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‘Cambridge Stress Test Series’ launched with four timely risk reports

20 November 2014

The article at a glance

From pandemic to cyber sabotage, series helps business prepare for potential ‘catastronomics’. The Cambridge Stress Test Series, a series of reports on …

From pandemic to cyber sabotage, series helps business prepare for potential ‘catastronomics’.

‘Cambridge Stress Test Series’ launched with four timely risk reports

The Cambridge Stress Test Series, a series of reports on the potential global impact of threats including pandemics, cyber sabotage, regional conflict and social uprising, was launched today by the Cambridge Centre for Risk Studies (CRS), based at Cambridge Judge Business School, University of Cambridge.

At a time the world is focused on the Ebola outbreak, conflict in Ukraine, Internet security and concerns over rising global inequality, the reports present fictional crises similar to real-life events in order to explore the possible impact of such crises – and help businesses identify their own vulnerabilities to such “catastronomics” in order to identify ways to improve their resilience to sudden shocks in the system.

The economic impact of these scenarios can range from relatively modest loss of gross domestic product (GDP) to – in the most extreme of several outcomes sketched out in the series – tens of trillions of dollars depending on the situation’s handling, its duration and its rate of escalation, underlining the importance of vigorous planning and efficient response to such dangers.

“We want the Cambridge Stress Series to help organisations with their risk preparedness in a complex and increasingly unpredictable world,” said Dr Andrew Coburn, director of the Advisory Board of the Centre for Risk Studies.

A theme running through the Series is that globalization of our economy means that events once confined to a single region can now quickly become worldwide crises – so businesses are looking for ways to manage these emerging and disruptive risks.

The official launch of the Cambridge Stress Test series follows completion of the first four reports, which focus on the economic impact of external events. These will be followed by a second cycle of reports more focused on financial shocks such as a global property crash and sovereign defaults. The reports are being formally presented to business leaders at a series of events beginning in London today.

The first four reports in the Series are the Pandemic Stress Test, which envisions a fictional influenza strain “H8N8” that starts in Brazil; the Cyber Catastrophe Stress Test, in which a “Logic Bomb” infiltrates a software company and spreads throughout the world; the Geopolitical Conflict Stress Test, imagining a China-Japan military conflict; and the Social Unrest Stress Test, focusing on uprisings sparked by high youth unemployment and disaffection.

The Cambridge Stress Test Series does not predict or speculate that any of these catastrophic events will occur – the fictional scenarios are all designed as “1-in-100” events. The scenarios were chosen, however, because although unlikely they are plausible, and businesses need to be prepared to address such “what-if” scenarios.

Each report is structured around a narrative of the fictional scenario and various versions of events, ranging from the standard scenario (S1) to the extreme scenario (X1), and each scenario is measured using a metric called World “GDP@Risk” – the predicted loss of global GDP output over a five-year period following the event, compared to what would have been expected if the event had never occurred. In the cyber sabotage scenario, for example, a key variable between levels is the latency period between the Logic Bomb’s activation and its discovery, because the longer the latency the greater the corruption of global computer systems and data.

The Series reports have various corporate and academic sponsors, identified in the reports, and all reports can be downloaded free of charge from the website of the Centre for Risk Studies.

This is a fuller summary of the first four reports in the Cambridge Stress Test Series:

Pandemic Stress Test: (São Paulo Influenza Virus Pandemic Scenario)

The scenario envisions a fictional influenza strain “H8N8” which is highly infectious, which jumps species from poultry chickens to humans. The pandemic is curtailed when a vaccine becomes available. The virus leads to the deaths of between 19 and 25 million worldwide, depending on the scenario severity, and leads to massive workplace absenteeism as people stay home to care for family members or to avoid the disease – disrupting business further. In the standard scenario (S1), vaccines become available in five months and there is a GDP loss of $7 trillion over a five-year period; S2 considers a similar scenario but assumes a slower public health response, with a loss of $11 trillion; in S3 the vaccine takes a longer time to arrive and is less effective than in S1 and S2, resulting in lost GDP of $14 trillion. In the extreme variant scenario (X1), the failures of the previous variants are combined, resulting in GDP@Risk of $23 trillion.

Geopolitical Conflict Stress Test: (China-Japan Conflict Scenario)

This report imagines a situation in which Japan and China carry out military strikes on each other, without provoking the military involvement of their allies. This clash follows an escalation of tensions over several months, and each nation uses air strikes to destroy the industrial and commercial facilities of the other in an apparent stalemate. The conflict is eventually resolved by international involvement from Russia and the United States. The scenario shows that the consequences of a conflict between major economies would flow far beyond the theatre of military activity to affect the networked activities of the world, including trade flows, national economies, business operations and productivity, and investment markets. The standard scenario (S1) of this event lasts nine months, costing $17 trillion; in S2, the conflict lasts two years and costs $27 trillion; in the most extreme scenario tested (X1), the conflict lasts five years and costs $32 trillion.

Cyber Catastrophe Stress Test: (Sybil Logic Bomb Catastrophe Scenario)

In this scenario, a Systemically Important Technology Enterprise (SITE) computer software company, called the Sybil Corporation, is subject to a malicious insider attack that introduces a compromise – or “Logic Bomb” – into Sybil’s flagship database product, used widely throughout the corporate world. The Logic Bomb has a long latency period between its activation and discovery, during which it progressively creates errors and glitches in data systems. The resulting global macroeconomic impact creates an economic downturn driven by a reduced trust in IT by business leaders, investors, and consumers alike, dubbed an “information malaise.” In S1 the Logic Bomb has a latency period lasting 15 months, with a GDP@Risk score of $4.5 trillion; S2 and S3 consider the same length of the latency period but with a higher impact factor, with potential losses of $7.4 trillion and $8.8 trillion, respectively; while X1 looks at S3 with a latency period of two years, costing $15 trillion in global GDP.

Social Unrest Stress Test: (Millennial Uprising Scenario)

In this scenario, huge social pressure in Europe and the US, linked to high rates of youth unemployment and disaffection, is stoked by a steady accumulation of corporate profits and news of corruption. The millennial generation (born 1980s to early 2000s) is most affected by these social pressures, and their approach to social media means that they are better able to mobilise worldwide than any other demographic group in history. After the bailout of a world bank and the roll out of new austerity measures in the UK, students barred from protesting the cuts in London orchestrate a global protest event via social media – and the resultant “Millennial March” takes place in 1,100 cities worldwide, at times turning violent and destructive, and leading to riots over several months. S1 represents a best guess of what a social unrest scenario of this magnitude might mean for the global economy, costing $1.6 trillion; S2 is identical to S1 but factors in a 20 per cent greater shock to employment, consumption, inflation and confidence, costing $5.3 trillion; while X1 raises these shocks by 50 per cent and expands the affected economies to include developing Brazil, Russia, India and South Africa, costing $8.6 trillion.

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20 November 2014.