Conference Issue 2018


Report pinpoints future threats

The accelerated pace of change creates uncertainty about the future and the ability to predict and manage risk, Marsh country head NZ Marcus Pearson told the NZILA conference.

He outlined the findings of the Marsh sponsored World Economic Forum's annual Global Risks Report, saying there was synchronised growth globally, with Asia as the growth engine, but some “fragilities”. The report, in its 13th year, pooled data to examine trends over time.

“Future shocks won't be mono risks but [involve] connectivity, for example, inequality, which drives protectionism,” Mr Pearson said.

The report's executive summary says “humanity has become remarkably adept at understanding how to mitigate conventional risks that can be relatively easily isolated and managed with standard risk management approaches. But we are much less competent when dealing with complex risks in the interconnected systems that underpin our world, such as organisations, economies, societies and the environment.

“There are signs of strain in many of these systems: our accelerating pace of change is testing the absorptive capacities of institutions, communities and individuals. When risk cascades through a complex system, the danger is not of incremental damage but of ‘runaway collapse' or an abrupt transition to a new, suboptimal status quo.”

Mr Pearson said climate change impacted on a range of risks and was “huge” for NZ because of its capacity for catastrophic risks.

Major global threats were environmental, cyber, power shifts, and inequality. “Growth doesn't benefit everyone,” he said.

He cited a range of risk threats, including:

• A predicted water crisis. By 2050, 80% of Asia would be in water crisis.
• Nat cat management, which was particularly important in NZ with earthquakes and storms. The Fijian insurance market was struggling because big Atlantic storms meant less capacity was available.
• Pollution reduction, particularly plastics.
• Low-carbon transition. "Australia will have a bigger transition because they like to burn coal," Mr Pearson said.
• Cyber had moved four places up the risk ranking. By 2020, there would be 20 billion devices globally, all interconnected. The infrastructure risk would increase. "The insurance market has been cautious and slow to respond" but was now "getting involved". Potential economic risks from cyber dwarfed nat cat risks. Mr Pearson said only 15% of cyber losses currently were insured so there was a massive coverage gap.
• The geopolitical landscape generated a lack of co-ordination on climate change, trade wars, decreased confidence in security alliances, and greater potential for weapons of mass destruction. Global trust was at pre-World War II levels. Mr Pearson said 93% of the risk community expected political-economic friction between major powers to increase.
• Many developing nations borrowed heavily when the $US was lower and now had massive debt. "They’re very fragile when you scratch under the surface." Other nations had record debt levels and high asset values.

Mr Pearson said top trends shaping global development were:
Climate change – cited by 44% of respondents
Cyber – 42%
Inequality – 41%
Ageing populations – 33%.

Inequality was a bigger issue in NZ than many other countries and impacted on social consequences, for example, life expectancy and homicides. Youth unemployment was high in Australia and NZ.

“We are good at looking back on historical risks, but can't use the same techniques to measure new complex risks,” Mr Pearson warned.

“How do we measure resilience? We haven't got our hands on that yet.”

The report said future shocks could include:

• Simultaneous breadbasket failures threatening sufficiency of global food supplies, eg 75% of food comes from 12 plants
• Artificial intelligence (AI) "weeds" proliferating, choking the internet’s performance
• Bilateral trade wars cascading and multilateral dispute resolution institutions being too weak to respond
• Democracy buckling – a new wave of populism threatening the social order in one or more mature liberal democracies
• Precision extinction – AI-piloted drone ships wiping out a large proportion of global fish stocks
• A cascading series of economic/financial crises overwhelming political and policy responses
• Bioengineering and cognition-enhancing drugs widening the gulf between haves and have-nots
• State-on-state cyber attacks escalating unpredictably because of a lack of agreed protocols
• Identity geopolitics – self-determination around contested borders sparking regional conflict
• Regulatory, cyber security and protectionist concerns leading to fragmentation of the internet.

Mr Pearson said the future shocks were not predictions but “provocative scenarios” to encourage broader thinking.

“We need to shift management priorities from familiar to emerging risks. Black swan events are starting to crystallise. We need to run fire drills” on those events, he said.

While Mr Pearson agreed his analysis seemed negative, there were opportunities with correct governance to capture positives, particularly with AI and robotics.

“Are our risk management efforts sufficiently focused on the real risks,” he asked.

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Resolve is the official publication of the Australian Insurance Law Association and
the New Zealand Insurance Law Association.