The Global Risks Report 2018

Last year’s Global Risks Report was published at a time of heightened global uncertainty and strengthening popular discontent with the existing political and economic order. The report called for “fundamental reforms to market capitalism” and a rebuilding of solidarity within and between countries.

One year on, a global economic recovery is under way, offering new opportunities for progress that should not be squandered: the urgency of facing up to systemic challenges has, if anything, intensified amid proliferating indications of uncertainty, instability and fragility. Humanity has become remarkably adept at understanding how to mitigate conventional risks that can be relatively easily isolated and managed with standard riskmanagement approaches. But we are much less competent when it comes to dealing with complex risks in the interconnected systems that underpin our world, such as organizations, 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.

In our annual Global Risks Perception Survey, environmental risks have grown in prominence in recent years. This trend has continued this year, with all five risks in the environmental category being ranked higher than average for both likelihood and impact over a 10-year horizon. This follows a year characterized by high-impact hurricanes, extreme temperatures and the first rise in CO2 emissions for four years. We have been pushing our planet to the brink and the damage is becoming increasingly clear. Biodiversity is being lost at mass-extinction rates, agricultural systems are under strain and pollution of the air and sea has become an increasingly pressing threat to human health. A trend towards nation-state unilateralism may make it more difficult to sustain the long-term, multilateral responses that are required to counter global warming and the degradation of the global environment.

Cybersecurity risks are also growing, both in their prevalence and in their disruptive potential. Attacks against businesses have almost doubled in five years, and incidents that would once have been considered extraordinary are becoming more and more commonplace. The financial impact of cybersecurity breaches is rising, and some of the largest costs in 2017 related to ransomware attacks, which accounted for 64% of all malicious emails. Notable examples included the WannaCry attack—which affected 300,000 computers across 150 countries—and NotPetya, which caused quarterly losses of US$300 million for a number of affected businesses. Another growing trend is the use of cyberattacks to target critical infrastructure and strategic industrial sectors, raising fears that, in a worst-case scenario, attackers could trigger a breakdown in the systems that keep societies functioning.

Headline economic indicators suggest the world is finally getting back on track after the global crisis that erupted 10 years ago, but this upbeat picture masks continuing underlying concerns. The global economy faces a mix of long-standing vulnerabilities and newer threats that have emerged or evolved in the years since the crisis. The familiar risks include potentially unsustainable asset prices, with the world now eight years into a bull run; elevated indebtedness, particularly in China; and continuing strains in the global financial system. Among the newer challenges are limited policy firepower in the event of a new crisis; disruptions caused by intensifying patterns of automation and digitalization; and a build-up of mercantilist and protectionist pressures against a backdrop of rising nationalist and populist politics.

The world has moved into a new and unsettling geopolitical phase. Multilateral rules-based approaches have been fraying. Re-establishing the state as the primary locus of power and legitimacy has become an increasingly attractive strategy for many countries, but one that leaves many smaller states squeezed as the geopolitical sands shift. There is currently no sign that norms and institutions exist towards which the world’s major powers might converge. This creates new risks and uncertainties: rising military tensions, economic and commercial disruptions, and destabilizing feedback loops between changing global conditions and countries’ domestic political conditions. International relations now play out in increasingly diverse ways. Beyond conventional military buildups, these include new cyber sources of hard and soft power, reconfigured trade and investment links, proxy conflicts, changing alliance dynamics, and potential flashpoints related to the global commons. Assessing and mitigating risks across all these theatres of potential conflict will require careful horizon scanning and crisis anticipation by both state and nonstate actors.

This year’s Global Risks Report introduces three new series:

  1. Future Shocks,
  2. Hindsight,
  3. Risk Reassessment.

Our aim is to broaden the report’s analytical reach: each of these elements provides a new lens through which to view the increasingly complex world of global risks.

Future Shocks is a warning against complacency and a reminder that risks can crystallize with disorientating speed. In a world of complex and interconnected systems, feedback loops, threshold effects and cascading disruptions can lead to sudden and dramatic breakdowns. We present 10 such potential breakdowns—from democratic collapses to spiralling cyber conflicts—not as predictions, but as food for thought: what are the shocks that could fundamentally upend your world?

In Hindsight we look back at risks we have analysed in previous editions of the Global Risks Report, tracing the evolution of the risks themselves and the global responses to them. Revisiting our past reports in this way allows us to gauge risk-mitigation efforts and highlight lingering risks that might warrant increased attention. This year we focus on antimicrobial resistance, youth unemployment, and “digital wildfires”, which is how we referred in 2013 to phenomena that bear a close resemblance to what is now known as “fake news”.

In Risk Reassessment, selected risk experts share their insights about the implications for decisionmakers in businesses, governments and civil society of developments in our understanding of risk. In this year’s report, Roland Kupers writes about fostering resilience in complex systems, while Michele Wucker calls for organizations to pay more attention to cognitive bias in their risk management processes.

GRR2018 1

GRR2018 2

Click here to access WEF – Marsh’s detailed Global Risk Report 2018

Keeping up with shifting compliance goalposts in 2018 – Five focal areas for investment

Stakeholders across the organization are increasingly seeking greater compliance effectiveness, efficiency, cost cutting, and agility in compliance activities to further compete in the expanding digital and automated world.

Organizations are being reinforced this way to continuously improve their compliance activities, because in the future, integration and automation of compliance activities is an imperative. To prepare for tomorrow, organizations must invest today.

When positioning your organization for the future, keep in mind the following five areas for investment:

1. Operational integration

Regulators are increasingly spotlighting the need for operational integration within a compliance risk management program, meaning that compliance needs to be integrated in business processes and into people’s performance of their job duties on a day-to-day basis.

When approaching the governance of managing compliance efforts, a more centralized, or a hybrid approach, strengthens the organization’s overall compliance risk management control environment.

2. Automation of compliance activities

The effectiveness of compliance increases when there is integration across an enterprise and successful automation of processes. Compliance leaders are turning toward intelligent automation as an answer for slimming down compliance costs, and becoming more nimble and agile in an ever-increasingly competitive world. When intelligent automation is on the table to support possible compliance activities, some important considerations must be made:

  • Compliance program goals for the future
  • Implementation dependencies and interdependencies
  • Determining how automation will and can support the business
  • Enhancing competitiveness and agility in executing its compliance activities

Automating compliance activities can also help augment resource allocation and realize greater accuracy by implementing repetitive tasks into the automation.

3. Accountability

Regulators increasingly expect organization to implement performance management and compensation programs to encourage prudent risk-taking. In fact, identified by the KPMG CCO Survey, 55% of CCOs identified “enhancing accountability and compliance responsibilities” as a top 3 priority in 2017.

It is essential that disciplinary and incentive protocols be consistently applied to high-level employees. To do so sends a message that seniority and success do not exempt anyone from following the rules.

4. Formalized risk assessments

Regulatory guidelines and expectations released in 2017 set forth specific focal areas that compliance leaders should ensure are covered in their risk assessments.

  • Evaluating the data needs of the compliance program can help the organization migrate to a more data-driven metrics environment in a controlled way.
  • Availability, integrity, and accuracy of data is needed to understand and assess compliance risks enterprise-wide. The use of data quality assessments to evaluate the compliance impact can help address this challenge.
  • Implementing a data governance model to share data across the 3 lines of defense is a good way of reassuring data owners and stakeholders that the data will be used consistent with the agreed upon model.
  • Further integration and aggregation of data is needed to avoid unintentionally ‘underestimating” compliance risks because of continuous change in measurement of compliance programs and data & analytics.
  • To maximize the benefits of data & analytics, leading organizations are building analytics directly into their compliance processes in order to identify risk scenarios in real time and to enhance their risk coverage in a cost-effective way.

5. Continuous improvement

Compliance efforts by organizations need to continuously evolve to ensure the control environment remains firm while risk trends appear, risks emerge, and regulatory expectations shift.

Compliance and business leaders must continuously improve their compliance activities in pursuit of greater effectiveness, efficiency, agility, and resiliency. Because by continuously improving, organizations can methodically position their organizations for the future.

KPMG

Click here to access KPMG’s detailed White Paper

Insurance Global Trends in 2017

A brief summary of the key regional trends :

  • Analytics, Customer Centricity and Digital Innovation achieve similar scores across all our regions.
    • Customer-Centricity trails marginally in North America.
    • Noteworthy is the perfect score of 60 attained for Digital Innovation in Asia-Pacific, which indicates that this was the number-one priority here in all four measures underlying the priority score (money, time, staffing and training).
  • Underwriting and Risk Management both score considerably higher in North America than they do elsewhere – as we saw in the first priorities table, Underwriting is 3rd in the list of priorities in North America, despite not getting above 7th place in any other regions, and its Risk Management score is more than 80% higher than the runner-up’s (Europe).
  • There is a step-up in focus on Claims in Europe and North America compared to Asia-Pacific.
  • With Distribution Diversification, we have the exact inverse scenario, with Asia-Pacific leading the pack, possibly a reflection of the emerging markets within it necessitating high-scale low-cost distribution, which traditional models cannot provide.
  • Fraud is also a marginally higher priority in Asia-Pacific.
  • Europe and Asia-Pacific lead North America with their focus on Internet of Things.
  • Cybersecurity and Mobile achieve similar (lowish) scores for all regions; Product Development is relatively high across the board.
  • Regulation is the biggest deal in Europe, where respondents quoted in particular Solvency II and the Insurance Distribution Directive (IDD) as being causes for concern.

InsuranceNexus

Click here to access Insurance Nexus detailed survey analysis

The new dynamics of financial globalization

Since the global financial crisis began in 2007, gross cross-border capital flows have fallen by 65 percent in absolute terms and by four times relative to world GDP. Half of that decline has come from a sharp contraction in cross-border lending. But financial globalization is still very much alive—and could prove to be more stable and inclusive in the future.

  • Eurozone banks are at the epicenter of the retreat in cross-border lending, with total foreign loans and other claims down by $7.3 trillion, or by 45 percent, since 2007. Nearly half has occurred in intra-Eurozone borrowing, with interbank lending showing the largest decline. Swiss, UK, and some US banks also reduced their foreign business.
  • The retrenchment of global banks reflects several factors:
    • a reappraisal of country risk;
    • the recognition that foreign business was less profitable than domestic business for many banks;
    • national policies that promote domestic lending;
    • and new regulations on capital and liquidity that create disincentives for the added scale and complexity that foreign operations entail.
  • Some banks from developing and other advanced economies—notably China, Canada, and Japan—are expanding abroad, but it remains to be seen whether their new international business is profitable and sustained.
  • Central banks are also playing a larger role in banking and capital markets.
  • Financial globalization is not dead. The global stock of foreign investment relative to GDP has changed little since 2007, and more countries are participating. Our new Financial Connectedness Ranking shows that advanced economies and international financial centers are the most highly integrated into the global system, but China and other developing countries are becoming more connected. Notably, China’s connectedness is growing, with outward stock of bank lending and foreign direct investment (FDI) tripling since 2007.
  • The new era of financial globalization promises more stability. Less volatile FDI and equity flows now command a much higher share of gross capital flows than before the crisis. Imbalances of current, financial, and capital accounts have shrunk, from 2.5 percent of world GDP in 2007 to 1.7 percent in 2016. Developing countries have become net recipients of global capital again.
  • But potential risks remain. Capital flows—particularly foreign lending—remain volatile. Over 60 percent of countries experience a large decline, surge, or reversal in foreign lending each year, creating volatility in exchange rates and economies. Equity-market valuations have reached new heights. Financial contagion remains a risk. The rise of financial centers, particularly those that lack transparency, is worth watching.
  • Looking forward, new digital platforms, blockchain, and machine learning may create new channels for cross-border capital flows and further broaden participation.
    • Banks need to harness the power of digital and respond to financial technology companies or fintechs, adapt business models to new regulation, improve risk management, and review their global strategies.
    • Regulators will need to continue to monitor old risks and find new tools to cope with volatility, while creating a more resilient risk architecture and keeping pace with rapid technological change.

Financial Globalization

Click here to access McKinsey’s detailed study