Instability, inflation and the ‘polycrisis’ – the Global Risks Report half a year on

• The World Economic Forum’s Global Risks Report highlighted the ‘polycrisis’ at the start of 2023, reflecting the combination of crises the world was facing.Many of these risks still remain, but we have grown accustomed to them, argues Peter Giger, Group Chief Risk Officer at Zurich Insurance Group.In the past, too little focus has been given to building in resilience, says Carolina Klint, Managing Director at Marsh McLennan, although there are signs this is changing.

This article is based on an edited transcript of an interview for Radio Davos. You can listen to the full podcast here or subscribe on any podcast app.

“Geopolitical tensions have not eased, the war is still ongoing, inflation is still out there. But we got used to it.”That stark analysis of the state of the world right now comes from Peter Giger, Group Chief Risk Officer at Zurich Insurance Group. At the start of 2023, the World Economic Forum published its Global Risks Report – a major survey assessing the biggest risks to the world – in which it concluded humanity was facing a ‘polycrisis’. Economic, global, political and climate crises were converging to create tensions and a sense of instability to a degree the world had not experienced in some years.At the Forum’s Annual Meeting in Davos earlier in 2023, polycrisis was very much the buzz word. Over half a year later, Giger joins Carolina Klint, Managing Director at Marsh McLennan, in reflecting on what has changed, and what are the biggest risks the world faces right now.

Are we still in a polycrisis?

Yes, Giger concludes, but perhaps many people feel it less acutely than they did at the beginning of the year. “Humans get used to circumstances very quickly. What they really don’t like is change. And that’s what creates the anxiety,” he says. “I think if the current situation persists, people will not be overly anxious about it, because now we dealt with it for half a year, we’ll deal with it.”

At the start of 2023, many countries in the developed world were experiencing a cost-of-living crisis as a result of market instability and inflation reaching levels not seen for decades. Six months on, and intervention by authorities has broadly contained the immediate risk of financial turmoil, Klint believes, but we’re not out of the woods yet.“Inflation could remain high and even rise if further shocks occur. There could be an intensification of the war in Ukraine, for example, or extreme weather-related events that could trigger even more restrictive monetary policies. And then we’re in trouble again. So I think we’re still waiting to see,” she says.“But I think that that very stressful moment in time that we were living through for a second, at least that’s settled a little bit.”China’s economy, which has rebounded less strongly than anticipated from the pandemic, is one example of why uncertainty remains. “Confidence is one of the most important factors to fuel growth. People make investments. They plan if they’re confident about the future. And I think there obviously is a lack of confidence and a lack of trust in where all the world’s going. And that’s not so easily re-established,” says Giger.

Supply chains have taken a blow in recent years – from the US-China trade war, to the pandemic, to the Ever Given container ship stuck in the Suez Canal. Layered on top of this, geopolitical tensions now result in increasing sanctions and trade controls.“With the current geoeconomic confrontation that we see playing out, we also see nationalistic policies being developed. And as a result, countries are increasingly looking to build self-sufficiency. And of course, that’s going to take a toll on globalization, but it’s also really highlighted how fragile and unreliable global supply chains have become,” says Klint.Companies are looking to build more stability into their supply chains by exploring alternative suppliers, stockpiling and bringing production closer to home. This is a huge strategy pivot for many companies.Klint argues that a focus on efficiency rather than resilience in supply chains has left companies vulnerable to shocks. By failing to recognize and respond to emerging risks they have reduced their capacity to respond to them. But company attitudes towards taking a strategic approach to risk have evolved significantly, she says.

Year after year, the climate crisis tops the Global Risks Report. And this is not something that’s likely to change. It remains the biggest risk facing humanity.“The ugly reality that we’re starting to see, is that certain places that were perfectly fine to live in, will become very uncomfortable and will become exposed to regular natural disasters to a point where insurance companies may no longer be able to offer premium, or the premium will be such that people are no longer willing to pick it up,” Giger says.Other environmental issues, like biodiversity loss – as a result of habitat destruction or aggressive agricultural policies, for example – are also climbing the risk agenda.But Klint also sees reasons for optimism – shareholder activism is pushing environmental, social, and corporate governance matters up the agenda. And the energy crisis as a result of the war in Ukraine has accelerated the drive for green energy.

In the past six months or so, artificial intelligence has hit the public consciousness – but Giger believes there is a lot of hype.“People totally overestimate the short-term impact and totally underestimate the long-term impact. Ten years from now, we will have adapted our world and AI will be an integral part of it and it will feel just natural. For the next six months? I don’t think so,” he says.Other emerging technology trends, such as aggressive data collection, and what that means for the generation of fake content, definitely need to be kept under review.Away from technology, the source of the next pandemic needs to be carefully monitored, says Klint, ensuring that we learn lessons from COVID-19 and build resilience.