Managing Risk in an Era of Chronic Unpredictability

09/23/2016 05:24 pm ET Updated Sep 24, 2017

It was not so long ago that managing political risk had a primarily developing world connotation, referring to those 'other' countries half a world away, where poverty, coups and corruption are the rule. An entire industry sprang up around the notion that there was a marketplace for information and insurance directly related to understanding cross-border risk in the (primarily) southern hemisphere. The political risk 'industry' is indeed a thriving marketplace today - a multi-billion-dollar business focused on delivering real time information to banks, insurance companies, corporates and governments, as well as a means to protect their interests in the countries deemed to be most at risk.

Or, that was the case until the new millennium, when a combination of the advent of climate change, social media, the Arab Awakening, economic nationalism, developed country political hubris, terrorism, cross-border conflict, and cyber-risk combined to transform the world into a cauldron of competing vortexes, the likes of which has not been seen before. The global landscape today is characterized by a clash between man-made and natural risks, which are butting heads on a seemingly continuous basis. It is also being buffeted by a self-destructive form of political change that is compounding the severity that any one of these forces would have on their own.

Nationalism, demagoguery, and self-interest are hardly new variables in determining how political forces coalesce to select leaders; what is new are the implications in a globalized and intimately interconnected world. Caustic and acerbic leaders such as the Philippines' Duterte have a profound impact on trade and investment landscapes. The Philippine stock market and foreign direct investment levels have seen significant declines since he took office less than three months ago. The same may be said of the UK's Foreign Minister - BoJo -who hasn't exactly set Europeans' minds at ease as he hurls names and epithets around. Since the UK decided to Brexit, the British pound has fallen as much as 15 percent against the U.S. dollar. Then there is the prospect of a Trump presidency in the U.S., which has higher odds at the present time than ever before. The global implications are staggering.

Apart from a shift to developed world-driven political risks - chronic unpredictability has become the norm in areas ranging from climate change to cyber risk to terrorism. Each month sets new records in terms of global warming, hurricane strength, rainfall amounts and drought. Cyber-attacks are making weekly headlines with increasingly severity, culminating in this week's revelations about the hacking of information on more than 500 million Yahoo users in 2014. And terrorism has become a recurrent reality, from daily attacks in Iraq and Syria to multiple attacks in France and the U.S. Citizens throughout the world have come to expect news of the latest unpredicted attack on any given day.

An inability to predict where the next weather, cyber or terrorist-related attack will occur has placed a premium on understanding the nature of risk, establishing a program to protect assets and respond, and having the organizational resilience to be able to withstand whatever comes your way. Resilience is no longer simply a matter of having the right insurance in place - while this remains an important piece of the puzzle - it is a function of having the right frame of mind, a plugged in view of the world, and a defensive posture that will allow for a swift, nimble and coordinated response. Those firms that will successfully manage risk today are not caught off guard when a risk is barreling toward them; they are anticipating that risk and have devoted the resources necessary to tackle it, head on.

Not so long ago, risk management was more or less a function of addressing known unknowns. Systemic shocks were infrequent. Existing paradigms were not being challenged on a regular basis. Today, unknown unknowns are a common element of the risk landscape. Previously unacceptable extremist political forces now have a growing voice in national elections. AAA credit ratings are largely a thing of the past. It is no longer given that fiscal and human capital resources will be available to respond to the next natural catastrophe. Antibiotics are losing their potency. Superbugs are becoming more commonplace. Some oil producing countries are on the verge of bankruptcy. The list of things that seemed inconceivable a decade or two ago are simply the reality today.

History is no longer the guide that it once was. Just because the stock market performed a certain way 20 years ago doesn't mean it will do so in the future. Market dynamics have changed. Weather patterns have changed. Migration patterns have changed. Communication patterns have changed. The competitive landscape has changed. So organizations and governments must cast aside their long-held assumptions about what is possible, what works, and what the future will look like in five or ten years. In an era of chronic unpredictability, the only constant is change, and it is occurring on an epic scale. Those entities that adopt a defensive posture should survive. Those stuck in dated modes of thinking or static means of addressing risk may not.

*Daniel Wagner is Managing Director of Risk Cooperative and co-author of the new book "Global Risk Agility and Decision Making.