Being Prepared

Don’t Lose Sight of the Greater Risks We Face

No one could fail to have noticed that we are in the grip of a recession. With unemployment affecting 2 million in the United Kingdom, interest rates almost at zero and a deflationary environment, there is a lot for businesses to deal with.

While the financial crisis has certainly been front-of-mind for many around the world, it would be disastrous for us to lose sight of the greater risks that we face, particularly as insurers.

This has been recognized at the highest level during the recent G20 meeting in London when the communiqué agreed by all of the world leaders reaffirmed their commitment to address the threat of climate change.

As our understanding of climate change and its impact develops, it is clear that it will have major implications, not only on our environment but also on how our societies and economies operate in the future. Indeed, it is likely climate change will pose a threat to the future security of the world.

For example, we could see a time when because of changes in our climate, nations cease fighting over ideology and instead compete for control of natural resources. As a result, the world map could be significantly redrawn as borders are decided on the availability of food, water and oil. Whereas prospectors left their homes centuries ago to search for gold and land, water shortages could force mass migration on a previously unseen scale. Nations could be held to ransom as energy pipelines become crucial bargaining tools in world politics and finally the exotic foods that we have all come to know and love could become a thing of the past.

Climate Change and Security

Our new report on Climate Change and Security, produced in conjunction with the International Institute for Strategic Studies, examines how climate change will affect global security by exploring four key interrelated issues — water scarcity, food supply, energy security and demographic pressures. To read more, visit our Web site at www.lloyds.com/360.

We are also investing in research to better understand the current threat of political risk. The recession is likely to lead to greater instability across the world — the increased incidences of piracy are just one recent manifestation of this. Incidences of piracy in the Gulf of Aden and off the coast of Africa have been increasing since 2005, but the number and scale of recent attacks is a real cause for concern. To set things in context, since June 2007 there have been more than 200 reported acts of marine piracy there and 30 percent of Europe’s oil goes through this route.

We are also likely to see a rise in businesses and their executive being targets from threat groups, terrorists and disgruntled populations following the financial and economic turmoil we are witnessing — which could long outlast the recession. We will be exploring this in more detail in a report in June.

Blame Culture

It’s not just changing weather and violent actions that the world seems to be facing more of, but a blame culture that, in this current financial environment, may spiral out of control. Boards now spend 13 percent of their time discussing litigation, and most companies believe that stakeholders outside the United States are now more willing to litigate generally.

Globally, actions brought by employees and customers are the most frequent, but actions from shareholders, regulatory authorities and special interest groups will grow as people take stock of the subprime and credit crunch crises.

Added to this, there is a perception that U.S. courts are becoming more willing to rule on cases that might have once been considered extraterritorial. Concerns about liability risk — whether real or perceived — are constraining entrepreneurship in business at a time when we need the best and brightest to stand up.

But it’s not all doom and gloom. Risk is not a dirty word. The insurance industry deals within it every single day and we have made it our business. We manage many risks — big and small; immediate and long term; simple and complex — but the most important thing is, when managing these, we don’t forget the others.

Topics Climate Change