OECD Studies in Risk Management

Innovation in country Risk Management

In the end of 2009, the Organisation for Economic Cooperation and Development (OECD) conducted a research about Risk Management in multiple OECD countries. The Futures Project on Risk Management Policies aims to assist OECD countries in identifying the challenges of managing risks in the 21st century, and contributing to their reflection on how to best address those challenges. Its focus is placed on the consistency of risk management policies and on their ability to deal with the challenges, present and future, created by systemic risks.

This OECD report looks at innovative practices in the management of risk in six countries: the United Kingdom, Canada, the United States, Japan, the Netherlands and Singapore. It focuses on recent developments in risk management at central government level such as approaches to multi-risk identification and assessment, and methods to prioritise investments in mitigation activities. Recent reforms to reorganise ministries, create collaborative partnerships with the private sector and reshape financial assistance following disasters share the common purpose to enhance efficiency and effectiveness in the prevention, protection, response and recovery from large scale events and are here considered in light of previous OECD policy guidance[i].

The call for this study comes amid rapid changes to the global risk landscape as evidenced not only by new sources of natural and man-made hazards, increasing frequency of disasters and rising magnitudes of damage, but also by new socio-economic trends such as rising population densities and value concentrations in geographic areas exposed to hazards.

In 2005, economic losses from natural catastrophes hit a record high, with direct financial losses of about US $ 230 billion, representing 0.5% of total worldwide GDP, of which US $83 billion was covered by insurance[ii]. Although unprecedented damage from Hurricane Katrina accounted for much of the costs in that year, 2008 ended up being the second highest year for economic losses from natural disasters (US $ 200 billion)[iii].

A high degree of technical integration and economic interdependence in modern societies has also increased uncertainty regarding where risks begin and end, as seemingly minor events may cascade into full blown crisis. The current financial crisis illustrates that even robust regulatory approaches may fail to foresee how risks to one sector of the economy can carry global ramifications. Concerns have arisen over the capabilities of governments to respond adequately to large scale disasters and the continued ability of insurers to offer property and casualty coverage. Adapting to the new risk landscape raises the need for new forms of partnership between governments, the private sector and individuals to prepare for crises in advance and to redistribute the burdens they incur.

Government efforts to manage large scale risks often focus on a particular type of hazard, because they have been established in reaction to the consequences of specific events such as natural catastrophes. Over time highly defined areas of competence tend to develop in which numerous ministries, departments and regulatory agencies at various levels of government carry-out operations in parallel and separate silos. A modern networked society with increased connections and interdependencies may be exposed to unforeseen vulnerabilities when risks arise that do not fit neatly within the remit of one particular department. Indeed, government departments might focus on one phase of what is actually a multi-layered risk management cycle comprising risk assessment, prevention, protection, response and recovery.

An integrated, all-hazards approach to risk management entails multifaceted interactions between public authorities at the national, regional and local levels of government and private parties such as operators of infrastructure and insurers. The challenge to improve country risk management is no easy task: the intricate web connecting these various groups may obscure lines of responsibility, allocation of resources, information flows and complicate the reception of effective input from interested parties. Indeed, efficient risk management may be compromised by the inability to deal effectively with bottlenecks in the exchange and analysis of information or to set priorities informed by the entirety of a country‘s risk portfolio.

Policymakers, regulators and emergency services with narrow or short sighted focus on achieving their individual mandates may also miss opportunities, fail to leverage the expertise of colleagues in different government departments, compare different types of risks and share lessons learned. This report highlights programmes that integrate the work of various bodies into coherent and credible sources of information that can guide prevention and protection efforts.

Public investments to mitigate risks entail the expenditure of limited resources that need to be prioritised. When such projects are in competition for funds, decisions should be informed by risk assessments that provide comparable criteria; silo operations in risk governance are not conducive to such comparisons. This report illustrates innovative tools that help policymakers compare risks for the purpose of targeting mitigation investments to their greatest benefit and how these decisions are validated.

Such decisions are complicated by the reality that risk is a moving target. For this reason some countries use horizon scanning methods that provide a forward looking perspective on risk assessment to ensure investments made today are not irrelevant tomorrow. Only by understanding such complexities is it possible to understand, and so be ready for, the possible long-term consequences of damage to a system – including the potential domino effect of harm to other systems.

The scope of this report pertains to risk management of large scale events such as natural catastrophes, terrorist events and pandemic disease that pose grave consequences for a country‘s population and national assets. It does not pertain to operational risk management systems that some countries have implemented to prevent disruptions to the operations of government per se. In particular the report focuses on organisational improvements and challenges to the pre-event phases of risk management: risk identification, assessment, and mitigation activities (including both prevention and protection measures). Policymakers face the challenge to determine not only how damage may be reduced most efficiently through pro-active measures before disaster strikes, but also how cost burdens may best be met and equitably shared. Recognising that it is impossible to perfectly prevent and protect against all risks, the report looks to new and inclusive approaches to the risk and financial management of large scale events.

 The full research report can be found on the OECD website.

 

© OECD 2009

 


[i] OECD (2003a).

[ii] Swiss Re, sigma No 2/2006.

[iii] Munich Re Press (29 December 2008).