Why your business should use integrated models of risk

In the midst of geopolitical volatility, a changing climate, inflationary pressures, emerging energy products and more, the best thing risk committees can do is build integrated models of risk, says Janice Gross Stein, founding director of the University of Toronto’s Munk School of Global Affairs at the RIMS Canada Conference in Halifax.

“Build a single committee, which integrates climate, finance, geopolitics…health, demographics, all in one committee, in one room. Throw the stuff on the whiteboard and say, ‘How are these factors interacting to change the prospects for my business in a world where shocks do not come from only one sector?’” she said.

“Shocks that come from one sector affect almost everything else.”

The Russia-Ukraine war is an example of a global event that has implications for financial loss in the political risk insurance market. 

“When Vladimir Putin rolled the tanks over the Russian border, energy markets changed, financial markets changed, climate changed,” says Stein. “This war is not taking place only in Ukrainian territory. It’s not only in the Russian and the Ukrainian armies. It is a global battlefield for a limited border, and it is taking place on the terrain of financial markets and energy markets, both of which are critical to projections of economic growth for this country.”  

News of President Joe Biden’s recent plans to begin investing in biotech production and research in the U.S. will also affect businesses on this side of the border, Stein says.  

“China manufactures components that are in 90% of our antibiotics,” says Stein. “President Biden just announced that he’s going to be a massive investor in biomedical innovation and manufacturing. So that is why governments are now investors, no longer regulators, to how you function as risk managers in this world.”

Janice Gross Stein, Founding Director of the Munk School of Global Affairs, University of Toronto, at RIMS Canada.

This announcement constitutes President Biden’s latest move to boost domestic industry and compete with China’s manufacturing sector. This week, his administration will announce new investments from several federal agencies. 

But how do these major events change what you do for your business? 

“Here’s my one sentence answer: build integrated models of risk,” says Stein, using the example of combining components like climate, finance, geopolitics, health and demographics all in one committee in one room.

By building integrated risk committees, businesses will get voices across a range of experience, understanding and opinions. 

“Tracing those connections is what is absolutely critical for you as risk professionals,” Stein says. “You want the best people in the room with you, but with different knowledge, with different expertise than you have.  

“You want them to tell you what you don’t want to hear. You want to stress test these estimates. And then you want to take your risk estimates to your CEOs, to your boards, and recognize that we’re dealing with the world that is volatile, uncertain, complex and ambiguous for the next five years as we build the new rules of the road.” 

“There has never been a more important time in your careers’ for the work that you’re doing, than right now,” she tells the audience.

Feature image by iStock.com/ridvan_celik