Several crises in one: what effects will COVID-19 have on the global risk landscape?

global risk

(Loic Leray, Unsplash)

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: John Scott, Head of Sustainability Risk, Zurich Insurance Group


  • A new Forum report based on the views of 350 senior risk professionals analyses the pandemic’s implications for the world.
  • The challenge is to reconcile people’s fears with the acceptance of uncertainties.
  • Here are areas for policy-makers and businesses to consider as we move forward into the ‘new normal’.

We are in a healthcare crisis that is also an economic crisis combined with an energy crisis. Add to that a looming humanitarian crisis in some emerging economies and you have a multitude of challenges, all of which are exacerbating geopolitical risks. How will these crises play out over the next 18 months – and what does it mean for the actions we take today?

The World Economic Forum’s COVID-19 Risks Outlook report, A Preliminary Mapping and its Implications, published on 19 May and informed by the views of nearly 350 senior risk professionals, identifies the main emerging concerns and fallouts, and analyses the pandemic’s implications and effects. This goes beyond the immediate crisis response, providing insights on the current and future global risk landscape.

 

Balancing fear and optimism

The length and depth of the current economic crisis will depend on solving the healthcare crisis with an exit strategy involving a combination of an effective, widely available vaccine and therapeutic drugs. Meanwhile, governments around the world are trying to manage the delicate balance between controlling transmission and returning some people to economic activity. The stakes are high, not only in the obvious health and economic consequences of mis-steps but also in managing public perceptions of risk.

Sir John Templeton, the British investor, banker, fund manager, and founder of the Templeton Growth Fund, once said “the biggest mistake in investment is to think that this time it’s different” – but this time, it really is different. The difference is that this economic crisis is combined with a healthcare crisis – and people are scared. The challenge is to return to the “new normal”; to reconcile the natural fears we feel with acceptance of the uncertainties, aided by a risk management architecture that helps manage the trade-offs.

The seven most likely global fallouts from the pandemic
The seven most likely global fallouts from the pandemic
Image: World Economic Forum COVID-19 Risks Perception Survey, April 2020

The fears we feel are real. They are reinforced by government messages, the data we read daily on infection rates and the sad reality of the actual numbers of COVID-19 deaths, in particular the data on “excess deaths” that are only now being made public. These have driven public behaviours that have controlled transmission and reduced deaths in many countries, but we now need to cautiously find ways, especially in the business community, of responsibly allowing society to adapt and manage the false dichotomy of public health and economic wellbeing.

Risk interdependencies

These crises also highlight the interdependencies of the global risks triggered by the COVID-19 pandemic. Make no mistake, we are experiencing a historic event that will change many aspects of the world we live in, such as geopolitics, the economic impact on many industry sectors, the competitive business landscape, the long-term societal impacts such as an exacerbation of inequality, consumer behaviours, the nature of work and the role of technology both at work and at home.

Economic risks are the most likely and concerning fallout, in particular the risk of a prolonged recession of the global economy. That in itself is not surprising, as recent IMF reports show that the global economic impacts have intensified since last month’s IMF forecast. These economic risks also have far-reaching environmental, societal and technological implications and interconnections. An increase in indebtedness, both public and private, will inevitably push some companies into bankruptcy and challenge the efficacy of current social protection systems, their funding, and private savings in general.

What toll with the coming global recession take on the world's poorest?
What toll with the coming global recession take on the world’s poorest?
Image: World Economic Forum COVID-19 Risks Perception Survey, April 2020

In addition to the dangers to public health, the pandemic and the resulting lockdowns and shutdowns could have long-lasting effects on people and societies. High structural unemployment is likely to affect consumer confidence and the speed of economic recovery, as well as exacerbate inequality, mental health problems and lack of societal cohesion. It is also likely to widen the wealth gap between young and old and to pose significant educational and employment challenges that risk a second lost generation.

One of the most important fallouts for the world when dealing with a global crisis like COVID-19 is ignoring other existential global risks – in particular, any shortfall in activity to address sustainability risks, especially climate change adaptation and mitigation. As countries emerge from the immediate health crisis and reboot their economies, changes in our working practices, attitudes towards travelling, commuting and consumption might make it easier to find business opportunities to capitalise on a lower carbon and more sustainable recovery. This could enable society to adapt responsibly, to return cleaner and greener, and to develop through sustainable growth with people and communities at the centre of society.

Although technology has been central to the way people, companies and governments have managed the COVID-19 crisis, it is also challenging the relationship between technology and governance. Mistrust or misuse of technology could have long-lasting effects on society. Borders have returned, as have local communities, but technology is allowing a return to a more global world. Technology is enabling the contact-free economy, through applications such as telemedicine, on-line retail, and social distancing delivery methods such as click and collect. New business and employment opportunities are being created in these sectors, but a greater dependence on technology has also increased cybersecurity risks.

How will we rebalance technology and governance?
How will we rebalance technology and governance?
Image: World Economic Forum COVID-19 Risks Perception Survey, April 2020

Business and policy considerations

In a time of great uncertainty, decisions are being taken today by governments and businesses that will determine how these risks or opportunities emerge and play out. In particular these include:

· To what extent do we manage the operational trade-offs between a quick return to work, but still protect our employees, customers and society more broadly?

· At a time of change for our business, with changing industry structures and changing competitive positions, how do we not only survive, but also find the silver linings?

· How can we accelerate our commitments to sustainability and drive a low-carbon transition?

· How will consumer behaviour change in our sector – and how will that affect our propositions and the way we deliver them?

For risk managers and businesspeople, in addition to all the current risk-management activities designed to protect employees and customers in the immediate crisis, there are a number of recommendations for how to deal with this future uncertainty:

· Modelling and scenario analysis; apply skills developed in economic scenario modelling to COVID-19, using a range of scenarios to explore how the future may unfold and to create agile responses.

· Build scenarios into existing risk models to understand the impacts of different recovery rates on business, operational, credit or market risks.

· Split your teams; one team to manage the immediate consequences of COVID-19, focused on bringing back business, and a second team to envision the future and find new opportunities as the competitive landscape and customer behaviours change.

· Ensure that appropriate measures are in place to protect physical and other assets that are currently idle, or repurposed, so that they can be restarted quickly once normal business activities are resumed.

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