Assessing risks: Ready for the unexpected?
With the easing of the lockdown, our lives are very slowly picking up again. Nevertheless, the pandemic is likely to change a number of things in the economy and society. This also includes how we assess and deal with risks.
Every year, renowned institutions conduct surveys and analyses to examine sentiment in the economic environment. A special focus is placed on risks that companies are most likely to face. In addition, risks are identified that appear to be of particular concern in the following fiscal year. These assessments are readily condensed into top 10 risks for media outlets that love rankings to pick up and comment on. Looking at the 2019 studies with an eye toward 2020, one wonders. Overall, business leaders and other experts identified a number of top risks. Topping the list were cyber risks, regulatory changes, adverse market developments, skills shortages or political risks - but no pandemic.
The pandemic hit us unexpectedly
Neither Allianz's Global Risk Barometer nor the global Business Continuity Institute, nor PwC's Global CEO Survey, nor the US University of North Carolina's likewise globally oriented risk survey with the consulting firm Protiviti had a pandemic on their radar. Only the Global Risks Report of the World Economic Forum (WEF) mentions a pandemic in passing. However, its effects "only" made it to 10th place among all risks. And because the probability of occurrence was rated as very low, the authors of the study did not examine this risk in detail. The Funk Group's Funk Global Risk Consensus, which consolidates the results of numerous risk studies to avoid bias, also failed to identify the pandemic as a top risk.
The fact that this was "overlooked" on a broad front raises a few questions against the background of current events. Especially since the pandemic risk was weighted much more heavily in the studies mentioned a few years ago. This was always the case after an immediate event (swine and avian flu or SARS and Ebola). With each additional year after the events, the probability of their occurrence was also estimated to be lower and lower.
Psychological effects distort risk perception
This error of judgment is the result of psychological effects. Instead of statistics, we are guided by media events and perceive the world in a distorted way. That is why we are more afraid of being killed in a plane crash than in a car accident, even though it has been proven that more people die in road traffic than in air travel. Moreover, collective forgetfulness sets in more quickly if one was only marginally affected by a loss event. Even experts are not immune to this. The risk studies therefore primarily depict a "current" risk situation or a risk situation conveyed by the media. Latent risks thus tend to fall off the radar. The surprise is all the greater when the event actually occurs.
Everything that can go wrong will go wrong
Estimating the probability of occurrence is one of the greatest challenges of risk management. They are often subjective, false-precise and usually lead to the underestimation of risks with a high impact. Whether a risk's probability of occurrence is judged to be small or whether one prepares for it in an expedient manner, unperturbed by it, makes a big difference. In this respect, a change in thinking and the realization that we cannot forecast everything are required. Within the bounds of our entrepreneurial possibilities, we should nevertheless prepare for certain eventualities and keep an eye on those risks which - like a pandemic - have a global impact but are potentially underestimated because they are assessed as unlikely.
For example, the interruption of the Internet or the failure of the communications infrastructure. These are two risks that are gaining in importance against the backdrop of the current digitalization leap. But a power outage in the world's biggest economic centers, a global pest infestation or the eruption of a super volcano are also risks that don't appear anywhere. Whether one likes it or not: Overall, we will have to take risk aspects more into account when making corporate and social decisions in order to decide more consciously how we as a company or society want to deal with them and how we want to arm ourselves against them.
Risk management is also becoming increasingly important for SMEs
To ease the burden on SMEs, companies with less than CHF 40 million in sales or fewer than 250 full-time employees were exempted in 2013 from the CO requirement to publish a risk assessment in the notes to the annual financial statements. The requirement had been introduced just five years earlier. Germany, meanwhile, goes one step further in terms of risk management. Instead of a classic risk assessment, an auditing standard has recently been introduced that requires risk aspects to be taken into account in all important business decisions - so that companies can also take precautions for cases that no one really expects.
About the author
Max Keller studied economics at HfWU Nürtingen and is currently completing a master's degree in digital business at HWZ. He heads the Funk RiskLab, founded three years ago at the Radio group in Switzerland. In addition to risk consulting and the development of new tools, his team analyzes the annually published risk rankings of renowned organizations and summarizes them in the Funk Global Risk Consensus. The following studies are evaluated: Allianz Risk Barometer: Survey of 2700 risk management experts in 102 countries; WEF Global Risks Report: survey of 800 members plus a survey of 200 members of WEF's Global Sharpers Community; Business Continuity Institute Horizon Scan Report: Survey of 9,000 members in more than 100 countries; CEO Survey by PwC: Analysis of almost 1,600 questionnaires from more than 80 countries; Executive Perspective on Top Risks, a project of North Carolina State University and the consulting firm Protiviti: Survey of more than 1,000 boards of directors and CEOs worldwide.
