CYRIL TUOHY, managing editor of Risk & Insurance®
Around the world, individual countries would benefit from a risk manager looking at risks facing them and their people, according to a risk management expert and participant in the World Economic Forum in January.
"Countries would benefit massively with a central person that looks at risk holistically for a country," said Christian Mumenthaler, chief marketing officer for Swiss Re, the global reinsurer. "You see it in the corporate sector, but not so much in government."
Especially now that governments have shown themselves willing to step up to become insurers of last resort, chief national risk officers could play an important role in helping elected officials plan for and react to the speed and the global interconnectedness of risk, Mumenthaler said, during a press conference and a live webcast marking the release of The World Economic Forum's
"Global Risks 2011" report.
The report underscored the importance of the connections between what the report called the "macroeconomic imbalance nexus," the "illegal economy nexus," and the "water-food-energy nexus."
These "nexus" risks, each a "particularly dangerous cocktail," said Robert Greenhill, managing director and chief business officer of the World Economic Forum, pose big challenges to government leaders around the world.
Expanding on the risks inherent in the macroeconomic imbalance nexus, Daniel Hofman, group chief economist for Zurich Financial Services, said that the financial crisis of the past two years accelerated public indebtedness.
"Age-related spending in advanced economies far exceeds receipts," he said, adding that advanced countries like Greece, Iceland, Ireland, Italy, United States and Belgium can't keep growing themselves out of their debt burden.
"It matters what you cut and how you cut," Hofman said.
Cutting social programs will have the least effect on economic growth. Cuts in public investment and government consumption will have a bigger effect on gross domestic product, he said.
Regarding risk in the water-food-energy nexus, John Drzik, CEO of Oliver Wyman Group, a unit of Marsh & McLennan Cos., commented that "a sustained period of higher price volatility is the new normal."
Coffee prices in 2010 were up 77 percent compared to 2009, and corn prices in 2010 were up 52 percent over the previous year, according to Drzik. The price increases have helped spark food riots in places like Nigeria. A new era in price volatility will challenge CEOs to operate their companies more efficiently and make better use of resources.
The sooner governments deal with these risks, Greenhill said, the easier they will be to solve, he said. But even these widespread risks are eclipsed by the overarching governance risk, said Greenhill.
"The challenge today is the vicious cycles and the system dynamics and the connections between risks," he said.
Speaking weeks before riots in Tunisia and the current crisis in Egypt, Greenhill pointed to governing challenges posed by global disparities in wealth, the fraying of social bonds and drained national treasuries.
For all the breadth and depth of risks facing nations today, governments have still shown they can intervene successfully. The G20 nations proved they could respond in the face of the financial crisis of 2008. In the United States, the Treasury Department bailed out failing banks, insurers and automakers. In Britain, the government stepped in to prevent the total collapse of insolvent financial institutions. On the Continent, the European Union arranged financial packages to bail out some of its member nations.
The challenge today, however, Greenhill said, is to "anticipate and act before things happen."
Short of completely anticipating a crisis, governments need to move quickly and respond decisively during an outbreak or they are going to find themselves in big trouble, particularly with the speed with which a crisis in one part of the world can affect another.
Mumenthaler said that, while most the risks discussed in the report ultimately fall on the shoulders of government, partnerships between government institutions and the private sector--like the insurance industry--could solve a lot of the issues stemming from the risks outlined in the report.
The WEF. report was produced in collaboration with Marsh & McLennan Cos., Swiss Re, the Wharton Center for Risk Management at the University of Pennsylvania, and Zurich Financial Services.
January 31, 2011
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