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Risk Management

by The Business Influencer

Frederick Gentile – Director Of Risk Engagement

 

As we begin to adjust to a new post-COVID-19 world it is becoming increasingly clear that  challenging times may be ahead. However, the prudent organizations will look at the pandemic from a proactive stance and imagine how they can create benefit and value for themselves as well as their clients. This article considers some of the challenges that we face through the lenses of business resilience, climate and geopolitics.

 

Business resilience

A common concern over the last six months has been the issue of supply chain continuity.

China, the world’s leading producer of personal protective equipment, has been hit hard by COVID-19 with over 84,000 confirmed COVID-19 cases as of July 30, 2020 (mainland). Although production and supply chain capacity has been restored the economy contracted by 6.8 percent (yoy) in Q1, preoccupations around trade relations with the United States continue and civil tensions in Hong Kong persist. These factors combined with localized movement restrictions within China, and also in countries it trades with, present the threat of further supply chain disruptions.

Southeast Asia is especially vulnerable to the economic risks associated with COVID-19 mainly because the region’s supply chains, labour flows and tourism industries depend so heavily on China, where the virus originated. Meanwhile, the threat to public health from the spread of the virus brings political risks for the region’s governments, and countries with weak healthcare systems, struggle to deal with severe COVID-19 outbreaks.

 

Supply chain impacts could linger longer than the COVID-19 outbreak.

Although production in China has for the large part resumed, many plants that depend on Chinese output (which is to say, many factories around the world) may not have yet experienced the brunt of the initial Chinese shutdown and could likely experience inventory “whiplash” in the coming months particularly in respect of critical spare parts. We are seeing incredibly complex supply chain dynamics reveal themselves, and this will be one of the greatest slow burn risks.

 

What effect will COVID-19 have on the Korean economy?

Even prior to the virus’ spread to South Korea, Korean companies such as Hyundai were temporarily shuttering domestic production of automobiles due to the unavailability of auto parts made in China and used in production in South Korean plants. Such supply chain disruptions, along with slowing domestic economic activity resulting from self-protection measures and reduced public dining and social activities, will drive the domestic economic impact of COVID-19. It remains to be seen whether any stimulus funds will provide a sufficient cushion for the businesses and local economies affected by the outbreak.

Perhaps the biggest uncertainty for supply chain managers and production heads is customer demand. Customers that have pre-booked logistics capacity may not use it; customers may compete for prioritization in receiving a factory’s output; and the unpredictability of the timing and extent of demand rebound will mean confusing signals for several weeks.

The immediate, if indirect, consequences of the supply chain issues may be clear, but a further consideration is that in some cases the effect may be felt several years later as Boeing found out after the 9/11 terrorist attack. In this instance when Boeing’s orders for a new plane started to roll in – six years after the attack – they found out that their principal supplier of specialized nuts and bolts had laid off half its workers and could not keep up with demand. From a supply chain perspective, the 9/11 terrorist attack, while vastly different in terms of event, impacted  American companies in a number of different industries across different timeframes and in different ways.

When the global system gets up and running – whenever that may be – who will be left standing, who is going to disappear, and who will need time to warm back up?

 

Climate and environment

In the early stages of COVID-19 there were suggestions that regions with hotter climates may be more resistant to the virus. However, the situation in Latin America, where the case notification rate is 6 times higher than the UK, suggests that geography/ climate appears to have little effect on virus spread.

The scientific community is actively collaborating to share insights, and as more data emerges this will help to refine assumptions and build up pandemic models that reflect the characteristics of this virus. This is leading to a communication challenge, where efforts to open up models to help coordinate within the scientific community, are resulting in these outputs making their way to audiences they were not intended for – the general public.

What it does flag is the importance of modelling environmental effects on your business model and having access to experts who can translate those effects into business insights. This is reflected in the broad people, capital and risk expertise that makes up our Climate QuantifiedTM proposition.

This is relevant for climate risks and considering pandemic risks. Outbreaks of new communicable diseases are typically seen as a rare, one-off events. The interconnected elements of climate change, global travel patterns, technology advances, animal-borne diseases and the rise of multi-drug resistant organisms all significantly impact the frequency and scale of events.

The ‘Minsky Moment’ described by the Bank of England for climate risks in 2018 – mixing economic disruption, policy responses, and overnight shift in market sentiment – is arguably happening now, at scale, for COVID-19. We are also starting to see stress test examples emerge from various groups that will continue to be improved as the event unfolds, such as the six scenarios from the 2 Degrees Investing Initiative.

The Cambridge Centre for Risk Studies at the Judge Business School, University of Cambridge, is a partner of the Willis Research Network that produces an annual study — the Cambridge Global Risk Index — that has seen pandemic risks consistently in the top five threats since the index began.

Their general pandemic threat estimates a potential $48.6 billion of GDP@Risk* in part due to the potential infection vector provided by airports and international travel and trade. The Cambridge Centre for Risk Studies has made a range of scenarios accessible at varying levels of severity for stress testing potential business impacts, and has started a new hub dedicated to COVID-19 analysis.

In a post-COVID-19 world, it will be critical to maintain momentum and interest in this area especially as this could accelerate the broader appetite towards environmental, social and corporate governance. Climate risks act as a threat multiplier, and should be considered across all business operations – and we should remember that we can respond to stresses, and think about how to make changes to move to a more resilient state while we have the opportunity. For example, future climate scenarios may change disease spread and again this should be factored in when considering investment/territorial strategies, risk appetite, strategic business model developments.

 

Geopolitical implications

We started 2020 in a world where areas that were once regarded as predictable and stable became volatile, and changes in international policy were bringing new uncertainty to long running conflicts. In the release of their ‘10 Conflicts to watch in 2020’ report released in December 2019, President and CEO of Crisis Group, Robert Malley, summed up the challenge; “The understandings and balance of power on which the global order had once been predicated – imperfect, unfair, and problematic as they were – are no longer operative.” COVID-19 brings new dynamics and the global ripples are continually happening.

 

A new geopolitical landscape?

A post-COVID-19 world could see the formation of a new geopolitical landscape. Despite the huge impact COVID-19 has had on major economies, some countries have moved quickly to support stricken nations like Italy by providing vital equipment such as ventilators, personal protective equipment (PPE) and blood. This kind of collaboration sets the scene for closer trading and political links over time.

Conversely, actions such as offers for exclusive rights to a COVID-19 antivaccine. or buying virtually the world’s entire supply of Gilead Sciences’ Remdesivir.  by a particular country exacerbates relations both within and between geographies.

Whatever the case, post-COVID-19 nations may retreat to a more protectionist stance, especially as a potential global recession begins to bite. Multinational businesses with many operations centers, multiple markets and complex supply lines are going to need to be vigilant to finance, economic and trade risks that area going to emerge as a result.

As the situation continues to unfold, Boards and their risk managers should be proactive and review their risk profiles and appetites, and ask themselves where they consider the tipping points to be. Decisions around strategy, investment, growth and expansion will at the very least need to be reviewed in the cold light of a harsher and more challenging environment.

Interconnected risks require integrated solutions that must be tailored and address insurable and non-insurable risks seamlessly. To do this effectively they need to:

  • Understand their new environment through relevant intelligence, assessment and quantification to comprehend the drivers and impacts on a business. Boards must look beyond the most obvious, and work with stakeholders across their business to identify interconnected risks; examining everything from complex supply chains through to human capital policies and reputational damage, to help protect the company and fulfill its duty of care.

 

  • Identify and assess. They should employ all the tools available to enable them to collate and interpret the information and then deploy subjective (depth of experience, industry insight, research and analysis) and objective (using analytical tools) assessment to inform the organisations’ decision making.

 

  • Prevent and Protect. As the geopolitical landscape changes, so must the way in which risk leaders protect their businesses. A thorough understanding of the interlinked geopolitical risk drivers and their impacts provides a strong foundation for prevention and protection against them.

However, it may not be all gloom and doom. The COVID-19 experience may bring opportunities such as different and more cost-effective ways of working, a more resilient society, larger home markets and more reliable supply chains. Either way boards need to be ready and able to seize the moment and adjust their course appropriately.

 

*GDP@Risk is the average annual loss (also known as the “expected loss”) to a selected location’s economic output from each threat or threat category. Another way of thinking about GDP@Risk is the amount a city would have to save each year to pay for the costs of the disruptive events in the long run, averaged out over time.

 

 

Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps
clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 45,000 employees serving more than 140 countries and markets.

We design and deliver solutions that manage risk, optimise benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas — the dynamic formula that drives business performance. Together, we unlock potential. Learn more at willistowerswatson.com.

 

 

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