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Better understanding, communication, management and mitigating of catastrophic risk.

The Global Agenda Council on Catastrophic Risk set out to identify means to achieve better understanding, communicating, and managing as well as mitigating catastrophic risks. The Council worked closely with the Forum’s Risk Response Network (RRN) to shape ideas central to global risk management. By drawing on each other’s experience and expertise, members of the Council were able to advance thinking on the subject. This collaboration resulted in valuable tangible products, such as a framework for identifying catastrophic risk management “leading practices”, as well as comprehensive insights drawn from recent catastrophic events.

The Risk Framework Matrix produced by the Council is in direct alignment and in collaboration with the RRN’s Leading Practice Exchange, which was developed in parallel. It was produced for use by decision-makers in the public and private sectors, as well as the community of risk managers, researchers and implementers of public policy related to catastrophic risk. The Framework is a basis for sharing lessons from eight functional phases of risk management within the Forum’s five categories of risk and cross references the typology of global risk in the 2012 Global Risk Report.

As well as working closely with the RRN, Council members also began to build relationships with other appropriate Global Agenda Councils during the Global Agenda Summit in Abu Dhabi, October 2011, as well as other organizations for examples of practice.

In support of the Risk Framework Matrix Council members have been developing a Robust Quality Assurance (QA), or vetting, process for populating the matrix, again in collaboration with the RRN. The purpose of this is to ensure that counterproductive practices are prevented from being entered into the database and only useful examples are included.

The Risk Framework Matrix and the supporting procedures have been designed to operate as an interactive relational-database repository, and will be continually enriched as it is populated. It is already providing a valuable contribution to the work and direction of the RRN.

The Council demonstrated the critical value of understanding higher levels of vulnerability as a result of increasing interdependencies between telecommunications, critical infrastructures and integrated supply chains. These principles have been adopted within other Forum initiatives as a core principle. They determined that increasingly efficient supply chains encourage greater economic interconnectedness, which results in a wider and greater economic impact of catastrophic events than had previously occurred. It was also determined that various existing risk-management tools are currently mobilized to address tractable risks while intractable risks urgently require different approaches.

The Council built on this by exploring recent catastrophic events such as in the 2011 Great East Japan (Tohoku) earthquake, the 2011 Thailand floods and Hurricane Katrina in the United States in 2005. They revealed multiple cascading points of failure and the aggravating damaging effects of catastrophic events that catastrophic risks are subject to. Such catastrophic events show that a major disaster immediately affects not only the country where it occurs but, through various interdependencies and networks, numerous others.

They were also able to articulate the concept of tractable and intractable risks, which is now a fundamental part of the Forum’s risk vocabulary and activities. The RRN Supply Chain Risk Radar, the newest RRN analytic tool, measures (among other things) the level of tractability across a range of global supply-chain disruptions touching on the economic, geopolitical, environmental and technological spheres. Tractable risks are those where likelihood and consequence can be estimated with a high degree of accuracy and reliability. Such risks have been described as “routine”, because they can be dealt with by orderly, technical, routine risk-management analysis and action. Because they can be studied:

  • (a) examinations can be conducted and understanding improved;
  • (b) data can be collected for a better prediction of likelihood and consequences;
  • (c) calculations can be made about the forms of mitigation worth considering;
  • (d) strategies may be developed for avoiding or mitigating them, and;
  • (e) preparations can be made to respond effectively if the event occurs.

Such risks can therefore often be insured against or directly hedged through financial instruments to redistribute the load of risk-bearing towards those better placed to to carry it.

Intractable risks defy detailed and definitive analysis. They are difficult to prevent, mitigate, or prepare for. The likelihood or magnitude of consequences cannot reliably be estimated with precision, therefore standard tools of risk assessment and management fail. Catastrophic risks, by their nature, tend to be intractable.

The Council’s work in this area provides an opportunity for a different approach to addressing major disasters by converting them to tractable risks if we can better assess and address them when they arise. For example, the “probability of a major terror event in an American city next year” may not be a well-defined concept in the same way that the “probability of a typhoon striking Hong Kong” is. Neither can the likelihood nor the consequences of “a major disruption to the European power grid from an electromagnetic pulse” be reliably estimated. However, although it may still be possible to manage or address intractable risks, it is imperative that strategies are developed for managing them.

The Global Agenda Council on Catastrophic Risks has advanced thinking and provided inspiration for a different approach to the traditional enterprise risk management. Although most effective tools focus on tractable risks – and there is still progress to be made – there is also a need to develop a language and frameworks for discussion, decision-making, and investment in prevention, mitigation and preparation that helps us to better manage intractable risks.

The memberships of the Council on Catastrophic Risk will be merged with those from the Council on Disaster Management to take advantage of the synergy and complementary nature of the two councils to work collectively towards common objectives. The close relationship between this Council and the RRN will continue to be built on to explore further the contributions council members can make to further still the thinking on catastrophic risk and on the various phases of risk management and disaster risk management in particular. The Council would like to continue and improve its outreach to other Global Agenda Councils and to invite them to continue viewing this risk framework from their field of expertise and to provide examples for consideration.

The studies have been made available by council members via Toplink and referenced below:

  • Victor Meyer & Kirstjen Nielson, “Identification of Catastrophic Risk Categories” October 2011
  • Yuichi Ono & Luis G. Aranda, “Economic and Social Impact of Volcanic Eruptions” December 2011
  • Emmanuel M. De Guzman, “The Cascading Global Impact of the Mt. Pinatubo Eruption of 1991” December 2011
  • Yuichi Ono, “Impact of Thailand Floods 2011 on Supply Chain” January 2012
  • Michael H. Faber, “Risk-Informed Decision Making in Societal/Corporate Management” January 2012
  • Yuichi Ono, “Disasters and Shocks to Global Supply Chain” February 2012
  • Yuichi Ono, “Economics of Volcanic Eruptions” February 2012
  • Michael H. Faber, “Best Practices in Risk Management with Severe Problems” February 2012
  • Kirstjen Nielson & Victor Meyer, “Development of Risk Framework Matrix” February 2012
  • Yuichi Ono, “Tropical Cyclones in the Indian Ocean Region: Reducing Human Losses due to Proper Implementation of Preparedness Programmes and Early Warning Systems” April 2012
  • Herman B. “Dutch” Leonard, “Tractable and Intractable Risks” April 2012
  • Anne Hastings, “From Intractable to Tractable: Insuring Haiti’s Poor against Natural Disaster” April 2012
  • Managing Catastrophic Risks: Davos Forum interview with Satoru Nishikawa by World Economic Forum content producer Nicolas Siegenthaler  www.weforum.org/s?s=Satoru+Nishikawa 
  • What if there was a large-scale volcanic eruption: Interview with Satoru Nishikawa produced by World Economic Forum senior media manager Michèle Mischler http://forumblog.org/podcasts/podcast-three-ways-to-end-the-world-as-we-know-it/

 Disclaimer

The opinions expressed here are those of the individual members of the Council and not of the World Economic Forum or any institutions to which they are affiliated.