2016's Unhappy New Year of Risk

2016's Unhappy New Year of Risk
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Risk managers and decision makers may already have been inclined to think that 2016 will be a challenging year, but based on the degree of market turmoil, saber rattling and sensational headlines in its first week, it could prove to be calamitous. Commodity prices are maintaining their free fall, foreign exchange rates continue to plummet around the world, and new and more perilous political risks are appearing on a daily basis. Retreating is not an option for most international businesses, for remaining on the sidelines could pose an existential threat. Yet in the era of man-made risk, many decision makers are wondering where they will find divine guidance to get them through this year.

To demonstrate the plethora of man-made risk that is permeating the landscape, Saudi Arabia is adapting to the era of cheap oil by ramping up the Sunni-Shi'ite schism with Iran, Kim Jong-un is fulfilling his obligation to act as a particularly dangerous petulant child, and Chinese stock investors are fulfilling expectations by dumping inflated shares with predictable panic. Moreover, the Syrian refugee crisis is manifesting itself in completely unanticipated ways, Brazil is imploding, and global weather events are setting new records with great abandon. Man-made risk has captured the world's attention like never before.

Coming off of the heels of the second warmest year ever recorded, accelerating climate change will surely remain a policy priority in 2016. Hundred-year flooding along the Mississippi river, record warmth in the eastern U.S. and the North Pole, and a pestilent methane leak of epic proportions in Los Angeles are reminders of the collision between the industrial age, natural and man-made risks. Such examples are sure to proliferate with time, as the rise in average global temperatures is unfortunately likely to surpass conservative expectations more quickly than many anticipate.

The designation of a new geological age is upon us - the Anthropocene - which scientists believe began as early as the 1950s, and marks the beginning of a new age of risk. In this new age, urban civilization is not only the central actor in the course of life on earth, but also the central driver of risk, and the chief object from which we must become resilient. New research from Lloyd's indicates that approximately 50% of the major threats to economic output in the world's cities are man-made. The Anthropocene is an age in which the world is being permanently scarred by man.

Against this dynamic backdrop, where change is the one constant, and where interdependencies imply inherent uncertainty, past experience is not necessarily helpful in determining the best course of future action. What may have been true yesterday is almost by definition not going to be the case tomorrow. By default, organizations must adopt forward thinking and forward looking approaches to managing risk. In today's world, it is the forces that drive change--and the ability to identify and embrace them--that will matter the most.

Today's ever-present risks are interstate conflict, terrorism, chronic unemployment/underemployment, extreme weather events, water crises and cyber-attacks (in other words, the collision of political, social, economic, environmental and technological risks). None of these is within the control of an individual or organization, and some are not even in the control of a government. Any 'Chinese Wall' that may have been perceived to have existed between these categories no longer exists--either in terms of perceived likelihood or impact. We no longer have the luxury of assuming that an event in another part of the world will not impact our ability to function at home, or elsewhere abroad. The age of global shocks is upon us and man-made risk is the central actor. Agility in the face of this challenging risk landscape is our best countermeasure.

Organizations must tread lightly into 2016 and beyond in order to gain resilience and improve their likelihood of thriving, and surviving, amid so much volatility. To address the types of challenges this year will continue to produce, agility is needed from political leaders and decision makers across the spectrum. We are squarely in the middle of a time for adaptation, where nothing can be taken for granted. Time to buckle your seat belts.

*Dante Disparte is founder and CEO of Risk Cooperative. Daniel Wagner is founder and CEO of Country Risk Solutions. Both are authors of the forthcoming book "Global Risk Agility and Decision Making" (Macmillan, Q2/2016).

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