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The Sun Hates You

You would never know it amid the cloudy, 40-degree weather here in Boston, but the sunny days of summer will be with us before you know it. The thing is that while many of us (particularly my fellow Northeasterners)  look forward to a little more sun in our lives, I’m not so sure the sun has our best interests at heart. I attended a session on solar storms the other day at RIMS 2010 and basically learned that there’s a good chance that the sun will be wreaking havoc on our cushy modern lives sometime in the not-so-distant future.

According to Dr. Sten Odenwald, a NASA astronomer, our sun is gearing up for what is called the 24th cycle–a period of increased sunspot activity, known to result in an uptick in solar flares and coronal mass ejections (massive jets of plasma that shoot out from the sun’s surface) that can effect the earth’s magnetic field. This sort of solar activity can damage GPS and satellite systems and cause power grid problems that evidently we are not prepared to deal with. In past periods of increased solar activity, earthlings have experience everything from TV and radio interference to a general increase in feelings of anxiety and panic. Airline traffic has had to be rerouted away from polar areas because radio communication is imposible. Satellites are degraded, shaving years off their useful lives and requiring millions of dollars of replacement or repair costs. Cosmic rays can fry sensitive computer components causing errors, glitches, of even total system failures. Basically it’s a mess.

But the real problem is that today, we are so much more dependent on technology than we ever were. We have a lot more to lose. John Kappenman of Storm Analysis Consultants pointed out that the power grid is particularly vulnerable. Many of the high-voltage transformers that we depend on to run just about everything are not adequately protected from exposure to cosmic rays and considering how costly and time-consuming these transformers are to replace (it takes a year or more just to build one), we would have a real problem if one goes down and,  say, takes out the power for the entire East Coast. According to estimates, about 130 million people are at risk in the most probable areas of power failure in the United States and we could see $1-2 trillion dollars in economic losses in the first year alone from a particularly bad, and unfortunately not unprecedented, solar storm. It’s a risk that sounds like the plot of a bad science fiction movie (I’m thinking something with Nicholas Cage) but its actually not even a little far-fetched.

The presenters were of the opinion that we need stronger design codes mandated by the government to prevent a sloar catastrophe. It certainly seems like a fine idea to me. Personally I’m thinking of starting my own sun worshipping cult. At the very least, it can’t hurt to get on the sun’s good side, right?

the sun

Swan Sighting

This has been a pretty content-rich conference, but today is the day I have been waiting for.

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Today, Nicholas Nassim Taleb is the RIMS Leadership Luncheon keynote speaker. If you don’t know who Taleb is, you really ought to.

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He is a veteran trader, professor at New York University’s Polytechnic Institute and is best known for his book, The Black Swan: The Impact of the Highly Improbable, in which he notes that history is largely defined by very low probability, very high impact events, on a scale that suggests such events are so rare as to be unforeseeable, and so severe as to be context altering. It is a book that I have heard more than a few risk managers describe as the risk management manifesto for the 21st century.

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Listen up! This man knows risk.

Listen up! This man knows risk.

Black Swan events, as defined by Taleb, have been referenced in over 600 books, according to Taleb’s website, and even Taleb himself is under a self-imposed media blackout until May, when the second edition of The Black Swan is released in May with over 100 pages of new content (On Robustness and Fragility). I cannot wait to get a copy.

If you are attending RIMS 2010 Boston, then run, do not walk, to this event and hear this man speak. He has forgotten more about risk than most experts and consultants will ever know. In the meantime, I’m going to leave you with an article he recently published in the Financial Times, entitled “Ten principles for a Black Swan-proof world.” Good stuff.

See you this afternoon. He’ll be speaking at the luncheon event, which runs from 12:30 to 2:00. Afterwards, he’ll be signing books at the RIMS booth from 2:15 to 3:00.

Be there.

RIMS 2010: Global Risks, Local Impact Session

I trekked over to New Hampshire — or at least it seemed that way after the amount of time it took to get to the very interesting session titled Global Risks, Local Impact: The View from Davos. Speaking on this topic were Brian Elowe and John Merkovsky, both with Marsh, who spoke about the World Economic Forum’s (WEF) Global Risk Report 2010. If you’re asking yourself, “Self, what does it take to be a global risk?” Then I have the answer. It takes:

  • Global scope
  • Cross-industry relevance
  • Uncertainty
  • Economic impact
  • Public impact
  • Multi-stakeholder approach

The World Economic Forum also defines five types of risk: societal, geopolitical, technology, economic and environmental. In analyzing the global risks for 2010, the WEF focused on three key themes:

  1. A higher level of systemic risk (the financial crisis, for example) and what the Elowe and Merkovsky referred to as a “retrenchment from trade”
  2. Slow failures or “creeping risks” or risks that manifest themselves over a long period of time (for example, population growth and natural resources shortage)
  3. Global governance gaps or a lack of governance to address risk

“If countries go to war over oil, imagine going to war over water.” — Brian Elowe, when discussing the issue of water scarcity.

The WEF report stated that the biggest global risk is asset price collapse considering that there are a significant number of asset bubbles that still exist (such as housing). Following closely behind — the second biggest global risk is the Chinese stock market because of its artificially high prices and uncertainty around exchange rates and regulatory regimes.

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The third most significant global risk is the ongoing fiscal crisis. The WEF is concerned with all the debt that countries are accumulating, stating that some areas are nearing debt of 100% of their GDP.

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Also of concern is chronic disease and the increasing problem of the general health of society considering the sedentary lifestyle and less nutritious foods that have become popular.

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The report also delves into risks that are emerging, such as the increase in global crime networks.

So how can companies apply the knowledge of these risks to their business?

  • Test assumptions in underlying strategic plans and capital investments
  • Understand and monitor the complex and changing interrelationship between systemic risks
  • Identify emerging opportunities within emerging trends or events

Both Elowe and Merkovsky stressed the importance that companies and risk managers take a long-term view when analyzing risks, suggesting firms take a 10-year (or more) approach, instead of the usual two-to-three-year corporate risk assessment.

All in all, a great session!

Joe Plumeri’s Top 10 Risks for 2010

It’s a risky world and according to Willis Chairman and CEO Joe Plumeri, it’s only getting worse. From volcanoes to oil rig fires to high-profile SEC investigations (and that’s only in the last few weeks), disasters that were once unheard of are becoming almost commonplace and outliers seem to be the rule rather than the exception. “It’s almost like in a given week there are more black swans than white ones,” he said today in an entertaining and informative talk at RIMS 2010.

Plumeri doesn’t think that the increase in disasters is a coincidence–this is just how the world is now. And risk managers need to adjust their thinking to take this new reality under consideration. “The world has changed,” he said. You have to do what is necessary to prepare and protect your organization. If there’s a gap, you have to change it.”

To that end, risk managers need to think about what the biggest risks to their businesses actually are. Plumeri’s list kind of reads like the perfect editorial calendar for a risk management magazine, like, say, mine.

10. Reputation
9. Piracy
8. Cybersecurity
7. Globalization
6. Cost and availability of credit
5. Regulation and compliance
4. Market cap risk
3. Pandemics
2. Terrorism
1. Climate change

The interesting thing, Plumeri said, was that many of these risks are things that would never have occurred to risk managers years ago. “Growing up, the only terrorist I knew was my brother,” he joked. But, as he pointed out, these are the types of things that can have the biggest impact and risk managers need to be ready.