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Global Risks Push World Toward a Tipping Point

Global risks are critical for business leaders to understand. These risks can have a significant impact on the earnings potential of existing business activities and change the lens through which new investment opportunities are evaluated.

Today, risk mitigation is a tale of resilience writ large against a global backdrop, in which challenges take shape over varying timelines while companies must meet the immediate demands of a fluid geopolitical environment that can bedevil supply lines and wreak havoc on personnel, productivity and prosperity.

In 2014, events in Ukraine led to a significant deterioration in the relationship between Russia and the West—with spillover impact for international trade, economic growth prospects and energy investments. Cyber-attacks throughout the year underscored the economic threat and the need for evolving risk mitigation strategies. The Ebola outbreak in West Africa crystallized fears about the potential harm from a widespread pandemic, while exposing lingering vulnerabilities in the international community’s ability to deal a global health crisis. Sustained low interest rates are raising the specter of more asset bubbles before we’ve recovered from the last financial crisis.

While trends and events that underlie risks of this magnitude cannot be controlled by companies—individually or collectively—better awareness of global risks can help companies prepare for adverse scenarios and take actions that help mitigate the impact. The evolution of some global risks may also create growth opportunities.

The annual Global Risks report, prepared by the World Economic Forum with the help of Marsh McLennan and other partners, highlights the major threats facing the world today. In recent years, the report has drawn attention to impending fiscal crises, the dangers of a slowdown in critical infrastructure investment, the growing threat of antibiotic-resistant bacteria, rising vulnerabilities in cybersecurity, and escalating environmental risks. The 2015 edition points to significant changes in the risk landscape.

Global Risks of Highest Concern

This year’s report represents a significant shift in risk perceptions among survey respondents. Geopolitical risks—interstate conflict, state collapse, failure of national governance—are now center stage. There is also rising concern about societal fragility: food and water crises, infectious disease and profound social instability are at or near the top of the survey list. Concerns about cybersecurity and other technological risks continue to grow.

The overall shift in the global risk ranking is the largest in the report’s ten-year history. Business leaders need to assess the impact of this changing risk landscape on their current businesses and future investments.

Global risks of highest concern by time period.

Global risks of highest concern by time period.

Major Themes in the 2015 Report

The Global Risks report also highlights three major themes that cut across multiple risk areas: threats arising from the accelerated interplay between geopolitics and economics, risks from rapid and unplanned urbanization in developing countries, and the potential hazards related to emerging technologies.

Yet the world seems ill-equipped to deal with global risk issues in an era when response times are compressed to match the speed of social media, where risks transcend borders and solutions require the collaboration of a multitude of stakeholders that are increasingly nationalistic and protectionist.

Geopolitics and Economics

Geopolitics and economics have been intertwined throughout history, but their interplay is intensifying in the current environment. Both advanced and developing economies are beset by rising social inequality and structurally high levels of unemployment. There is a constant groundswell of discontent with political leaders who are not delivering the quality of services that people demand or who are suspected of corrupt practices. In some countries, this is strengthening fundamentalism, nationalist sentiment and desires for independence or regime change.

Unilateralism has taken root on the international stage; protectionism is on the rise in G20 countries. Sanctions and other constraints are wielded as major diplomatic weapons—not just to hurt individual countries, but also to target dominant market players.

Trade agreements are becoming more tortuous and politicized. East Asian countries are now faced with three competing initiatives, led by the U.S., China and ASEAN respectively. New institutions, such as the twin pillars of the so-called BRICS bank, are being set up to rival existing multilateral bodies. Together the weakening of global institutions and rise of punitive geo-economic measures could choke long-term economic growth in both advanced and emerging economies.

Companies need to adapt their strategies to reflect the potential impact of these geopolitical risk dynamics. They can also try to play a proactive role in mitigating the risk by steering policymakers toward global collaboration rather than national self-interest.

Rapid and unplanned urbanization

In 1950, one-third of the world’s population lived in cities. Today the proportion is over 50 percent, and by 2050 city dwellers are expected to account for more than two-thirds of the world’s population. Urbanization can bring important benefits for economic development. But rapid urbanization can also amplify many global risks.

Poverty and inequality can be high when labor outstrips demand. Social instability can increase in the absence of much-needed services, and urban violence can soar. The existence of almost 700 million urban dwellers across the world without adequate sanitation is fertile ground for the spread of infectious diseases. Urbanization is also concentrating a higher proportion of the world’s population in flood zones; coastal cities in China, India and Indonesia are at most risk.

Strong leadership at both the city and national levels will be vital for developing plans to counter these vulnerabilities. Private sector collaboration will be needed to provide necessary investment, and maintain a long-term trajectory toward positive economic development.

Strong leadership at city and national levels will be vital for developing plans to counter these vulnerabilities.

Emerging Technologies

Emerging technologies that are visible today have the potential to further enhance global prosperity and help alleviate major global concerns.

However, innovation also creates new risks. Take synthetic biology: creating new organisms from DNA building blocks offers the potential to fight infectious diseases, treat neurological disorders, alleviate food security concerns and create biofuels. The flipside is that genetic manipulation of organisms could also create significant harm, through accidental leakage of dangerous synthetized organisms or bio-terrorism threats from organized groups or lone individuals in the growing “biohacker” community.

Artificial intelligence (AI) also presents a double-edged sword.   Advances in AI can increase economic productivity, but might also create large-scale structural unemployment leading to serious social upheaval. AI developments also raise new questions about accountability and liability: who is accountable for the decisions made by self-driving cars, when they weigh the choice of harming pedestrians versus passengers?

Realizing the potential benefits from emerging technologies requires a willingness to accept risk, but we also need to manage this risk to avert disasters that might have been avoidable. More energetic dialogue between stakeholders—including both industry and governments—and increasing funding and priority for research related to risk governance are among the steps needed to help balance the scales.

Understanding and managing risk is critical to business success. The global risk environment is changing and corporate leaders need to understand the nature and implications of these shifts for their businesses—to take actions which help mitigate potential damage, and to capitalize on potential new opportunities.

Companies should also consider how to collaborate with the public sector to establish better governance of global risks. Concerted efforts to balance stakeholder interests, foster cooperation, and encourage timely interventions should help to build resilience and yield benefits for all.

John Drzik

Chairman of Marsh McLennan Insights

John P. Drzik is chairman of Marsh McLennan Insights, a research group focused on identifying breakthrough perspectives and solutions to society’s most complex challenges. He frequently writes and speaks on timely strategy, risk management and insurance issues. John previously served as president of Marsh’s Global Risk and Digital division, where his responsibilities included consulting, analytics and digital insurance solutions. Prior to this, he was CEO of Oliver Wyman. John serves on the advisory board of the International Risk Governance Council and the Wharton Financial Institutions Center.

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