The 5 keys to managing risk in ‘The Age of Volatility’ [Slideshow]

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1. Weaknesses in the West: Economics and institutions

Rosengarten pointed out that the Eurozone faces continued pressure from participating countries. What will happen around the world if Greece rejects the terms of its creditors and withdraws from the Eurozone?

High global unemployment among youth also is a significant issue and cause for concern, Rosengarten said. According to the United Nations, World Population Prospect report, 67% of the population of the Middle East and North Africa (MENA) is below the age of 24, young people between the ages of 15 to 24 averaged 34% of the working age population in 2005, and unemployment among this group averaged about 30%. In the U.S. the unemployment rate for this age group was 14.5% in 2014. The picture in Latin America and the Caribbean is also grim: Nearly 20% of young adults in the region are neither working nor studying. Boredom and poverty can be a deadly combination.

As for military spending, Rosengarten noted that the U.S. is downsizing its military forces, and China now spends about three times as much as India on defense—more than Japan, South Korea, Taiwan and Vietnam combined. British defense spending has fallen from third place to fifth, behind Russia and Saudi Arabia. Japan is remilitarizing, expanding its military ties with India and increasing its naval presence in the Indian Ocean.

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2. Nationalism, 'the tribe' and separatist movements

"Nationalism is the polar opposite of globalization," Rosengarten said. Young people have far less faith in governments' ability to resolve the world's problems, not just in the U.S. but in other countries as well. He observed that failed global institutions can cause societies to turn inward and nationalistic in a "romantic" desire to recapture historical greatness.

Rosengarten provided the following examples:

• Belgium has a language and ethnic divide of Flemish vs. French.
• Ukraine has a similar divide. About four out of every six people in Ukraine are ethnic Ukrainian and speak the Ukrainian language. Another one in six is ethnic Russian and speaks Russian. The last one in six is ethnic Ukrainian, but speaks Russian.
• Spain is dealing with the Basque separatist movement and the Catalonian drive for independence.

Other separatist movements include Muslim vs. Hindu in Pakistan and India, Chechnyan vs. Russian, and Muslim vs Christian in Nigeria, the Philippines and Egypt, for example.

Advances in technology caused tribes to be subsumed by stronger peoples and ultimately nation states, Rosengarten explained. But not every tribe assimilated into the host societies. Technology now gives smaller groups more outlets to share their message and challenge the status quo.

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3. Urbanization and the growth of the middle class

Urbanization is defined as a process in which an increasing proportion of an entire population lives in cities and the suburbs of cities, which has been closely connected with industrialization. As more people move to cities, the size of the middle class generally increases, but it's also this group that is vulnerable to economic pressure—not wealthy enough to withstand downturns and not poor enough to qualify for many social safety nets. Social media has helped the middle class find its voice and become more organized in its opposition to government action or inaction.

Rosengarten also pointed out the following risks of urbanization:

• Vulnerability to natural and man-made disasters
• Infrastructure degradation and lack of efficient infrastructure for traffic, healthcare and education
• Health issues caused by large concentrations of people
• Pollution management and remediation, which cause stresses on the world's ecology
• Proximity of megacities—those with more than 2.5 million inhabitants—to coastal areas, with increased risk of flooding
• Ineffective governance, leading to more dependency on governmental processes and programs
• Ease of assembly for social unrest, as demonstrated by the street protests in Brazil and Turkey
• Socio-economic disparities, primarily from the different backgrounds of immigrants and extreme poverty in developing countries

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4. Rise in power and significance of developing markets

The BRICS (Brazil, Russia, India, China and South Africa) and the "Next 11" (N-11) countries account for about 33% of the world's gross domestic product, said Rosengarten. According to Goldman Sachs, the BRICs and the N-11 are likely to be among the world's largest economies in the 21st century. The Next 11 include Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, Turkey, South Korea and Vietnam. He also pointed out that, according to Forbes, seven out of the world's 25 largest companies in terms of market capitalization come from emerging market countries.

Although free and fair elections are clearly an important part of stable government, Rosengarten said, long-term stability for any country also requires:

• A truly independent judiciary and respect for the rule of law,
• Freedom of the press,
• Property rights that are stable and enforceable,
• Minority rights, and
• Stable geopolitical surroundings.

Minority rights are important in developing countries, Rosengarten said, however, they can be susceptible to mob rule, which is another form of tyranny.

Developing nations generally lag behind developed countries with respect to some or all of these dimensions. Many emerging markets, he pointed out, were themselves great markets at one time—China and Russia, for instance. They have the potential to be true world powers once again. As previously noted, this situation makes the world defense stage more complex. "It's the nature of great economic powers that they ultimately become a military power," he added.

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5. Technological revolution

There are some clear benefits to the technological revolution, said Rosengarten, including improvements in productivity and product innovation. Technology has made wealth production more a function of human skill as opposed to raw materials and heavy machinery, creating more upward mobility of individuals and countries. He used the examples of Japan and Israel as countries that are poor in minerals but rich in technology and innovation.

The technological revolution is not without risks, however, Rosengarten observed. There is more capacity for small groups (tribes) to do harm in a way not possible 50 years ago. The speed with which new and more deadly weapons are developed—as well as greater access to weapons—makes risk management more challenging. Consider the ongoing debate over Iran's nuclear program and whether the country is planning to use that technology to develop nuclear weapons.

Rosengarten added that computational advances and technology have increasing created algorithms and techniques that reduce costs but increase risks through just-in-time production. Optimization techniques may overstate the true risk-adjusted returns for many industries when constraints are incomplete or not specified correctly, he said, using the collapse of a bridge in Minneapolis in 2007 as an example. There may be similar issues if resiliency steps to prevent or manage the various types of cyber events are not well understood or prepared for, such as a cyber attack or a solar storm.

Rosengarten also noted that just-in-time inventory techniques and supply chains risks increase when a company relies on a limited number of production facilities. Many organizations don't have a contingency plan in place if a major—or sole—supplier suffers a catastrophic loss.

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Some ideas for risk managers

As the chief enterprise risk officer, Rosengarten has thought carefully about what risk managers can do to mitigate risks from the "age of volatility." Here are his seven tips:

• Run to trouble, not away from it.
• Technology is important, but don't forget that there are deep human traditions and tendencies.
• Understand the role of culture in creating behaviors that sustain an organization.
• Maintain the role of the contrarian, by always challenging the norm.
• Develop resiliency in your organization and supply chain because problems will always occur.
• Get comfortable with discomfort and prepare others for the same.
• Remember that, in the words of Charles Dickens, it is always the best of times and the worst of times.