Don't just focus on a single risk, take a broad look at risk intersection
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All eyes are on the pandemic, but let's not forget the other economic, environmental and societal risks driving losses. These threats to businesses, individuals and government entities have not gone away while our attention is elsewhere. In many instances, they've grown more severe as a result of COVID-19.
Nothing showed risk intersection better than the first 90 days of the pandemic when we were dealing with its effects on a personal level. Crumbling supply chains meant we couldn't access necessities, like toilet paper and cleaning supplies. And the shift to a remote society meant families were suddenly fighting over broadband and quiet spaces to work and attend school.
COVID-19, shifting priorities and emerging risks
2020 is a case study on the intersection of risk. The pandemic has shifted politics, regulation, and the market – and refocused priorities – as entities plan their economic recoveries.
Millennials, who face a slump in incomes and increased unemployment, will be particularly hard hit, putting more pressure on intergenerational social contracts. We're seeing part of a generation return home – with the accompanying tradeoffs and increased stress. Their frustrated expectations around job security and wealth building may translate into political tensions and social unrest.
COVID-19 also expedited the shift to remote working, which, according to the OECD, is unlikely to entire disappear after the COVID-19 crisis subsides. As a result, we will see an impact on everything from productivity to management styles to risk exposure.
Mental health and wellbeing
The pandemic has also significantly impacted mental health and wellbeing. Interestingly, while some individuals reported feeling less stressed under lockdown and pandemic-related restrictions, others reported increased concern about their mental health and feelings of vulnerability, exclusion and isolation. Additionally, with many schools moving to remote learning, families are struggling to balance personal, parental and professional obligations. And parents, non-parents and children alike are experiencing the impact of reduced social interaction.
The COVID-19 pandemic is already showing the first signs of increased mental illness among the young, with one in six people aged 10-19 affected. Mental illness does not exist in a silo. Higher diagnoses of mental health issues have driven global healthcare costs and disability claims higher. Mental illness can have many co-morbidities such as obesity, cardiovascular diseases, back pain or diabetes. Early treatment is key to mitigate long-term chronic illness. As a result, we have both a social and a business rationale for addressing this growing crisis.
Climate Change and weather events
Yet as the pandemic accelerates emerging risks and trends, it shouldn't overshadow the need to transition to a more sustainable economy and a low carbon future. There are clear targets, which highlight political tensions and come with a price tag. But while reaching net-zero by 2050 is daunting, failure to achieve this target would be far more costly in the long-term.
According to the Swiss Re Institute's annual sigma report, natural catastrophes caused an estimated USD 137 billion in losses in 2019. Almost two-thirds of these losses were uninsured, revealing a protection gap where countless people and businesses are at risk of financial difficulty following an event.
And the cost of natural catastrophes keeps rising. Just over 15 years ago, Hurricane Katrina became the costliest US natural catastrophe with an estimated USD 160 billion in economic losses. Yet if it made landfall in 2020, the economic toll would likely exceed USD 175 billion. And given that this year we reached Greek letters for named storms the first time since 2005 and second time in recent history, the next Katrina is likely not far away.
That being said, large named storms are not the only perils to cause significant economic damage. Secondary perils, or high-frequency, low-to-medium severity loss events, caused more than 60% of the USD 76 billion of insured natural catastrophe losses in 2018. They were also the primary loss drivers in 2019 and in the first half of 2020.
Secondary perils can happen independently, such as drought or wildfires, or they can be secondary effects of primary perils, like torrential rainfall or storm surges associated with tropical cyclones. They are becoming more frequent, severe and costly.
Warming climates may not be the sole reason for the rising losses from secondary peril events, but climate change is certainly a major contributing factor. Businesses and public entities need to do more to protect themselves against this growing risk. There are numerous traditional and innovative risk transfer solutions that can help companies mitigate these risks and better protect their balance sheets.
Loss of biodiversity
We can also reduce the risk of damage from natural catastrophes by investing in biodiversity and ecosystems, like reforesting coastal mangroves.
The loss of biodiversity and damage to ecosystems is a major global risk. Yet KPMG reports that over three quarters of the world's largest companies don't report risks from the loss of biodiversity despite repeated warnings of their economic and social impacts. Biodiversity loss isn't a new problem, but we have tended to focus on single phenomena, (like the declining populations of bees), rather than on the loss of entire ecosystems and the services and benefits they provide for society - such as freshwater production or climate regulation.
The Swiss Re Institute's Biodiversity and Ecosystem Services Index highlights which economic sectors are most reliant on nature and the exposure each country has to biodiversity and ecosystems services decline. If we understand the connectivity between these ecosystems, we can take steps to mitigate against deteriorating biodiversity and ecosystems and make our societies and businesses more resilient.
Building a better tomorrow
Of course, disruption, loss and change also bring benefits. After all, the temporary shutdown of the industrial complex meant less traffic and bluer, less-polluted skies, modern day miracles in places like L.A., even if short-lived.
Crisis can also change perspective and bring people together. We better recognize the importance of essential and frontline workers who are keeping our hospitals, transportation systems, and food supply chain running. And while there has been a decline in some forms of social capital, there may have been an uptick in volunteering in the US and many other countries.
COVID-19 is also expediting the restructuring of global supply chains, which had become increasingly complex and geographically diverse. Going forward, many businesses will likely reshape their supply chains to become less dependent on remote suppliers, to the benefit of both their bottom line and the environment.
Given the threat of climate change, this shift couldn't come soon enough. It also fits with a greater trend of companies making decisions with environmental consequences in mind. Following the 2020 World Economic Forum, Swiss Re CEO, Christian Mumenthaler, reported it was the first time he had seen business leaders getting serious about climate change. And while climate change and COVID-19 threaten our health and economies, they give us the opportunity to rethink the way we do business and build a stronger tomorrow.
Crucially, they also challenge us to step back and look at the myriad risks we're facing – large and small – and their relation to each other. If we do that, we'll end up with more resilient individuals, businesses, and societies.
Just as contact tracing has shown how we are each impacted by the actions of complete strangers, the pandemic has laid bare how reliant businesses and entities are on systems, processes, and forces beyond their oversight or control. It's up to us to connect the dots at these risk intersections and prepare ourselves for this chain reaction. In short, when we look at risk, we need to look beyond the immediate and obvious ones.