NU Online News Service, July 19, 3:47 p.m. EDT
While globalization has brought many benefits to businesses, companies need to spend more time studying the new and emerging risks and planning for low-probability events, according to Lloyd's.
In its latest 360 Insight Report, "Globalization and Risks For Business: Implications of an Increasingly Interconnected World," Lloyd's noted that increased globalization in the last 20 years has rapidly integrated societies and economies, offering unprecedented opportunities for success and a range of new risks for business to contend with.
"Is globalization a runaway train? Are we now vainly looking toward national governments to solve problems and crises which are international in nature? Has world trade grown too quickly to be governed by the rules which are currently in place?" Lloyd's Chairman Lord Peter Levene asked in a forward to the report.
"I do not believe that globalization is out of control, but we all–public and private sector alike–need to spend more time and care examining the potential impact of events which happen many miles away from our own work," he said.
The tidal wave of globalization over the past 20 years has led to two new dimensions of risk, according to the report:
o Risks now transmit much further and more rapidly than in the past.
o These risks can transcend traditional boundaries and take on systemic properties in which the source and final impact of the risks may not be regarded as connected.
Because of globalization, what were previously considered independent and unrelated risks are now interconnected and interlinked. They are also more complex and systemic.
These risks are often unpredictable and have a high or catastrophic impact, Lloyd's said in the report. Lloyd's noted that globalization risks include economic and financial risk, global pandemic risk, infrastructure risk, supply chain risk, food security and geo-political risk.
Because of increased integration of societies and business, higher population densities and higher asset values, the risks and their impact are growing, the study found.
To deal with these risks, Lloyd's said businesses need to:
o Conduct systemic risk audits. A starting point, the report said, would be for each corporate risk officer or manager to review significant episodes of corporate transformation within their part of the business over the past 10 years and look for new potential patterns or concentrations of risk exposure when taken collectively.
o Explore different future scenarios. Ask whether these events can be contained or whether they will spread beyond control with potentially catastrophic results.
o Examine industry codes of conduct.
o Interaction with governments is vital, the report said. Business has an important role to play in ensuring that governments are aware of the new and potentially systemic risks facing organizations.
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