No. 1 global risk is international conflict, says WEF Global Risks 2015 Report

According to the 10th Global Risks 2015 report published by the World Economic Forum (WEF) on Jan. 15, the biggest threat to world stability in the next 10 years is the risk of international conflict. A quick scan of the current news channels and newspaper headlines confirms that finding.

Each year, experts assess the top global risks in terms of likelihood and potential impact over the coming 10 years. For 2015, the experts identified the No. 1 global risk in terms of likelihood, and fourth most serious risk in terms of impact, as interstate conflict with regional consequences. In terms of potential impact, the nearly 900 experts participating in the Global Risk Perception Survey rated water crises as the greatest risk facing the world. These water crises include the effect of droughts and flooding around the world.

The 28 global risks that were assessed for the report were grouped into five categories: economic, environmental, geopolitical, societal and technological. The report also focuses on three specific cases that became apparent from the interconnections maps: the interplay between geopolitics and economics, the risks related to rapid and unplanned urbanization in developing countries and the effects of emerging technologies.

Geopolitics and economics

“Interconnectedness is a theme near and dear to Zurich’s heart,” says Linda Conrad, Director of Strategic Business Risk for Zurich Global Corporate in North America. She spends much of her time analyzing the way businesses interconnect globally, especially with regard to their supply chains.

Conrad recommends extensive modeling to help companies assess the impact of business interruptions at any point along the supply chain. “They have to ask themselves, ‘what does large global risk mean to me?’” she says. This helps a company quantify the impact of a political uprising in country A, for example, that destroys the cotton crop the company was relying on to manufacture clothing in country B.

She also notes the significant impact of an interruption in the water supply, which often goes across national boundaries. Consider the Congo River, for example, the main transportation source in Central Africa. The river and the streams leading to it affect 11 countries, including Zaire, the Republic of the Congo and Rwanda. If these countries are fighting about water rights (or anything else), the situation is likely to disrupt a company’s ability to move goods from point A to point B and get the goods to market.

(Photo: Umar Shariff/Shutterstock.com)

Unplanned urbanization

Rapid and unplanned urbanization also is a significant risk, according to the report, which considers how best to make companies and governments resilient enough to mitigate the challenges of managing the transition from predominantly rural to urban living around the world.

Conrad points out some related risks that businesses may overlook as part of their day-to-day operations. If you’re a company that transfers its employees between countries, for instance, how do you manage the increased risk of communicable diseases and the lack of vaccinations in some locations? Growing cities also have pollution issues, especially in developing countries. “In 1950, one-third of the world’s population lived in cities,” Conrad says. “By 2050 two-thirds will live in cities.” She also points out that 15 of the world’s 20 largest cities are near water. In a natural catastrophe, there will be a significant impact on a city’s infrastructure.

She finds social instability also is a significant risk factor, looking at the high unemployment rates among new immigrants, particularly young people. They can’t afford housing in the more expensive urban areas, and they often don’t have good-paying jobs when they can find employment—all ingredients for a powder keg.

In addition, rapid urbanization leads to changes in diet. City dwellers tend to consume more meat, Conrad explains. “Raising cattle uses 10 times as much water as growing vegetables does.” That will have a long-term effect on the water supply in certain areas.

Investing in infrastructure

On the positive side, Conrad says, investments in infrastructure bring a rise in a country’s gross domestic product. However, in the U.S. and Northern Europe, that infrastructure is 50 to 60 years old. About 30% of state funds spent on infrastructure is spent on maintenance, not improvements, she notes, which helps explain why U.S. bridges and roads are deteriorating.

She recommends public/private partnerships, which are much more prevalent in Europe, as one way to solve the issue of unplanned urbanization and infrastructure. “The insurance industry has a role to play in this long-term investment,” she says, noting that Zurich has increased its long-term investments to support sustainability and economic growth.

Emerging technologies

According to the report, the rapid pace of innovation in emerging technologies, from synthetic biology to artificial intelligence, has far-reaching societal, economic and ethical implications. “Developing regulatory environments that are adaptive enough to safeguard their rapid development and allow their benefits to be reaped, while preventing their misuse and any unforeseen negative consequences is a critical challenge for leaders,” the report says.

Conrad also believes that “You have to manage the impact of the technologies.” Many third world companies are involved in nanotechnology development, but there is far less quality control with its attendant problems of the use of toxic materials, for instance.

On the issue of cyber risk, the focus has been on the loss of data, Conrad observes, but most companies haven’t modeled the potential risk of business interruption from the cyber breach of a vendor or supplier. That breach could disrupt your company’s manufacturing process or take down your company’s website, even though you weren’t the target of the breach.

Enterprise risk management

Conrad believes strongly in helping customers move to broader enterprise risk management (ERM), because “global risk demands a global approach.” ERM adds rigor and discipline, gathers data and quantifies the risk, she says.

“There’s too much emphasis on business resilience,” according to Conrad. She believes that it’s better not to bounce in the first place. To minimize enterprise-wide risks and losses before they happen, Zurich provides its clients with a gap analysis of the company’s business continuity plans for its own operations and for its suppliers or vendors. Only 7% of businesses have these plans now, she adds. “Just in time should be just in case.”

Zurich uses its proprietary program, Total Risk Profiling with its clients to help them understand the risks they face when doing business on a multinational basis. The process starts, Conrad explains, with gathering key stakeholders to brainstorm about a single topic—global human resources issues, for instance—and in an organized way assess the risk only for that topic. The process is repeated with the company’s other significant risks, and the whole picture is brought together later. She finds that it’s the best way to ensure that no risks are overlooked.

Conrad believes that risk should be discussed as often as profit and sales. It’s a valuable exercise and the company ends up with few surprises, but you have to make this part of a company’s culture. “You can’t manage what you can’t see,” she says.