as many as 85 million jobs in the next five years, over and above the millions of jobs lost through 2020/21, and that there was a real risk of “creating a digital underclass” of individuals unable to work in an environment dominated by fourth industrial revolution technologies. Technological advancements seem to play on both sides of the risk spectrum, featuring in the problem statement and solution columns.

“It is clear to us that technology such as the deployment of artificial intelligence (AI) and 5G will create a tremendous engine for economic growth”, commented Guillaume Barthe-Dejean, Director, Chairman’s office at SK Group. AI plus big data allow large manufacturing firms to make real-time decisions that optimise goals and objectives such as maximising safety and throughput or minimising carbon emissions. He encouraged firms to view investments in technology as necessary to unlock significant savings in the future. 

Building resilience in your business

All of the participants in the WEF Global Risks Report 2021 media launch stressed the importance of building resilience in both businesses and government. Barthe-Dejean said there were two key challenges in achieving this, first how to address the economic repercussion from pandemic and second, how to protect businesses from future shocks. 

Concerns over the cost of building business resilience were dismissed out of hand. “Resilience is not inefficient; we have to build in slack to meet the challenges of tomorrow,” noted Carolina Klint, Managing Director: Risk Management Leader Continental Europe at Marsh. Giger echoed her sentiment, saying that “building resilience leads to lower costs over time because it is always cheaper to build a dam than to pay for a flood … on the assumption of perfect stability, costs can be lower; but overall, resilient processes will be more cost effective”. 

The executive report to the 2021 Global Risks Report concludes that emerging risks in the form of social unrest, political fragmentation and geopolitical tensions will shape the effectiveness of [global] responses to the other key threats of the next decade, such as cyberattacks, weapons of mass destruction and, most notably, climate change. Global business leaders are encouraged to use the report findings to inform long-term sustainable views of their external risk environments. “The key to risk management is to prepare for the unexpected,” concluded Giger. “The risks identified in the report are an expected universe; but we must leave space for risks that are not on the radar … good risk management will create resilience to a broad range of outcomes”. 

Writer’s thoughts:
One of the many powerful observations shared during the launch of the WEF Global Risks Report 2021 was that its value lay in process rather than prediction. The report identifies the expected universe of risks that businesses should be aware of when preparing their risk plans; but it cannot serve as a risk plan template. Does your advice practice dedicate capital and human resource to the risk planning function? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

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