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Risk in Context

Tomorrow’s Risks Today

Posted by Edward Farrelly 12 September 2018

The Lloyd’s City Risk Index Discussion took place in Hong Kong on September 6, 2018. The event was jointly organized by Marsh and Lloyd’s, in collaboration with PARIMA. Edward Farrelly moderated discussions at the event.

First, the numbers

The Lloyds City Risk Index considers 279 major cities around the world, which together make up 41% of the estimated total global economic output. Of this, just over US$ 546 billion is at risk annually as a result of catastrophes. According to Thomas Haddrill, General Representative of Lloyd’s Hong Kong, this is a projection of the financial losses to a city annually if the risk events took place. As such, it can be seen as a measure of the money a prudent city needs to put aside each year to cover the cost of catastrophic events.

Continuing with this theme, Lucy Nottingham, Director of the Global Risk Center at Marsh & McLennan Companies, stated that in 2017 alone there were 16 weather events around the globe that resulted in negative economic impacts of more than US$ 1 billion. She also pointed to the increased frequency and intensity of weather events around the globe and posed the question that while insurance policies and business continuity programs may mitigate some of the potential economic losses, what happens when structural shifts threaten the very way we do business?

Weather vs Climate Change

As defined by NASA, the difference between weather and climate is a measure of time. Weather refers to conditions in the atmosphere over a short period of time, and climate describes how the atmosphere "behaves" over relatively longer periods of time.

In 2008, as a result of climate change, the US listed polar bears as a threatened species under the Endangered Species Act. The WWF also lists the survival and the protection of the polar bear habitat as an urgent issue. It should however be safe to say this probably has not been an agenda item in many boardroom discussions around the world.

However, Climate Change is not only about polar bears or penguins, or what we are doing to the environment. According to Lucy, for corporations, it is also about how the environment affects financial performance, both directly and indirectly.   

Who does what?

Lloyd’s correctly highlights the role that Government has to play in mitigating risk, by investing in stronger infrastructure to minimize losses, by ensuring economic growth is reinvested in strategies to reduce wealth inequality, and by developing technologies to mitigate disasters and manage resources. However, individual corporations must also seize the initiative and share responsibility. Corporate action on Climate Change, and in particular its indirect impacts, while laudable, also makes economic and financial sense, benefitting shareholders.  

Companies tend to focus on short term events. Direct consequences of these near-term events are seen as tangible and easier to quantify, compared to the less apparent indirect repercussions from climate change. However, Lucy emphasized that as we shift to a low carbon environment, the steps that organizations take to improve resilience - the ability to adapt, thrive, and survive – becomes critical. This goes beyond Corporate Social Responsibility and drives to the core of our ability to capitalize on the strategic advice and operational improvements that are involved in the transition.

Natural vs Man-made risk

Environmental risks have consistently ranked among top global risks and these can be significantly reduced by improving cities’ infrastructure and developing a robust economy, with insurance playing a key role in this process. However, risk is evolving and a heightened level of man-made risk – cyber, market crash, etc - is emerging in more mature economies. Organizations across Asia are particularly vulnerable to cyberattacks due to (i) the absence of a rigorous regulatory framework, (ii) underinvestment in cyber-security, and (iii) a shortage of talent.

The response from an insurance perspective to the growing threat may have been initially lackluster a decade ago, but the industry has since become more sophisticated. Across the wider tech sector, more flexible and agile products now seek to address anticipated changes. For example, as mobile autonomous technologies are further developed and rolled-out, the risk landscape is likely to evolve. We are already seeing advances in the transfer of liability risk in response to these developments.

Despite increased awareness, risk surveys carried out by Marsh suggest a wide chasm between how prepared businesses think they are for an attack and how prepared they truly are. As pointed out by Steve Tunstall, General Secretary of PARIMA, there are two types of companies; those that have suffered a cyberattack and those that are unaware they have suffered a cyberattack.

Steve highlighted the urgent need for conversations about risk - natural and man-made, as well as direct and indirect - to permeate organizations. Risk Managers need to engage with C-suite executives to raise awareness and initiate action. It would be a mistake to say this is not relevant today as changes that are happening now will lead to new regulations and new competitors. This conversation also needs to be broadened to encapsulate changes in supply chain dynamics and changing customer demands. 

The time for this conversation is now.

Related to:  Real Estate

Edward  Farrelly

Edward Farrelly is Real Estate Leader for Marsh Asia.