The 2012 ‘Centres of Gravity’, those risks perceived by survey respondents to be of greatest systemic importance within each of the five risk categories, are: 

   chronic fiscal imbalance
   rising greenhouse gas emissions
   global governance failure
   unsustainable population growth
   critical systems failure.

These are the areas that, according to the report, “should serve as focal points to guide strategic interventions.”

The risk with the highest likelihood was severe income disparity, followed by chronic fiscal imbalance, rising greenhouse gas emissions, cyber attacks and water supply crises.

The risk with the greatest impact was major systemic financial failure, followed by water supply crises, food shortage crises, chronic fiscal imbalance, and extreme volatility in energy and agriculture prices.

According to the WEF, analysis revealed four risks that each play a significant role in connecting the Centres of Gravity to each other.

These four ‘Critical Connectors’ are:

   Severe income disparity
   Major systemic financial failure
   Unforeseen negative consequences of regulation
   Extreme volatility in energy and agriculture prices.

The report also highlights ‘X Factors’-—emerging concerns with still unknown consequences that warrant more research.

These include a volcanic winter, mega accidents, resource wars, cyber neotribalism, financial illiteracy, constant connectivity and epigenetics. There is also a special chapter in the report on key lessons to be gleaned from the Japan earthquake and subsequent crisis at the Fukushima nuclear plant.

The report is concerned with likelihoods and critical connections, as well as ‘weak signals’ that are ‘on the radar’.
These weak signals include vulnerability to geomagnetic storms, proliferation of orbital debris, unintended consequences of nanotechnology, ineffective drug policies, and the militarisation of space.

The WEF stressed that the report is not meant to be a forecast and is not about predictions.

W Lee Howell, Managing Director, Risk Response Network, World Economic Forum, explained: “What we are trying to do is get a sense from participants of the likelihood and the impact of these risks in a ten-year timeframe…it is about raising the flag and sounding the alarm.”

The 50 global risks are defined as having global geographic scope, cross-industry relevance, uncertainty as to how and when they may occur, and high levels of economic and/or social impact that require a multi-stakeholder approach to response. The report identified three areas of risk causing concern globally.

The first, which it described as ‘Seeds of Dystopia’, comprises ageing populations and retirement concerns, rising inequalities, youth unemployment and lack of prospects, and fiscal imbalances, all leading to greater social unrest and instability.

John Drzik, CEO, Oliver Wyman Group, said: “This is a cluster of demographic and fiscal trends which are colliding to create significant future risks in areas such as retirement security, healthcare, and long-term financial investments. These risks are being exacerbated by the recent financial crisis.”

He pointed to a disconnect between the expectation and the delivery.

The second area of risk is described as ‘Unsafe Safeguards’, and comprises the weakness of existing safeguards, combined with the dangers of new safeguards having unintended negative consequences because of the increasingly complex and interdependent world.

Swiss Re’s David Cole said that in a number of cases, whether sub-prime, debt crisis in Europe, or events such as the Icelandic volcano, it was clear that the original policy responses were incorrect.

They were based on previous experiences, and initial responses were based on archaic regulation. He stressed the importance of not just looking at one sector, but looking at the cross-sectoral impact.

“We’ve seen examples of over-regulation, like the response to the Icelandic volcanic eruptions, or under-regulation, such as the subprime or eurozone crises. We need to get the balance right with regulations and, to that end, our safeguards must be anticipatory rather than reactive. It’s equally important that regulations be made more flexible to effectively respond to change,” he said.

Mr Cole added: “We must avoid the application of yesterday’s solution. It only applies to yesterday’s problem.” He said that it was important to be aware that by focusing solely on one risk, it may exacerbate other risks.

“We need to be careful that we understand the impact regulation can have cross-sector, and we also need to watch out, a little bit, for the over-zealous reaction to yesterday’s problems which is effectively just creating tomorrow’s problems,” explained Mr Cole.

The third area of concern is described by the World Economic Forum as ‘The Dark Side of Connectivity’ and consists of cybercrime, hyperconnectivity and online security.

Steve Wilson, Chief Risk Officer for General Insurance at Zurich, said that interconnected risks require connected solutions. “The Arab Spring demonstrated the power of interconnected communications services to drive personal freedom, yet the same technology facilitated riots in London. Governments, societies and businesses need to better understand the interconnectivity of risk in today’s technologies if we are truly to reap the benefits they offer,” he said.

He admitted that it can be hard to understand the risks in this complicated new world, but emphasised that managing risk effectively requires a view over the entire system.

He added that systems designed to mitigate risk could often end up concentrating the risk. “Systemic risk can be catastrophic, and coordination and collaboration is critical,” said Mr Wilson.

The interconnectivity of risk is a major theme in the report and is highlighted in the preface by Klaus Schwab, Founder and Executive Chairman of the World Economic Forum, who described the report as: “A ‘call to action’ for the international community to improve current efforts at coordination and collaboration, as none of the global risks highlighted respect national boundaries.”

Zurich’s Steve Wilson said: “We are in the business of risk. Understanding risk is something we are trying to do all the time. We think we know and understand risks such as North American hurricanes relatively well, but what this report helps us with is: How do we understand some of these emerging risks, particularly around the connectivity of risk?”

The report concludes that decision-makers need to improve understanding of incentives that will improve collaboration in response to global risks, and that trust, or lack of trust, is perceived to be a crucial factor in how risks may manifest themselves. And finally, the report notes: “Communication and information sharing on risks must be improved by introducing greater transparency about uncertainty and conveying it to the public in a meaningful way.”

The World Economic Forum stressed that the report is not a policy document but is designed to raise awareness of the issues amongst policymakers—‘to inform and alert decision-makers on risk perceptions and emerging cases’.

Mr Howell explained: “We are trying to get the best diagnostic that we can provide, and the policy makers have to think about the prescription and the approaches to that.”

David Cole, Chief Risk Officer at Swiss Re, said: “One of the key functions of risk management is to increase awareness, and what we are trying to do is to create a common language. The key role of any risk manager is to try to ask the right question. You won’t always have the answers to those questions, but at least try to pose the right questions to the right people and then let them work on some of the answers.”

The report has been welcomed by risk management associations such as the Federation of European Risk Management Associations (Ferma) and the UK’s Airmic.

The President of Ferma, Jorge Luzzi, said: “This report is very useful in highlighting the interconnections across risks of different types. As we have seen, and the report points out, for example, the growing complexity and interdependence of supply systems mean that there are cascading consequences from major events, such as the Japanese earthquake and tsunami and the floods in Thailand. Building resilience into companies’ supply chains is one of the most important issues for risk managers today.”

Mr Luzzi added: “We are also conscious of the need to manage the risks of what the report calls ‘the dark side of connectivity’, especially in terms of the potential for theft of confidential and sensitive information from businesses and the risk of reputational damage through social media.”

John Hurrell, Airmic Chief Executive, said, “This is the ‘world’s risk map’. It is useful at a macro level for governments and global leaders of global institutions. It points to the importance of a global approach to responding to some of these critical risks with the implication that the agencies do not exist to start tackling these risks effectively across political frontiers.”

Mr Hurrell continued: “However, from the perspective of a risk manager, this is useful context for thinking about wider risk issues but not detailed enough at a country or risk level to influence decisions. Having read the last seven editions, it is interesting to see how influenced the findings have been by either recent events or long intractable problems (e.g. climate change) rather than predicting the emergence of new risks.”

Mr Hurrell said that this ‘mirrors the practice in many companies who often fail to give sufficient attention to threats where there has been no recent history of failure’.

He added: “But this is a very useful part of the wider risk debate and is welcomed by Airmic and its members.”

Ferma’s General Secretary Pierre Sonigo commented: “Out of the five global risks listed in the report—rising greenhouse gas emissions, global governance failure, chronic fiscal imbalances, unsustainable population growth and critical system failure—the corporate risk manager can only have a small impact on a day-to-day basis. However, this report can help him or her raise management awareness by connecting operational concerns to more global issues.”

Whether political leaders will welcome the report, or indeed will listen to the questions being asked by the report is another matter.

The WEF’s W Lee Howell pointed out that the political cycle is much shorter these days, and these risk issues go well beyond those cycles.

He said leaders are aware of the issues in a national context to some extent, but the worrying thing is the global context.

He said there are global mechanisms for nations to come together, but they are rooted in the twentieth century, and he questioned whether they are still fit for purpose in the twenty-first century.

“The troubling aspect is that the global governance system we have is maybe outdated, but we don’t have an alternative to that, and there is a general lack of a spirit of cooperation,” he said.

The global risk report is published in cooperation with Marsh & McLennan Companies, Swiss Re, The Wharton Center for Risk Management and Zurich.

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