Workstream 1:
Strategic Guidance & Convergence

Guide the integration of Climate and Disaster Risk Finance and Insurance solutions in global climate change and resilience frameworks

Perspective: Towards a More Resilient World

Managing global risks in the new age of growing complexity

by Professor Markku Wilenius

Transition to a new era

What do such wide-ranging global phenomena as the financial crisis dating from 2008, the truly alarming rate of climate change over the last ten years and the current pandemic-driven economic meltdown have in common? The one common denominator is that a) they came as a complete surprise for 99% of people and b) they all have far-reaching consequences for our global systems.

In addition to a general answer, there are also some specific answers to the question as to why these kinds of event occur. The general answer is that these events all are results of the dramatic rise of complexity in our societies, boosted by fast-forward economic globalization and an escalation of new technologies. It is precisely at this point that the probability of any unexpected major events – we may call them X-events – will increase. The specific answers range from wilful blindness to the housing-market bubble and allowing greenhouse gases to increase unchecked through to systematic animal exploitation.

The ultimate outcome of this furious global development is obvious: We are now entering a new, often turbulent era with unprecedented challenges and opportunities¹. This new age calls for new ideas, structures and systems with which to tackle and manage the global risks of this century. In the most recent Global Economic Forum Risk Report, six out of the seven major threats identified were environment related².

At the dawn of this new era, we find that our 20th century national and regional control mechanisms, coupled with often relatively weak supranational mechanisms such as the United Nations, are inevitably outdated. Whether for purposes of prevention, aversion or adaptation, it is clear that we will need new tools that better address the vulnerabilities lying ahead.

The systems perspective teaches us this important lesson: If we want to properly address the complexity of the problems we face, it is critical that the management mechanism reflects that very complexity of the system. From this vantage point, we need institutions and mechanisms that resonate with the growing impact of the new hazards ahead.  Moreover, we need a keener awareness and understanding that will lead to real action.

All this explains why we so desperately need mechanisms that will protect us from the risks caused by our ruthless interventions in the natural environment. Climate and disaster risk insurance cover is a viable measure for the growing number of entities that are exposed to extreme events. Governments are increasingly integrating climate and disaster risk insurance and other risk-finance instruments in their comprehensive risk-management strategies as they struggle with the financial impacts of climate shocks. Since climate change is throwing economic stability into jeopardy, we will need to find new ways to deal with the unprecedented situation. Insurance is an effective measure of climate adaptation, helping to effectively address and control risks. As the global economic losses from disasters are now averaging more than USD 300 billion a year, it is time to make use of financial protection. What we need to do is plan ahead so that we can better manage the costs of disasters, guarantee predictable and timely access to much-needed resources and ultimately moderate long-term fiscal impacts³. We need measures that are proactive and that match the complexity of the problem.

¹ See for example IPCC 1.5℃ -Report.
² This report was compiled before the Covid-19 crisis.
³ See the report on Sovereign Climate and Disaster Risk Pooling.

Shifting from risk to uncertainty

In the post-Covid-19 world, it seems that there are various alternative pathways to the future. The very recent report by the World Economic Forum’s Global Risks Advisory Board states that after Covid-19, the world might be much more nationalistic, conflictual and divided than before. On the other hand, it is also possible that we will move towards a stronger collective awareness and global action.

Needless to say, we need a much more resilient and sustainable global system. That system will need to exhibit the following properties in the face of new and emerging global risks: a) relevant information is readily exchanged around the globe, regardless of its point of origin, b) decisions are made swiftly and acted upon without delay and c) implementation takes place on a global level. The fight against the current pandemic has made the lack of global leadership amply clear, with catastrophic consequences for many economies. Given the vast numbers of deaths involved, coupled with a massively increased debt burden, recovery will be an extremely long and arduous journey.

All this highlights the imperative for us to work more closely together in order to address and manage our common concerns in a world that has become dramatically globalized over the past 15 years. We need more resilience in our systems, which means we need to envisage a new era in which governments build much stronger bonds of coordination and cooperation when a global threat emerges. Whether the challenge is to prevent health risks from growing into pandemics or to build effective measures against climate change escalation, in the post-Covid-19 world we must be able to do everything far better than we have so far. The costs of the failure of our current system to respond rapidly and adequately are simply too high, both for governments and for individuals, families and other entities.

The lessons from the current pandemic come from three different streams: First, the sluggish response of large countries such as the US and Brazil has cost them dearly. In the future, it is imperative that the response is swifter and firmer. Second, global coordination has been woefully weak. The World Health Organization’s budget is roughly the same as that of an average hospital, so it is unreasonable to expect anything else. Moreover, governments must have an obligation to take its advice. In the current pandemic, many countries have taken scant notice of its warnings. We need some basic common rules and an institution that is mandated to do the job. Thirdly, even if there has been increased scientific collaboration to understand the virus and to develop a vaccine, there is still too much information hoarding because of perceived financial interests or for other reasons. To ensure a fast and effective response on a sufficient scale, it is essential that science collaboration is further stepped up. Science-based information is the only real option for building our actions on knowledge rather than vague political assumptions or vested interests.

In an age of growing complexity, we will be entering a world where traditional risk calculation loses some ground while understanding uncertainties assumes paramount importance. Quantitative forecasting with probability estimates may be adequate under conditions of rather deterministic, natural systems that contain only a few variables and feedback loops. But in a world of dynamic and structural uncertainty, this approach will no longer be good enough. What we will need are qualitative scenarios that incorporate factors that cannot be modelled in, including so-called wild cards and black swans, events that in normal risk calculations hardly figure at all, yet in the real world may surface as a result of unknown factors.

While we still need certain quantitative instruments to calculate the risks for insurance products and we need past data to ensure our projections, we also need – in an age of rising complexities – new, more qualitative approaches to assess risks for which we have no historic data. This is because the use of quantified probabilities, even those derived from rigorous trend analysis, may produce either grossly inaccurate or overly self-confident outcomes when it comes to new kinds of uncertainty.

In a world of uncertainty, the only possible salvation is to prepare for a wide range of eventualities and to have the readiness to mount an immediate response if something unexpected appears on our radar.

 

While we still need certain quantitative instruments to calculate the risks for insurance products and we need past data to ensure our projections, we also need – in an age of rising complexities – new, more qualitative approaches to assess risks for which we have no historic data.

This is because the use of quantified probabilities, even those derived from rigorous trend analysis, may produce either grossly inaccurate or overly self-confident outcomes when it comes to new kinds of uncertainty.

What are the alternative pathways?

What we need, then, is more insight, a more holistic understanding of what is actually going on. Making better use of qualitative tools to assess future options will pave the way to expanding our horizon and thinking of global development in terms of directions. Let us consider this in the context of the post-Covid-19 world. Five different scenarios can be extrapolated to highlight different possible outcomes4:

All these outcomes are possible in the not-very-distant post-Covid-19 times. Indeed, it is hard to identify any one scenario as much more likely than others. However, what we can do at this stage is think in terms of resilience.

4  The author is grateful to the team of foresight experts at the Stockholm Environment Institute for highlighting these scenarios.

Towards a more resilient world

Resilience means retaining the capacity to act even in unexpected situations. As we move towards post-Covid-19 times, we should focus on increasing our resilience in the following domains:

1. We clearly need a transnational institution with genuine global coverage that can provide the tools we need to deal with highly interconnected, cross-sectoral risks and uncertainties. That institute should assist national governments in assessing their options under various scenarios.

2. We need more scientific and evidence-based policies. The Covid-19 crisis has taught us how important it is to know and understand the real underlying reasons for major crises and to build evidence-based policies on that basis. The countries that turned to experts for advice and took firm and early action fared the best in the coronavirus crisis. The same should hold true with regard to the even bigger problem that is now on our doorstep: the climate crisis.

3. We need to define the specific roles of different institutions on the ground. To that end, we need to endorse many more activities for different networks of local organizations. At the same time, we need to invest much greater effort in stepping up global collaboration, as exemplified by the InsuResilience Global Partnership and its vision to strengthen the resilience of developing countries.

The irrefutable fact is that we have reached a point now where, much more than ever before, we have to envision the kind of future we want. From there, using the back-casting method – building a roadmap from future to present – we can build a vision that should guide us to the future and help us steer clear from the path of short-term opportunism.

Future, ultimately, is for those who can imagine it, design it and execute it. In the new world we are entering, we need to lean to the future, not to the past.

The Author

The author is professor of futures studies at the University of Turku, Finland, who currently works as a Dean of Dubai Future Academy. He has also been appointed to the UNESCO Chair of Learning for Transformation and Planetary Futures. He has worked for several years as a senior executive at Allianz SE.

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