Has the current coronavirus crisis shown us the importance of forward-looking risk management?
A novel coronavirus emerges from Asia and spreads rapidly around the globe. Travel and free movement are curtailed and the wearing of masks in public becomes commonplace. But then the virus suddenly disappears, having infected fewer than 10,000 people and causing less than a thousand deaths. Sound familiar? This happened in 2003 when the SARS virus sent shockwaves around the world.
The shockwaves reached a subcommittee of the All England Lawn Tennis and Croquet Club, the organization that sponsors and hosts the Wimbledon Championships. Unlike many other sporting events at that time, they deemed the risk worthy of preparation. They accordingly added a pandemic clause to their insurance policy. That decision might seem a masterstroke in light of the 2020 coronavirus pandemic, which resulted in the cancellation of this year's Wimbledon and a host of other major sporting events.
Did the All England Club have some special knowledge in 2003? Not necessarily. Pandemics are not new. Epidemiologists have been warning about the potential for a pandemic outbreak for decades. Pandemics are classic examples of low probability, high severity risk events. They happen relatively infrequently, so their likelihood of occurrence in a given year is low. This contributes to a false sense of security, with mortality and morbidity risks being overlooked or underestimated despite the potential for a significantly adverse impact.
In theory, these risks should be simple to manage. You identify the threat, consider the mitigation options, compare the costs and benefits of implementation, and then implement an optimal solution. Why, then, were so many event organizers, be they sporting or other, so ill-prepared for the current pandemic?
SARS was not the only warning of the likelihood of pandemic emerging. In recent years we have contended with MERS, Zika, the 2009 H1N1, and Ebola, to name a few. However, because such threats cannot be predicted, they tend to be oversimplified. This combined with other cognitive biases, such as overconfidence, can lead to sub-optimal risk decision making.
People do not naturally think in terms of probabilities. Most are more comfortable with binary thinking, or cases where something either happens or does not. There is another problem. Those who ignore low probability events and fail to prepare for them are often less likely to be adversely impacted. In some cases, it pays to ignore improbable events. However, even a highly improbable event with a 1% chance of occurring in a given year, becomes inevitable over longer time horizons. Those who do not prepare will be found wanting.
Crises precipitate change. Once an improbable and extreme event occurs, preparations are made to mitigate such risks after the fact, with protection being sought at any cost. But memories fade, reshaping our perception of risk, and allowing the panic-neglect cycle to repeat. How do we break this cycle?
Forward-looking risk management frameworks can play a role. These frameworks should be designed to enable risk-based decision making and should incorporate the following:
The pay out that the All England Club receives this year is expected to save them more than 拢100 million. Their decision, taken back in 2003, even made it possible for them to make pay outs to players for a tournament t hat was cancelled due to circumstances beyond their control. The All England Club did not predict the future; but it had a competent risk and finance subcommittee, which understood the value of forward-looking risk management and proactive decision making.
Originally published in FA News, August 2020.