ADVERTISEMENT

Risk Interconnectivity

The Threat of
Invisible Risk
Connectivity
An incomplete grasp of the total risk
picture can increase the likelihood
of calamity

In the news recently there has been talk

of an emerging used-car loan bubble in
the U.S., the result of lenders using many
of the same dodgy tactics that created
the subprime mortgage crisis and the
2008 economic meltdown. The scale of
the two bubbles is surely different, but
its a risky play for financial institutions
nonethelessa case, it would seem, of
those who didnt understand the risks the
first time around being doomed to repeat
them. And today its more of a challenge
than ever to fully grasp interconnected
global risk.
The nature of risk has changed
massively in both degree and kind, says
Steve Wilson, Chief Risk Officer, General
Insurance at Zurich Insurance Group. You
simply cant overstate that fact.
The key change centers on interconnectivity. Never before has understanding
the domino effect played such a central
role in effective risk management; what
the 2008 financial crisis made most clear is
that littleif anythingis ever as clear as
it might seem.
What was seen to be diversifying
risk was, in fact, concentrating it,
Wilson says, referring to the mortgage
cataclysm. It was an amazing example
of interconnectivity that wasnt visible,
between various layers of financing, and
part of the reason the subprime crisis
blew up.

Wilson stresses that there might be

analogous threats today, especially in
new, rapidly growing fields such as cloud
computing. More and more organizations
are putting more and more data into the
cloud via a huge proliferation of cloud
providers. Are these providers simply
outsourcing to other software houses, and
thus concentrating risk under the guise of
diversifying it?
There are again multiple players in the
chain, with no one seeing the big picture,
Wilson cautions. And if you dont see the
big picture, you dont see the risk.

All together now

The danger in failing to view risk holistically can cause great chaos on the
enterprise level, too. A prime driver of
such failures is the propensity to analyze
risks individually within an enterprise
that is, to see risks only in the context
of corporate silos. Valerie Butt, Head of
Customer and Distribution Management
for Global Corporate, Zurich Insurance
Group, recalls a classic example of failing
to connect the risk dots. Her cautionary
tale regards an auto manufacturer and
a precious metal needed for car production. The companys purchasing department, seeing the metals price escalating,
decided to make bulk purchases and start
stockpiling the material. In the meantime,
the R&D department was successfully

reducing the car manufacturers dependence on the metal. When the company
tried to sell the excess metal it no longer
needed for production, it discovered
that the price of the metal had dropped
dramatically, leading to a $1 billion loss
all because the company did not have an
enterprise-wide view of risk.
The key component to managing
global risk is taking a holistic view, Butt
says. A flatter world has led to faster and
more efficient communications systems,
trade and investment, but these interconnections have led to more systemic
risks. Ones gut instinct must be supplemented by a sound methodology around
the mission-critical risks, both now and
emergingand how those interrelate. To
me, thats the key piecemapping those
risks and running the what-if scenarios.
What Butt is encouraging entails an
encompassing risk dialogue rather than a
series of risk monologues. Bringing all the
key stakeholders into a room together
strategy interacting with the facilities
manager, or the M&A head talking with
sales, for exampleallows the value chain
to be fully mapped out. In doing so, a total
picture of risk correlations and aggregations emergesa high-definition, fully 3D
picture that can fuel the development of
a holistic risk management strategy based
on a clear view of all the globally interconnected factors. Evan Rothman