Risk Management

Little Green Men Make the List of ‘Extreme’ Risk Factors

Don't laugh. There is a litany of unlikely but possible events that could ruin your business.
David McCannMay 12, 2014
Little Green Men Make the List of ‘Extreme’ Risk Factors

You probably won’t be happy to hear that the list of risk factors in your financial filings is missing some whoppers that would severely cripple or kill your business. If you think you’ve thought of everything, think again.

AliensFor instance, have you considered what could happen to your cash flow if Earth were invaded by hostile aliens bent on enslaving the human race? We didn’t think so. How about if computers get smarter than people and commence exterminating their inferiors? Not so much.

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But while such risks might not actually be keeping you awake at night, Towers Watson is on the case, at least insofar as pointing them out. A new report by the consulting firm lists 30 “extreme risks,” defined as “potential events that are very unlikely to occur but would have a significant impact on the global economy, existing social orders or current political regimes.”

The report doesn’t, though, go as far as discussing how to formulate risk-management strategies addressing the scary scenarios. That’s too bad, as one wonders how companies would go about mitigating the impact of a deadly invasion by extraterrestrial beings advanced enough to figure out how to pull that off.

Most of the extreme risks, however, are unfortunately more contemplable and, what’s more, no laughing matter. They are divided among six broad categories:

Opinion_Bug7Financial: A banking crisis, with central banks unable or unwilling to supply sufficient liquidity to institutions; insurance crisis, triggered by catastrophic events that cause failures and market withdrawals by major insurers; and sovereign defaults, where nonpayment by a major sovereign borrow causes market panic and global economic disruption.

Economic: Abandonment of fiat money, or a collapse of confidence in the purchasing power of paper currency; breakdown of capitalism, or distrust in the private capital/property system; currency crisis, or a significant devaluation of a major currency; deflation; depression; hyperinflation; and stagnation, or a prolonged period of little or no economic growth.

Political: Anarchy, or extreme social disorder in a major country that leads to governmental and economic collapse; global trade collapse, where there’s a protectionist backlash against cross-border mobility of labor, goods and capital; political extremism by which an oppressive government rises to power in a major economy; terrorism; and World War III.

Environmental: Alien invasion; biodiversity collapse, where destruction of the world’s ecosystem damages food and water supplies; cosmic threats like large meteorites, solar flares or magnetic storms; global temperature change; and natural catastrophe.

Societal: Extreme longevity, where advances in medicine or genome science overwhelm human support systems; food/water/energy crisis; health progress backfire, or a massive rise in morbidity or mental illness, perhaps due to an unintended consequence of a new health practice; a significant rise in organized crime; and pandemic, where a new, infectious, fatal disease spreads around the world.

Technological: Biotech catastrophe; cyber-warfare, or computer sabotage/espionage on a major scale; infrastructure failure, such as loss of the electricity grid for an extended period; nuclear disaster; and technological singularity, the point at which computers achieve intelligence beyond that of humans, who thereupon lose control over the machines they built.

The point, says Towers Watson, is that while any single one of those events is unlikely to occur, the odds don’t look as appealing when you add them all up. The report quotes Goldman Sachs CEO Lloyd Blankfein as stating, “Most risk management is really just advanced contingency planning and disciplining yourself to realize that, given enough time, very low-probability events not only can happen, but they absolutely will happen.”

Factoring the potential intensity and scope of impact for each extreme risk, the likelihood it will happen and the degree of uncertainty in assessing its risk level, Towers Watson identified food/water/energy crisis as the greatest risk. Economic stagnation was second, followed by global temperature change (which ironically will affect Democrats and Republicans equally).

The rest of the top 15: depression; global trade collapse; banking crisis; sovereign default; currency crisis; deflation; health progress backfire; nuclear contamination; extreme longevity; insurance crisis; terrorism; and infrastructure failure.

Image: flickr user thebadepete

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