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  • January Article: Risk Management

    By Leon Grove, DBA, Full-Time Faculty  
    Published January 2014

     

    Managing Risk

    The importance of risk management is significant to the understanding of emerging risks; the development of emerging risks can affect the world’s economy. The landscape of emerging risks is shifting more rapidly than ever; insurers and reinsurers are developing integrated approaches to identifying and mitigating emerging risks. The emerging risks today are assessed mainly as a reactionary approach due to loss experiences; however, due to the faster pace of change, insurers and reinsurers will require a more anticipatory approach to charting the rate at which changes occurred in the past to create ways to develop pre-emptive processes to manage such changes in the future.

    Emerging Risks—Think the Unthinkable

    The anticipatory approach to identifying emerging risks in the future is difficult, simply because the human mind is not conditioned to “think the unthinkable.” Therefore, in risk management we are challenged by the limited reference point of our experiences in trying to discover the unknown. From a risk management viewpoint, the term “emerging risks” challenges us to identify, qualify, and assess the probability of things beyond our experience. Although the challenges pose certain risks to predictability, the probability of emerging risks helps insurers and reinsurers to gain a perspective or an insight on how bad something could be and how likely an event is to happen. If and when such an event does happen, insurers and reinsurers can implement strategies for mitigating losses.

    While emerging risks covers both unknown cost of known events or risks and unknown cost of unknown risks, some experts may find it harder to imagine the unknown. Here are some emerging risks that merit consideration:

    • Global Cyber-Attacks
    • Political Risk
    • Natural Disasters

    The three emerging risks listed above are emerging risks that have the propensity to affect the world’s economy. The systematic cyber-attacks to financial institutions could cause a global crisis risk to both emerging and developed nations. The advent of cloud computing may be a way to mitigate the loss of data and systems capabilities, but such systems are still vulnerable to cyber-attacks.

    The Arab Spring marked the turn of the political process for many of the Arab nations to protest and to oust political regimes; this process has spread to other parts of the world. The unthinkable here is: Could the process of pushing political leaders out of office and removing the powers of government in this fashion happen in America? The last sentence is an emerging risk factor that may be unthinkable.

    The ever-changing and unpredictable change is evident; changes in the global climate can create catastrophic destruction through natural disasters. We have seen recent climate changes affect people and property in the Philippines with Typhoon Haiyan in 2013, Super Storm Sandy throughout the East Coast in 2012, Haiti’s earthquake in 2010, China’s earthquake in 2008, and Hurricane Katrina that devastated New Orleans in 2005.

     

    Leon Grove is a full-time faculty member at Kaplan University. The views expressed in this article are solely those of the author and do not represent the view of Kaplan University.

     

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