Globalisation tidal wave creates new risk pathways: Lloyd’s

July 14, 2010 – Globalisation over the past two decades has surged like a tidal wave. Whilst it has made the majority of us healthier, wealthier and wiser about our planet, the financial crisis has shown it also leaves society exposed to systemic risks that, if the wave breaks, require international co-operation to predict and prevent rather than react and solve.

Over the past 20 years, as national barriers to the flow of goods, capital and people have broken down, the world has become increasingly interconnected. The removal of these barriers has helped businesses to expand and economies to grow, but has also created pathways across borders for new risks to spread.

Businesses must manage more complex supply chains. Outsourcing and the internet have made companies more vulnerable to infrastructure failure and criminal attacks, and pandemics can be propelled around the world in days by the flow of carriers through busy transport hubs.

A new report examining the risks associated with globalisation was launched today at a Lloyd’s conference in London. The report, Globalisation and Risks for Business, examines in detail how globalisation has improved our society, but also led to increased political, economic, health and cyber risks.

The conference brought together over 200 representatives from business, the media and academia to discuss and debate the merits and risks of what is arguably the greatest phenomenon of the past 50 years.

Analysing the new risks to business at the conference in London today, Chairman of Lloyd’s, Lord Levene, said:

“Distance is no longer nature’s insurance policy which insulates you from the disasters and tragedies happening halfway around the globe. From pandemics, to supply chain failures, globalisation means that businesses are exposed to events which happen far away from their head offices.

“However, we remain strong advocates of world trade and free markets. We cannot go backwards. We should not be protectionist. Instead we must manage these risks better. Business models, and particularly our risk management systems, must change as the risks change.”

Lord Levene warned that the financial crisis was only the first example of the systemic shocks of globalisation. The report calls for governments and businesses to work together at an international level to predict and prevent the aggregation of these risks in the future.

Dr Ian Goldin, report author and Director of the University of Oxford’s James Martin 21st Century School, said:

“The political, economic and technological revolution, together with population growth and urbanisation, has brought huge benefits. However, it also has transformed the nature of risk.

“Physical and virtual proximity has led to new forms of systemic risk, which transmit much more rapidly and further, leapfrogging traditional risk boundaries. Businesses and governments failed to keep pace with the rapid growth of globalisation leaving blind spots in the supervision of systemic risks. This presents unprecedented challenges which need to be addressed.”

The report urges companies to build their own resilience against systemic risks by:

  • conducting risk audits, which include contingency and disaster management plans;
  • stress testing for low-probability catastrophe scenarios;
  • examining and enhancing industry codes of conduct; and
  • working with governments to monitor risk aggregation and educate society to ensure the nature of risks is understood.

Lloyd’s believes that globalisation remains a positive force. It will drive more people out of poverty and isolation through global trade and investment and the free-flowing exchange of information and ideas.

Businesses will continue to benefit from global markets opening up. However, the re-emergence of protectionist tendencies presents a challenge for businesses to overcome by better controlling and managing their own risks.

About Lloyd’s

Lloyd’s is the world’s leading specialist insurance market and occupies fifth place in terms of global reinsurance premium income, and is the second largest surplus lines insurer in the US. In 2010, 78 syndicates are underwriting insurance at Lloyd’s, covering all classes of business from more than 200 countries and territories worldwide. Lloyd’s is regulated by the Financial Services Authority.