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Preparing for war: business contingency planning urged in Cambridge Risk Centre seminar

19 February 2015

The article at a glance

As conflict continues in Ukraine, and the prospect of an expansionist Russia throws a shadow of war over Europe, the Cambridge Risk …

Andrew Coburn
Andrew Coburn

As conflict continues in Ukraine, and the prospect of an expansionist Russia throws a shadow of war over Europe, the Cambridge Risk Centre for Risk Studies today urged businesses to incorporate geopolitical conflict scenarios into their business preparedness planning.

“These risks are continuing to grow in this new era of political uncertainty,” said Dr Andrew Coburn, Director of the Centre for Risk Studies Advisory Board at Cambridge Judge Business School. “Businesses should reappraise their readiness to manage possible disruption to their activities from armed conflicts in different parts of the globe,” he said at the Centre’s risk briefing held in the City of London.

Interstate conflict was the number one concern of nearly 900 businesses and academics who responded to the Global Risks 2015 Report published in January by the World Economic Forum.

The Cambridge Risk briefing demonstrated how a major regional conflict, such as a war between China and Japan continuing over months, could cause damage to the world’s economy as severe or worse than the great financial crisis of 2008.

This is, Andrew Coburn stressed, not a prediction but a scenario of a highly unlikely but not impossible event that allows organisations to stress test their business continuity plans and strategies for surviving the financial and counterparty challenges that could result.

It also offers a capital stress test for insurers to consider their ability to manage underwriting losses and the impact of market fluctuations on their investment portfolios.

The Centre for Risk Studies and its research partner, Cytora, identified more than 100 potential country-to-country conflicts based on recent antagonist statements towards each other, antithetical values and historical enmity. All have the potential to cause severe disruption to business activities.

Cytora’s risk map of potential future conflicts highlights a number of regional hot-spots, including the obvious Middle East, Central and Eastern Africa; the Eastern European margins; the Indian subcontinent, parts of Latin America and the emerging Southeast Asian powers.

Said Andrew Coburn: “The threat to the global economy is most severe from outbreaks in Southeast Asia, due to the trade linkages there, but conflicts in the Russian hinterland could have severe impacts on the energy sectors and commodities.”

Since China and Japan are the world’s second and third largest economies, the global impact of the hypothetical conflict would be very significant with the worst economic damage to international trade. In total, the scenario presented today envisages the world’s GDP output at between $17 trillion and $32 trillion less than currently expected over the next five years. The capital markets would be badly hit and investment portfolio returns could be reduced by 20-50 per cent.

When it comes to insurance, because claims from war damage are excluded from most policies, such a conflict is not likely to result in large insured property losses. There could however, be significant claims from the indirect consequences of the conflict, for example in liability classes, life and health insurance, contingent business interruption and in other lines where there are ambiguities around exclusion. “Insurers need to ensure that their war exclusion terms are robust to avoid major losses,” said Andrew Coburn. “They should also be aware that in an event, it may be politically impossible to enforce the exclusions, at least in full.”

Managing the business risk posed by political instability and other threats is a research theme of the Cambridge Centre for Risk Studies, presented in its current London risk briefing series and provided in a new suite of publications. Other detailed scenarios include cyber risks, influenza pandemic and large scale social unrest.