Risk management in the era of unpredictability

Leon Gettier in the Sydney Morning Herald: The floods that ravaged Queensland and Victoria are a warning for businesses to overhaul their risk-management strategies. They are events that tell us we are now in a very different world.

How different? Erwann Michel-Kerjan, managing director of the Wharton Business School's Risk Centre in the US and chairman of the OECD secretary-general's advisory board on financial management of catastrophes, says that in the 21st century there has not been a six-month period without a major crisis that simultaneously affected several countries or industry sectors. We are seeing more and bigger catastrophes created by increasing urbanisation, climate change and globalisation. The world has become an interdependent village.

…It's fair to say that the floods did not figure highly in risk-management strategies. Woolworths has cut its net profit growth guidance to a range of 5-8 per cent, from 8-11 per cent, partly due to uncertainties presented by the floods. Virgin Blue announced a $40 million hit because of floods and fragile consumer sentiment. Treasurer Wayne Swan says the floods will have a ''dramatic'' effect on the budget and IBISWorld has downgraded Australia's GDP forecast from 2.9 per cent to 2.6 per cent.

We now see forecasts of a worldwide impact on the supply and prices of commodities such as cotton, wheat, sugar and other foodstuffs, and coal, which will in turn put pressure on utilities reliant on coal-based energy generation. Climate specialists say global warming has contributed to the disaster, with record ocean temperatures around Australia and, from July to October, record rainfall and humidity.

…Some commentators describe the floods and La Nina as a ''black swan'', the kind of low-probability event like natural disasters, pandemics and terrorists slamming planes into buildings, described by Nicholas Taleb, events that no one predicted. That is not strictly true, though. In Australia, floods, droughts and bushfires are hardly unpredictable. They are part of the natural system….

A pair of black swans, shot by Sannse or perhaps Pixel ;-), Wikimedia Commons, under the Creative Commons Attribution-Share Alike 3.0 Unported license