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include International Organizations, Banks, Reinsurance Companies and Consulting Firms. We have also
identified the common risks within each institutional cluster.
The risk landscape below portrays both common and unique risks identified in each of the four institutional
clusters. It is divided by four different color themes ranging from dark to light tones from the core to the border
areas. The most common risks identified in each cluster by three or more institutions are positioned nearest to the
core and are depicted by the darkest tone. The middle ring shows the common risks identified by at least two
institutions and is depicted by the mid-range tone. The outer-most ring shows the unique risks identified by
institutions and is depicted by the lightest tone. The risks, while compared within each cluster, are not compared
across all four clusters, as each cluster has a unique perspective on risks. In addition to this "risk landscape", we
have produced four separate summary tables which will list and compare the risks identified by each institution
within the four clusters.
In summary, the common risks identified by International Organizations include Health Risk, Natural Disasters,
Macroeconomic Risk and Climate Change Risk. For Banks, these include Over-Complexity of Banking Regulation,
Global Economic Risk, and Banking and Market Liquidity Risk. Reinsurance Companies have listed Property-
Causality Insurance Risk, Capital Market Risk and Underwriting Risk. And Consulting Firms have identified
Exchange Rate Risk, General Economic Risk, Regulation Requirement Risk, and Market and Credit Risk.
International Organizations
Summary Table
The United Nations
Currencies in a number of developing countries, particularly those that are commodity exporters, have
depreciated against the dollar substantially since mid-2008. The heightened risk aversion of international
investors has led to a “flight to safety”, as indicated by the lowering of the yield of the short-term United States
Treasury bill to almost zero. However, it is expected that the recent strength of the dollar will be temporary and
the risk of a hard landing of the dollar in 2009 or beyond remains.
The immediate priority in today’s context is to prevent the global financial crisis from turning into a 1930s-style
Great Depression. Over time, the ability of the IMF to safeguard the stability of the global economy has been
hampered by, among other things, limited resources and increasingly undermined by the vastly greater (and more
volatile) resources of private actors with global reach. As a consequence, the IMF has, by and large, been
sidelined in handling the present crisis. The lack of a credible mechanism with broad representation for
international policy coordination reflects an urgently felt lacuna which is limiting swift and effective responses to
the present crisis.
Source: World Economic Situation and Prospects 2009, Department of Economic and Social Affairs, the United
Nations Conference on Trade and Development and the five United Nations regional commissions
http://www.un.org/esa/policy/wess/wesp2009files/wesp2009.pdf
OECD
1. Natural Disasters
The observed number of natural disasters, including floods, storms and droughts, has risen dramatically since the
beginning of the 1960s. In the past decade, such disasters have resulted in some 79 000 fatalities on an annual
basis, with 200 million people affected. Progress has been much more limited in developing countries than in
developed countries, so that victims of natural disasters are nowadays concentrated in the former. In financial
terms, on the other hand, damage has grown exponentially, and is concentrated in developed countries,
especially if insured damage is considered.
2. Technological Disasters/Accidents
Recorded technological disasters such as explosions, fires, and transportation accidents have also risen rapidly
since the beginning of the 1970s. During the 1990s, they caused on average 8 000 fatalities and affected 67 000
people per year. In financial terms, their cost has been exceptionally high in the past two decades, but remains
erratic.
According to these measures, recorded technological accidents are small events with a limited scope in both
space and time with respect to their human and economic impacts, especially when compared to health or natural
disasters. This does not exclude, however, the occasional occurrence of very large accidents, such as the 1987
ferry collision in the Philippines (4 375 victims), the 1984 chemical factory accident in Bhopal, India (3 000
victims), the 1986 nuclear reactor meltdown in Chernobyl (31 immediate victims, 135 000 reported affected, USD
2.8 billion in economic losses), or the 1988 Piper Alpha oil platform explosion in the United Kingdom (167 victims,
insured losses close to USD 3 billion in 2000 prices).
3. Health Risk
Disasters related to health have gained ground. The “Health For All 2000” accord signed in 1978 by the member
states of the United Nations predicted that by the end of the century, infectious diseases would no longer pose a
significant threat to human beings, even in the poorest countries. Today, it appears that the long-term trend of
progress in the control and eradication of infectious diseases that fuelled this optimism has been reversed. This
results from a number of factors, including the spread of drug-resistant microbes, the emergence of new
infections with devastating effects in some parts of the world, adverse socioeconomic factors such as the rise of
megacities with poor sanitary conditions, and the rapid increase in cross-border movements of people and
merchandise.
5. Globalization Risk
Information, communication, space and transport technologies have developed possibilities of exchange between
people – no matter how distant – to an extent that few imagined only twenty years ago. From the point of view of
risks, connectedness makes individuals and organisations accessible over distance, both for the better and the
worse. On the positive side, victims of disasters are easier to reach, and emergency rescues can be organised
more efficiently. Monitoring and warning systems can be developed thanks to satellites and wireless
communications. Capacities for gathering and processing information on natural processes and hazards as well
as diseases increase dramatically, helping to improve our understanding of risks.
On the negative side, connectedness multiplies the channels through which accidents, diseases or malevolent
actions can propagate. Natural disasters at one side of the planet can have substantial economic and financial
impacts at the other. Epidemics spread more rapidly and more widely due to the intensification of international
travel and trade and the development of tourism. Every day, computer systems and internal networks are
submitted to electronic attacks originating from sources that are usually unidentified. Although in each of these
cases damage is highly unlikely to spread to all parts of the network, it might nonetheless affect some critical
nodes, with devastating second-round effects.
6. Bio-technology Risk
Next-generation technologies often entail a modification of living matter. Combined with the continued increase in
capacities for computing, transmitting and storing information, they represent a potential for transforming humans
and their environment that probably has no precedent. At the same time, they are capable of interacting far more
closely than ever before with the living environment. They are often self-replicating, or might be relatively easy to
access once their development is completed. Therefore, they might diffuse easily, and trigger long-term
evolutions that are extremely difficult to predict.
Uncontrolled release of genetically modified organisms, the subject of an intense debate during past years, is
among the first examples of the risk issues induced by new technologies. It has been established that the
possibility of interactions between GMOs and wild plant species, as well as that of unintended effects on the
human metabolism, needs to be carefully examined. Many next-generation technologies might generate
unforeseeable risks with irreversible consequences, while their potential uses will be virtually impossible to control.
1. Lifecycle Risks
These risks identify individuals at-risk due to age, gender, and other personal or household characteristics. Life-
cycle approaches are used to identify vulnerable groups at particular points in their life cycles or given particular
characteristics. The Risk and Vulnerability Analysis (RVA) for Benin found that older people, having had time to
accumulate agricultural land, fruit tree plantations or other income-generating means, were often considered
relatively prosperous. On the other hand, younger people who have not yet accumulated wealth were more likely
to be counted among the poorer, especially young women whose productivity is greatly reduced by childbearing
and childrearing. In Colombia, individuals who are displaced due to conflict were found extremely vulnerable to
shocks.
2. Macroeconomic Shocks
Macroeconomic factors such as terms of trade shocks or financial crises may affect large segments of the
population. Some studies examined the impact of terms-of-trade-shocks on rural households showing the impacts
of the 2000-2002 “coffee crisis” on the coffee-growing regions of Latin America. Other studies addressed whether
the volatility of workers' hours and incomes increased as a result of increasing trade liberalization, and whether
the same has had an impact on vulnerability to poverty.
4. Natural Disasters
Regions prone to natural disasters are likely to be particularly vulnerable to poverty. For example, Turkey
experienced severe losses of life and infrastructure in 1999 caused by an earthquake. The earthquake was
followed by a period of economic and financial crisis, culminating in a major currency devaluation in February
2001. The World Bank examined the coping mechanisms households used to cope with the earthquake and
found that the major effect of subsequent crises has resulted in an increase in poverty in urban areas.
6. Health Shocks
While health shocks are generally considered to be idiosyncratic shocks, the widespread nature of HIV/AIDS and
malaria in some parts of the world implies that these shocks can often be viewed as covariate shocks. In
Zambia’s Poverty and Vulnerability Assessment (PVA), formal and informal coping mechanisms for dealing with
shocks have come under increasing stress due to high rates of HIV/AIDS and death. Health risks may also be
due to environmental degradation and outmoded industrial practices. For example, the Kosovo Poverty
Assessment (PA) found that exposure to health risks is widespread, largely resulting from environmental pollution.
7. Unemployment/Underemployment Risk
Unemployment and underemployment have been identified as major risks faced by households of a certain
demographic especially in Bolivia, Uruguay, Argentina and Colombia. The Columbia 2002 Safety Net Assessment
notes that even though economic growth recovered modestly in 2000, poverty and unemployment remained high,
and there had been a decline in some human development indicators. This was partly due to Colombia not having
an effective safety net in place, capable to address the social consequences of the crisis.
Source: Risk and Vulnerability Analysis in World Bank Analytic Work: FY2000—FY2007, 2008, World Bank
http://www-
wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2008/07/21/000333038_20080721044237/Ren
dered/PDF/447800NWP0Box327410B01PUBLIC10SP00812.pdf
5. Economic Crisis
In the view of the economic crisis, the pressure on fiscal systems will be exacerbated by current bailout packages
and fiscal programmes to jump-start growth. Asset prices have also declined dramatically. There will be continued
scope for further losses over a broad class of assets in the short term.
7. Terrorism Risk
The perceived risk has decreased overall internationally but the risk remains relatively high in several countries
such as Iraq, Afghanistan, Pakistan and Somalia.
Although there is a general increase in a greater awareness and education in water scarcity, this risk is still
constant in terms of likelihood and severity.
In addition, the incidence of chronic disease is rising across both the developed and developing world. Medical
advances and awareness can reduce the risk severity but chronic disease is still the main cause of death
worldwide.
1. Macroeconomic Risk
Forward-looking estimates of risks from macroeconomic variables show that a one-half standard deviation
permanent shock to real growth would increase the debt-to-GDP ratio five years later by 6.8 percent of GDP on
average in a sample of 19 advanced and emerging market countries. A one-half standard deviation shock to the
primary deficit would raise the debt-to-GDP ratio by 5.2 percentage points. And a one-half standard deviation
shock to interest rates would lead to somewhat smaller increases on average, though it would have even more
significant effects in countries that rely primarily on floating interest rate debt. In developing countries, a decline in
economic growth would have an especially notable effect on debt dynamics.
In addition, there is also the risk of a deterioration of debt-to-GDP ratio through Exchange Rate Depreciations.
The impact of exchange rate depreciations is immediate, and can be especially strong when a large share of the
debit is in foreign currency. A 30 per cent depreciation of the real exchange rate would increase the debt-to-GDP
ratio by 8 percent in the year of the shock and (reflecting gains in competitiveness) 6.5 percent after five years in
the sample of advanced and emerging economies, and by similar amounts in developing countries. Indeed,
turning to information on ex post realization of risks, exchange rate depreciation accounted for a major share of
the increase in the debt-to-GDP ratio in the context of several emerging market crises during the 1990s.
4. Bank Failures
A review of the fiscal costs of systemic banking crises identified 24 episodes in which cumulative costs exceeded
5 percentage points of GDP, based on a sample of 117 banking crises that occurred in 93 countries during 1977–
98. It estimated costs at 30–55 percent of GDP in Argentina, Chile, and Uruguay in the early 1980s, 25–50
percent of GDP in Indonesia, Korea, and Thailand in 1997–98, and about 20 percent of GDP in Japan in the
1990s. Such costs arise primarily from depositor and debtor bailouts, open-ended liquidity support, and repeated
recapitalization programs—and are often larger when incurred after years of implicitly subsidized lending by state-
owned financial institutions.
5. Natural Disasters
Direct economic losses from natural disasters have often exceeded 10 percentage points of GDP in developing
countries and amounted to a few percentage points of GDP in some advanced countries. Such losses are
unevenly distributed across countries, as disasters usually revisit the same geographic zones. The fiscal
implications are clearly substantial, though estimates are available only for a limited sample. A study on Latin
American and Caribbean countries found several episodes where the fiscal deficit rose substantially in the
aftermath of natural disasters.
Subnational government defaults or bankruptcies have also often led central governments to provide rescue
packages, occasionally with large costs: examples include Brazil (7 percent of GDP in 1993 and 12 percent of
GDP in 1997, Argentina (1 percent of GDP, cumulative, in the mid-1990s, and Mexico (1 percent of GDP in the
aftermath of the Tequila crisis.
Source: Fiscal Risks: Sources, Disclosure, and Management, 2009, IMF Fiscal Affairs Dept
http://www.imf.org/external/pubs/ft/dp/2009/dp0901.pdf
Source: http://www.irgc.org/-Critical-Infrastructures-.html
2. Pandemic Risk
A potential influenza pandemic remains a hot topic in the field of infectious diseases with considerable attention
focused on avian influenza, both for its consequences for wild and domestic fowl and its impact on the human
population. The World Health Organisation (WHO) has published a pandemic preparedness plan and many
countries around the world are developing national preparedness plans.
Source: http://www.irgc.org/-Pandemic-Diseases-.html
3. Risk in Nanotechnology
A particular concern of IRGC is that the opportunities flowing from new technologies and innovations are not
forgone due to inadequate or inappropriate risk governance, including poor communication. When these
technologies have the capacity to alleviate major global concerns, a failure to adopt them has potentially
catastrophic consequences. An example will be the emergence of nanotechnology, where it is an important and
rapidly growing field of scientific and practical innovation that will fundamentally transform our understanding of
how materials and devices interact with human and natural environments. These transformations may offer great
benefits to society such as improvements in medical diagnostics and treatments, water and air pollution
monitoring, solar photovoltaic energy, water and waste treatment systems, and many others.
Despite the benefits, the transformations may also pose serious risks. The social, economic, political and ethical
implications are significant. Because nanotechnology raises issues that are more complex and far-reaching than
many other innovations, the current approach to managing the introduction of new technologies is not up to the
challenges posed by nanotechnology.
Source: http://www.irgc.org/-Nanotechnology-.html
4. Risk in Carbon Capture and Geological Storage
Carbon capture and storage has the potential to be an important climate change mitigation technology for the
21st century, integrating fossil fuels into a carbon managed energy system, and helping to meet the growing
worldwide demand for energy until fully renewable energy systems come online. The technology is conceptually
simple: carbon dioxide (CO2) is captured from electric power plants or industrial sources, transported to the
injection site, and injected deep underground for storage.
However, the technology is still some years from commercial implementation. There are very few test sites in
operation and, therefore, almost no risk assessment data available. There are, additionally, substantial
unresolved questions which relate to how the technology will be regulated, how the necessary investment will be
financed and what liability regime(s) will be most appropriate.
Source: http://www.irgc.org/-Carbon-Capture-and-Storage-.html
5. Bio-Energy Risk
The development, production and use of bioenergy have become increasingly attractive to governments around
the world as an alternative to traditional fossil fuels (oil, coal, and gas). The attractions of bio-energy are many.
However, awareness is increasing about some of the potential environmental, economic and social risks
associated with bio-energy development, and aspects of the current situation may represent a failure of good risk
governance.
Source: http://www.irgc.org/-Governance-of-Bioenergy-.html
However, there are also some potential risks and governance issues arising from the design of synthetic
biological components. For example, there are ethical issues surrounding converting nature into market
commodities and the ownership of what has previously been seen as a “public good”, as well as potential
unintended harmful consequences for human health or the environment (e.g. due to accidental release) or
deliberate misuse (e.g. recreation of known pathogens). Another risk may result from the fact that the technology
is cheap and easy to acquire and a lot of the coding being developed and used is made public through the
Internet. This could both decrease the potential for patent protection and increase the potential for an emerging
hacker culture to exploit this public information.
Source: http://www.irgc.org/Synthetic-biology-genomics.html
• Analyzing the current needs and expectations for energy security (reliability, affordability, autonomy and
sustainability) in terms of supply and demand
• Identifying the main risk trade-offs
• Understanding the diverging stakeholder interests in managing the major risks and challenges
• Identifying the main gaps in the current governmental and private decision making processes
• Setting the basis for an innovative risk-based decision making process to improve the management of
risks and support management decisions in the energy sector.
Source: http://www.irgc.org/Risk-based-Decision-Making-for.html
• Loss of opportunities
• Cost of inefficient regulations
• Loss of public trust
• Inequitable distribution of risks and benefits between countries, organizations and social groups
• Excessive focus on high profile risks, to the neglect of higher probability but lower profile risks
• Failure to move from business as usual and trigger action
Understanding how risk governance deficits arise and how they can be minimized is an important part of dealing
with new risks and, in some cases, of revising approaches to existing risks. This is important not just for
governments and regulators who may have to codify the approaches to new risks, but also for industry and, in
general, all those who are potential drivers of the risks or are affected by them, including society at large.
Source: http://www.irgc.org/Current-work-focus,85.html
Banking Sectors
Summary Table
HSBC
Increased illiquidity adds to uncertainty over the accessibility of financial resources and may reduce capital
resources as valuations decline. The extreme market conditions facing the financial services industry have been
reflected in shortages of liquidity, lack of funding, pressure on capital and extreme price volatility across a wide
range of asset classes. Illiquidity of these assets has prevented the realization of existing asset positions and has
constrained risk distribution in ongoing banking activities. The extreme market conditions, which have highlighted
the importance of a strong diversified core deposit base, have lead to increased competition for such deposits
and the risk of deposit migration.
2. Counterparty Risk
A bank’s ability to engage in routine transactions to fund its operations and manage its risks could be adversely
affected by the actions and commercial soundness of other financial services institutions. Financial institutions are
extremely interdependent because of trading, clearing, counterparty or other relationships. As a consequence, a
default by, or decline in market confidence in, individual institutions, or anxiety about the financial services
industry generally, can lead to further individual and/or systemic difficulties, defaults and losses.
Competition may further intensify or the competitive landscape may change as the consolidation of financial
services companies continues and others are brought into part or full public ownership in response to the current
market conditions. A bank’s ability to grow its businesses, and therefore its earnings, is affected by these
competitive pressures and is dependent on the bank’s ability to attract and retain talented and dedicated
employees.
5. Operational Risks
Banks are exposed to many types of operational risk, including fraudulent and other criminal activities (both
internal and external), breakdowns in processes or procedures and systems failure or non-availability.
6. Reputational Risk
The risks to a bank’s reputation arise from a variety of sources with the potential to cause harm to the
organization and its ability to operate. These issues require the bank to deal appropriately with potential conflicts
of interest, legal and regulatory requirements, ethical issues, anti-money laundering laws or regulations, privacy
laws, information security policies, sales and trading practices, and the conduct of companies with which it is
associated.
Failure to address these issues appropriately may give rise to additional legal and compliance risk to banks, with
an increase in the number of litigation claims and the amount of damages asserted against them, or subjects
them to regulatory enforcement actions, fines or penalties.
8. Tax-related risks
Banks are subject to the substance and interpretation of tax laws in all countries in which they operates. A
number of double taxation agreements entered into between countries also affect the taxation of the bank. Tax
risk is the risk associated with changes in tax law or in the interpretation of tax law. It also includes the risk of
changes in tax rates and the risk of consequences arising from failure to comply with procedures required by tax
authorities. Failure to manage tax risks could lead to increased tax charges, including financial or operating
penalties, for not complying as required with tax laws.
Citigroup
In addition, the current market and economic disruptions have affected, and may continue to affect, consumer
confidence levels, consumer spending, personal bankruptcy rates and home prices, among other factors, which
provide a greater likelihood that more of bank customers or counterparties could use credit cards less frequently
or become delinquent in their loans or other obligations to the banks. This, in turn, could result in a higher level of
charge-offs and provision for credit losses, all of which could adversely affect bank earnings.
5. Systemic Risk
The commercial soundness of many financial institutions may be closely interrelated as a result of credit, trading,
clearing or other relationships between institutions. As a result, concerns about, or a default or threatened default
by, one institution could lead to significant market-wide liquidity and credit problems, losses or defaults by other
institutions. This is sometimes referred to as “systemic risk” and may adversely affect financial intermediaries,
such as clearing agencies, clearing houses, banks, securities firms and exchanges with which banks interact on a
daily basis.
1. Nationalization risk
When banks nationalize, the shareholders may face the possibility of losing the full value of their shares. Under
the provisions of the Banking Act in the United Kingdom, substantial powers have been granted to Her Majesty's
Treasury, the Bank of England and the Financial Services Authority as part of the Special Resolution Regime to
stabilize banks that are in financial difficulties and may fail. The Special Resolution Regime gives the authorities
three stabilization options: private sector transfer; transfer to a ‘bridge bank’ established by the Bank of England,
and temporary public ownership (nationalization).
2. Global Economy Recession and Financial Market Instability
The performance of a bank will be influenced by the economic conditions of the countries in which it operates,
particularly in the United Kingdom, the United States and other countries throughout Europe and Asia.
Recessionary conditions are present in many of these countries, and such conditions are expected to continue or
worsen over the near to medium term. In addition, the global financial system is continuing to experience the
difficulties which first manifested themselves in August 2007, and the financial markets have deteriorated
significantly since the bankruptcy filing by Lehman Brothers in September 2008. These conditions have led to
severe and continuing dislocation of financial markets around the world and unprecedented levels of illiquidity,
resulting in the development of significant problems at a number of the world’s largest corporate institutions
operating across a wide range of industry sectors.
Perception of counterparty risk between banks has also increased significantly following the bankruptcy filing by
Lehman Brothers. This increase in perceived counterparty risk has led to further reductions in inter-bank lending,
and hence, in common with many other banks, banks’ access to traditional sources of liquidity has been, and may
continue to be, restricted. In addition, there is also a risk that corporate and institutional counterparties with credit
exposures may look to reduce all credit exposures to banks, given current risk aversion trends. It is possible that
credit market dislocation becomes so severe that overnight funding from non-government sources ceases to be
available.
JPMorgan Chase
3. Underwriting Risk
Securitization has been a highly effective way to finance assets in the U.S. financial sector. But some
securitizations, particularly mortgage securitizations and mortgage servicing contracts, had an enormous flaw
built into them: no one was responsible for the actual quality of the underwriting. Without a standardized
methodology and regulations, the customer would get consistent resolution when the security and contracts turn
void.
7. Socio-Environmental Risk
Beyond the financial crisis, there are several important issues that will dictate whether or not the U.S. will continue
to thrive over the next century. The nation can and should be able to provide health care coverage for all, an
energy policy to be economically efficient, create great innovation, reduce geopolitical tensions and improve the
environment, and finally, improve U.S. infrastructure and develop an education system.
These factors can affect, among other things, the activity level of clients with respect to the size, number and
timing of transactions involving investment and commercial banking businesses, including underwriting and
advisory businesses, the realization of cash returns from private equity and principal investments businesses, the
volume of transactions that are executed for customers and, therefore, the revenue being received from
commissions and spreads, the number or size of underwritings being managed on behalf of clients, and the
willingness of financial sponsors or other investors to participate in loan syndications or underwritings.
Crime, corruption, war or military actions, acts of terrorism and a lack of an established legal and regulatory
framework are additional challenges in some of these countries, particularly in the emerging markets. Revenue
from international operations and trading in non-U.S. securities may be subject to negative fluctuations as a result
of the above considerations. The impact of these fluctuations could be accentuated as some trading markets are
smaller, less liquid and more volatile than larger markets. Also, any of the above-mentioned events or
circumstances in one country can and has in the past, affected our operations and investments in another country
or countries. Any such unfavorable conditions or developments could have an adverse impact on our business
and results of operations. The emergence of a widespread health emergency or pandemic also could create
economic or financial disruption that could negatively affect revenue and operations or impair the ability to
manage financial businesses in certain parts of the world.
Competition is made worse through technological advances and the growth of e-commerce, which had made it
possible for non-depository institutions to offer products and services that traditionally were banking products, and
for financial institutions and other companies to provide electronic and Internet-based financial solutions, including
electronic securities trading. Increased competition also may require institutions to make additional capital
investment to remain competitive. These investments may increase expenses or may require them to extend
more of their capital on behalf of clients in order to execute larger, more competitive transactions. As such,
ongoing or increased competition may put downward pressure on prices for products and services or may cause
institutions to lose market share.
Bank of America
5. Commodity Risk
Commodity risk represents exposures to instruments traded in the petroleum, natural gas, power, and metals
markets. These instruments consist primarily of futures, forwards, swaps and options.
Munich Re
3. Market Risk
Market risk is defined as the risk of economic losses resulting from changes on the capital markets. Relevant here
are, inter alia, the equity risk, the interest-rate risk, the property risk and the currency risk. Market price
fluctuations affect investments and liabilities.
4. Credit Risk
Credit risk is defined as an economic loss which the company could incur as a result of changes in the financial
profile of a counterparty, issuer of securities or other debtor with liabilities towards us.
5. Operational Risk
Operational risks is defined as potential losses resulting from inadequate processes, technical failure, human
error or external events. These include criminal acts committed by employees or third parties, insider trading,
infringements of antitrust law, business interruptions, inaccurate processing of transactions, non-compliance with
reporting obligations or disagreements with business partners.
6. Liquidity Risk
Liquidity risk is defined as the risk of not being in a position to meet financial obligations when they are due.
Detailed liquidity planning ensures that resinsurance companies are able to make the necessary payments at all
times. Liquidity risks may also arise because the actual payout structure of liabilities differs from that assumed in
asset-liability management (e.g. due to a lengthening or acceleration of claim payments in a line of business or
region).
7. Strategic Risk
Strategic risk is defined as the risk of making wrong business decisions, implementing decisions poorly, or being
unable to adapt to changes in the operating environment.
8. Reputational Risk
The reputational risk is the risk of a loss resulting from damage to the company’s public image or its reputation
among clients, shareholders or other parties such as the supervisory authorities.
Source: http://www.munichre.com/publications/302-05987_en.pdf
Swiss Re
1. Aviation Risk
The number of fatalities per accident has risen from 12.5 to 29.2 since 1945, and if aircraft are soon to carry close
to 800 passengers, the possible consequences of an individual accident will be almost doubled.
4. Urbanization Risk
People flock to cities because they expect to find more social and economic security than in more rural areas. It is
estimated that by 2015, some 23 mega cities will be home to some 375 million inhabitants.
In response to this powerful influx, cities are growing downwards and upwards. In all metropolises, more and
more traffic areas and shopping centres are being reallocated underground, where fires can have particularly
devastating consequences: emergency exits and escape routes are getting longer and longer.
5. Natural Hazards
More people, buildings, factories and infrastructure per unit of area mean that events of equal magnitude will
affect more people
8. Over-reliance on Telecommunications
Between 1990 and 2002, the worldwide telephone network more than doubled and now numbers some 1.1 billion
users. In the same period, the number of registered mobile phone subscribers rose from 11 million to 1.3 billion.
The total time spent on the phone during international calls quadrupled during this time, coming to 135 billion
minutes. In purely arithmetical terms, over 250,000 international calls are made round the clock every day.
Telecommunications networks are no longer mere links. Instead, they constitute virtual spaces in which
commerce is conducted and work colleagues all over the world interact intensively. Power cuts nowadays have
thus attained the status of market and institution collapses, such that the cyber-quake is considered one of the
most damaging scenarios. An aggressive computer virus could trigger a worldwide collapse of entire markets and
industries within hours.
According to WHO estimates, a new influenza epidemic could claim up to 650,000 fatalities even in the medically
best-equipped industrialized countries within two years. It could cause economic losses of up to USD166 billion in
the U.S. alone.
Source: http://zonecours.hec.ca/documents/H2005-P6-385185.FutureRisks.pdf
Hannover Re
1. Underwriting Risk
A significant technical risk is the risk of underreserving and the associated strain on the underwriting result.
We reduce these potential risks with a broad range of risk management measures. For example, the reserves in
life and health reinsurance are calculated in accordance with actuarial principles using secure biometric actuarial
bases and with the aid of portfolio information provided by our clients. Through our own quality assurance, we
ensure that the reserves established by ceding companies in accordance with local accounting principles satisfy
all requirements with respect to the calculation methods used and assumptions made (e.g. use of mortality and
disability tables, assumptions regarding the lapse rate etc.). New business is written in all regions in compliance
with internationally applicable Global Underwriting Guidelines, which set out detailed rules governing the type,
quality, level and origin of risks. These global guidelines are revised every two years and approved by the
Executive Board. They are supplemented by country-specific special underwriting guidelines that cater to the
special features of individual markets. In this context the quality standards set for the portfolio reduce the potential
counterparty risk stemming from an inability to pay or deterioration in the credit status of cedants. We review the
risk feasibility of new business activities and of the assumed international portfolio on the basis of a series of
regularly performed, holistic analyses, inter alia with an eye to the lapse risk. Quality is further assured, especially
at the level of the subsidiaries – by the actuarial reports and documentation required by local regulators. A key
tool of our value-based management and risk management in the area of life and health reinsurance is the
European Embedded Value (EEV). This is calculated as the present value of future earnings from the worldwide
life and health reinsurance portfolio plus the allocated capital. In this context appropriate allowance is made for all
risks underlying the covered business. Since the 2006 financial year the EEV has been calculated on a market-
consistent basis. In future, this Market Consistent Embedded Value (MCEV) is to be established on the basis of
the principles of the CFO Forum published in June 2008. We publish the MCEV on our Internet website at the
same time as the quarterly report for the first quarter. The interest guarantee risk, which is important in life
business in the primary insurance sector, is of only minimal risk relevance to our business owing to the structure
of our contracts.
We reduce these potential risks using a broad range of risk-controlling measures, the most significant of which
are monitoring of the Value at Risk (VaR), various stress tests that estimate the loss potential under extreme
market conditions as well as sensitivity and duration analyses and our asset/liability management (ALM). Despite
our conservative investment strategy, restrictive limits and thresholds as well as the controlling tools described
above, we cannot divorce ourselves entirely from general market developments. We took a number of risk-
minimizing measures in the year under review in response to the financial market crisis:
• Limitation of the investment spectrum to government or supranational bonds in September 2008.
Although this step reduced the average yield for 2008, it also limited any new risk-taking on the credit
markets in view of the uncertain state of the market.
• Elimination of all counterparty risks with respect to existing options for equity hedging.
• Despite the already high diversification of the portfolio, further tightening of issuer limits for all
investments of the Hannover Re Group in September 2008 in order to minimise potential accumulation
risks.
• Near complete reduction of unhedged holdings of listed equities in October 2008.
• Thorough review of the existing investment guidelines in December 2008. Scarcely any adjustments were
necessary even in the present circumstances; the limits, especially in respect of covered bonds, ABS and
MBS, were nevertheless further refined.
• Making available of a minimum level of liquidity or assets that can be realized at any time in an amount of
at least EUR 4 billion or around 20% of the investments under own management as the prevailing
illiquidity of secondary markets that had begun in September 2008 continued and in view of the risks
arising in connection with the acceptance of LOCs by ceding companies.
4. Credit risks
The credit risk consists primarily of the complete or partial failure of the counterparty and the associated default
on payment. Also significant, however, is the so-called migration risk, which results from a rating downgrade of
the counterparty and is reflected in a change in fair value.
In reinsurance business the credit risk is material for our company because the business that we accept is not
always fully retained, but instead portions are retroceded as necessary. These retrocessions conserve our capital,
stabilize and optimize our results and enable us to derive maximum benefit from a "hard" market (e.g. following a
catastrophe loss event). Alongside traditional retrocession we also transfer risks to the capital market. Overall,
these tools support diversification within the total portfolio and promote risk reduction. Credit risks are also
relevant in life and health reinsurance because we prefinance acquisition costs for our ceding companies. Our
investments similarly entail a credit risk. Our clients, retrocessionaires and broker relationships as well as our
investments are therefore carefully evaluated and limited in light of credit considerations and are constantly
monitored and controlled within the scope of our system of limits and thresholds.
5. Operational risks
In our understanding, this category encompasses the risk of losses occurring because of the inadequacy or
failure of internal processes or as a result of events triggered by employee-related, system-induced or external
factors. Operational risks also encompass legal risks, although they do not extend to strategic or reputational
risks. Operational risks may derive, inter alia, from system failures or unlawful or unauthorized acts. Given the
broad spectrum of operational risks, there is a wide range of different management measures tailored to
individual risks. Core elements of risk management are our contingency plans that ensure the continuity of
mission-critical enterprise processes and systems (recovery plans, backup computer centre). The range of tools
is rounded off with external and internal surveys of clients and staff, the line-independent monitoring of risk
management by Internal Auditing and the Internal Control System (ICS).
Hannover Re's reputation as a company is one of its most vital intangible assets. It often takes decades to build
up a positive reputation, yet this reputation can be damaged or even destroyed within a very brief space of time.
Like the strategic risk, the reputational risk usually manifests itself in combination with other risks, such as market
or technical risks. Management of this risk is facilitated by our mandatory communication channels and processes
that have been specified for defined crisis scenarios as well as by our business principles. The liquidity risk refers
to the risk of being unable to convert investments and others assets into cash in order to meet our financial
obligations when they become due. The liquidity risk consists of the refinancing risk, i.e. the necessary cash
cannot be obtained or can only be raised at increased costs, and the market liquidity risk, meaning that financial
market transactions can only be completed at a poorer price than expected due to a lack of market liquidity.
Regular liquidity planning and a liquid asset structure are core elements of our ability to manage this risk. Our
active liquidity management has helped to ensure that even in times of financial crisis we are able to meet our
payment obligations at all times without reservation.
7. Natural Disasters
Catastrophe risks, especially those associated with natural hazards such as earthquakes or windstorm events,
constitute another material risk for Hannover Re. Licensed scientific simulation models, supplemented by our own
expertise, are used to assess the risks posed by natural hazards. Within the scope of accumulation control the
Executive Board defines the appetite for assuming natural hazards risks once a year on the basis of our risk
strategy. In order to manage the portfolio with this consideration in mind, maximum underwriting limits (capacities)
are stipulated for various extreme loss scenarios and return periods/probabilities, utilization of which is monitored
and reported to the relevant bodies.
8. Price/Premium Risk
The price/premium risk lies primarily in a failure to correctly calculate the necessary premiums in relation to the
future loss experience. The risk arises out of the incomplete or inaccurate estimation of future claims, especially
over time. Regular and independent reviews of the models used for treaty quotation as well as the implemented
methods, e.g. our compulsory central and local underwriting guidelines, are therefore essential for the
management of these risk potentials.
Source: http://www.hannover-re.com/resources/cc/generic/hr-reports/2008_GBKonzern_E.pdf
Lloyd’s of London
3. Underwriting Risk
Underwriting losses incurred are outside expected thresholds, resulting in potential failure of members and
subsequent Central Fund exposures.
Lloyd’s suffers financial loss and/or reputational damage through poor underwriting.
4. Insurance Liabilities
Lloyd’s suffers increased insurance liabilities, additional regulatory burden, decreased asset values and/or capital
constraints.
management principles.
Source: http://www.lloyds.com/NR/rdonlyres/E3BE7537-CEE9-46A2-849B-
FF8972CB9D3B/0/AR2008_Lloyds_AR08_20090424.pdf
1. Natural/Man-made Disasters
The Property business underwritten by SCOR Global P&C is exposed to multiple insured losses arising from a
single or multiple events, which can be catastrophic, being either caused by nature (e.g. hurricane, windstorm,
flood hail, severe winter storm, earthquake, etc.) or by the intervention of a man-made cause (e.g. explosion, fire
at a major industrial facility, act of terrorism, etc.). Any such catastrophic event can generate insured losses in
one or several of SCOR’s lines of business. The same losses may be covered under various different lines of
business within the Property branch such as fire, engineering, aviation, space, marine, energy and agricultural.
4. Underwriting Risk
The assessment of biometric risks is at the centre of underwriting risk in life reinsurance. These are risks which
result from adverse developments in mortality, morbidity longevity and pandemic claims for direct insurers and
reinsurers. These risks are evaluated by SCOR Global Life’s medical underwriters and actuaries, who analyze
and use information from SCOR Global Life’s own portfolio experience, from the ceding companies as well as
relevant information available in the public domain, such as mortality or disability studies and tables produced by
various statistical organizations.
7. Terrorism
In the context of business, SCOR may be exposed to claims arising from the consequences of terrorist acts.
Future terrorist acts, whether in the U.S. or elsewhere, could cause the company significant claims payments and
could have a significant effect on our current and future revenues, net income, cash flow and financial position.
8. Environmental Pollution
Almost all reinsurance companies are exposed to environmental pollution and asbestos related risks, particularly
in the United States. Insurers are required under their contracts to notify us of any claims or potential claims that
they are aware of. However, the companies often receive notices from insurers of potential claims related to
environmental and asbestos risks that are not precise enough, as the primary insurer may not have fully
evaluated the loss at the time it notifies us of the claim. Due to the imprecise nature of these claims, the
uncertainty surrounding the extent of coverage under insurance policies and whether or not particular claims are
subject to any limit, the number of occurrences and new developments regarding the insured and insurer liabilities
only give a very approximate estimate of potential exposure to environmental and asbestos claims that may or
may not have been reported.
As a result of these imprecisions and uncertainties, reinsurance companies cannot exclude the possibility that
they could be exposed to significant environmental and asbestos claims, or have to increase their reserving level,
which could have an adverse effect on their current and future revenues, net income, cash flow and financial
position.
Another factor of uncertainty resides in the fact that some of the activities of reinsurance companies are “long-tail”
in nature, in particular workers compensation, general liability or those linked to environmental pollution or
asbestos. For these type of claims, it has, in the past, been necessary to revise estimated potential loss exposure
and, therefore, the related loss reserves.
Source: http://www.scor.com/www/fileadmin/uploads/publics/SCOR_DDR_2008_EN.pdf
Consulting Firms
Summary Table
SAP Global
1. Economic Risks
Regionally and globally, the fields in which SAP does business were subject to powerful economic forces during
2008. Global markets, especially capital and credit markets, fluctuated strongly. As a result of the changes in
these markets and the related growing sense of insecurity among investors and consumers, there is a much
greater risk that businesses will be held back for a sustained period. Consumer hesitancy or limited availability of
finance may constrict the business operations of customers and consequently impede business operations. The
consequences may include restrained or delayed investments, late payments, bad debts, and even insolvency
among customers and business partners.
A catastrophic event that results in the loss of a significant portion of our human resources or the destruction or
disruption of operations in our headquarters or other key locations could affect our ability to provide normal
business services and generate expected business revenues. However, data redundancies and daily information
backup worldwide ensure that our key IT infrastructure and critical business systems should not materially be
adversely affected.
4. Competition Risk
Competitors may gain market share because of acquisitions, the spread of new development models such as
service-oriented architecture (SOA) technologies, and the popularity of new delivery and pricing models, notably
software as a service. If such competitors successfully integrate their new acquisitions, the value proposition of
integrated package solutions from SAP may be undermined. SOA may lead to a shift in purchasing patterns,
encouraging more custom development, which would benefit vendors of development software.
5. Product Risk
To achieve full customer acceptance, new products and product enhancements can require long development
and testing periods. Such efforts are subject to multiple risks, for example, scheduled market launches can be
delayed, or products may not completely satisfy stringent quality standards, entirely meet market needs, or
comply with local standards. Furthermore, new products and product enhancements may not be sufficiently
technologically advanced, still contain undetected errors, or be unready for high volume data processing.
9. Sustainability Risk
For SAP Global, business sustainability is a standard that guides our engagement in new business opportunities
– holistically encompassing profitable growth, environmental value, and societal benefit. We therefore address
sustainability risks, especially relating to climate change, corporate integrity, human resources management, the
ethical behavior of suppliers, the accessibility, user-friendliness, and safety of our products, privacy and data
protection in connection with the use of SAP products, and the digital divide. The term “digital divide” refers here
to the belief that people’s access to digital and information technology is dependent on social factors. If
sustainability strategies fail to fulfill the requirements of our partners or customers or fail adequately to meet
generally accepted standards, our profitability, business outlook, or good reputation could be adversely affected.
We address the risks in these respects with suitable measures aimed at avoiding negative effects for our
customers, employees, and investors, all of whom expect a reliable sustainability strategy from SAP.
Source: http://www.sap.com/germany/about/investor/reports/gb2008/en/our-results/the-sap-group-of-
companies.html
1. Legal/Regulatory Risk
Consulting Companies are subject to a number of legal proceedings, regulatory actions and other contingencies.
An adverse outcome in connection with one or more of these matters could have a material adverse effect on
business, results of operations or financial condition in any given quarterly or annual period. In addition,
regardless of any eventual monetary costs, these matters could have a material adverse effect on MMC by
exposing companies to negative publicity, reputational damage, harm to client or employee relationships, or
diversion of personnel and management resources.
2. Reputational Risk
One of our significant responsibilities is to maintain the security and privacy of our clients’ confidential and
proprietary information and the personal data of their employees and plan participants. We maintain policies,
procedures and technological safeguards designed to protect the security and privacy of this information.
Nonetheless, we cannot entirely eliminate the risk of improper access to or disclosure of personally identifiable
information. Such disclosure could harm our reputation and subject us to liability under our contracts and laws
that protect personal data, resulting in increased costs or loss of revenue.
Further, data privacy is subject to frequently changing rules and regulations, which sometimes conflict among the
various jurisdictions and countries in which we provide services. Our failure to adhere to or successfully
implement processes in response to changing regulatory requirements in this area could result in legal liability or
impairment to our reputation in the marketplace.
3. Geographical Risk
We do business worldwide. In 2007, 51 percent of MMC’s total operating segments revenue was generated from
operations outside the United States, and over one-half of our employees are located abroad. We expect to
expand our non-U.S. operations further. The geographic breadth of our activities subjects us to significant legal,
economic, operational and market risks which include:
5. Competitive Risk
As a global professional services firm, MMC experiences acute and continuous competition in each of its
operating segments. Our ability to compete successfully depends on a variety of factors, including our geographic
reach, the sophistication and quality of our services, and our pricing relative to our competitors. If we are unable
to respond successfully to the competition we face, our business and results of operations will suffer. In our
consulting and risk consulting and technology segments, we compete for business and employee talent with
numerous independent consulting firms and organizations affiliated with accounting, information systems,
technology and financial services firms around the world.
6. Inability to retain qualified talent
Across all of our businesses, our personnel are crucial to developing and retaining the client relationships on
which our revenues depend. It is therefore very important for us to retain significant revenue-producing
employees and the key managerial and other professionals who support them.
Losing employees who manage or support substantial client relationships or possess substantial experience or
expertise could adversely affect our ability to secure and complete client engagements, which would adversely
affect our results of operations. In addition, if any of our key professionals were to join an existing competitor or
form a competing company, some of our clients could choose to use the services of that competitor instead of our
services.
If we need to raise capital in the future (for example, in order to fund maturing debt obligations or finance
acquisitions or other initiatives), any further credit rating downgrade could negatively affect our financing costs,
and likely would limit our access to financing sources. Further, we believe that a downgrade to a rating below
investment-grade could result in greater operational risks through increased operating costs and increased
competitive pressures.
In addition, the profitability of our consulting and risk consulting and technology businesses depends on the prices
we are able to charge for our services. If we are unable to achieve and maintain adequate billing rates for our
consultants, our profit margin and profitability could suffer.
Source: http://www.mmc.com/investors/documents/10K_2007.pdf
2. Regulatory Risk
Regulatory risk – last year’s number one threat – remains near the top of the list. This risk may not have such an
obvious impact as the global credit crunch, but regulatory risks continue to be keenly felt at leading firms in
sectors such as life sciences, telecoms, oil and gas and power utilities. Furthermore, uncertainty regarding the
regulatory response to the global financial crisis has caused this risk to become more important in asset
management, banking and insurance.
5. Competition Risk
New competitors are emerging from adjacent markets and distant geographies. National oil companies now
compete with the majors in oil and gas; banking, insurance and asset management companies now compete for
the same customers; as do internet, telecom and media companies; and emerging market companies are more
competitive in the automotive sector.
Source: http://www.ey.com/GL/en/Services/Assurance/Top-10-business-risks-for-2009
3. Financial crime
Financial crime is a major problem for banks, insurers and other financial institutions. Trading conditions today
require a sharp focus on minimising operational costs, so getting fraud losses under control will be a key factor. In
addition to the accumulated costs of the losses incurred, the risk to the enterprise of a breach which results in a
fine or a publicised loss is a constant concern. The requirement to comply more fully with anti-money laundering
regulations is now extending beyond banks to insurers, trade financiers and financial markets.
4. Solvency II Risk
European insurers have started to think carefully about the implications of the proposed “Solvency II” Directive,
which will comprehensively reform the prudential supervision of insurance and reinsurance in Europe. Its main
objective is to strengthen protection for policyholders by encouraging insurers to improve their risk management
techniques and to align their capital more closely to the risks they take.
Under Solvency II, firms will be able to use their own internal model to quantify the level of risk they face and the
level of capital required to support those risks, rather than use the European Standard Formula. Using their own
model may produce a more accurate assessment of their risk and potentially result in lower capital requirements.
This internal model must be approved by the relevant regulator. To gain approval, insurers will have to
demonstrate that the model is based on sound statistical techniques, uses current, credible information to support
assumptions, covers all material risks and meets calibration tests and documentation requirements. They will also
have to demonstrate to the regulator that the internal model is used in the management and decision-making of
the business.
Source: http://www-304.ibm.com/jct03004c/easyaccess/fileserve?contentid=126874
To make matters worse, consumer products companies maybe unable to find the capacity they will need to fill
orders at a critical time during the economic recovery. New capacity takes time to develop, and new suppliers
require even lengthier lead times, largely to complete the qualification process that ensures their product quality,
safety, and adherence to acceptable social practices. To minimize these disruptions, companies should act to
protect and manage their future supply base.
Currency fluctuations had also occurred in developed countries; in the month of October 2008 alone, the euro
depreciated more than 8 percent against the dollar, the British pound depreciated about 8 percent, and the
Japanese yen appreciated about 6 percent. The considerable fluctuation in global currencies has made it difficult
to assess the full potential for achieving future savings through sourcing from low cost countries.
Source:
http://www.bcg.com/impact_expertise/publications/files/Sourcing_Consumer_Products_in_Asia_March_2009.pdf