Towards a more sophisticated understanding of global risks
This document summarizes the output of a collaboration between the World Economic Forum, MMC (Marsh & McLennan Companies, Inc.), Merrill Lynch and Swiss Re, in association with the Risk Management and Decision Processes Center of the Wharton School at the University of Pennsylvania, on the topic of Global Risks. A longer document containing more information on the genesis of the World Economic Forum’s Global Risk Programme, on the methodologies employed and detailing the scenarios constructed is available at www.weforum.org.
The purpose of this collaboration, building on work undertaken in 2004, was to:
- identify and assess current and emerging global risks in the 2006 and 2015 time horizons;
- study the links between them and to assess their likely effect on different markets and industries; and
- advance the thinking around more effective mitigation of global risks.
The global risk landscape
The 2006 risk landscape is dominated by high impact headline risks, such as terrorism and an influenza pandemic, which top the global risk mitigation agenda and are increasingly well understood. Other risks, like climate change, whose cumulative impact will only be felt over the longer term, have begun to move to the centre of the policy debate and may offer the greatest challenges for global risk mitigation in the future. Finally, we consider a number of potential risks whose outcomes are as yet very unclear, such as those associated with new technologies. These risks are thought about by few, but have the potential to be highly disruptive in the future. In many ways 2005 was a wake-up call. What is needed now are positive responses, innovation and an understanding of potential business opportunities implicit in a rapidly changing environment.
Impacts can be greater than the sum of their parts
Identification of individual global risks, however, is only one part of the story. In reality, global risks rarely manifest themselves in isolation. The combination of speed (the effects of global risks travel fast), the interconnectivity of the global system as well as its deepening complexity can lead to rapid and unexpected contagion of global risks across industries and geographical areas. The interplay of multiple global risks and their combined ripple effects can create potentially disastrous “perfect storms” – cumulative events which cause damage far in excess of the sum of each individual risk event. In 2005, Hurricane Katrina provided a powerful example of conflation that will have long-term impacts. Avian flu may present similar global challenges, should widespread human-to-human transmission occur.
Global solutions to global risks
Internationally collaborative approaches like those coordinated by the World Health Organization and public-private cooperation on global risk mitigation can help to improve the way the world deals with risk. Similarly, there is scope for more widespread and effective initiative by the private sector. Incentives need to be properly aligned to make risk mitigation as much about proactive prevention as about reactive recovery.
In some cases, as in the increasing contribution of business to disaster relief and the growth of innovative financial instruments to price risk, more sophisticated mitigation approaches are developing. However, our collective ability to mitigate global risks is still seriously hampered by divergent perceptions of the nature and importance of such risks; differing agendas; and the inability of any government, business or international institution to address these risks independently.
Looking to a better future
The World Economic Forum’s Global Risk Programme has identified three core areas where these problems can be addressed and risk mitigation improved:
- enhancement of the quality of information on risk and its flow amongst stakeholders;
- reassessment of risk priorities and reallocation of resources and incentives accordingly; and
- strengthening the capacity and resilience of business and political and administrative institutions at all levels.
No one can succeed alone in dealing effectively with global risks. An integrated multistakeholder approach offers the best hope of increasing our capacity to pre-empt, manage and mitigate global risks.