Managing global risk

3/10/2011 - The world is a risky place and getting riskier, with national fiscal crises and global climate change at the top of the list.

That was the assessment of Mike Foley ’89, CEO of Zurich North America International, who spoke at the Feb. 23 conference “Managing Global Risk.” The conference was the latest event in the Kellogg Risk Summit, a series of forums on risk management.

The vagaries of climate change present a worldwide risk nearly as large as insurance companies’ aggregate premium pool, Foley said, and “we don’t have just Mother Nature to deal with.” For example, immediately behind the worst-ever disaster in U.S. history — Hurricane Katrina — were the terrorist attacks of Sept. 11, 2001.

As companies expand globally, they can’t try to manage their affairs from the U.S., Foley said. “If there’s a problem in China, you want to know there’s someone in China who can help you, (someone) who knows the local laws and customs,” he said.

Speaker Brian Wesbury ’89, chief economist at First Trust Advisors L.P., rejected the idea that the world has gotten any riskier, citing statistics that showed fewer oil spills, train accidents and coal mining fatalities over time.

“I’m sorry to disagree fully with that statement,” he said. “The level of fear about the direction of the world in general has never been higher. I call it economic hypochondria. … Yes, there are risks, and we ought to insure against them.”

Wesbury believes the subprime mortgage crisis and the troubled economic times that have ensued have underscored people’s sense of risk, but he believes the Federal Reserve Bank’s decision to lower interest rates to 1 percent in 2004 and the use of mark-to-market accounting in housing valuation caused the collapse.

While others focus on financial or economic risks, Wesbury cites the subprime crisis as a reason why political risks are the most worrisome. “I think about the risks that government introduces,” he said.

The World Economic Forum sees both economic disparities and global governance failures as the two major drivers of risk, manifesting themselves through macroeconomic imbalance, illegal economies and the nexus of water, food and energy shortages, said Brian C. Elowe, managing director of global risk management, another speaker at the conference.

In terms of emerging risks, the Forum points to cybersecurity, demographic change, resource security, retrenchment from globalization, and weapons of mass destruction, said Elowe, who advises companies to assess their own exposure.

“If water scarcity is an issue that affects your company, you have to put a dollar figure on it,” he said. “And then ask, ‘What’s our strategy around that particular volatility?’ Sometimes people read these reports and say, ‘Yeah, that could happen to us, and I’m sure someone is thinking about it at our company.’ ”

The next event in the Risk Summit series, “Climate Change Risk: Preparing Your Business,” will take place on May 17 and will address the impact of climate-change science and policy on risk management. Speakers will include Jon Anda ’80, head of UBS Environmental Markets Group, among others.