Hailstorms in Australia, tornadoes in the southeastern U.S. and windstorms in northern Europe: We’re in the second month of the year and already receiving hints that 2012 may be shaping up to equal the meteorological mayhem of 2011. It’s not a good sign for the insurance industry, which paid more than $100 billion in 2011 on natural disasters.
But cats of the future may not arise from the usual suspects like hurricanes, flooding and earthquakes. A recent report by the World Economic Forum indicates we could be looking at even bigger problems that will affect the ever-connected globe.
For the past 7 years, WEF’s 1,000 member global companies have ranked the top five global risks in terms of both likelihood and impact. The group has been spot on in the past. For example, in 2008 through 2010, the No. 1 top global risk for likelihood was "asset price collapse," while for 2011 the top most likely threat was "meterological catastrophes," and the risk with the highest impact was "fiscal crises."
For 2012, the likelihood ranking is:
- Severe income disparity
- Chronic fiscal imbalances
- Rising greenhouse gas emissions
- Cyber attacks
- Water supply crises.
And for impact include: major systemic financial failure, water supply crises, food shortage crises, chronic fiscal imbalances and extreme volatility in energy and agriculture prices.
The "severe economic disparity" seems like a no-brainer. According to data compiled by the World Bank, the U.S. has a higher level of income inequality than Europe, Canada, Australia and South Korea. And while many countries have seen a gradual rise in income inequality, the situation in the U.S. has happened more rapidly in recent decades. Given this reality, a "major systemic financial failure" doesn’t seem that far-fetched, in spite of the feeble recent gains in the U.S. economy.
Economy aside, the other looming threats are just as feasible: cyber attacks, rising greenhouse gases and water and food supply crises. And as the study so astutely points out, all of these problems are interconnected.
Using last year’s Japanese earthquake and tsunami as an example, WEF diagrammed how the resulting contamination and property damage led to business interruption, supply chain disruption, reputational loss, drop in sales and revenue, and tightened cash flow for businesses—which in turn undermined stock price and added to the threat of a global fiscal crisis.
I’m not a believer in New Year’s resolutions but I did make one for 2012: Control what you can control. Although many problems may be out of our hands, we’re lucky to be working in an industry that’s based on this mantra. Smart risk management, beefed-up building codes, formalized disaster planning and appropriate levels of insurance coverage may not solve the world’s problems, but they can at least help slow down the snowball effect.