Good morning and thank you for the invitation to speak today.
As I am sure you are aware, NATO and Lloyd’s have one key thing in common – we are both in the business of risk. For 321 years, Lloyd’s has been the place where the world takes risk and this is no different today. What we have inevitably seen though is a huge shift in the types of risks that we cover.
Just as NATO redefines its Strategic Concept to match the realities of a much changed world in the post-Cold War environment , so an institution like Lloyd’s must adapt to new circumstances and seek to structure itself to best deal with the present and the unknown future.
Nothing in this world remains static for very long. This is never truer than with risk. One risk recedes, and others emerge. For NATO, the demise of the Soviet Union and the passing of the Cold War did not, sadly, usher in a world devoid of military and political risk, as the break-up of the former Yugoslavia, and indeed numerous wars have shown.
So against this backdrop, NATO is renewing its Strategic Concept. This very process is a good analogy for thinking about how businesses, and indeed all organisations, should adapt to risk. Recent events, not least 9/11, or the financial crisis, show us all that the unthinkable not merely became thinkable, but happened, with the devastating consequences we are all aware of. Businesses must become ever better at researching, analysing, anticipating and then preparing for future risks. This is something that we do at Lloyd’s. But we have also chosen to reach outside the confines of our sector, and indeed business itself and seek to promote informed debate about risk whenever we can, for the benefit of us all.
Today an anniversary is being commemorated in London and is a pertinent reminder of the changing nature of risk. On the 7th July 2005, four British Muslims blew themselves up on the London transport system killing 52 people and injuring hundreds. While London is no stranger to terrorism, the current strain of home-grown terrorism presents a particularly menacing and constant threat.
And this is of course only one of a number of new emerging risks that occupy the minds of the underwriters in our marketplace. Over the past decade, the world has changed beyond recognition. I am not sure that I would subscribe to the argument that the world is necessarily a riskier place but I do believe that we have witnessed fundamental changes in our risk landscape that pose challenges for businesses and governments alike.
Ten years ago, I doubt very many of us had even heard of nanotechnology, had thought that computers could be used to launch attacks on businesses, believed that pirates would be raging on the high seas and that terrorists would be being nurtured in our schools and colleges.
Lloyd’s role
Anticipating and responding to business risk is the heart at what we do at Lloyd’s. That is why we have a dedicated Emerging Risks Team and we have established our 360 Risk Initiative which supports research and drives debate on risk.
This morning I would like to touch on the three main areas of super risk that I believe are top of business agendas at the moment and will continue to occupy them for foreseeable future. I also want to explain how we are seeking to prepare for and manage these risks and some of the common challenges we are all likely to face.
Political Risk and Recession
As we consider the future, we do this against the backdrop of the worst recession for 70 years. Its impact has already extended beyond our financial centres and into the real economy – with the sad result that real jobs, real businesses and real skills are being lost. This is inevitably putting increasing pressure on our political and social systems and has at times bubbled over into mass protests – as in Iceland and civil unrest as we witnessed in Latvia.
Political risk is not new and threats such as piracy and civil unrest have been around for centuries but these risks are being redefined and are evolving in response to the economic downturn. As the recession bites, the assets of companies operating and investing in emerging markets, with fragile or fractured political systems, are likely to come under increasing threat of expropriation and existing tensions in developing markets could be amplified.
While the doomsday scenarios that the media has painted – such as the so-called summer of rage in Europe – seem unlikely to happen, increasing geopolitical instability will have significant effects on global business.
Piracy – which is perhaps one of the most prominent manifestations of political risk and a very current issue for NATO, shows no signs of abating. Indeed, there is a growing body of opinion that fuelled by the recession, piracy hotspots could re-emerge over the coming years, and that the kidnap tactics successfully employed in the African seas could be copied by criminals elsewhere.
These risks are compounding what is an already a volatile situation, with incidents of political violence rising, impacting supply chains, raising fears of cyber terrorism and creating new home-grown terrorists.
Even without the recession, these are all having an impact on businesses and their desire to take risks.
Climate Change
Political risks are also likely to magnify the effects of other emerging risks, chiefly climate change.
There is no denying that climate change is the biggest story of our age. We have heard ever more loudly for the past decade about C02 emissions, greenhouse gases, dramatic weather changes, melting ice sheets and the effect this will have on our planet.
In order to understand what climate change means for our future security, we recently teamed up with the International Institute for Strategic Studies to produce a report into Climate Change and Security. We found that climate change, population growth and urbanisation are interacting to cause concerns about water shortage, catastrophic loss, energy security, food security and migrations.
We must recognise that in many cases it is the poorer states that will be the worst affected. Understanding the potentially destabilising effects on these countries will therefore be particularly important in maintaining security, not just in emerging markets, but right across our globalised 21st century world. It may also better inform our choices about international development aid in the future.
For the insurance industry, climate change is a priority at the moment, even though many of the effects will not be fully felt for decades. Climate change is transforming the nature and gravity of the risks businesses bear and we must be at the forefront of understanding this.
Pandemic
Finally who would have thought that birds, pigs and cattle could strike fear in humans. The current Swine Flu outbreak that we are facing is a mixture of pig, bird and human viruses in a combination never seen before. It has jumped the species barrier and is spreading from human to human – that alone is disturbing. Even "mild" seasonal flu infects 10 per cent of the population and kills around 4,000 people in the UK per year. A flu pandemic as severe as that witnessed in 1918 would kill tens of millions and is predicted to cause a global recession with estimated impacts of between 1-10% of the world’s GDP.
The current Swine Flu pandemic clearly shows the implications of international travel, larger populations and the increasing trend for people to live in densely populated cities. The current strain is weak and I hope it stays that way; it should at least serve as a warning and we should learn as much as possible from it.
As an insurer, it is our responsibility to pick up the pieces when disaster strikes. It is also our responsibility to plan and anticipate for emerging risks – driving debate and helping companies, their boards and their risk managers prepare for the future.
And as I mentioned before, you can be assured that we practice what we preach – we have a suite of realistic disaster scenarios to ensure that we can cope with a range of natural and manmade disasters and we are continually seeking to engage with the wider world and develop meaningful tangible partnerships with government bodies and other organizations.
There is no doubt that we will face significant challenges in the decade ahead. I want to take a moment to talk about a few of these issues and some of the questions that you may want to ask as you develop your new Strategic Concept.
Challenges
Are we thinking the unthinkable?
Insurers are subject to unpredicted risk all the time; who would have thought that terrorists would carry out multiple hijacks and fly the planes into the twin towers and pentagon? Who amongst insurers would have thought that policies written to cover aviation, property damage, business interruption, employers liability, fine art, life insurance and disability insurance could be triggered simultaneously; another previously unbelievable scenario. Except that 9/11 caused such a combination of loss. Who would have believed that the default of a small number of mortgages in the US could lead the world into a global recession? Again it is our understanding of the interconnectedness of processes that is flawed; viewed individually these elements seem relatively well behaved; yes we can expect some failures - that is the nature of capitalism and limited liability; but this is acceptable amongst a great number of successes. The key point is that these are not individual elements; they are part of a complex web that makes up our global society. Unequal distribution of wealth, water and food shortages in some regions, differences in religious views combined with light passenger security and planes that are easier to fly to create the conditions for 9/11.
So how do we deal with the unpredicted? Firstly we must consider scenarios seriously. It is ok to ask "what if?" Indeed we must reward rather than suppress this attitude. If the unthinkable actually happened; and if our processes would struggle to cope - then we may need to act to mitigate the downside. Insurers in the UK are annually required to look at financial events that could occur with probability 1 in 200; and to ensure we can remain solvent if they occur. Looking to the deep downside and away from the average is a healthy process. It is one that perhaps nations and Governments should adopt.
Is our principle of defence the right one?
The second question I would like to pose is – Is our principle of defence the right one? The armed services, across Europe and the US play a key role in the aftermath of hurricanes, floods and other natural catastrophes but should part of our defence budgets be invested in mitigation and adaptation strategies to actually help reduce the effects of climate change?
I have already mentioned several global trends that combine to pose difficult long-term challenges. Climate Change, population Growth, industrialisation and urbanisation may lead to food, water and energy shortages. There is an urgent need to solve these problems but this also leads to the risk that we will be persuaded to attempt large scale solutions that are not properly tested. Some are suggesting geo-engineering such as seeding clouds, or encouraging plankton blooms in the Pacific Ocean. Nano technology may lead to stronger lighter materials with a lower carbon footprint. Synthetic Biology could allow us to rewrite the genetic code of plants; to make them drought, salt and heat tolerant. This technology might also allow us to engineer bacteria that can produce biofuels and solve our energy problems.
These are opportunities; but they also pose some major risks. We do not know how life that we have created in the laboratory will interact with our ecosystems if it escapes. The increasing ease by which such organisms can be created leads to concerns of bioterrorism. Some nano particles have properties very similar to asbestos, a chemical with which my industry has had a very unpleasant relationship with in the past. Our previous attempts at even small scale geo engineering have typically produced unexpected and adverse outcomes. Therefore we must innovate; but we must do so responsibly and cautiously.
Just in time or too little too late?
Finally, organisations have become used to a ‘just in time’ model with supply chains orchestrated to deliver a specific amount of goods at a specific time to ensure that customers ever changing demands are met, storage costs are reduced and goods don’t perish. If you throw a pandemic into the equation, then an optimal strategy does not look so sensible. You could imagine a wave of shortages propagating from one industry to the next; the well oiled machine might suddenly stop. In a scenario where social interaction is, temporarily, reduced to a minimum a global supply model might fail. By considering such scenarios we might conclude that a degree of resilience, even if it leads to some waste, is preferable. Optimising expected profit might not be the best approach - perhaps protecting against the downside is better.
Conclusion
However tempting it may be to leave discussion of these complex issues to politicians and policymakers, it is clear that these risks will have major economic and business implications. That is why it is crucially important that businesses engage fully in the discussions. We bring to the table an unparalleled insight into the realities of emerging risk as they affect our businesses. For us it is not mere conjecture, or an academic treatise. It is reality, not merely the bottom line but the future survival of our businesses which is at stake.
We at Lloyd’s understand this better than most, which is why we have taken a lead, within the business community, in contributing to these debates in a constructive and informed way.
Of course it is in our self-interest as an organisation to conduct well-informed research and analysis, and even to engage with the powers that be. However, we view it as in our intelligent self-interest to reach out across the worlds of business and politics internationally in an effort to both inform and stimulate rigorous debates about risk and the complex web of issues that face us all now and into the future.
A gap has emerged between our heightened awareness of the risk and a lack of understanding as to how to tackle it. We need to close this gap urgently. For future risks are, in all likelihood, going to be of a scale and nature which we have never seen before. I am not being alarmist, rather, I am, as Lloyd’s is, taking a calm, educated look into a future in which it is likely that global trends such as climate change, epoch-changing technologies and radical changes to the centre of global economic gravity are likely to transform our world in as yet unimaginable ways.
So while we don’t know exactly what impact these emerging risks will be in the future, we are doing all that we can to meet our goal of anticipating them to the best of our ability. The interaction between government, civil society, NGOs, academia, organisations such as NATO and businesses in this crucial area, which we try very hard to foster, can only help in reaching this goal.
