Managing risk in the 21st century by dux15396


									                                  managing risk in
                                  the 21st century
                                  The risk environment is changing faster then ever
                                  before. Global insurance market Lloyd’s and NATO have
                                  collaborated to examine how business leaders and
                                  governments can tackle future emerging risks.

impacts of climate managing cyber risk: tackling piracy:
change on business from cyber terrorism issues, trends
and security       to cyber CRIME       and solutions
page   02                          page   04                              page   06

These articles do not necessarily represent the opinion of the Financial Times, but the opinions
of Lloyd’s and the contributing authors.

                                                   Lord Levene, Lloyd’s Chairman
                                                  are seeing a series of incremental but insidious     looked for solutions. Some important trends
                                                  changes that have the potential to disrupt the       emerged:
                                                  way we do business.
                                                      The overriding impression I took from          • We need greater investment in research and
                                                  the seminar is that we are looking at a pretty       development, particularly on climate change
                                                  scary future of floods, droughts, kidnaps            and digital threats.
                                                  and ransoms, identity fraud and computer
                                                  scams. Faced with such a prospect, people          • Risk management needs to move from the
                                                  and businesses are divided into two camps;           backroom to the boardroom. We have acres of
                                                  those who think that there is nothing they           data at our disposal, but too few decisions.
                                                  can do, that they are too small or insignificant
                                                                                to solve these       • We need pragmatic policies that reflect reality.
                                                                                problems and,          Climate change is irreversible. Cyber space
                                                                                on the other hand,     is here to stay. Failing states will breed more
                                           Risk Management                      those who will         pirates. Action is necessary.
                                                                                adapt themselves
    Lloyd’s recently
                              needs to move from the                            to change and              Lloyd’s teamed up with NATO in part
asked business leaders        backroom to                                       influence the future. because when things go wrong in a very big
which risk keeps them                                                               Our seminar        way, NATO and Lloyd’s are on speed dial. But
up at night. The answer       the boardroom.                                    gathered people        the partnership reveals more than a common
was overwhelming:                                                               from very different interest in risk management. Business and
“the economic climate”.                                                         fields. A polar        governments need each other to manage
Given the global economic recession this is       explorer, a security expert from BT, the             each of these risks. Take piracy – without the
not surprising, but this publication – based      Estonian Defence Minister and a Lloyd’s              insurance provided by Lloyd’s or the security of
on a 360 Risk Insight seminar jointly hosted      piracy underwriter all shared a stage. The           NATO’s patrol vessels, shipping could seize up
by Lloyd’s and NATO should remind the             variety was deliberate, because even a cursory       in the Gulf of Aden.
business community that the other big issues;     glance at some of these problems reveals a               Globalisation has re-distributed power.
climate security, cyber crime and piracy haven’t  complex cast of characters. We could have            This doesn’t mean that governments are less
gone away. If a lasting feature of this economic  found the event was a Tower of Babel, with           important, but it does mean they will need to
crisis will be to improve risk management, my     us all speaking different – and untranslatable       bring business to the table to work out how to
advice to industry is to ensure that these issues - languages, but that wasn’t the case. People        manage complex risks. This publication sets out
are on your boardroom agenda. In all three, we    listened hard, rolled up their sleeves and           why business needs to accept the invitation.
                                                                                                            CLIMATE CHANGE

impacts of climate
                                                                                                   to home: storms and flooding, droughts and
                                                                                                   water shortages. But how will this impact on
                                                                                                   business and security?

change on business                                                                                 Arctic opportunities

and security
                                                                                                       In September, two commercial ships used
                                                                                                   the Arctic to transport goods from South
                                                                                                   Korea to the Netherlands. This journey
                                                                                                   feels significant, the beginning of a new era,
In just a few weeks, at the UN Climate                                                             or a symbol that something we had taken
Change Conference in Copenhagen, world                                                             for granted, that the ice caps were fixed,
                                                                                                   monumental and permanent, has changed.
leaders will pose for the customary “family                                                        Many of us dimly recall learning at school
                                                                                                   about the search for the Northwest Passage
photograph”. Will this be one that we want                                                         linking Asia and Europe – tales of maritime
to keep in the albums of history, or will it                                                       daring and disaster as, for centuries, ship after
                                                                                                   ship failed to make it through the ice.
endure as a reminder of the day when the                                                               Of course, the Arctic remains a hostile,
world failed to tackle global warming?                                                             high risk and difficult environment, for
                                                                                                   shipping and for energy exploration, but it
                                                                                                   is becoming accessible.
Our 360 Risk Insight panel of                    returned from the Arctic and wants to share his       The opening of something that has been
Pen Hadow, David Smith and                       experiences and observations from the Catlin      locked tight to every previous generation
Nick Mabey examines whether                      Arctic Survey. The video deftly sums up his main  requires sensitive and careful handling by the
the road to Copenhagen is paved                  point: the ice at certain times of year is thin   businesses that want to operate in the region
with more than good intentions,                  enough and sparse enough to swim through.         and by the Arctic states, which are busy
and why business and security                    The ice cap is shrinking, and more quickly        staking claims to the newly accessible seabed
communities must prepare                         than we first thought. Hadow explains that we     and the precious resources that lie beneath it.
themselves, regardless of the                    have already lost 40% of summer
success or failure of the summit,                ice cover, an area the size of the
for massive changes ahead.                       United States, and what is left
                                                 is thinner.
                                                                                                      The secret to survival
                                                     Hadow, who will present his              as the fittest, is to get ahead
The world is changing                            findings in Copenhagen, wants
    Presentations at Lloyd’s rarely begin with   to drive home to the business                of the climate curve and exploit
a video clip of “me at work”. But then most      and security communities that                the opportunities before
people’s average day doesn’t involve a swim in   the loss of ice will affect far
the Arctic Ocean. Explorer Pen Hadow has just    more than the Arctic region.                 your competitor does.
                                                 “As the Arctic opens up, and it is
                                                 going to open up, I think there
                                                 is going to be a mass-scale change of vision           The de-industrial revolution?
                                                 in how we regard our planet. It is not going          Pen Hadow calls the Arctic the “visual
                                                 to be seen as this irrelevant, inaccessible,       manifestation” of global warning, but stresses
                                                 dead-end place”.                                   that change will happen everywhere. David
                                                     NATO Secretary General Anders Fogh             Smith, Chief Executive of Global Futures
                                                 Rasmussen agrees, setting out how the              and Foresight, argues that “we are at a point
                                                 opening up of shipping channels in the Arctic of discontinuity”, in other words that climate
                                                 and potential resource exploration will, very      change has led us to a tipping point where
                                                 directly, change the relationship between          nothing will ever be the same again. Strong
                                                 human beings and the Arctic.                       words, and Smith takes a Darwinian position,
                                                     Both men understand that this is not           whereby companies that recognise change is
                                                 just about the ice caps, or as Hadow calls         inevitable will outclass competition that is
                                                 them “the white bits on a children’s globe”.       slower to grasp the point.
                                                 There is a connection between the white               The secret to survival as the fittest is to
                                                 bits and the Equator, which in turn drives         get ahead of the climate curve and exploit the
                                                 our weather systems. The melting ice will          opportunities before your competitor does.
                                                 lead to more extreme weather events closer         Significantly, panelists predict enormous

                                                                Impacts of climate change on business and security

investment in non-polluting infrastructure                                                         If the international
and a growth in green consumer spending.                                                        community wants to avoid
According to Smith, ethical spending has                     Climate change is not              a breakdown in the security
held up well during this recession.                                                             environment, Mabey is
Nick Mabey, of the think-tank E3G, estimates
                                                      going away, so we need to focus           unequivocal that the world needs
that “the transition to a low-carbon economy          on adapting our businesses                a zero-carbon energy system by
will require investments worth $1.3 trillion                                                    2050 with a carbon-free power
up to 2030”. Smith assumes that a massive             and homes to reduce our                   system in developed countries
change in public thinking will drive businesses       vulnerability.                            by 2030. This calls for
to ensure that their brand is greener than their                                                a quadrupling of governmental
competitors’. A race to the top will ensue, with                                                expenditure on research and
                                                                                                development and a doubling
                                                                                 of the rate at which advanced technology
                                                                                 moves into the developing world.
                                                                                     Will this happen? Mabey and Smith fear
                                                                                 a “greenwash”, climate change speak for
                                                                                 a fudge. Yet regardless of the hard outcomes
                                                                                 in Copenhagen, the direction of travel
                                                                                 is looking increasingly clear, with public
                                                                                 debates springing up in such diverse places
                                                                                 as China and Mexico. Mabey, however,
                                                                                 wants to hear stronger voices from the
                                                                                 security and business sectors in the lobbying
                                                                                 ahead of Copenhagen, after all, he warns:
                                                                                 “you are going to have to pick up the bill”.

                                                                                                     Whatever happens at Copenhagen,
                                                                                                     climate change will not stop
                                                                                                         Our 360 Risk Insight panelists agree
                                                                                                     on the importance of decisive action at
                                                                                                     Copenhagen, but divide on the prospects
                                                                                                     of success. Perhaps the only person not
                                                                                                     tuning into what happens in the Danish
                                                                                                     capital this December is Mother Nature.
                                                                                                     Regardless of what is, or is not, decided,
                                                                                                     the ice will get thinner, crack and melt,
companies devising tighter, cleaner supply          – not just oil and gas, but also water and       and forests will fall prey to fierce fires. The
chains. Additional climate change wins,             basic food crops – will lead to instability      overriding impression of this debate is the
argues Smith, will include the ability to recruit   between states and within individual             inevitability of a big shift in the way we live
the best talent, to keep on the right side of       countries. Mabey claims that security            and the risks that we face. Lord Levene,
regulators and even to secure investment.           analysts are converging on a central scenario:   Chairman of Lloyd’s, argues for a “policy
    Is Smith right to predict such a profound       the world will witness more instability,         of pragmatism”, accepting that climate
shift in public expectations? Mabey thinks          more internal conflict - more “Somalia-like”     change is not going to go away, and a focus
so, he senses activism in the air and predicts,     ungoverned places.                               on adapting our businesses and homes to
in the weeks leading up to Copenhagen,                   Given these trends, managing resources      reduce our vulnerability. Adaptation, claims
that “a tsunami of public opinion is about to       will require enormous amounts of preventive      Levene, ranges from “grand schemes” like
land on politicians”. He suspects that this is      diplomacy. NATO Secretary General agrees         the Thames flood barrier, to simple solutions,
making some people nervous: “a lot of press         that a discussion should begin on “how we        such as householders in flood zones “moving
releases are already being prepared to justify      – NATO as an organisation and individual         valuables upstairs”.
why Copenhagen can’t work”.                         Allies as well – can do better to address the        Another conclusion from the debate
                                                    security aspects of climate change”.             is the urgent need for highly networked
Climate change will act as a threat                     Mabey is calling for sharper risk            solutions, bringing in governments, security
multiplier                                          management of climate change, and urging         architecture, businesses and consumers.
   Nick Mabey believes that one ray of              all parties to consider the worst-case           Pen Hadow ends his presentation by turning
light at Copenhagen will be unanimity on            scenarios: a failure to agree low-carbon         to the great and the good of the security and
the global security implications of climate         targets, or prevent deforestation or glide       business worlds, arms stretched wide, saying
change. The premise is that scarce resources        smoothly to a nuclear powered future.            “it is over to you now”.

   Impacts of climate change on business and security
                                                                                             CYBER RISK

                      managing cyber
                      risk: from cyber
                      terrorism to
                      cyber CRIME
                       In less than a generation, cyber space
                       has gone from being a new frontier to an
                       established city, where we shop, bank, trade
                       and even govern. But for criminals, terrorists
                       and hostile states, cyber space still bears the
                       hallmarks of a frontier town, with inadequate
                       policing, security or standards.
                       Our 360 Risk Insight panel of                  similar trends of careful planning against clear
                       British Telecom’s Ray Stanton and              targets. Government, industry and private
                       Estonian Minister of Defence Jaak              internet sites were carefully identified to cause
                       Aaviksoo consider how businesses               maximum disruption to the country. Many
                       and governments can manage this                ordinary Estonians found themselves unable
                       growing threat.                                to go about their daily routines so, of course,
                                                                      they questioned the ability of their government
                                                                      to provide stability and security. Although the
                An enemy within the PC                                motivations of the commercial criminal and
                    Cyber crime is not a niche business.              the hostile state are very different, our panelists
                It attracts a broad range of criminal activity        identified some common defences against
                from petty thieves and organised criminals            cyber attack.
                                        to hostile states and
                                        terrorists. We all            Are you wearing a cyber safety belt?
                                        have information                  Ray Stanton advises that “today, there are
                                        somewhere in our PCs          more compromised personal and business
proper risk analysis,                   or BlackBerrys that           computers than two years ago” – a clear call
                                        others would like to use      for individuals and businesses to pay more
businesses are running                  for their own ends. The       attention to their cyber security.
a risk of their systems                 phishing attack at Yahoo,         Many of us underestimate the digital risks
                                        Hotmail and Google in         we run, or we think that there is nothing we
being compromised                       early October, resulting      can do to defend ourselves. This is actually
through the                             in the loss of thousands      not true. Basic security rules apply in cyber
                                        of passwords, is the latest   space just as they do when we drive a car.
back door.                              sign of the determination     In a car we keep the brakes in good condition
                                        of organised cyber gangs      and ensure that the lights work. When
                                        to access our data. These     operating a computer, we need to keep
                groups are growing increasingly sophisticated.        a constant eye on the virus guards and firewalls.
                They will seize on times when our defences are        A failure to do this can have disastrous results.
                at their lowest - during a flood or an earthquake     For example Bank of America lost its ATM
                - when IT departments are focused on restoring        network due to a simple virus.
                online services.                                          An important role for governments and
                    At another end of the crime spectrum,             businesses is to educate people about cyber
                the 2007 cyber attack on Estonia showed               risks and how to defend themselves from attack.

                             Managing cyber risk: from cyber terrorism to cyber crime

    But we should guard against a belief that       Balancing security and innovation                     pioneering stages of the industrial revolution.
producing a leaflet or a training manual will           It is impossible to stop, or even slow            An overwhelming amount of invention in
solve all of our problems. Many people need to      down the speed of innovation. Businesses              a short period of time led to an initial phase of
change their online behaviour and unlearn bad       that try to do this may find themselves at            barely regulated, highly localised innovation.
habits. Getting people to stop smoking or wear      a disadvantage – everyone in the workplace            Railways ran on different gauges and there
seatbelts were not easy tasks, but over the space   knows how frustrating it is to be denied the          was a general lack of standardisation. Of
of a generation, many people have ditched           latest technology or access to certain sites          course, the situation settled in the end and
cigarettes and belted up, so it can be done.        and services. However, businesses need to             common practices, not least safety standards,
    Stanton predicts that individuals will          keep a close eye on security.                         were established. Essentially, the pace of
increasingly buy their own end devices,                 At the international level, the Council of        change slowed so that the predecessors of
BlackBerrys or PCs. Remote workers are              Europe Convention on cyber crime aims to              today’s risk managers could catch up. But it
already using machines which have not been          stimulate countries to monitor, patrol and            took an enormous burst of energy and
bought or adapted by an IT department.              regulate their cyber space, and to cooperate          a conscious attempt at better coordination.
Without proper risk analysis, businesses            with one another. Jaak Aaviksoo believes              Now we need to do the same.
are running the risk of their systems being         cyber space must continue to be “a free                   For Jaak Aaviksoo, the most important
compromised through the back door.                  domain, where civil rights and liberties              factor in Estonia’s stand against the 2007
    Complex supply chains lead to what              remain protected”.                                    attack was not its formal defence hierarchy,
Stanton describes as ‘deperimeterisation’ –                                                                        but the informal cooperation between
a long word meaning we do not know where                                                                           experts in government, banking and
our information boundaries lie. Can a modern                                                                       telecommunications companies. The
company secure information all the way
                                                                     Digital threats need                          actual attack has sharpened minds.
through its supply chain? Stanton believes that        a focused, long term risk                                   Aaviksoo believes “different states
it can, but this requires highly focused risk                                                                      and non-state organisations have
management, concentrated on understanding              management strategy, with                                   decided to grab the ball and run with
what data is critical to a business.                   a heavy emphasis on                                         it”. But he sounds a warning bell that
    A significant challenge is the sheer                                                                           often there is “little coordination,
scale of people using digital technologies,            business continuity.                                        with civilian and military structures
or what Stanton calls the power of four:                                                                           working in parallel, with limited
veterans, baby-boomers, generation X,                                                                              communication”.
and the Y-generation. They all have                     But the international dimension remains
different educational needs. In addition,           a thorny one, even in the case of a hostile           Prepare for the improbable
the Y-generation of people in their teens           attack from another state, leaving NATO’s                 Jaak Aaviksoo, who has experienced the
and twenties demand more online services            legal team with a series of difficult issues. Can     front line of a cyber war, sums up his approach:
which creates the commercial imperative             a computer be considered a weapon? Is a cyber         “It is the impact of highly improbable events
for constant digital innovation. So the risk        attack an armed attack? Do NATO allies have           which will change our lives, sometimes
landscape is never static.                            a collective duty to defend each others cyber       dramatically.” Good risk management does not
                                                                 frontiers? Where are these borders       only cover what is likely, but looks at the big
                                                                       anyway? Individuals and            bang events that change everything. Digital
                                                                           businesses may well have       systems, which interconnect a myriad of
                                                                              the easier task. They       systems, processes and people could make
                                                                                can make real strides,    a very big bang indeed, so we need to be bold
                                                                                 simply through           in thinking the unthinkable. We can draw
                                                                                 surveying their digital  a number of conclusions. Digital threats
                                                                                 space in the same way    need a focused, long-term risk management
                                                                                 as their physical space. strategy, with a heavy emphasis on business
                                                                                 No one would leave       continuity. Failure to plan for the worse can
                                                                                the door to their house   have serious effects - disruption to IT systems
                                                                              or business open when       caused by a subsea earthquake left traders in
                                                                            they go out, and in cyber     financial institutions unable to work for hours.
                                                                        world, there are usually several  Boards need to get involved, not least because,
                                                                    doors that need to be locked.         in the UK at least, data protection laws could
                                                                                                          leave them responsible and accountable for
                                                           Cooperation, cooperation,                      a loss of data. Proper risk management could
                                                       cooperation                                        quite literally, save you from jail.
                                                        In many ways, we find ourselves in
                                                    a similar position to nineteenth-century                  Lloyd’s new report, Digital Risks, can be found
                                                    businesses and governments during the                 at

   Managing cyber risk: from cyber terrorism to cyber crime

tackling piracy:                                                                            boarded, the remedies look pretty desperate.
                                                                                            So the challenge is to stop them getting on

trends, issues
                                                                                            deck in the first place.
                                                                                                Efthimios Mitropoulos provides a quick

and solutions
                                                                                            geography lesson. Global piracy hotspots
                                                                                            have switched from the Straits of Malacca,
                                                                                            Singapore and the South China Sea to the
                                                                                            coast of Somalia and the Gulf of Aden, and
Lloyd’s has dealt with the age-old problem                                                  now into the Horn of Africa and the wider
                                                                                            expanses of the Western Indian Ocean.
of piracy for centuries, but the daring of                                                      Modern day pirates are not just extending
                                                                                            their geographical reach. Mitropoulos
new-age pirates with their speedboats and                                                   points out that they have become bolder,
machine guns has captured the headlines                                                     better armed and that attacks have grown
                                                                                            dramatically in both number and ferocity.
and sent fear rippling through the marine                                                   The Somali pirates are a long way from the
community. With hundreds of ships held                                                      treasure-seeking buccaneers of Hollywood
                                                                                            films. Their methods, as they take on multi-
hostage every year, pirates have once again                                                 nationals, are brutal and direct – hijacking

stepped out of the pages of children’s fiction                                              ships and holding their crews against huge
                                                                                            ransom demands. “The average ransom
and into a brutal new reality.                                                              last year was between one and two million
                                                                                            dollars, and this has gone up to between two
                                                                                            and three million” explains Atkin.
                                                                                                To date, this has resulted in the injection
                                                                                            of some $90 million into the Somali
                                                                                            economy. For the struggling communities
                                                                                            in this part of the world, which a bitter
                                                                                            civil war has left with no effective form of
                                                                                            government or justice, it is easy to turn a

                                                                                              Pirates have become
                                                                                       bolder, better armed and
                                                                                       equipped and attacks
                                                                                       have grown dramatically
                                                                                       in both number
                                                                                       and ferocity.

                                                                                            blind eye to the pirates’ activities.
                                                                                            Atkin describes how, when early Somali
Efthimios Mitropoulos, Secretary           has watched piracy grow and become               pirates returned home, their families were
General of the International Maritime      increasingly sophisticated over recent years.    missing, having been kidnapped while they
Organization (IMO), and Rupert Atkin,      Have we responded accordingly? Merchant          were holding up a ship. The pirates have got
Chief Executive of the underwriting        seamen, understandably, do not want to           round this problem by making deals with
firm, Talbot, consider the impact of       carry arms. So they have used a variety          local communities to protect their families
modern day piracy on business.             of tactics from fixing barbed wire to their      whilst they are at sea. This has resulted in
                                           ships to using fire hoses and loud horns.        pirates funding not just the growth of 4x4
                                           Not hugely different from sailors in the last    vehicles in the Somali wilderness, but also
Pirates of the Gulf of Aden                Elizabethan era, who greased the decks and       basic services such as clean water. The more
   No one would expect a city CEO to be    sprinkled them with dried peas and broken        reliant that Somalia becomes on this money,
worrying about pirates, but Rupert Atkin   glass. The message is clear: once a pirate has   the less likely a permanent solution looks.

                                                                      Tackling piracy: trends, issues and solutions

Cost of piracy                                    and hence the Suez Canal, would affect Egypt’s   is expensive and nobody really wants the
    Ask the crew of the kidnapped vessels         economy and its fight against extremism.         pirates either in their jails or seeking asylum in
what the human cost of piracy is, after they         Seen in this way, piracy quickly becomes      the event that the legal process fails, they are
have been held hostage for weeks on meagre        a universal concern, with severe impacts on      often just simply disarmed and handed back”
rations. Consider the impact on consumers         global trade and regional stability.             explains Atkin.
across the world. Shipping is about taking                                                             The IMO has created the Djibouti Code
products from A to B, and if that journey is Short-term military solutions                         of Conduct, which aims at cooperation
prolonged, or a cargo is lost through a hijack,  The International Maritime Organization           between signatory states on the arrest and
                                             (IMO) has been working to find a solution to
then costs inevitably rise. The average cost of                                                    prosecution of pirates, as well as rescue work.
                                             piracy since the 1980s, in conjunction with
a hijack is $1,000,000 per ship. These expenses                                                    Unsurprisingly, with so many different states
are currently being born by the shipping and the United Nations, national governments              and international actors, finding the right legal
                                                             and other political and defence       framework to close up the loopholes that allow
                                                             organisations, such as the            pirates to return, time after time, to their ships,
                                                             European Union and NATO.              is a major challenge.
                Until the international                          Efthimios Mitropoulos
   community finds the tools to                              believes that this grand alliance     Long-term solutions
                                                             is making headway.                         Protecting merchant vessels through the
   address failing states, we can only                       “The response to piracy has           Gulf of Aden, and ensuring that more pirates
   treat, not cure, this modern                              been one of the great examples        face justice are short-term goals. The long
                                                             of international cooperation in       term solutions lie inland, in the struggling
   day outbreak of piracy.                                   the modern era,” he says, with        state of Somalia. Everyone agrees that once
                                                             a degree of pride, noting that        onshore, the pirates face a bleak and insecure
                                                             national Navies from every point      future in a country with no functioning courts,
energy sectors, but if the problem persists, of the compass are working together.                  frequent fighting between rival warlords and
Atkin advises that “ship-owners will             The IMO is working with the military to           little opportunity for regular work. Until the
eventually pass on these costs”.             protect shipping routes and educate them on           international community finds the tools to
   The astonishing growth of attacks by      preventive, evasive and defensive measures.           address failing states, we can only treat, not
Somali pirates has not gone unnoticed in     Mitropoulos advises ships sailing through the         cure, this modern-day outbreak of piracy.
neighbouring countries. Yemen, which has     Gulf of Aden to contact coordination focal
Al-Qaeda and secessionist issues itself, is  points, to use the transit corridor and to travel         Email to register for
potentially the next source of problems.     in groups. The Secretary General and Rupert           information from Lloyd’s 360 Risk Insight,
Looking at worst-case scenarios, Atkin asks  Atkin agree on the need for punitive measures         including regular newsletters, events and reports
how a shipping boycott of the Gulf of Aden,  against the pirates. “Because legal prosecution       on emerging risks.

   Tackling piracy: trends, issues and solutions

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