Better efforts are needed to understand, measure and foresee the evolution of inter-dependencies between risks, points out a recent World Economic Forum report.
The ninth edition of the World Economic Forum report, titled “Global Risks 2014″, highlights that moving from urgency-driven risk management to more collaborative efforts to strengthen risk resilience would benefit global society.
Ten global risks of highest concern in 2014
The WEF report argues that the risks of highest concern to respondents are fiscal crisis in key economies, structurally high unemployment and underemployment and water crises. The following table highlights the top 10 global risks of highest concern:
The report points out that the risks perceived to be most interconnected with other risks are macroeconomic – fiscal crises, structural unemployment and underemployment – with strong links between this macroeconomic risk nexus and social issues, such as rising income inequality and political and social instability.
The report considers a core set of 31 global risks in five categories: economic, environmental, geopolitical, technological, and societal.
The following graph plots the aggregated survey responses on the perceived likelihood and impact of the 31 risks. The global risks are grouped in four quadrants as delineated by the averages of their overall likelihood and impact.
As can be deduced from the above graph, most risks cluster around the two upper quadrants, which identify risks with high impact.
The following table captures the five risks considered the most likely and most impactful since 2007:
Risk interconnectedness
The WEF report points out that while the 31 risks have been separated out for analytical purposes, the numerous and complex interconnections between these global risks can create consequences that are disproportionate and difficult to contain or predict.
The following Global Risks Interconnections Map seeks to connect the dots by identifying and visualizing the underlying patterns:
The report points out that kind of analysis allows for a better understanding of the impact of systemic risks so as to mitigate them by identifying the transmission channels between risks and potential second- and third-order effects.
Strategies to manage risks
The WEF report highlights that the risk analysis and management process is broadly the same across most firms, as can be deduced from the following graph:
However, there is a wide spectrum of ways in which each step of the process is carried out. For instance, the following graph highlights the level at which risk identification, prioritization and assessment are performed in various firms:
