Global Risk Reports 2014–Managing Catastrophic Risks


1.   Introduction

The first two parts of the Global Risk Report 2014 deal with processes that are analogous to some of the planning processes of Risk Management used in project management:  Plan Risk Management, Identify Risks, and Perform Qualitative and Quantitative Risk Analysis.   Part Three of the Global Risk Report 2014 deals with the next process, which is Plan Risk Responses.   In the last post, I talked about general risk response strategies.   A summary of this discussion is contained in the next section.

This post deals with the specifics of risk responses for managing catastrophic, global risks.   Because of the global scale of these risks, any attempt to effective manage such global risks will itself have to be global in scale.

2.  General Risk Strategies

There are four general strategies for dealing with risk, depending on whether they are negative risks (threats) or positive risks (opportunities).  Which strategy to use depends on two factors:  the probability of the risk occurring and the impact that it would have on the project if it were to occur.  For the sake of simplicity, let’s categorize both the probability and impact of a risk into high and low categories.  Then we have the following matrix for negative risks and positive risks:

Probability Impact Strategy (-) Strategy (+)
High High Avoid Exploit
Low High Transfer Share
High Low Mitigate Enhance
Low Low Accept Accept

Let’s take a look at the four general risk response strategies for negative risks avoid, transfer, mitigate, and accept, and discuss how applicable these strategies are for global risks.

3.  Strategies for negative risks or threats

Let’s first discuss the two risk strategies that are the least applicable to global risks.

a.  Avoid

If the probability of occurrence of a particular risk and its potential impact were it to occur are both high, you would normally want to avoid that risk.    Note that the global risks that were considered to be of highest concern in the Global Risk Report 2014, which are contained in the following list, are defined as those that have both the highest probability of occurrence and the highest potential impact if they occur.
# Global Risk Risk Category
1 Fiscal crises in key   economies Economic
2 Structurally high   unemployment/underemployment Economic
3 Water crises Environmental
4 Severe income disparity Economic
5 Failure of climate change   mitigation and adaptation Environmental
6 Greater incidence of   extreme weather events (e.g. floods, storms, fires) Environmental

If a company is contemplating a project with a risk that has high probability and impact, the avoid strategy may work by avoiding that  project altogether, or at least the portion of the project with that high risk.  For example, an automobile company that has expertise in normal manufacturing processes may outsource the production of a high-risk component, such as an airbag system, to a company that specializes in the manufacture of that type of component.

But when you have risk #6, the greater incidence of extreme weather events on a global scale, for example, how are you supposed to avoid that?   This is why the avoid strategy is impossible for global risks, because they are, by definition, global in scope.

b.  Transfer

Now if a risk is low in probability, but high in potential impact, a strategy that a firm can use is to transfer the risk, or a portion of it, to a third party that specializes in handling risk.   For example, the probability of my getting into a car accident is low (fortunately), but the potential impact to me if my car were to get into an accident could be great, even life-threatening.   Since it doesn’t happen that often, I can pay a certain amount, called a premium, to an insurance company.   The premiums are pooled together (and invested), and if there is an accident, the money to pay for car repair and/or medical bills for any injured people is taken out of this pool.    Insurance companies can even transfer risk to other insurance companies, called reinsurance companies.   For catastrophic risks, governments will have to pay money for the response to disasters, which then spreads the costs across all of the taxpayers.

The problem with a risk like #6 is that the impact may be greater than even reinsurance companies, or perhaps even governments, in the wake of recent fiscal crises, can bear.   So transfer of global risk is the second least desirable risk response strategy.

What then are the best two risk response strategies to take with regards to global, catastrophic risks?

c.  Mitigate

A fourth strategy occurs when either the impact or the probability is high, and that is to mitigate the risk by lowering the probability of it occurring, or reducing the impact on the project if it occurs.   This can be done with the threat of climate change, by reducing the emission of greenhouse gases, for example, which would lower the probability, or the avoidance of giving permits for building projects that come within a certain distance of coastal waters, which would lower the impact of flooding if it were to occur as a consequence of climate change.

This is the best long-term strategy, but because the effects are long-term, persuading governments to forego a portion of short-term economic growth to invest in the reduction of longer-term risk may take persistent, multidirectional dialogue with those governments.

d.   Accept

A shorter-term strategy is to accept the risk, in the sense of accepting the necessity for creating contingency plans for that risk.   Now, these strategies are not mutually exclusive.   You can develop contingency plans for risk, let’s say, of climate change, while at the same time you make efforts to reduce the probability of its occurrence.

In my opinion, to accept and mitigate are the most effective and efficient portfolio of strategies to take regarding global, catastrophic risks.

4.   Public-Private Partnerships for Managing Catastrophic Risks

Any strategy for managing global catastrophic risks will also have to be global in scale, but it will also have to include buy-in from multiple stakeholders:  from the private sector, from non-profit organizations, and from governments in order for it to succeed.

These public-private partnerships will have each sector bring something unique to the table, as is shown in the chart below, with research and development, however, being something to which both sides can contribute.

Public Sector

Private Sector

Disaster management organizational framework Community engagement
Legal protections Innovative business processes
Personnel and training Products and supplies
Research and development Research and development

Like any project, successful public-private partnerships can

  • identify and agree to outcomes and objectives,
  • establish roles and responsibilities,
  • leverage environmental factors that support such partnerships, and
  • mitigate any environmental barriers to the successful implementation of such partnerships.

As it says on p. 45 of the report, “The World Economic Forum’s Global Agenda Council on Catastrophic Risks works to codify and articulate such leading practices about how public-private partnerships can work.

A cultural shift is under way, out of necessity, towards the creation of public-private partnerships to address catastrophic risks.  Analyzing the establishment and operations of these partnerships, as well as the effective use of the partners’ collective capabilities, is a vital step towards strengthening communal security and resilience.”

5.  Conclusion

Managing global, catastrophic risks may seem a daunting task, and people may think, “well, I’m just a drop in a limitless ocean of humanity, what can I do?”  To quote from the movie Cloud Atlas, “yes, but what is the ocean but a multitude of drops?”

There really is no alternative to facing these risks.   As the final words of the protagonist in the 1936 movie “Things to Come” says while pointing to the stars, “for man, there is no rest and no ending.  He must go on—conquest beyond conquest. . . If we’re no more than animals—we must snatch at our little scraps of happiness and live and suffer and pass, mattering no more… All the universe—or nothingness… Which shall it be?”

If we refuse to manage these risks, particularly the threat of global climate change, our children and grandchildren may be facing the specter of nothingness.    The choice is clear.

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