Risk management in the era of unpredictability

By Leon Gettler
February 1, 2011 Urbanisation, climate change and globalisation are leading to more and bigger catastrophes. THE floods that ravaged Queensland and Victoria are a warning for businesses to overhaul their risk-management strategies. They are events that tell us we are now in a very different world. How different? Erwann Michel-Kerjan, managing director of the Wharton Business School’s Risk Centre in the US and chairman of the OECD secretary-general’s advisory board on financial management of catastrophes, says that in the 21st century there has not been a six-month period without a major crisis that simultaneously affected several countries or industry sectors. We are seeing more and bigger catastrophes created by increasing urbanisation, climate change and globalisation. The world has become an interdependent village. Examples include September 11, hurricane Katrina and the global financial crisis. The floods in Australia and Brazil are more of the same. Also, more crises, natural or otherwise, seem to be interconnected. Accounting firm Andersen was destroyed by Enron’s accounting tricks. The world’s biggest insurer, American International Group, nearly collapsed because of a 377-person London unit, run with almost complete autonomy from the parent company. Wall Street has plunged to its lowest in six months with anti-government riots in Egypt. It’s fair to say that the floods did not figure highly in risk-management strategies. Woolworths has cut its net profit growth guidance to a range of 5-8 per cent, from 8-11 per cent, partly due to uncertainties presented by the floods. Virgin Blue announced a $40 million hit because of floods and fragile consumer sentiment. Treasurer Wayne Swan says the floods will have a ”dramatic” effect on the budget and IBISWorld has downgraded Australia’s GDP forecast from 2.9 per cent to 2.6 per cent. We now see forecasts of a worldwide impact on the supply and prices of commodities such as cotton, wheat, sugar and other foodstuffs, and coal, which will in turn put pressure on utilities reliant on coal-based energy generation. Climate specialists say global warming has contributed to the disaster, with record ocean temperatures around Australia and, from July to October, record rainfall and humidity. Alarmingly, the climatic variability is coming at a time when fuel and food prices are soaring. The United Nations Food and Agriculture Organisation’s food price index reached a record high at the end of last year, topping levels from the food crisis in 2008. The floods will only add to this. Grain shortages will send food prices soaring, spreading hunger and destroying governments. The coup in Tunisia started with food riots. The food crisis also shows the lines of connection holding a globalised economy together. The greater interdependencies mean that disasters and crises will affect many more people. They are no longer local accidents. Multinational co-ordination will become more critical. The attempt to create a global solution for climate change is just the start. …