Terrorism and “hacktivism.” Mass migration. Pandemics. Water shortages. Cyber-attacks. These events grab headlines every day in the rapidly changing risk landscape we now inhabit, one that seems to double in complexity every few years.
In the 11th edition of the Global Risks Report produced by the World Economic Forum, CEOs of multinational corporations were asked to identify the top five global risks of highest concern for the next 18 months. The five most frequently cited issues have direct ties to geopolitical instability: large-scale involuntary migration, state collapse or crisis, interstate conflict, unemployment or underemployment, and failure of national governance.
Businesses cannot help but take notice.
Take Syria for example. As noted in the Global Risks Report, an extended drought in 2011 — since linked to environmental factors — contributed to rural-urban migration that increased tensions in the nation’s cities before conflict erupted, igniting a civil war that continues to this day.
Meanwhile, amid a growing refugee crisis driven by the Syrian civil war, the EU finds itself in search of solutions to maintain a united front in the face of growing insularity in some parts of the continent and calls for de-integration. Already the open border policy that has been a hallmark of the EU has been called into question due to the combined impact of refugees and terrorism fears. While the breakup of the EU remains unlikely, such an event would be disruptive at best for multinational corporations with people, operations, and property in the region.
These interlinked examples are just the tip of the iceberg in terms of geopolitical instability, which is but one — albeit important — emerging risk area for organizations as they confront significant global operational, financial, governance, and safety risks.
At the same time, identifying emerging, critical business risks is not expected to get any easier. In Marsh’s just-published report, Excellence in Risk Management XIII, 48% of C-suite executives and risk professionals surveyed said that forecasting critical business risks will be significantly harder three years from now, with another 26% saying it would be about the same. Yet, despite the growing awareness surrounding global threats, businesses have been slow to enhance their ability to identify, assess, and manage emerging risks.
So what should businesses do to keep pace with the changing nature of risk? Here are three suggestions to start:
Connect the dots between isolated geopolitical incidents.
The findings of this year’s Global Risks Report suggest an emerging status quo with geopolitical risks front and center in terms of their potential impact or likelihood. Corporate executives should pay close attention to a broad array of expert information sources to monitor these risks and connections. Expect international security and geopolitical trends to exert even greater influence on the global economy in the months and years ahead — and to weigh more heavily in your strategic planning.
Harness the power of predictive data analytics.
Predictive analytics can help companies manage known risks that are rapidly evolving — dynamic risks, such as cyber and regulatory risks — and identify less visible emerging risks such as social instability, water crises, and sustainability.
In the Excellence survey, 74% of respondents said their organization would benefit by using analytics to better quantify emerging risks; 37% said their company does so currently.
Predictive analytics applies statistics to analyze large quantities of data and past events to build forecasts about future events. These risks are then mapped to show frequency, severity, and corporate exposure for both insurable and non-insurable risks; the map can be adjusted in real-time to show how insurance can be applied to mitigate these issues.
Improve internal coordination of risks.
Cross-company collaboration was cited by 43% of Excellence respondents as the main barrier to properly understand the risk landscape, a theme we have seen play out repeatedly in the 13 years of the survey. If risk data is to play its essential role in understanding emerging risks, organizations will also need to aggregate and analyze it across departments to enable C-suite executives to make strategic decisions based on 360-degree assessments. What’s more, this sort of transparent collaboration on risk management ensures that interconnected risks — such as a cyber-attack knocking out a power grid — do not fall between the cracks.
One way to foster collaboration is through cross-functional risk committees that meet regularly to gather views from throughout the organization. So we asked companies that have such committees if emerging risks were a regular item on their agendas. Fewer than half of respondents said they were a regular topic, 47% said they were only discussed occasionally, and more than 10% said they were never discussed. This needs to change; emerging risks should have a regular spot on the agenda.
New challenges lie around every corner. The links between geopolitical instability, climate change, and technology innovations illustrate how modern risks are interconnected as never before. Through greater awareness and understanding, careful planning, and effective investments, businesses can become risk ready and protect themselves against the rising tide of emerging threats.
Organizations that use these high-powered tools to assess and manage the impact of emerging risks such as geopolitical instability on their operations will give themselves a competitive advantage. Those who don’t will become footnotes to history as CEOs are expected to chart forward in a world changing with increasing velocity.
Peter Zaffino is Chairman of Marsh & McLennan Companies’ Risk & Insurance Services segment and Chief Executive Officer of Marsh.