Page 23 - Insurance Times December 2015 SAMPLE

The World Economic Forum have identified following top five
market triggering unanticipated losses to Baring Bank. Had
that earthquake in Japan not come,the Baring bank would
have been in existence today- we do not know.
Similarly, Long-Term Capital Management (LTCM) was a
hedge fund management firm based in Greenwich, Connecti-
cut that used absolute-return trading strategies combined
with high financial leverage suffered losses due to failure of
Russian Government to honour the payment which was a
macro risk event. Both the examples suggest that macro
risks assessment is important and should find place in the
future risk management framework. Understanding such
macro risk may also help in reducing the capital requirement
of the company.
Future focus on Risk Management
Many tail risks results from macro events such as social,
economic, political, natural calamities, terrorist attack etc.
but get un-noticed leading to financial disaster. With in-
creasing integration of global economy, the correlation be-
tween different macro risks factors are increasing at a
much faster pace now than ever before.
Failure in one economy or fallout in one political system or
devastation from hurricane in US or terrorist attack in one
part of the world will have adverse effect on the financial
system of the world. These events are likely to impact ad-
versely the stock market of other economies, fall in currency
value, rising inflation, imbalance in exports and imports lead- impact in short to medium term. They are, geopolitical
ing to crumbling of financial system round the world.
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global risks in terms of likelihood and in terms of impact in
the year 2015:
Likelihood impact
1. Interstate conflicts with regional consequences (geopo-
litical risk)
2. Extreme weather events (environmental risk)
3. Failure of national governance (geopolitical risk)
4. State collapse or crisis (geopolitical risk)
5. High structural unemployment or underemployment
(economic risk)
Severity of impact
1. Water crisis (societal risk)
2. Rapid and mass spread of infectious disease (societal
risk)
3. Weapons of mass destruction ( geopolitical risk)
4. Failure of climate-change adaption (environmental risk)
It was reported that the top global risks in terms of likeli-
hood and potential impact over coming 10 years are inter-
state conflicts with regional consequences as number one
global risks in terms of likelihood and fourth most serious
risk in terms of impact. With the increasing geopolitics in-
fluencing global economy, geopolitical risks account for
three of the five most likely, and two of the most potential
impactful risks.
It is important to note that environmental risk is getting
more prominent than economic risk. This is particularly
because of negative assessment of existing preparedness to
cope up with such extreme weather and climatic change
challenge.
The interplay of risk is also important in the global
risk landscape.The World Economic Forum have identified
three key interplays that may exacerbate the overall
and economics, the risks related to rapid and unplanned ur-
banization in developing countries and emerging
technologies.
Another few areas that require attention in the effort of
improving risk management framework is the recognition
of correlation between risks, as correlation play an impor-
tant role in risk diversification and aggregation. The impor-
tant point to be considered is that, correlation under the
The Insurance Times, December 2015 19