Coronavirus heightens current challenges, creates future fallouts

By John Scott, Head of Sustainability Risk, Zurich Insurance Group

We are in a healthcare crisis that is also an economic crisis combined with an energy crisis. Add to that a looming humanitarian crisis in some emerging economies, and you have a multitude of challenges, all of which are exacerbating geopolitical risks. How will these crises play out over the next 18 months, and what does it mean for the actions we take today?

The World Economic Forum, in partnership with Marsh & McLennan and Zurich Insurance Group, has prepared the report COVID-19 Risks Outlook: A Preliminary Mapping and Its Implications. The report is informed by the views of nearly 350 senior risk professionals and identifies the main emerging concerns and fallouts, analyzing the pandemic's implications and effects. This goes beyond the immediate crisis response, providing insights on the current and future global risk landscape.

Challenges of the coronavirus include balancing fear and optimism

The length and depth of the current economic crisis will depend on solving the healthcare crisis with an exit strategy involving a combination of an effective, widely available vaccine and therapeutic drugs. Meanwhile, governments around the world are trying to manage the delicate balance between controlling transmission and returning some people to economic activity. The stakes are high, not only in the obvious health and economic consequences of miss-steps, but also in managing public perceptions of risk.

Sir John Templeton, the British investor, banker, fund manager and founder of the Templeton Growth Fund, once said, “The biggest mistake in investment is to think that this time it’s different,” but this time it really is different. The difference is that this economic crisis is combined with a healthcare crisis and people are afraid of death. The challenge is to return to the “new normal” and reconcile the natural fears we feel, with acceptance of the uncertainties, aided by a risk management architecture that helps manage the trade-offs.

The fears we feel are real, reinforced by government messages, the data we read daily on infection rates R0 and the sad reality of the actual numbers of COVID-19 deaths, in particular the data on “excess deaths” that are only now being made public.¹ These have driven public behaviors that have controlled transmission and reduced deaths in many countries, but we now need to cautiously find ways, especially in the business community, of responsibly allowing society to adapt and manage the false dichotomy of public health and economic well-being.

Risk interdependencies

These crises also highlight the interdependencies of the global risks triggered by the COVID-19 pandemic. Make no mistake, we are experiencing a historic event that will change many aspects of the world we live in, the geopolitics, the economic impact on many industry sectors, the competitive business landscape, the long-term societal impacts  such as an exacerbation of inequality, consumer behaviors, the nature of work and the role of technology both at work and at home.

Economic risks are the most likely and concerning fallout, in particular the risk of a prolonged recession of the global economy. That in itself is not surprising, as recent International Monetary Fund (IMF) reports show that the global economic impacts have intensified since the IMF forecast last month.² These economic risks also have far-reaching environmental, societal and technological implications and interconnections. An increase in indebtedness, both public and private, will inevitably push some companies into bankruptcy and challenge the efficacy of current social protection systems, their funding and private savings in general.

In addition to the dangers to public health, the pandemic and the resulting lockdowns and shutdowns could have long-lasting effects on people and societies. High structural unemployment and the speed of economic recovery is likely to affect consumer confidence and exacerbate inequality, mental health problems and lack of societal cohesion. It is also likely to widen the wealth gap between young and old and pose significant educational and employment challenges that risk a second lost generation³.

One of the most important fallouts for the world of dealing with such a global crisis as COVID-19 is ignoring other existential global risks, in particular a shortfall of activity to address sustainability risks, especially climate change adaptation and mitigation.⁴ As countries emerge from the immediate health crisis and reboot their economies, changed working practices and attitudes toward traveling, commuting and consumption might make it easier to find business opportunities to capitalize on a lower carbon and more sustainable recovery.⁵ Responsibly allowing society to adapt and come back, clean, green and to develop through sustainable growth with people and communities at the center of society.

Although technology has been central to the way people, companies and governments have managed the COVID-19 crisis, it is also challenging the relationship between technology and governance, while mistrust or misuse of technology could have long-lasting effects on society.⁶ Distance is back; borders have returned, as have local communities, but technology is allowing a return to a more global world again. We are seeing technology enabling the contact-free economy, such as telemedicine, online retail and social distancing delivery, such as click and collect. New business and employment opportunities are being created in these sectors, but a greater dependence on technology has also increased cyber security risks.

Business and policy considerations

In a time of great uncertainty, decisions are being taken today by governments and businesses that will determine how these risks or opportunities emerge and play out. In particular, these include:

• To what extent do we manage the operational trade-offs between a quick return to work, but still protect our employees, customers and society more broadly?
• At a time of change for our business, with changing industry structures, changing competitive positions, how do we not only survive, but also find the silver linings?
• How can we accelerate our commitments to sustainability and drive a low-carbon transition?
• How will consumer behaviour change in our sector and how will that affect our propositions and the way we deliver them?

Recommendations to move forward

For risk managers and business leaders, in addition to all the current risk management activities designed to protect employees and customers in the immediate crisis, there are a number of recommendations of how to deal with this future uncertainty:

• Use skills developed in economic scenario modeling to apply to COVID-19, using a range of scenarios to explore how the future may develop and create agile responses.
• Build scenarios into existing risk models to understand the impacts of different recovery rates on business, operational, credit or market risks.
• Split your teams, with one team to manage the immediate consequences of COVID-19  and focus on bringing back business, while the second team envisions the future and finds new opportunities as the competitive landscape and customer behaviors change.
• Ensure that appropriate measures are in place to protect physical and other assets that are currently idle, or repurposed, so that they can be restarted quickly once normal business activities are resumed.

References

¹ BBC News article by Robert Cuffe, Head of Statistics “Coronavirus: How Many People Have Died in the UK?” https://www.bbc.com/news/health-52623141
² FT Article by Jonathan Wheatley 12th May 2020 “Global economic outlook still worsening, says IMF”
³ The Herald Scotland article May 6th 2020 by Alistair Grant “Coronavirus in Scotland: Warning over “lost generation” of vulnerable children”
⁴ IMF. 2020. Policy Tracker. International Monetary Fund. 1 May 2020. https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19#J
⁵ BBC News article by Roger Harrabin 6th May 2020 “Climate change: Could the coronavirus crisis spur a green recovery?” https://www.bbc.com/news/science-environment-52488134
⁶ BBC News article by Cristina Criddle & Leo Kelion 7th May 2020 “Coronavirus contact-tracing: World split between two types of app” https://www.bbc.com/news/technology-52355028