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Why far-off global risks spell danger for all businesses

At a glance

  • John Scott, Chief Risk Officer of Zurich Global Corporate, gives the lowdown on a new report that offers a practical guide for individual businesses to remain resilient in the face of these global risks
  • Brokers can use the report to drive new business
  • Report highlights the importance of building resilience at a strategic and operational level

Big global risks – such as high structural unemployment, fiscal crises and conflicts – may, for individual businesses at least, seem like a far-off problem for governments to solve, but their impacts can have a negative impact almost immediately even at a local level.

A new report has just been published, entitled Responding to Global Risks: A Practical Guide for Business Leaders, which offers a practical guide on how people running businesses today can remain resilient and withstand these shocks that can spread across national boundaries.

Zurich Insider caught up with John Scott, Chief Risk Officer, Zurich Global Corporate, who was one of the key industry experts to contribute to the report, to ask him what advice businesses, both large and small, can take to manage and mitigate these risks, and how brokers can use the report to win new business.

Q: John, you are one of the risk management experts called upon to contribute to the report. What was the purpose of the report?

A: The new report, which is very much a companion report to the World Economic Forum’s recent report, Global Risks 2014, aims to give advice to individual businesses on how to deal with these global risks at a functional level.

Q: Why does the report help brokers?

A: Many of these global risks end up as insurable risks, whether it is supply chain, business interruption, property damage linked to severe weather, cyber risk products related to data privacy and security, or human resource risks mitigated by the provision of insuraance covers related to employee benefits.

There is also a risk management angle, helping businesses to manage the consequences of global risks in a pro-active way. The report should give brokers the opportunity to drive new business both in terms of advice on risk management and advice around the best insurance programmes to purchase to mitigate the consequences of these global risks.

Q: What are the big global risks that businesses should be aware of?

A: One of the characteristics of global risks is that they are often highly interdependent on each other. This systemic nature can be seen in the way one global risk, for example a fiscal crisis, can have multiple impacts on other global risks such as failure of a financial mechanism or institution.

In a practical way, this can create funding difficulties for businesses, as banks seek to repair balance sheets and tighten credit checks on lending. Other global risks, such as extreme weather, create knock-on impacts in terms of not only property damage, but also supply chain and business interruption.

The macroeconomic risks of fiscal crises can also drive social risks such as income and social disparity, underemployment and unemployment. These create challenging problems for companies operating in a recessionary period, especially when the government response is often to cut spending at a local level, the so called ‘austerity budget’, which amplifies the consequences of these risks for business.

Increased levels of claims on workers compensation, or employers’ liability policies and increasing incidents of aggravated property damage through arson, or other types of fraudulent activity, are well known consequences for the insurance industry during recessionary times.

Attacks on the Internet, too, to the point where the internet becomes unstable and untrusted and no longer becomes the medium to do business, could also affect a lot of business models because the growth of a lot of businesses over the last 15 years has been based on the existence of the internet.

To quote John Donne, the 17th century English metaphysical poet, no man is an island, but it is equally true to say no business is an island either

John Scott, Zurich’s Chief Risk Officer

There is also geopolitical risk with a so-called ‘G-Zero’ world where no one country has the ability either economically or politically to intervene and influence in world affairs.

The current problems in Syria and Ukraine are good examples where indecision is leading to civil unrest and intra-state war. This has a knock-on impact on emerging market economies and how they might grow, as well as ultimately creating a more regional and national world where businesses with global supply chains may find increasing levels of supply chain interruption, making it more difficult for them to operate.

Q: Why is it important for businesses to build resilience at a strategic and operational level, and adopt risk management as a part of good corporate governance?

A: You have to think about how resilient a business is to all sorts of shocks that may immediately impact on the ability of a business to operate.

And if you don’t think about the business and strategic risk for large global risks, then you are missing a trick, as you are not seeing the forward-thinking radar of risk to help manage in a pro-active way the business response and sustainability of that business to those global risks.

You can’t ignore these things and imagine that it can’t be you, as one day it could be and if you are not prepared for it then it could spell the end of your business.

Q: Finally, what is a good example of a global risk that has had an immediate impact on businesses?

A: This winter’s extreme weather and flooding in the UK, which may be a global phenomenon linked to climate change – although we don’t know for certain as it is a very complex link – will have surprised businesses not prepared for extreme versions of weather in all sorts of ways and could have had a significant impact on their ability to deliver goods and services.

For instance, the flooding on the Somerset Levels had a big impact on the local farming community but had all sorts of other knock-on impacts in terms of cost of feedstock to cost and availability of basic foodstuffs.

The severe flooding in Thailand in 2011 is another example. Many global supply chains were disrupted, so things happening on the other side of the world that are a consequence of global risk often come home to roost.

To quote John Donne, the 17th century English metaphysical poet, no man is an island, but it is equally true to say no business is an island either.

Image © Getty

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