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RISK MANAGEMENT

Resilience efforts face challenges

Leadership needed to tackle huge issues

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Tom Ridge
Tom Ridge

WASHINGTON — Governments' response to disasters sometimes can actually harm efforts to promote resilience.

The convergence of manmade and natural disasters can make the task of dealing with resilience that much more difficult.

That was the assessment of speakers and attendees during a Washington event earlier this month hosted by Lloyd's of London and Washington-based risk management consultant Risk Cooperative.

The summit, Pathways to City Resilience, reviewed the findings of “Lloyd's 2015-2025 City Risk Index” and examined ways to improve resilience, particularly regarding infrastructure.

“Resiliency is a journey that will never end,” said Tom Ridge, former U.S. secretary of Homeland Security and chairman of Washington-based consultant Ridge Global L.L.C.

Doing business in the 21st century requires building a culture of resilience that has to begin in the C-suite, he said. “Everyone has a role to play, from the boardroom to the loading dock.”

But governmental entities can inadvertently get in the way of promoting resilience, some speakers and attendees said.

Moral hazard exists on the governmental side “in that it misprices risk,” said Risk Cooperative CEO Dante Disparte. Rebuilding structures as they were predisaster “can preclude innovation in building more resilient structures.”

“Government treats risk as if it were a surprise event,” he said in an interview. “We need to think about budgeting or large losses. We know large losses will occur. We shouldn't treat them as a surprise.”

“With the growing complexity and interconnectedness of risk, not just in the U.S. but globally, the importance of the economic and behavioral signals insurance can send is growing,” said Francis Bouchard, a managing director at Washington-based consultant Hamilton Place Strategies. But he also said governments can distort such signals by relying on nonrisk factors to drive decisions.

That “poses fundamental challenges to the types of public-private partnerships needed to tackle society's greatest risk challenges,” said Mr. Bouchard. Issues including cyber security, climate change and aging populations all face the same dilemma.

“With these hazards, you're talking about something that doesn't happen very often,” said David Snyder, vice president-inter-national policy in the Washington office of the Property Casualty Insurers Association of America.

“Then when you combine that with the perception that the government will come in and bail you out, you have a prescription for moral hazard and not taking prudent steps in advance to reduce your risk,” he said. “That's true of communities, that's true of individuals and fosters a sort of short-termism. That's what makes the role of insurance, which is a long-term proposition, particularly important.”

Natural, manmade risks collide

But the nature of risk itself is changing, with the biggest issue being “the collision of manmade risks with natural ones,” said Daniel Wagner, CEO of Bethel, Connecticut-based consultant Country Risk Solutions. An outbreak of Ebola in 2014 and 2015 serves as a reminder of how little is within our control, he said.

“It's new for the simple reason because we had previously been accustomed to thinking about risks being in silos,” said Mr. Wagner, who has written a book which will be available later this year titled “Global Risk Agility and Decision Making” with Mr. Disparte. But manmade and natural risks have risen in intensity, so they now collide.

He cited as an example climate change, pointing to the cyclone that ravaged Fiji earlier this month with winds gusting in excess of 200 mph.

“We're having hurricanes with record levels of intensity almost monthly in 2015 and 2016,” Mr. Wagner said. “That's having profound impacts wherever it hits,” affecting migration patterns and the ability to grow crops, he said.

He said manmade and natural resources risk can collide in the corporate world as well, as happened with Volkswagen A.G.

“Here's an organization that made a decision about how to address an environmental and commercial risk,” he said. In making the choices they did and failing to make certain choices, they “created a problem that is much more severe than they could have imagined.” He said the result is a threat to the company's very existence.

Risk managers have not made the transition to the new world where the collision is occurring, and some don't realize the change is happening, Mr. Wagner said.

“It's important for every risk manager to become a decision-maker, and every decision-maker to become a risk manager,” he said.

“It's all about silos,” said Mr. Snyder. “What can really create a widespread disaster is when the natural disaster strikes a particularly sensitive critical infrastructure like what happened with the tsunami (in Japan following a massive earthquake in 2011), or part of a global supply chain.”

“The other junction to be concerned about is when cyber attacks begin to impact the real world beyond simply the loss of data, such as systems that operate transportation and water systems and the power grid itself,” he said. “So it's a combined challenge for both government and the private sector — particularly insurance — to make the case to an otherwise skeptical public.”

The Obama administration is aware of the need to promote resilience, said a White House official who addressed the summit.

“Most of our infrastructure was built to withstand historical norms,” said Alice Hill, special assistant to the president and senior director for resilience policy at the National Security Council. “But the historical norms are not turning out to be good guides for the future.” For example, Ms. Hill said that the effect of projected climate change has to be taken into account in infrastructure planning.

Infrastructure needs to be designed and built in a manner that will withstand threats possible throughout the life of the building. “Our goal should be to build it right that first time, not have to rebuild it twice,” she said.

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