SRLA in conversation with OECD
In July, SRLA board member, Peter Young, met with Jack Radisch, Senior Project Manager at the Organisation for Economic Cooperation and Development (OECD), who is responsible inter alia for research on management of risks and crises of national significance. The discussion focussed on the need to improve understanding and governance of critical risks, and in particular the Framework on Management of Emerging Critical Risks recently published by OECD.
The short summarizing essay below is contributed by Jack Radisch for the SRLA audience.
Governments have a fundamental responsibility to protect citizens from extreme events that exceed the capacity of individuals and communities to protect themselves. Whereas firms have the option of moving or exiting a market, governments and citizens have to live with the hazards and threats facing their national territory and prepare to manage the consequences. Public policy decisions on national security and public safety entail weighing the costs and benefits of different options informed by the best available evidence. Risk analysis is a useful tool to calculate and compare where mitigation investments may produce the highest rate of return in this sense. Indeed, models using historical data on well understood hazards, such as river floods and earthquakes, are crucial to inform a range of policy decisions.
A challenge surrounding preparedness for extreme events, however is the inherent uncertainty of their occurrence and consequences. In a context of record public debt, political support for seismic retrofits to infrastructure, for example, may be difficult to muster when investment in public transportation, education and health services is languishing and the benefits are more certain. The ultimate benefits of retrofitting would occur only if, and when, an earthquake takes place and fewer damages materialize as a result. When considering risks associated with general artificial intelligence or a manmade pandemic produced by synthetic biology, there are few or no precedent events for predictive models to use and low confidence levels in any case.
The interconnected world of today would have been hard to imagine for most policy makers when the internet opened to the public in 1991, yet it is now foundational to many of the world’s greatest opportunities and risks. If policymakers had understood then what cyber risks would become today, what policies would they have enacted to design a more secure digital economy and interconnected economy? The global risk landscape continues to evolve rapidly, driven by changes in climate, technology, globalisation and geopolitics. Governments should be asking themselves now, “What will the context for managing strategic risks look like in 2030, 2040 and 2050? What knowledge gaps do governments confront about emerging risks? What gaps are there in assigned responsibility, authorities to act, and capabilities to respond and recover?”
OECD Members recently collaborated to develop a Framework on Management of Emerging Critical Risks that describes a seven-step process for identifying, assessing and developing strategies for managing risks of national significance that are either entirely novel, or known but manifesting under circumstances or in ways that render current preparedness plans less useful. These risks may be characterised along a spectrum of understanding, from those that have not materialised but are very well understood, to deeply uncertain glimpses of events in possible futures. Governments should prepare to manage these new, but well understood, risks (as they would any other), and invest in research to transition uncertain futures into well understood risks, while preparing to manage future risk that remains deeply uncertain. Whether and how much to focus on managing specific emerging critical risks or the inherent uncertainty associated with future risk is a challenging balance to strike.
Countries with stronger assessment capabilities or less uncertain risks may focus more on research to better understand emerging critical risks and integrating them into existing risk management processes. While countries experiencing greater uncertainty may focus more on preparing for and building resilience against the unknown. With publication of this Framework, OECD is providing guidance on how governments can develop a repeatable process for anticipating, assessing, and classifying emerging critical risks. It is also outlining steps governments can take to manage risks with deeply uncertain futures and build resilience against unexpected shocks.
SRLA Bookshelf
The SRLA Bookshelf is a monthly feature of the Newsletter and highlights new and notable publications of books, reports, and other research on strategic risk leadership, including—but not limited to—the work of SRLA Members. This month we feature Peter Young’s (2024) “Public/Private Risk Financing Innovation: The Case of Government Self-Insurance Risk Pools in the United States.” This appeared in Chapter 4 of Cross-Disciplinary Impacts on Insurance. Ed. Rego, ML, Grima, S. Springer Publishing.
Summary Description: Innovative practices are not often associated with local authorities, and certainly not very small public bodies (villages, schools, towns), but in the USA the success of local government self-insurance pools flies in the face of that notion. Over 75,000 (out of a total of 84,000) local bodies have come to participate in pools and—indeed—they were collectively/collaboratively responsible for their own creation. Starting in 1974, these pools have provided risk financing across most traditional lines of insurance—property, liability, life, and a range of specialty lines. In fact, reinsurance pools have also emerged; pools of pools it might be said. Perhaps most significantly, many of these pools have extended their activities well beyond risk financing and have become what might be called risk management pools. As such, the real innovation may not just be seen in providing a myriad of risk coverages to small public bodies but to providing relatively advanced risk management programs to thousands of these bodies; bodies that otherwise simply would not have the capacity to take on these activities themselves. In achieving this range of sophistication, the case is easily made that pooling is the most important example of public sector innovation in USA local governments.
Collaborative risk management is emerging in many forms.
