Global risks from an insurance perspective

One of the few ways to prepare for black swan events or shocks is to think about what could be the potential big threats. Develop and think through scenarios. Turn the unknown into know risks with some probability, albeit small.  The process of thinking about the unthinkable is critical in protecting any investment portfolio. Risks have to be identified, their likelihood assessed, and their impact measured. Of course, the actual events that may harm a portfolio are likely to be surprises but the process of thinking of alternative scenarios is the foundation of good risk management.

The 10th  Global Risk Report for the World Economic Forum provides a detailed analysis of current risks in a unique format that shows the interconnectedness of risks from some of the leading risk thinkers. These risks are global because there are likely to spill-over across all markets around the world. Insurance providers are likely to better think through potential scenarios because these assessments are part of  their core business. Money managers will often have too short a focus.  For global macro traders, these risks offer great opportunities to add value.

The key global risks can be classified as economic, environmental, geopolitical, and technology. These threats are often interconnected which makes for significant systemic risks. A geopolitical event can have economic spill-overs, may be expressed through technology, and may be set-off by an environmental shock.

Review of potential risk scenarios allow for just-in-case hedging or asset allocations decisions which are more important than trying to react after the event occurs. Still, it is hard to protect against all of these events so the first line of defense is diversification across asset classes and strategies.