This evening's Risk Talk at the Swiss Re Center for Global Dialogue was, as usual, excellent and assembled a capacity crowd of local business people and researchers.
World Economic Forum's Sheana Tambourgi set the theme for the discussion by reviewing the results of the WEF's new Global Risks Perception Survey. According to Tambourgi the survey distilled details of the complex and apparently escalating 'global risks landscape' to reveal a core set of risk ingredients that includes collapsing asset prices, over-stretched fiscal pledges, the future of China (and India) and of course climate.
Seems that the Survey is the result of an extensive talk-fest sponsored by the WEF involving 120 experts based in New York, London, Zurich and also Kenya, Turkey, China and India. The results have been fed into a clustering algorithm that churns out what Tambourgi calls a Risks Interconnections Map.
Each of the risk ingredients mentioned above appear as tightly interconnected clusters on the map. The map consolidates economic data from 160 countries and expert opinions on 24 separate risk categories. According to Tambourgi, the map indicates how risks interact with one another and has the potential to anticipate the "propensity of a given risk to trigger other risks".
Interconnectedness is also the theme of Swiss Re's David Bresch research focusing on climate change. As head of Swiss Re's Atmospheric Perils Group, Bresch identifies CO2 as a common thread linking together the ever growing world economic losses due to climate change.
It was at this point that the audience witnessed the re-insurance angle. Bresch presented some neat results estimating the ratio of insured versus uninsured global economic value during the past 30 years. In the mid 1980's this ratio was sitting on its historical average of roughly 50:50.
But in the last two decades there has been a dramatic rise in the proportion of uninsured global capital such that a mere 20% of it is currently covered by insurers and re-insurers. Bresch calls for action to reduce the resulting hike in risk faced by the global economy. His preferred method to hand: the creation of a global carbon market using cap and trade.
Thomas Hess, chief economist at Swiss Re, presented some very elegant mathematical models of the global financial risk landscape. According to Hess' calculations, the impact of the ongoing financial crisis on the real economy "is just getting started". His analysis focuses on an historical analysis of the default rate observed in so-called speculative grade companies.
This key business risk index typically stands at around 5%. Hess' warning about the possibility of nastier things to come is based on the observation that the current value is barely above this historical level, yet his model predicts that it will peak at 21% during the course of the crisis.
To put that percentage in perspective, the peak speculative grade default rate during the deep global recession of the early 1990s was a mere 12%. The dramatic bursting of the dotcom bubble in 2002 yielded a value of just 10%.
The problem, Hess emphasized, is the potential for this kind of upheaval to destroy good companies as well as bad. And Hess didn't seem to have the same enthusiasm for market based solutions as Bresch had presented before him. Hess quipped "When will the current crisis end? When the next bubble starts."
So can cap and trade really provide an interconnected solution to the global economic and environmental calamity we seem to be facing? The most recent news from the EU's carbon trading scheme would suggest otherwise.
Alas, we are yet to see the dawn of a new bubble in the value of carbon credits.
