Financial crisis only the first systemic shock

While globalisation has brought many benefits it also leaves society and businesses open to systemic risks, according to a new report from Lloyd’s.

The report, ‘Globalisation and Risks for Business’, produced by Lloyd’s 360 Risk Insight and Dr Ian Goldin, found that while the increasing interconnectedness of countries has helped businesses to expand and economies to grow, the removal of barriers had also facilitated the spread of risks, leading to increased political, economic, heath and cyber exposures.

Lloyd’s chairman Lord Levene warned that the global financial crisis was only the first example of the systemic shocks of globalisation.

“Physical and virtual proximity has led to new forms of systemic risk, which transmit much more rapidly and further, leapfrogging traditional risk boundaries,” added Goldin, who is director of the University of Oxford’s James Martin 21st Century School. “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 highlights six main exposure areas arising from globalisation: economic and financial risk, global pandemic risk, infrastructure risk, supply chain risk, food security and geo-political risk.

It urges companies to build resilience against systemic risks by conducting risk audits, stress-testing for low-probability catastrophe events, examining and enhancing industry codes of conduct, working with governments to monitor risk aggregation and educting society to ensure the nature of risks is understood.

While outlining the risks associated with globalisation, Lloyd’s believes it remains a positive force. “We remain strong advocates of world trade and free markets,” said Levene. “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.”