BRINK News

Beyond the Inflection Point, When Will Women Thrive?

For women, the past year was remarkable in its disruption and its dialogue. Women broke barriers and broke their silence, earning not only the right to drive in Saudi Arabia but also, and more importantly, exposing abuses of power in the entertainment and media industries, and among government officials. A social movement seized the world’s attention, and one of its most vital goals must be to focus on increasing female workforce participation and empowering women.

Amidst the headlines and the hashtags, leaders and organizations need to ask themselves: “Are we making progress or creating an echo chamber?” When it comes to gender equality, the data remains stark, according to The Global Gender Gap Report 2017 from the World Economic Forum, which was introduced in 2006 as “a framework for capturing the magnitude of gender-based disparities and tracking their progress over time.” The report benchmarks 144 countries on their progress toward gender parity across four thematic dimensions—economic participation and opportunity, educational attainment, health and survival, and political empowerment—and provides country rankings that allow for effective comparisons across regions and income groups.

The most eye-opening statistic from this global study? “Given the continued widening of the economic gender gap, it will now not be closed for another 217 years,” it says. A gap of such magnitude may be hard for us to process as more than an abstraction, but it’s easier to comprehend when we look at the forces facing women in the workforce. For example, millions of jobs primarily held by women—mainly administrative and service jobs—are threatened by the rise of automation. The slow progress toward pay equity plays a huge role in the gap.

A Future-Focused Agenda for Women

This week at Davos-Klosters, Switzerland, as the yearly World Economic Forum gets underway, the opportunity to drive the conversation on the gender gap—and explore solutions—is back. Set for Tuesday, January 23, Mercer’s fourth annual When Women Thrive session will advance the goal of creating a future-focused agenda for women, businesses and societies. When Women Thrive, Businesses Thrive is Mercer’s global research and solution platform, founded to help organizations grow through the active and productive participation of their female workforce.

Men make up 80 percent of the executive ranks. They have a unique obligation to be out in front advancing women’s participation and engagement in the workforce—personally and on behalf of their organization.

Indeed, the current #MeToo moment is a rare inflection point for women in society, as we find ourselves thrust into a broad and potentially game-changing conversation about how women are faring in the workplace and beyond. Everyone – from investors, board members and leaders to rank-and-file employees and customers – is unexpectedly aligned on this issue and paying attention like never before.

The choice facing all of us is whether we are going to seize this opportunity to accelerate progress or watch the potential for progress slip away. The fact is that things could go either way. If we get distracted—if we pay lip service to gender equality but fail to apply the true accelerators of progress in our own organizations—then we may never achieve the results we want.

So what is this model for change? It is essentially the same one that we have been sharing since our first report: a formula for advancement that is uncomplicated but requires great focus and determination. To ensure that women thrive, organizations need:

  • Proof. Organizations must understand what is happening to their female talent. Simply acting on a hypothesis or anecdotes won’t advance women in a meaningful way. The good news is that organizations have abundant data about their workforce and a multitude of analytic tools and methodologies that make it faster and easier than ever to mine that data for critical insights.  
  • Leaders with passion and personal commitment. Analytics, while essential, are not enough. Organizations must have leaders courageous enough to lead change. After all, the purpose of analytics is not simply to study a problem but to solve it, and this requires leaders at all levels of the organization ready and willing to act. This is the much bigger challenge for many organizations, because while analytics can be outsourced, passion can’t. There has never been a more promising moment to engage leaders and create alignment through an organization.
  • Practices and programs that support women’s careers and enable them to bring their whole selves to work. This includes diligent pay equity processes, bias-free promotion and performance management processes, and programs that acknowledge and support women’s disproportionate responsibility for caretaking and unique health and financial needs.

While these building blocks are critical to women’s progress, equally essential are linking mechanisms that connect an organization’s efforts for maximum impact. HR may be sponsoring mentoring programs and business resource groups, Legal may be doing pay equity analyses, and Talent may be conducting employee engagement surveys and looking at high potentials. But if no one is linking together these efforts to ensure they collectively deliver the desired results, the organization’s effort is likely to fall short of creating real change.

Accelerating Towards Change

A number of “system accelerators” give us a growing sense of excitement and confidence about the future, both for women and for the organizations and societies they help power:

  • Advances in big data combined with cutting-edge analytics, which are making it easier than ever for organizations to help women—and all employees—successfully navigate the future of jobs.
  • Committed and engaged leadership, from the board and investors down to team leaders, with heightened interest in issues such as talent development, pay equity and safe working conditions.
  • Innovations in change management, which are helping organizations achieve desired outcomes—not by changing people but by identifying and implementing the drivers of new behaviors.  

When we began this work in our own organization and in others, we knew we were on a journey that would take years to show real results. We are thrilled by the results achieved by some, but there is still a long way to go to truly help women thrive. It will take perseverance and long-term commitment. It’s also vital to emphasize that men matter. They make up 80 percent of the executive ranks and even more than that at the CEO level, and they have a unique obligation to be out in front advancing women’s participation and engagement in the workforce—personally and on behalf of their organization.   

When it comes to preparing for the long term, women face a “perfect storm” financially: They are paid less than men are on average, have more gaps in employment, engage in more part-time employment and are more risk-averse investors. All of these factors potentially reduce the amount of money women are able to accumulate for retirement—yet a woman’s retirement tends to last on average three years longer than a man’s does.

Too often, though, the responsibility for effecting change that would empower women at work is placed on HR management, but what’s required is more than programming within the human-resources silo. The larger goal of a thriving female workforce must be the focus of business leadership, of senior executives who play the role of organizational consciences, educators, and goal-setters. This week at Davos is an opportunity to inspire change from the top down, at a time when the world is listening to women as never before.

The Payoff and Peril of Smart Infrastructure

Smart infrastructure, defined as the “result of combining physical infrastructure with digital infrastructure, providing improved information to enable better decision making, faster and cheaper,” is changing society. Indeed, the Cambridge Centre for Smart Infrastructure and Construction estimates that such infrastructure is a global opportunity worth $2.8 – $6.6 trillion.

Smart grids, for example, which are used to monitor and manage energy consumption in cities, are starting to come online globally. To a large extent, the growth of these new innovations depends on the public sector’s investment appetite. The European Union “aims to replace at least 80% of electricity meters with smart meters by 2020 wherever it is cost-effective to do so.” This ambition was set in 2014, and progress has been substantial. By 2020, according to the European Commission’s 2014 report on smart metering, “it is expected that almost 72% of European consumers will have a smart meter for electricity. About 40% will have one for gas.”

Smart infrastructure will directly reduce costs, increase reliability, and save energy. Other positive externalities, such as enhanced environmental sustainability, will also contribute to the overall benefit to society. In the U.S., smart grid deployment is expected to deliver $1.3 trillion to $2 trillion in benefits over a 20-year period.  

Although the benefits are substantial, potential risks are severe, and the evidence shows proper planning to meet them is not keeping up with smart infrastructure implementation. Insurance companies are acutely aware that the growing interconnectivity within cities may lead to large loss accumulation. In the case of a large infrastructure failure, for example, insurers could be required to meet claims across many different classes of coverage, including direct damage, business interruption, and third-party liability policies. Or take a cyberattack on the U.S. Northeast electrical grid, which could result in economic losses as high as $243 billion. In addition, insurers are pointing to other potential risk scenarios of emerging risks that have vastly varying estimated costs:

The majority of these and other innovation-related risks are uninsured: The insurance gap is as high as 83% in a cloud service disruption scenario and 93% for a mass vulnerability setting. Other risks are yet unknown. Society faces two stark realities that need to be resolved, says Matthew Leonard, partner at Oliver Wyman: “First, people do not fully understand the risks they are running; and second, those who seek to mitigate their risk with insurance are faced with a decided lack of choice and/or affordability.”

Although the benefits of smart infrastructure are substantial, potential risks are severe, and the evidence shows proper planning to meet them is not keeping up with smart infrastructure implementation.

The World Economic Forum convened a working group comprised of government officials, business leaders from the insurance industry, and technology players in its Mitigating Risks in the Innovation Economy initiative to examine how emerging technologies—such as smart infrastructure—are causing a radical shift in the nature of risks faced by individuals, businesses and society. “The world is changing as new technologies proliferate and the nature of risks facing individuals, and the economy is morphing at an increasingly rapid pace,” says Prashanth Gangu, partner at Oliver Wyman and a member of this initiative. “Society needs to be ready for events bigger than the more than $100 billion loss estimates from Hurricanes Harvey, Irma, Maria which could be caused by risks in the global cyber-physical system, either errors in code, malicious hackers or AI gone wild.”

The initiative provided comprehensive recommendations, and prioritized three high-level areas where key stakeholders could start to collaborate:

  1. Insurers, governments and technology players need to come together to accelerate the development of a solution to this large and pressing issue. Existing liability rules were not designed with complex and autonomous systems in mind, which has left stakeholders guessing as to how current liability rules will be applied in practice.
  2. The exchange of data can and will be an effective tool to support the management of vulnerabilities and threats. In the future, governments should continue to foster collaboration and the sharing of information between the public and private sectors. Insurers and technology players should take an active role in these initiatives.
  3. A patchwork of standards and regulations is likely to ensue if there is no collaboration across borders. The resulting risk is an environment in which new technologies must operate under an inconsistent set of safety and operational protocols globally. It is important to identify areas with significant gaps and promote the development of collaborative efforts to establish these global protocols.

The recommendations, along with the risks and challenges posed by various emerging technologies, are laid out in a report prepared by the World Economic Forum and Oliver Wyman titled How Emerging Technologies Are Changing the Risk Landscape.

The Steering Committee and Working Group are now working on developing specific resiliency solutions against the failure of emerging technologies, starting with smart grids. As adoption rates for smart infrastructure and emerging technologies more broadly increase, the public and private sector must work together to develop resiliency and support the implementation of recommendations. The recommendations are to be further developed and piloted in 2018, starting at the World Economic Forum Annual Meeting in late January.

Getting Practical With Emerging Risks

Yesterday’s BRINK article on the outlook for global risks depicted a fractured and fractious world, characterized by the confluence of far-reaching technological disruptions and seismic shifts in political and geopolitical imperatives. The extraordinary velocity of change that is spurring many companies to question not just their basic resilience, but also their fitness for purpose in the new world order is also influencing expectations of risk management.

If robust finances were the major corporate concern during and after the financial crisis, the key issue these days is market positioning. If back then the risk management buzzwords were prudence and controls, now they are business case support and responsive agility. Staying out of—or exiting—certain markets for fear of an unwelcome shift in the political climate might prove expensive, not least if competitors are more bullish. Likewise, the pressure for adopting new technologies is intense, even where near-term performance benefits are uncertain and longer-term ecosystem effects unclear.

As our new report contends, risk leaders should devote more resources to grappling with emerging threats. While this doesn’t mean tasking teams with predicting the future, it does call for a stronger role in challenging prevailing assumptions and giving shape to key uncertainties in a way that illuminates the impact of plausible scenarios and informs senior management decisions. It involves recognizing not just that new risks are appearing on the horizon, but that operational risks may become strategic risks, known risks may become unknown, controllable risks may become uncontrollable, and risks assumed to be acceptable may acquire “fat tails.”

From Identification to Action

Three things are essential if work on emerging risks is to remain true to the messiness of these issues and also be truly integrated into corporate decision processes. These are: creatively exploring the sources of risk; embedding a thorough risk characterization in impact analyses; and being able to justify potential responses.

The search for emerging threats requires looking beyond the issues that can immediately and easily be anchored to business performance. Unpack hot risk topics and trends to see how different—often non-market—forces might surge or collide in problematic ways. Tease out pockets of volatility or uncertainty in the firm’s commercial ecosystem. Apply a fresh lens to the firm’s strategic and institutional vulnerabilities.

It’s often unwise to dismiss possible risk topics too early—they may combine with other ideas and be useful later. And don’t worry at the outset whether something is a risk, a driver or a consequence—that can be resolved in due course. A preparedness to challenge “house truths” is vital, as is not constraining discussions by views on probability (“the chances of that happening are tiny”).

A thorough characterization of the top emerging risks involves assessing what’s shaping each risk, their likely trajectory and its potential consequences, with a view to determining where it might touch the firm, the types of impact and the time profile of the damage. This helps clarify the materiality of each risk, and provides an initial steer for response planning.  

Quantified scenarios that give shape to plausible alternative futures are useful for exposing hidden tensions between commercial ambitions and corporate risk appetite. They can be used not just for stress-testing finances, but also for challenging strategic goals and rehearsing crisis management preparedness. Although scenario narratives and quantification exercises for emerging risks shouldn’t be constrained by historic data and risk relationships, acceptance of the results will depend on the degree to which key stakeholders have appreciated the validity of the inputs.

John Drzik on the Global Risks Report

Management levers that address a range of top-tier emerging risk concerns may present a more compelling business case than multiple action plans targeting individual issues. However, overly generic recommendations will encounter pushback from company leaders as they will be unable to articulate what they will deliver and the (opportunity) cost of doing so. The threshold for mandating action is that much higher than for familiar risks, given the high levels of uncertainty, especially with regard to preemptive responses.

Investment decisions regarding solutions for emerging risks should also take into account residual risk exposures (“are they acceptable?”), any significant knock-on consequences, the lead-in time required to implement the measures, and the speed with which precautionary measures can be unwound should they no longer be needed. Sometimes, aggressive market plays and investment in research and development are more appropriate than defensive mitigation measures. Contingency planning may strengthen resilience against fast-onset risks, where precautionary action has been deemed unviable.

The search for emerging threats requires looking beyond the issues that can immediately and easily be anchored to business performance.

A New Boldness for Risk Teams

With new risks swinging into view, senior-level demands changing, and new technological capabilities emerging, this is an exciting time for risk leaders to reframe their function for the new era.

Taking advantage of the new opportunities requires a shift of emphasis in three areas:

  1. Better alignment with business priorities: Risk teams need to demonstrate strong business or commercial acumen and engage more intensely with the company’s strategic ambitions and major investments. This will sharpen their ability to develop valuable insights into emerging concerns and help scope innovative risk mitigation solutions.
  2. More flexible deployment of resources: Revised analytical methodologies, including the introduction of new data science and automation techniques, should free up capacity in risk teams for more project-based (as opposed to routine) risk work and the provision of advice to business and functional leaders.
  3. Greater dynamism in stakeholder engagement: A more creative lens with regard to emerging risks will enable risk teams to engage with institutional and individual biases and blind spots and help build an appreciation of threats for which evidence may be limited or conflicting.

To take this forward, some risk leaders may need to expand their comfort zone. But those who can mesh strategic vision, influencing skills, and technological fluency on top of their core risk-management expertise will be best positioned to help their firms negotiate dynamic risk environments laden with potential shocks and disruption.

Reconciling Opportunity and Resilience in Changing Times

The world’s major countries have been enjoying solid economic growth over the past few months, and this recovery clearly creates opportunity for expansion and innovation. However, the operating risk for companies in today’s global environment should not be underestimated. Building resilience against a wide and expanding array of potential shocks is required for sustainable success.

In 2017 we experienced instability stemming from a range of sources: intensifying societal polarization; assertive nationalism and a weakening commitment to multilateralism; numerous geopolitical flashpoints; and far-reaching cyberattacks, both state-sponsored and financially motivated. There are few signs that these challenges will reverse this year.

Global Risks of Highest Concern

The Global Risks Report, prepared by the World Economic Forum with the support of Marsh & McLennan Companies and other partners, evaluates the major threats facing the world over the next decade. It draws on survey data provided by nearly 1,000 members of the risk community, spanning business, government, academia and nongovernmental organizations.

The survey revealed deep pessimism about the direction of international relations. Ninety-three percent of survey respondents expect that political and economic confrontations between major powers will increase in 2018. There were high levels of concern about an increase in state-on-state conflicts that may draw in other countries. Western respondents also highlighted growing concern about economic protectionism.

Technological risks are seen as a rising global threat. Business leaders in advanced economies consider large cyberattacks to be the No. 1 risk for doing business in their respective countries, and respondents in most parts of the world anticipate these attacks will get worse in 2018. Societal risk emanating from the increase in media echo chambers and fake news is also expected to grow.

On a longer-term horizon, environmental risks ranked highest in both likelihood and impact. Extreme weather and failure to adapt to climate change showed the greatest leap in concern since last year’s report, perhaps reflecting the hurricanes, earthquakes and wildfires suffered during September when the survey was open. However, even before the devastating events of 2017, apprehension in this area was strongly reflected in this survey.

Greater Scope for Geopolitical Conflict

Recent European elections revealed continuing dissatisfaction with mainstream parties, with far-right, nationalist and populist parties gaining ground in Germany, Austria and Spain. Italy, Hungary and Sweden go to the polls next year. Moreover, disagreements between countries over Brexit, immigration and further integration issues are becoming more acute at a time when greater coordination in response to potential crises is needed.

Regional players and smaller states—especially those across Asia and the Middle East—are struggling to seize opportunities and avoid being sidelined or crushed. Among major powers, an increased preparedness for confrontation has disturbed traditional alliances, facilitated proxy conflicts and created worrisome levels of brinkmanship. Given this geopolitical climate, serious conflicts could arise from accidents or missteps.

With national sovereignty paramount, commitment to international institutions and multilateral agreements is fragile. Trade agreements are unraveling, and the functionality of the World Trade Organization has been undermined; the Paris Agreement now lacks the U.S. as a signatory; and various nuclear nonproliferation agreements, including that with Iran, are under threat. The deployment of so-called “sharp power,” focused on pressuring and manipulating opinion to gain influence, is on the rise.

Escalating Cyber Challenges

Cyber breaches recorded by businesses are escalating, having nearly doubled since 2012. Attackers have become more sophisticated and persistent, and there have been more incidents with systemic ripple effects. The takedown of a single cloud provider could cause as much economic loss as Hurricane Katrina, and the aggregated cost of cybercrime to business is projected to be $8 trillion over the next five years.

Two trends make cyber an even more challenging risk. First, cyber exposure is growing sharply as companies become more dependent on technology. For example, the explosive growth in interconnected devices, from 8.6 billion today to an estimated 20 billion by 2020, and the increasing use of artificial intelligence expand the attack surface significantly. Second, state-sponsored attacks are likely to escalate given the changes in the geopolitical climate. Cyber-risk management may be improving, but firms will have to invest significantly more to counter the growing threat of well-resourced attackers with objectives that range from simple theft and disruption to economic espionage, reputational damage and the crippling of key infrastructure and services.

Environmental Degradation

2017 included the most extreme month on record for the intensity and duration of Atlantic storms and the most expensive hurricane season ever. Economic losses from Harvey and Irma were an estimated $175 billion. The challenges posed by Hurricane Maria’s damage to Puerto Rico proved extremely demanding, with huge swaths of the island’s infrastructure out for months. Wildfires in California, Chile and Portugal also caused significant loss of life and economic damage.

Extreme weather is by no means the only environmental challenge to many centers of population and commerce. According to the World Health Organization, indoor and outdoor air pollution are together responsible for more than one tenth of all deaths globally each year. Large emerging market cities such as New Delhi endured particularly difficult spells, but pollution spikes in places such as London and Paris have also resulted in significant health impacts.

The new Global Risk Report reveals deep pessimism about the direction of international relations. Ninety-three percent of survey respondents expect confrontations to increase.

With the climate continuing to change—2017 was the hottest non-El Niño year on record—weather patterns will become ever less predictable, with impacts on biodiversity and food security. A simultaneous failure of corn (maize) production in the world’s two main growers, China and the United States, has recently been assessed as a one-in-twenty chance per decade. Progress in both regulation and disclosure requirements is needed to reduce the probability of the worst-case climate scenarios. Businesses should take proactive measures in anticipation of the structural changes in the economy that will likely come from tightening policy requirements.

No Room for Economic Complacency

Positive growth in recent months shouldn’t blind us to potential economic fragilities. The debt-to-equity ratio of the median S&P 1500 company (excluding financials) has almost doubled since 2010 and is now well above pre-financial crisis levels. Asset prices in some sectors are at historically high levels. Global debt has risen to a record $233 trillion, and at 318 percent, the global debt/GDP ratio remains near its all-time high.

Persistent low commodity prices continue to rattle exporter countries and their neighbors, with political and societal implications. Structural issues such as income inequality, rising health care costs and diminishing long-term retirement security also show little sign of being resolved.

Against this backdrop, how will investor and corporate confidence fare in the event of a major geopolitical altercation, an aggravated trade standoff or a technological catastrophe—none of which is implausible?

A Business Lens

Corporate lifespans are dramatically shortening. The average time companies spend in the S&P 500 index was 61 years in 1958 versus 12 years today. Given the rapid changes in the global environment, the pressure to define a strategy with both ambition and resilience against major shocks has never been higher.

CEOs and their leadership teams need to reconcile growth and innovation opportunities with risk and security considerations and rigorously assess the value of potential initiatives in a wide range of scenarios. A dual focus on prevention and response—given the increased velocity of new and unpredictable risks—is needed.

The Global Risks 2018 report provides rich commentary on complex challenges and potential surprises, but also significant context for charting an aggressive growth strategy.

Catastrophic Events Drive Innovation in the Reinsurance Market

Recent major weather events in Australia, Mexico, the Caribbean and the United States, including three hurricanes that were Category 4 or greater, have resulted in catastrophe losses exceeding $100 billion for the third year on record.

But the large insured loss, currently estimated at a record $111 billion before accounting for National Flood Insurance Program losses and the California wildfires, has created a perfect opportunity for the reinsurance market to showcase its ability to adapt solutions to the unique risk profiles of individual clients.

The value of reinsurance as a capital substitute was apparent during the 2008 financial crisis, when debt and equity financing was difficult to obtain. In its place, the reinsurance market demonstrated its ability to protect balance sheets, manage earnings and reduce volatility. Now, the series of catastrophic events in 2017—earthquakes in Mexico and Hurricanes Harvey, Irma and Maria—is reminding corporations, primary insurers and reinsurers that (re)insurance is one of the most effective ways to protect corporate capital bases from these events.

The third quarter of 2017 is likely to be one of the costliest in the insurance industry’s history. While it is still early and loss estimates will likely fluctuate, total catastrophe losses of just $75 billion would mean a combined ratio of 106 percent for the world’s top 20 reinsurers, according to A.M. Best. Although there appears to be little risk to solvency, earnings of individual insurers will be impacted, and in some cases, excess capital positions and catastrophe budgets may be eroded, which could result in ratings actions.

Record Capital Levels

Fortunately, the U.S. property and casualty industry is sitting on record capital levels and the global reinsurance market adds another $427 billion, so the sector is well-positioned to absorb such losses. But despite years of low reinsurance rates and low interest rates that have reduced the industry’s profitability since the last material rate increase after Hurricane Katrina, we do not expect a similar price revision this time around. Reinsurers have built up cash during the recent favorable years, while capital-market investors seeking non-correlated investments, such as hedge funds and pension funds, have put record amounts of money into catastrophe coverages.

Harvey on its own will probably not require an increase of industry capital; the addition of the cumulative effect of the earthquake in Mexico and Hurricanes Irma and Maria, however, could create a capital event. Yet with abundant capacity—and, of course, depending on the final numbers—the aggregate impact may be a one-time firming of rates within specified regions or coverages or a halting of decreases that recently began to moderate as reinsurers’ margins approached breakeven. We also expect casualty reinsurance rates to continue their recent trend of declining year-over-year rate reductions.

Rise of Insurance-Linked Securities

Insurance-linked securities (ILS), which provide approximately $82 billion of the reinsurance industry’s capital base, will likely continue to generate demand and augment traditional reinsurer capacity. Though the recent events may provide the first real test of alternative capital, investors have indicated they are prepared to recapitalize or increase their current positions, and in some cases they already have.

Earthquakes and hurricanes provide an opportunity to define the viability and effectiveness of catastrophe bonds, creating either a day of reckoning or a day of glory for the ILS market.

Thus far, we have seen these catastrophe bonds demonstrate their effectiveness and serve their intended purpose. Of course, the eagerness of investors to return to the market may be tempered by a possible capital lockup. Until all claims are settled, investors’ assets collateralizing the transaction cannot be released, which could cause them to offset any new ILS capacity offered against these withheld funds. The ability to trade certain classes of cat bonds in the secondary market enhances their liquidity if funds are withheld. Insurance company sponsors are monitoring payout patterns compared to the traditional market. Any payment disputes from ILS investors could provide reinsurers an opportunity to demonstrate their value-add to clients.

The series of catastrophic events in 2017 is reminding corporations, primary insurers and reinsurers that (re)insurance is one of the most effective ways to protect corporate capital bases from these events.

Assuming the ILS market responds to these catastrophes as defined, this capacity will likely remain an integral part of insurers’ capital structure, even when interest rates rise. Most ILS issuances define interest rates as a risk spread on top of return on U.S. Treasuries or to LIBOR, so the asset class will remain attractive as interest rates rise. ILS is now very much ingrained in the overall risk community, creating a pool of diverse capacity collectively serving and supporting the (re)insurance industry.

Technological Innovation

Overall, we expect the reinsurance marketplace to remain vibrant and continue offering a full range of products, supporting growth in reinsurance purchasing in virtually all its forms. Industry capital is at an all-time high, and clients are expanding covers, fully leveraging a broader array of solutions as the industry modernizes in the face of technological innovation. In addition to transactional products, reinsurers and ILS providers are developing more comprehensive, consultative value propositions, such as capital advisory and enterprise risk management services. These offerings withstand market cycles and macroeconomic factors and provide insurance companies with a dedicated, informed partner to support new product development and growth initiatives. This creates opportunity by leveraging advanced platforms and innovative customized solutions, such as coverage features applying to specific industries or risks unique to specific clients.

Advanced Modeling Techniques

As economic growth and demographic patterns impact risk concentrations, advanced modeling techniques will help ensure sufficient vertical and horizontal reinsurance coverage to support post-event liquidity and close the protection gap, especially around historically difficult risks such as floods. Only 27 percent of those affected by Hurricane Harvey had flood insurance, and sustained industry profitability will depend on increasing global insurance penetration. Complex emerging exposures such as cyber and terror are also increasingly finding solutions in the reinsurance market, and optimal structuring of coverage can also minimize regulatory capital. By tapping a variety of capital sources, structures and modeling capabilities, insurers are matching more efficient, customized solutions to their unique risk profiles, whether they are focused on protecting earnings against attritional losses or shielding their capital base from catastrophe losses.

As the industry enters the 2018 renewal, the market remains strong with a variety of solutions to deliver the right capital to risks. Following the recent catastrophes, reinsurers are adjusting business plans for opportunities in marine, energy, flood and specialty lines of business. In today’s world of unprecedented disruption, the (re)insurance solution for managing capital and earnings is as relevant as its solution for severity protection.

Risk and Opportunity in the Internet of Things

Can you envision 30 billion devices connected to the Internet of Things (IoT) by 2030? What about 100 trillion connected devices? That’s the number that Oliver Wyman predicts could be the reality by 2050. Communications, media, and technology (CMT) companies are at the nexus of the creation and use of IoT devices and offer telling insights into the opportunities and risks of IoT development.

Sixty-five percent of CMT companies said they view the Internet of Things as an opportunity over the next three to five years, according to Marsh’s global 2018 Communications, Media, and Technology Risk Survey. And nearly half said their organization already creates or provides products and services for IoT devices. Meanwhile, many CMT risk professionals may be unaware of connections to the Internet of Things.

Exhibit 1: Many CMT risk professionals may be unaware of connections to the Internet of Things

Source: Marsh 2018 Communications, Media, and Technology Risk Study

That number reinforces an awareness gap about the IoT that Marsh has found in other studies. For example, in Marsh’s 2017 Excellence in Risk Management survey, 52 percent of risk professionals said their organization does not use or plan to use the IoT, which conflicts with other data regarding IoT use.

This lack of understanding regarding the full range of risks presented by being a part of an IoT system stood out when we asked CMT organizations about related loss exposures.

Exhibit 2: System operation and security dominate IoT provider concerns; users increasingly concerned with physical risks

Source: Marsh 2018 Communications, Media, and Technology Risk Study

On the high end were system or network failure, security failure, and privacy breach. At the bottom were financial loss, property damage, and bodily injury. We also asked in which areas CMT companies’ customers/partners are seeking additional contractual protection. And here we found a disconnect, for example, in bodily injury losses. The failure of an IoT-connected device—through a production error, a cyberattack, or other cause—has the potential to cause injury. The component in a semiautonomous vehicle could fail, leading to an accident, or an IoT-connected device could be hacked, causing the system to overheat and catch fire. Fully half of respondents said their customers/partners are asking for increased protection against the risk, yet less than one-third of IoT providers are making the connection and seeing bodily injury as an IoT risk.

Partners in Innovation

A majority of our CMT survey respondents said their organizations hold risk management in high regard, with nearly 75 percent saying they’re seen as partners or providing support for innovation. But in order for these perceptions to match reality risk, professionals should challenge themselves to review their day-to-day tasks and determine if they are truly leading conversations about emerging risks and solutions, such as IoT.

Exhibit 3: CMT risk managers view themselves as innovation partners

Source: Marsh 2018 Communications, Media, and Technology Risk Study

Given the relentless pace of innovation and disruption, how can CMT risk professionals stay relevant in 2018? They must become experts in emerging risks, innovations, and trends within and outside of their industry in order to maintain a seat at the table for strategic decisions.

Companies would benefit by boosting their understanding and evaluation of IoT involvement, with specific emphasis on the new risks being created. For risk professionals, this means being a leader in discussions in all aspects of IoT and other technology risks. This includes such steps as aligning or embedding risk management team members with product development, building risk solutions into product or service offerings, and taking the lead in pushing for investment in emerging risk mitigation technologies or applications.

The IoT is just one of many technologies that will evolve and emerge in 2018, further disrupting CMT and other industries. Whether it’s IoT, artificial intelligence, blockchain, or something else, risk professionals should be prepared to lead the discussion of how these technologies will affect their companies’ risk profiles and business strategies.

BRINK’s Top 5 Geopolitical Risk Stories of 2017

The past year saw no shortage of upheaval in the geopolitical landscape.

In Asia, China continued to expand its influence on the world stage through the high-profile Belt and Road Initiative. In Europe, nations grappled with the implications of Brexit and similar deglobalization initiatives. And new technologies and cross-border tensions forced corporations everywhere to expand their notion of risk.

Here are five stories about geopolitical risk that captured the attention of BRINK readers in the past year.

The Geopolitical Impact of China’s Economic Diplomacy

The prevailing wisdom of a singularly powerful, hegemonic China may be too simplistic. In the interconnected geoeconomics of today’s world, complex political realities surround the execution of China’s economic diplomacy.

At a public forum at the Brookings Institution titled The Geopolitical Impact of China’s Economic Diplomacy, panelists outlined a collection of competing political interests—within and outside of China—vying for a geopolitical advantage that might tip the balance of power in Asia in their favor.

Experts made the case that despite the enormous influence China exhibits across the globe today, the story of Asia’s future will be written by many Asian countries.

“[When China announced the Belt and Road Initiative] people said ‘Oh my god, China’s got this new big strategic initiative, how are we going to react to this?’ as if connectivity in Asia had been invented in China, invented in 2013, and like Athena from Zeus’s head had sprung from the head of President Xi Jinping,” said Evan Feigenbaum, vice chairman of the Paulson Institute. “It’s easy to forget that for most of its history Asia was an astonishingly interconnected place.”

Does China’s ‘One Belt, One Road’ Threaten an East-West Rift Within Europe?

China has worked hard to make its Belt and Road Initiative feel more like a charm offensive than coercion. It has tried to calm the EU’s anxieties about its motives, insisting that it would prefer Europe strong and united and that it wants to contribute to various European projects rather than compete with them. However, regardless of the economic benefits of China’s engagement, the EU still sees it as a threat. Already the signs are there that this investment comes with political strings attached, writes Małgorzata Jakimów, a lecturer in Chinese Politics at the School of East Asian Studies at the University of Sheffield, UK.

While the EU urgently needs a common policy toward China, many EU states clearly think they’ll do better if they form their own bilateral ties with Beijing—and as a result, many are now competing with each other, vying for China’s attention and cash.

As Ms. Jakimów notes, for all that the Belt and Road Initiative is presented as a purely economic project, it remains deeply political.

Examining Geopolitical Risks Under a Different Lens

2017 was fraught with tensions across the globe. The UK formally triggered its exit from the European Union, the U.S. warned North Korea about nuclear weapons and the far right made a credible bid for power in France. This level of instability and change requires businesses to develop a new lens for assessing geopolitical risk, writes Evan Freely, a global practice leader at Marsh.

“Historically, when assessing a potential foreign investment, a company might limit analysis to the economic and political risks associated with the host country and, possibly, to those that border it,” writes Mr. Freely. “Companies were generally most concerned about host government expropriation actions and international conflict. Today risks are no longer constrained by borders.”

A new lens should accommodate a broader view of the world, focusing on developments in both developed and emerging markets and analyzing a greater range of outcomes, including ways in which each could impact the full scope of business operations.

There is no consensus as to whether this challenging environment is a short-term period of instability or the edge of a longer period of change, Mr. Freely writes. But by better understanding the breadth, scope, and depth of geopolitical risks, companies can be in a better position to thrive while meeting the challenges ahead.

Sino-Indian Stand-Off Could Increase Risk and Benefit the U.S.

A tiny speck of land along the Chinese-Bhutan border roiled the leadership of both China and India last summer, causing the two countries to flex their military muscle amid hasty diplomatic communiques intent on keeping either side from firing the first shot.

Lindsay Hughes, research analyst for Future Directions International, examines how the stand-off surrounding the tri-border region between Bhutan, China and India in mid-June was emblematic of larger geopolitical themes encircling the region.

The potential for conflict in this region is causing a closer alignment between the U.S. and India, Mr. Hughes notes. This creates new geopolitical risks to China at a time when it is seeking to expand Beijing’s “soft power” in the region via the Belt and Road Initiative.

Peering Over the Precipice: Implications of a ‘Cliff Edge Brexit’

Brexit loomed large in 2017, as negotiations continued over the contours of Britain’s exit from the European Union. The slow progress made in negotiations—and the sometimes fractious relations between the two sides—appeared to portend UK’s exit from the bloc with no deal in place, a so-called “cliff edge Brexit.”

Thomas Lake, a senior analyst of political risk for BMI Research, outlines how a cliff edge Brexit would impact the British economy and the European Union at large.

The likely fallout from a cliff edge Brexit could discourage other countries with strong euroskeptic movements from seeking to leave the bloc, writes Mr. Lake. However, it would also show that the EU is more interested in preserving its key ideals than working toward a deal that would soften the blow of the UK leaving on other member states.

BRINK’s Top 5 Environmental Risk Stories of 2017

Environmental risk factors must be top of mind for executives today as they are increasingly called upon to shield their organizations from threats associated with the natural world.  

From questions about how society should respond to the challenges of climate change to concerns about disruption within the transportation, shipping, and energy sectors, 2017 provided no shortage of inputs in the evolving conversation on environmental risks.  

Here is a recap of BRINK’s top five stories about environmental risk, which ranged in subject from an analysis of Germany’s plans electric cars and renewable energy to the vast potential of fusion power.

The Surprising Effects of an All Electric-Car Society

In October 2016, the Bundesrat—Germany’s upper legislative chamber—called on the country to support a phase-out of gasoline vehicles by 2030. The resolution isn’t official government policy, but even talk of such a ban sends a strong signal toward the country’s huge car industry. So, what if Germany really did go 100 percent electric by 2030?

Instinctually, one might assume that replacing regular petrol vehicles with electric cars would cut the carbon footprint. But it isn’t that simple, explains Dénes Csala, a lecturer in Energy Storage Systems Dynamics at Lancaster University.

An electric car running on power generated by dirty coal or gas actually creates more emissions than a car that burns petrol, writes Mr. Csala. For such a switch to actually reduce net emissions, the electricity that powers those cars must be renewable. And, unless things change, Germany is unlikely to have enough green energy in time.

The Danger Lurking in the Hotter Cities of the Future

Since 2000, more than three quarters of Americans reside in cities, and cities have grown both up and out. They don’t just have more people; they have more buildings, more cars, and more machines, all of which create heat. Cities also have more cement and asphalt, which hold in more heat than plants and grass.

These changes have created urban heat islands—areas in and around cities where temperatures are measurably hotter than in nearby rural areas. As a result, the young and old living in urban centers will be vulnerable to health issues from extreme heat and the smog it helps generate; the power grid will be pushed to the limit by an ever-increasing demand for air conditioning; and hotter cities will actually perpetuate a vicious cycle of greenhouse-gas-driven global warming.

Cities can better prepare themselves and their residents for heat waves and increase the overall awareness of the hazards of urban heat islands, writes Alyson Kenward, vice president for creative production at Climate Central. But the risks will persist unless global greenhouse gas emissions are also dramatically reduced.

Saving Coastal Communities Requires a Community-Based Approach

Hurricanes Harvey and Irma exposed how vulnerable communities are to extreme climate events. With the two storms destroying thousands of houses and causing well over $200 billion worth of losses, questions have been raised about how we don’t seem to be doing enough to move homes out of harm’s way.

The worst is yet to come for many at-risk communities, writes B. R. Balachandran, director at Alchemy Urban Systems. It is imperative for governments at national, state and local levels to work together to facilitate processes by which such communities can move out of harm’s way while protecting their culture and the social capital of community life.

Fusion Energy: A Time of Transition and Potential

If we’re able to solve an extremely complex set of scientific and engineering problems, fusion energy promises a green, safe, unlimited source of energy. But how likely is it that fusion researchers can accomplish this task—and incorporate fusion power into planning for use in the future?

Stewart Prager, a professor of Astrophysical Sciences at Princeton University, and Michael C. Zarnstorff, deputy director for research at the Princeton Plasma Physics Laboratory, outline the progress to date on this ambitious energy innovation and the road ahead on the path to fusion.

The positives are matched by the significant scientific challenge of fusion, write Mr. Prager and Mr. Zarnstorff. But the potential of fusion’s outsize benefits to arrive in the second half of this century means we must keep working.

Shaping the Low Carbon Future of the Shipping Industry

Shipping is arguably the most carbon-efficient mode of commercial transport and is fundamental to the functioning of the global economy. However, there will be no space in the carbon budget to allow even the emissions of shipping (currently approximately 1 gigaton per annum) to be ignored, writes Alastair Marsh, CEO of Lloyd’s Register.

Low Carbon Pathways 2050—a joint study by Lloyd’s Register and Shipping in Changing Climates—aims to answer a fundamental question: What is a reasonable estimate of how shipping might be required to change, and what does this look like?

The results of the report show that shipping likely needs to start its decarbonization imminently and that the associated changes will be fundamental and require a lot of further work and development to minimize disruption.

BRINK’s Top 5 Technology Stories of 2017

The forward march of technology last year continued to challenge the way organizations think about innovation and adapt to change.

Questions about finance, currency and the future of work loomed large across sectors as organizations weighed the risks and benefits of InsurTech, blockchain and automation.

Will InsurTech take hold at scale? Will Blockchain revolutionize shipping and logistics? More broadly, what challenges face modern societies as the Fourth Industrial Revolution unfolds?

These questions and more were woven throughout the top technology stories that captured the attention of BRINK readers in 2017.

InsurTech: Hype or the Next Frontier?

InsurTech—the blending of insurance with digital technology—has been attracting a great deal of interest from founders, investors and incumbents. As a result, investment in InsurTech firms has skyrocketed. According to data from CBInsights, total deal activity has increased sevenfold over the past decade, averaging $1.7 billion a year from 2014 to 2016, compared to $250 million a year, from 2011 to 2013.

Dietmar Kottmann, a partner in the Digital Insurance Strategy practice at Oliver Wyman, and Nikolai Dördrechter, a managing director of Policen Direkt-Group, explore the factors at play in this piece outlining InsurTech trends. The two developed a model to analyze the crowded InsurTech field, identifying 19 types of InsurTech business models within three industry value chain segments and compiling a database of more than a thousand InsurTechs and other relevant players. Their conclusion: The InsurTech race will no doubt keep heating up from here.

Blockchain Builds Trust in Marine Shipping with ‘Single Version of the Truth’

Blockchain is traditionally known as the underlying foundation for the cryptocurrency Bitcoin. But its ability to create “mutual distributed ledgers,” which are self-governing, tamper-free, online databases that no one owns but that everyone has access to and can trust, has begun to make inroads to mainstream commerce.

The forward march of technology last year continued to challenge the way organizations think about innovation and adapt to change.

Now, the technology promises to revolutionize container logistics and marine shipping by connecting the supply chain in a way the industry has never seen before, eliminating costly, time-consuming processes and creating trust and partnership in an industry where such principles can, at times, be misunderstood by providing the “single version of the truth” to all parties involved.

Stepping Up to the Challenges of the Fourth Industrial Revolution

The Fourth Industrial Revolution—the ongoing digital revolution—is upon us. One of the key questions, however, is how we can exploit the opportunities it provides while mitigating its potentially substantial risks.

We are at the beginning of a revolution that is fundamentally changing the way we live, work, and relate to one another, writes Klaus Schwab, the founder and executive chair of the World Economic Forum. Mr. Schwab highlights the staggering confluence of emerging technology breakthroughs, covering wide-ranging fields such as artificial intelligence, robotics, the Internet of Things, autonomous vehicles, 3-D printing, nanotechnology, biotechnology, materials science, energy storage and quantum computing, to name a few. Many of these innovations are in their infancy, but they are already reaching an inflection point in their development as they build on and amplify each other in a fusion of technologies across the physical, digital and biological worlds, Mr. Schwab writes.

Construction Machines in the Digital Age

At first glance, giant earth-moving excavators and bulldozers would not appear to have much in common with the microchip-based worlds of drones and multidimensional imaging. But in the digital age, the heavy-duty tools of the construction industry and groundbreaking new tech will all be connected, write Romed Kelp and David Kaufmann, both partners at Oliver Wyman.

The first wave of digitization is already arriving in construction machines, which are becoming increasingly automated and connected, enabling operators to deploy them more efficiently, write Mr. Kelp and Mr. Kaufmann. Equipment manufacturers’ success will be determined by how effectively they apply digitized machines in this connected ecosystem.

When Artificial Intelligence Disrupts the Call Center

Customer service centers have been typically regarded as a necessary evil, where customers have encountered their fair share of unhelpful calls. However, despite efforts to change this behavior, the phone is still the most widely used customer-service channel, with 73 percent of consumers phoning in for live interactions.

Call center interactions influence brand perception and loyalty, writes Josh Feast, founder and CEO of Cogito. They serve as a critical moment of truth in a customer relationship with a lasting impact on the decision to purchase or abandon ship.

Particularly, AI can be used to understand and improve phone calls during these crucial interactions, which can result in enhanced customer loyalty, increased employee engagement and improved operational effectiveness, the piece notes.

BRINK’s Top 5 Societal Risk Stories of 2017

Business leaders must have a firm grasp of dynamic social trends and shifts that intersect with risk management. All too often, however, organizations fail to anticipate changes, and they are forced to take a reactive—instead of a proactive—stance.

Societal risk took many forms in 2017. Many nations faced the challenges of a “longevity boom,” as citizens grow older but increasingly lack a financial safety net. Modern globalized societies wrestled with the increasing implications of populism. The conversation about gender equity expanded because of #MeToo and other movements. And workers faced the looming threat of automation and AI.

Here are the five top stories about societal risk that captured the attention of BRINK readers in the past year.

Is It Time to Retire Retirement or Just Redefine It?

As poverty falls and wealth expands, life expectancy has increased, bringing with it implications for work-life trends. Still, a growing class of citizens may find itself in dire financial straits. The financial system simply hasn’t been developed to accommodate the growing population of older citizens.

It falls to leadership to help promote financial security in these aging-boom times, writes Julio Portalatin, president and CEO of Mercer.

Organizations face real risk to employee productivity and engagement as a result of this financial unpreparedness. For example, in the U.S., people spend about 150 hours a year on average worrying about money. In addition, the broad shift to defined-contribution retirement plans is putting greater pressure on employees to ensure they save enough.

Societal risk in 2017 stemmed from populism, extreme weather, longevity, automation and more.

In fact, one World Economic Forum study calculated that the gap between aggregate savings and expected annual retirement needs for eight of the largest nations is expected to expand to $400 trillion by 2050—from a comparatively paltry $70 trillion today.

This is the time that organizations need to stay fully involved with employee health care, professional development and financial security, writes Mr. Portalatin.

Are Robots ‘Stealing’ Productivity from Humans?

The good news: Automation is creating factory work for humans, not just destroying it. And working in today’s auto factory is safer and more engaging than ever. The bad news: The U.S. can’t find the right humans for all this new work.

In our interview with Ron Harbour, senior partner of Global Automotive Manufacturing at Oliver Wyman, Mr. Harbour outlines why he thinks blaming automation on a loss of jobs and productivity is “a simplistic answer.”

“The biggest transformation in factories in my 35 years hasn’t been automation—it’s been in the way we work,” says Mr. Harbour. “People have been more involved in the process. They’ve been given more authority and accountability to run the floor themselves. The supervisors become coaches and trainers and not firefighters.”

Living Quality in the World’s Cities: The Infrastructure Advantage

One of the key factors employers consider when assessing cities for future workforce location is city infrastructure. In 2017, Mercer introduced infrastructure as a separate factor for evaluation in its 19th annual Quality of Living Survey.

Easy access to transportation, reliable electricity, and drinkable water are all important considerations—and cities and urban planners, as well as employers and multinational organizations, are paying much closer attention to how particular cities stack up against the competition. Singapore, for example, tops the Quality of Living Survey’s city infrastructure ranking, followed by Frankfurt and Munich, both in 2nd place.

The success of foreign assignments is influenced by issues such as ease of travel and communication, sanitation standards, personal safety, and access to public services—in addition to such factors as the quality of educational systems for expatriates’ children and other cultural touchstones, writes Ilya Bonic, senior partner and president of Career Business for Mercer. Multinational companies rely on such information to help calculate fair and consistent expatriate compensation—a real challenge in locations with a compromised quality of living.

Is UK Fresh Food Rationing the Tip of the ‘Iceberg’?

When the World Economic Forum published its annual Global Risk Report for 2017, the highest-ranking item on its list of most likely risks is extreme weather—which could significantly impact people’s access to fresh food. In fact, in February of 2017, major supermarkets in the UK introduced rationing on certain fresh vegetables in response to cold weather in Spain, Italy, and Greece hampering food production, according to The Guardian.

In his piece, Nick Harrison, a partner and co-head of the European Retail Practice at Oliver Wyman, outlines how kale provides an interesting template for adapting to this kind of risk.

“A decade or more ago, kale (curly or otherwise) was an unpopular and underused vegetable, mostly used for animal fodder. But for years now it has now been a staple in juice diets, quiche recipes and is regularly praised by celebrities,” writes Mr. Harrison. “This reinvention of kale should be a template for supermarkets to drive the transformation for other historically unpopular but locally-grown, hardy vegetables with long growing seasons.”

Populism is Poison; Plural Cities are the Antidote

2017 saw the evolution and continued advancement of the populist tendencies that animated the tremendous upheavals of 2016.

“Global anxiety is feeding the growth of nationalist movements, emboldened by the drumbeat of populism,” write Misha Glenny, a writer and broadcaster, and Robert Muggah, the research director of the Igarapé Institute. “Anti-immigrant and anti-establishment parties are capitalizing on public disquiet, gaining footholds in political systems across the planet. But as alarming as all this sounds, there are opportunities to head off potential disaster.”

It’s a warning that is relevant as ever—but Mr. Glenny and Mr. Muggah offer a solution. Plural cities, which are “constructing a positive, inclusive and plural vision of the future,” can be the antidote to nativist fears stoked by populist leaders across the world. The development of these kinds of cities, then, must become a priority.

BRINK’s Top 5 Economic Stories of 2017

The theme of global economic development in 2017 was undoubtedly “turbulence.”

As populism and polarization gripped global politics, new, previously marginal economic ideas entered mainstream discourse, including the notion of a universal basic income.

The governments of North America grappled with the implications of legacy trade agreements in the modern age, and the financial sector sought creative solutions to disruption ushered in by changing regulatory demands and emerging customer preferences.

Meanwhile, politicians, policymakers and business leaders sought to make sense of the international economic order coalescing before them by putting into historical context the developments that have fundamentally altered global exchanges.

Against this backdrop, here are five economic stories that captured the attention of BRINK readers in the past year.

The Pros and Cons of a Universal Basic Income

Swiss voters rejected a ballot initiative last summer to introduce an unconditional basic income that would “allow the whole population to lead a decent life and participate in public life.” It lost badly but also represented how far the idea had come among supporters.

Although people have advocated for some type of universal basic livelihood or support for centuries, recent advocacy has been closely linked to fears about extensive job losses due to technology, especially artificial intelligence (AI) and robotization of work, writes Rick McGahey, senior vice president for programs at the Institute for New Economic Thinking.

Futurist author Martin Ford details these dystopian scenarios in “Rise of the Robots: Technology and the Threat of a Jobless Future.” Ford says he sees new technologies pushing the economy towards “permanent technological unemployment,” implying that some form of UBI is necessary, although “you’d have to phase it in at a relatively low level.”

Canadian Free Trade Framework Mitigates a NAFTA Demise

Politicians and policymakers in Canada, Mexico, and the United States reopened tough negotiations over the North American Free Trade Agreement last year, trading pointed language throughout. The agreement has come under particular scrutiny from President Donald Trump and his administration.

However, while NAFTA is a very valuable agreement, “it wouldn’t be the end of the world if it disappeared,” writes John M. Weekes, the former Canadian Chief Negotiator on NAFTA. In this piece, Weekes outlines the reasons a withdrawal from NAFTA might not be as catastrophic as some critics predict, citing among other things the existence of a bilateral trade agreement between Canada and the U.S.

The biggest thing business should do is analyze what the actual effects of different scenarios would be and advise their governments on how to defend their interests, Weekes writes.

Design Thinking: The New DNA of the Financial Sector

Facing disruptive challenges such as increasing regulatory demands and changes in customer preferences, the banking sector has sought innovation to address a shifting landscape.

Significant investment has gone toward attracting new talent, such as designers and artists, who  have skills not typically associated with the banking industry, write authors Josemaria Siota, a project leader at IESE Business School, and Inigo Ania, a principal in Oliver Wyman’s Financial Services Practice. A LinkedIn job search using the term “design” within the financial services sector in the U.S. revealed more than 15,000 related jobs, the authors note.

As a new tool for tackling disruption and innovation questions in the financial services industry, design thinking is enabling banks to boost growth by adapting to a rapidly changing environment.

A Walk Through an Open World Economy in Crisis

In a year during which economic discourse revolved around questions of disenfranchisement within the the modern financial system, a primer on the state of the economy was essential.  Jeffry Frieden, a professor of government at Harvard University, delivered just such a primer.

“The first era of globalization became politically unsustainable,” writes Frieden. “Its stability had depended on a willingness among those who mattered to subordinate a country’s domestic concerns to the requirements of its global position. But those who mattered were usually a small elite, for virtually no country was democratic. The middle classes, farmers, and the working classes—the people who bore the brunt of adjusting to international economic trends—had little or no voice.”

Bringing the historical detail into a contemporary context, Frieden writes that “until existing political parties and leaders are able to present a workable, attractive vision of how our societies can address the economic and social costs of globalization, an open world economy will be in danger.”

Cargo Loss Control: How to Make a Million in Two Hours

Captain John Dalby, the CEO of Marine Risk Management, dives deep into loss, a relevant topic for any professional in the risk sector, using the lens of the shipping industry as a mechanism. Dalby outlines how the cargo shipping industry miscalculates losses—and how those losses can lead to huge windfalls for skilled grifters.

“There are a myriad of so-called losses that can be either physical (that is, some are stolen or mislaid and never arrive at their destination or were never shipped in the first place) or of a documentary nature—mistakes (deliberate or otherwise) in recording data on the shipping documentation, miscalculation, and/or mismeasurement,” writes Dalby. “Almost all of these involve criminal intent and can be carried out with surprising efficiency and at small risk of detection.”

Five Reasons Consumers Will Embrace Artificial Intelligence

Christmas 2017 was a busy one for retailers. During peak season, Amazon reported records for holiday shipping as they handled deliveries to 185 countries. UPS, meanwhile, said it was breaking records on package returns, having processed more than a million daily in December. With a 23 percent global growth in the last year, e-commerce continues to post solid performances, but stress and confusion are routine for merchants, logistics companies and consumers. According to a UK survey, over half of Christmas parcels failed to turn up on time in the run-up to Christmas, and parents panicked as popular Christmas toys sold out at the UK’s biggest retailers.

Artificial intelligence can help bring order to this chaos. Here’s how:

On-time or Faster Deliveries Through AI

Delivery delays and out-of-stock items cause consumer frustration. Wouldn’t it be ideal if companies knew who was likely to buy what and when? Supply chain professionals could then make sure they had the right manpower, warehouse and transport capacities, or even send goods to be stored close to delivery addresses before we buy them (a process known as “anticipatory shipping”). Amazon has been experimenting with AI for years—for example in its cashier-less store—but other companies are close behind. Otto, a German e-commerce merchant, has created a system that analyses around 3 billion transactions and 200 variables, including sales data, website searches and weather information. With 90 percent accuracy, it is able to predict sales behavior in the next 30 days. Now, the company purchases around 200,000 items a month without human intervention. Surplus stock has declined by a fifth and product returns by more than two million items a year. While customers receive their orders more promptly and efficiently, the planet benefits too, as fewer shipped packages need to be sent back.

Consumers Get What They Wish For

A major challenge in the supply chain is predicting next season’s hit products. Merchants have to make choices early on, and accept the risk that their stockpiled goods may not be bought. On the other side, consumers also have to hope that retailers have in stock what they want to buy. Supply-demand uncertainties and mismatches are costly and inefficient for all participants. Brand reputation is at stake, and consumers pay a higher price to cover the risk. One AI-powered approach is dubbed optimized line planning, which integrates data such as internal sales and customer records, competitive intelligence, trend analysis and social media preferences to create a customer profile or persona. This customer segmentation allows retailers to determine the selection of products that will resonate best with each persona. Designers can create placeholders for next season, and even calculate expected revenues. This provides confidence that both sales targets and the needs of the consumer will be met.

When supply-chain professionals know what is happening, they can ensure packages will arrive despite any adverse conditions. AI is helping such professionals figure it out.

Goods Travel Safely

When supply-chain professionals know what is happening, they can ensure packages will arrive despite any adverse conditions. The Tel Aviv maritime data provider Windward says it is able, through AI, to predict shipping safety worldwide. The Israeli startup signed a deal with London-based insurance market Lloyd’s in November 2017, with Windward providing Lloyd’s member companies software that forecasts maritime hostilities or accidents at sea. Flextronics International—which counts Apple, Microsoft and Ford Motor as customers—has pioneered software that generates real-time alerts of supply-chain disruptions throughout its 14,000-strong network of global suppliers. The AI-based system helps predict actual and potential problems, such as supplier delays, strikes, earthquakes or tsunamis, and allows the relevant teams to make informed decisions to keep inventory moving and consumers happy.

Fewer Goods are Stolen

Some orders don’t arrive due to crime. The FBI estimates that cargo theft costs US businesses more than $30 billion each year. Facial recognition and the detection of suspicious behavior can help prevent this. At the Chinese AI research company Yitu Technology, the pass cards of staff and visitors taking the lifts to floors 23 and 25 are read automatically—no swipe required—and each passenger is deposited at their specified floor, and only there. Cameras record everyone entering the building, and track them once they are inside. “Our machines can very easily recognize you among at least 2 billion people in a matter of seconds,” says Yitu co-founder and chief executive Zhu Long. Yitu’s generic portrait platform already contains 1.8 billion photographs of those logged in the national database and everyone who visited China recently. 320 million of the photos have come from China’s borders, where pictures are taken of everyone who enters and leaves the country. This cutting-edge technology can be used to protect any kind of asset—from vehicles to shops, to warehouses and even entire cities. In Boston, intelligent security cameras are even anticipating crime. The security system monitors feeds in real time and alerts authorities the moment it identifies unusual activity.

Quicker and Better Customer Service

According to a survey conducted by Genesys in 16 key economies, the cost of poor customer service is estimated at $338.5 billion per year. Consumers disappointed when drivers don’t show up or products are sold out can still be satisfied when they can act based on timely and correct information. AI tools can speedily provide proper information to customer service staff, and improve customer-agent conversations without replacing them (chatbots have been shown to thus far lack empathy and problem-solving capability). At the same time, digital voice-activated assistants could provide an opportunity for progress—just imagine you ask: “Contact DHL and find out when my order will arrive,” and your digital assistant connects to a chatbot, finds the information and gets it to you promptly. The assistant would soon even be able to use your voice, if required. A paper published by Google in December 2017 reveals details of a text-to-speech system called Tacotron 2, which claims to be able to replicate near-human accuracy when imitating a person speaking.

These developments don’t come without risks. Concerns about job losses and out-of-control machines that have the potential to teach themselves are daily topics in the news. As AI-enabled robots have started to work alongside humans as autonomous vehicles, security cameras and digital assistants, some experts have said they should be fitted with an “ethical black box” to keep track of their reasoning, and enable them to explain their actions when accidents happen—such as the fatal self-driving car crash of a Tesla Model S in May 2016. Others think the behavior of robots should be viewed similarly to that of humans, which often remains a mystery. While there are many voices urging caution, there are also positive ones. Stephane Kasriel, the CEO of Upwork, predicts “that there will not be a shortage of jobs in the future, but rather a shortage of skills to fill the jobs.” History has taught us that, over time, concerns with respect to new technologies will be addressed so that consumers can reap the benefits.

AI is on the rise and is sure to enter into many parts of our lives. Considering the impact it can have on consumer satisfaction, it would not be surprising if consumers not only embraced the intelligent supply chain but demanded more AI solutions in the purchasing process. Meanwhile, investors soon may no longer fund businesses that aren’t planning to incorporate AI in some form.

This piece first appeared on the World Economic Forum’s Agenda blog.

China Fails to Woo U.S. With Financial Sector Opening

Now that the dust has settled, one thing is clear: President Donald Trump’s visit to Asia in November served as a milestone in the increasingly rapid transfer of power from the U.S. to China. President Xi Jinping’s enthronement during the 19th Party Congress as China’s leader for the foreseeable future did most of the work, but Mr. Trump helped by failing to advance a clear agenda articulating the U.S.’s key national interests regarding China.

The transfer of economic power to China has only accelerated since Mr. Xi came to power. It will accelerate further if and when China institutes real economic reform. But when China announced reforms to open up its financial sector—just hours after Mr. Trump concluded his visit to Beijing—the reaction from the Trump administration was muted at best, as the administration remains focused on China’s too-benign attitude toward North Korea and its nuclear missile program.

Reaction from investors, too, was muted. The only significant announcement came from UBS for a securities investment that was approved months before the announcement. Recall that China has been promising to open its financial markets since entering the World Trade Organization in December 2001. Beyond the lack of progress so far, the announcement does not fully cast away doubts about the speed and depth of the opening going forward.

For example, the foreign ownership cap of domestic securities firms will increase from 49 percent to 51 percent and then to 100 percent in the coming three years. However, there was no hint about lifting the current restriction on listed securities companies (ranging from 20 percent to 25 percent based on various conditions). Until further clarification, this probably means foreign investors can only gain control of non-listed securities firms, which are, of course, much smaller.

There’s even less clarity regarding the banking and insurance sectors. We already know that reforms are delayed for another three years. However, China’s vice finance minister, Zhu Guangyao, told The New York Times that China would raise the investment in insurance companies to 51 percent in three years and 100 percent in five years. In addition, China also plans to end its current 25 percent limit of foreign ownership in banks, according to what Mr. Zhu told the Times.

China clearly has a strong self-interest in opening up its securities market. After the massive growth of bank balance sheets and the piling up of non-performing loans, Chinese regulators hope that the market (with Chinese characteristics) will do the cleaning up.

The massive securitization occurring in China over the last couple of years would clearly benefit from foreign expertise. Even better would be if foreign players brought along foreign investors to share in the potential losses. Within this context, one should not be too surprised at the general lack of interest in the opening of China’s financial sector.

Certainly the move does not seem to have softened the U.S. administration’s stance toward China. The U.S. has officially declared its opposition to China’s obtaining market economy status from the WTO. Of course, this decision might be more closely related to China’s perceived lack of cooperation on North Korea. But it also suggests that obtaining a couple of licenses to operate in China’s financial market will not calm down Mr. Trump.

Clearly, Mr. Xi is frustrated with Mr. Trump’s reaction to his kind gesture. All in all, it would be hard to expect an auspicious 2018 for the Trump-Xi couple—probably the most important one on earth.

Risk Divisions at Banks and Insurers Must Be More Agile

For decades, the risk profile of financial services firms has been relatively predictable. An economic downturn might push credit defaults to unusually high levels. Market prices might move against an insurer’s investment position. A rogue trader might defraud a bank of hundreds of millions of dollars. These are the kinds of risks that preoccupied risk departments, guided in part by expanding regulatory demands and in part by experience.

That’s changed today. Previously second-tier, nonfinancial risks, such as cyber risk, conduct risk, other operational risks, strategic risks, and business model risks, have become a top priority. At the same time, banks are more driven than ever by a rise in regulation-based rules and controls. This combination has reduced the agility of financial services firms, especially their risk departments. In some, risk departments have even become a bottleneck.

Risk managers know this. Our recent surveys of chief risk officers of leading European banks and insurance companies showed that most are concerned about their organization’s ability to adapt quickly enough. They understand that good risk management can no longer rely on rigid methodologies and processes. They understand that risk departments must be agile, but where should they begin?

Forward-Looking Approach Needed

For starters, risk departments should take a more forward-looking approach to risk identification and measurement. Rather than relying largely on historical data, agile risk divisions should give greater emphasis to what is coming. Advanced scenario analysis is currently the best way to incorporate a changeable variety of risk factors into loss forecasting. Most institutions now use stress testing in their internal planning processes, but few apply it to the full range of tasks where it has real value, such as risk identification and credit decisions.

Risk divisions must also have timely access to as much relevant data as possible. Some leading institutions are more closely integrating risk model builders with IT developers and ensuring that they use the same coding language.

Most of all, risk departments will need to rethink their operating model in several ways. First, agile risk departments will have to have a best-of-breed network of specialist third-party providers who supply focused expert reviews or analyses. That’s a marked change from traditional risk functions, which typically undertake all key elements of the risk management in-house. The traditional approach is both expensive and suboptimal given that, in many areas, third-party providers are quicker, cheaper, and more effective.

Risk departments should take a more forward-looking approach to risk identification and measurement. Rather than relying largely on historical data, they should give greater emphasis to what is coming.

Risk managers, especially at a senior level, will also need to develop a broader skill set and embrace greater diversity to avoid siloed thinking. Staff members need to rotate through a wide range of roles and work closely with other functions, such as IT, finance, and compliance. A leading European bank is experimenting with this concept by differentiating between “base camp” teams, who perform day-to-day credit risk assessments, and “mission” teams, who develop new models.

Adaptability Is Key

Agile risk divisions need equally adaptable employees and managers. They must be able to think through the business implications of risk management and provide content based on challenges to the wider business. That means they must have a hunger to learn continuously and recognize the value of cognitive and skill diversity within the team. The days are fast disappearing when 70 percent of a risk function’s work focused on a single risk type. Agile risk functions are changing their recruitment, development, and leadership models accordingly.

Rethinking Agility at Financial Firms

In parallel, banks and insurers will need to change their wider governance models and decision-making processes. The digital industry practice of making decisions fast, even with limited supporting evidence, and releasing new products as beta versions is hard to replicate in a risk division given the requirements of regulators and shareholders. But it doesn’t mean that improvements are impossible.

Risk divisions need to determine which decisions need the full governance process and which can be fast-tracked. Most organizations are still applying a one-size-fits-all approach to decision-making. Local empowerment and more flexible escalation mechanisms are key, as is accelerated decision-making within a formal governance model.

Other areas have achieved improvements of 50 percent to 75 percent across a range of performance indicators, such as time required to respond to new operational requirements, speed of strategic decisions, and success in change management. There is no reason why such gains cannot be achieved in risk management, too. For example, we believe that an agile risk function could cut credit decision-making time by half or more. The agile organization of staff, external providers, and new technologies could reduce the size of risk teams by over 50 percent.

All of these recommendations must be carried out amid changing commercial imperatives. Customers’ expectations for speed and ease of transactions keep rising, so risk functions need to reduce friction by minimizing data demands on customers. They should use publicly available data wherever possible and make risk assessments quick, transparent, and transferrable. Meeting future demands will require agile working practices.

Risk functions are rightly cautious in their estimates of risk and in the advice they provide business lines. That’s their job. But an inability to adapt quickly will increase the chance of nasty surprises and of slipping behind traditional competitors and fintechs in an era of open banking. Risk functions need to get agile.

A more in-depth version of this piece first appeared in the Oliver Wyman Risk Journal vol. 7.

The Return of Supersonic Flight

Imagine being able to fly from San Francisco to Tokyo in just five and a half hours—half the time it normally takes. More than a convenience, it would literally add hours to one’s productive life, converting a tedious business flight into a simple day trip. Thoughts like this are what have kept the quest for affordable, faster-than-sound flight alive, and this time the dream looks about to come true.

Earlier this year the supersonic startup company Boom Technology raised $33 million to build its first supersonic jet, the XB-1. Nicknamed “Baby Boom,” the 1/3-scale prototype could fly as early as 2018, with production of the full-sized, 40-seat passenger jet soon to follow. The company is projecting initial ticket prices on par with conventional business class but has plans to eventually build planes with the scale needed to make supersonic travel as affordable as flying coach. It’s not every day that a small team of engineers disrupts the global aviation industry, but with Virgin Galactic lining up to order the first 10 aircraft they produce, Boom Technology is on the track to do just that.

It’s a disruption that is long overdue. The first half of the twentieth century saw remarkable progress in aviation speeds, going from the Wright brothers’ historic first flight at 7 miles-per-hour to breaking to the sound barrier just forty-four years later. Yet aviation speeds have stagnated in the years since, and by some measures they have slowed. In a classic innovator’s dilemma, the big airplane makers have spent the last several decades investing in tweaks that improve efficiency and cut costs, unintentionally locking themselves into a business model that is too risk averse to break the mold.

That doesn’t mean the return of supersonic will be easy. But at least the next generation of supersonic transport developers will have the benefit of learning from the mistakes made by the Concorde.

The British- and French-made Concorde flew passengers across the Atlantic at twice the speed of sound for 27 years before retiring in 2003. Its illustrious history has since become the stuff of legend among aviation enthusiasts. On the one hand, the Concorde remains widely admired for its audaciousness—the cutting edge of 1960s aerospace engineering brought to the masses. And yet many more see the Concorde as the ultimate proof that a supersonic passenger jet will simply never be economical.

To say the Concorde was unprofitable is an understatement. Beset by runaway production costs and unveiled in the midst of the 1970s oil crisis, its ticket prices were exorbitant—upward of $20,000 for a round trip flight from New York to London in today’s dollars. Worse still, the government committee responsible for its design had no real business plan. As a result, the 100-seat plane routinely flew at half capacity, losing money on virtually every flight.

Less appreciated is the role regulation played in the eventual demise of the Concorde and commercial supersonic more generally. In 1973, civil supersonic transport was outlawed over the continental United States, effectively halving the market for the Concorde, along with any supersonic transporter that may have succeeded it. The origins of the ban trace to a panic over the risks posed by sonic booms—the loud bang emitted by supersonic planes as they pass overhead—reinforced by an early environmentalist movement called the Anti-Concorde Project. It didn’t help that the American competitor to the Concorde, the 300-seat Boeing 2707, had just been canceled for being overly ambitious.

The private sector has shied away from supersonic flight. So why, today, does the tech seem poised for a comeback?

Sonic booms were not an entirely illegitimate concern. At 110 decibels, the Concorde’s boom was startling. And yet addressing sonic boom concerns through a ban on supersonic flight overland meant the Federal Aviation Administration had effectively created a speed limit, when a noise limit would have been far more appropriate. Private-sector research and development into quieter supersonic designs was stifled as a result.

The ban mattered due to the importance of industry learning curves within the aviation industry. The Concorde attempted to go from designs on the page to a mid-size passenger jet with no sense of what we would today call product-market fit. In contrast, a smaller business jet doing more frequent trips could have met early market demand without the risk of flying at half capacity. Only then, by iterating on design to reduce costs and noise, would larger models be built to achieve the economies of scale needed for affordability. It is a familiar development path across industries, from electric vehicles to mobile phones: a class of early adopters seeds a nascent industry, with subsequent innovations bringing the product to the masses. The only problem? Business jets spend 75 percent of their flight time overland, and as such the ban on civil supersonic flight overland cut the industry learning curve off at the knees.

What’s Driving the Supersonic Comeback?

That’s the story of why the private sector has shied away from supersonic transport for the last forty years. The question is why, today, do they seem poised to make a comeback? The short answer is that aerospace innovation continued apace and in recent years has allowed the new players to essentially leap-frog business jets to go straight to transoceanic passenger jets, with much more certainty on the economics.

The ability to iterate aircraft designs with computer simulations has been of particular importance, rather than the expensive, months-long process of building scale models for air tunnel testing. Combine this with better engines, and the commodification of carbon fiber composites that are strong, lightweight and infinitely shapable, and it is suddenly possible for a small team to design a relatively quiet and fuel efficient supersonic passenger jet with an order of magnitude less capital than was required in the past.

The ban on civil supersonic transport overland looks increasingly obsolete given that the intensity of a sonic boom can be greatly attenuated by shaping the aircraft differently. Indeed, the next generation of supersonic passenger jets will likely produce less of a boom and more of a thump. In Boom Technology’s case, they are anticipating a sonic boom 100 times quieter than the Concorde, while NASA, in partnership with Lockheed Martin, is building a prototype with a boom over 1,000 times quieter than the Concorde.

So-called “low boom” supersonic passenger jets are still several years away, but as long as the ban on overland supersonic remains in place, the private sector is on standby about how quiet of a sonic boom they should shoot for. Replacing the ban with a reasonable supersonic noise standard would bring regulatory certainty to the industry and spur the private sector into a race to be first to market.

Speed is an underrated force in our society. In 1830, the American merchant Asa Whitney got a taste of the unprecedented speed of a steam-powered locomotive while passing through Britain. Its juxtaposition with a grueling, 153-day trade trip to China was such that, when he returned home, he determined to connect the United States with a transcontinental railroad. While he failed, his activism inspired the entrepreneurs that ultimately succeeded.

The return of supersonic transport over oceans will do something similar for supersonic transport overland. As soon as it is possible to fly from San Francisco to Tokyo faster than it is to fly from San Francisco to New York, people will begin to ask questions. And when they hear the noise—the thump—on which the overland flight ban is based, moves to overturn it won’t be far behind, and a new generation of entrepreneurs will make history.

How Long-Term Investors Can Step Into the Breach

2017 was a bad year for long-term investors. While short-term gains from public equities will likely narrow the yawning gap in funded liabilities, these will likely turn out to be Pyrrhic victories, because major medium and long-term risks got worse. Much worse. As long-term investors prepare for 2018, it’s time to undertake a reassessment of portfolio strategies and the role of long-term capital in the macro-economy itself.

The list of risks is daunting and climate change tops the list. Record hurricanes in the Caribbean, record fires in southern California, accelerating polar melting, and a summer of drought and protest in India drove up insured losses and political risk.

Geopolitically, Russia continued its attempted hacking of elections in Germany and France, North Korea launched itself into the nuclear powers club, the civil war in Yemen put a million people at high risk of cholera infection, Brexit negotiations distracted Europe, and Washington recognized Jerusalem as the capital of Israel. Economically, China’s debt got worse, Americans leveraged up on consumer credit, OPEC raised the price of oil, the Fed raised rates, and Europe began to curtail its policy of quantitative easing.

This matters to portfolio theory because institutional investors build their holdings around an assumption that developed-world governments are making macro-prudential decisions that, together, work to address the primary drivers of long-term risk. After 2017, it is hard for an objective fiduciary to say U.S. fiscal, securities, tax, or environmental policy—policy which impacts 50 percent of global stock market equity—is prudent or will be for some time to come.

If that assumption is false, and if the U.S. is not investing in or shaping the regulatory environment to support a foundation of sustainable, long-term growth, then portfolio diversification is no longer sufficient to mitigate the catastrophic losses that would come from a new exogenous shock, or perhaps, a self-inflicted shock as newly-increased middle-class tax burdens force families to stop spending.

This is the fundamental problem from which the idea of strategic impact investing emerges, as this columnist has articulated in the past. If investors believe that it is unlikely that advocacy will correct the problem in time, do they have an obligation to invest themselves to fix it? Is it possible for responsible, long-term investors to articulate, structure, and fund a coherent investment hypothesis that makes the kinds of investments a major economy like the U.S. needs? Could we replace missing investment dollars from the federal government with investment dollars from long-term impact and institutional investors? Could the resulting system be more resilient, responsible, and prosperous than the status quo ante? And, could such a system be introduced to other economic regions lacking in more traditional Keynesian investment?

To all of these questions, the answer is: Yes.

If investors believe that it is unlikely that advocacy will correct the problem in time, do they have an obligation to invest themselves to fix it? The answer is: Yes.

Strategic Impact Begins Here

Here’s how. Starting in the U.S., the key to this investor-led strategy is the increasing demand for walkable communities across the country. More than 60 percent of Americans prefer a walkable community in their next housing purchase. That’s three times the demand for suburban housing after World War II. However, today only 12 percent of homes are on the 1 percent of land that is walkable. By unlocking this secular pool of demand we can put capital and labor back to work, rebuilding America on a more sustainable and equitable footing.

To tap into that demand, a consortium of institutional and impact investors would need to establish a series of four strategic sector impact funds that would use blended financing to pay investors a competitive return while ensuring taxpayers received a lower-than market interest rate for infrastructure improvements. These funds would invest in four sectors across the U.S. in need of low-rate, long-term financing: intra-city rail, residential mortgages, inter-city high-speed rail, and renewable smart grids.

By blending these lower-rate investments with higher-rate real estate investments along infrastructure corridors, cities will be able to afford the financing, while investors receive a competitive return as homeowners purchase or rent in these newly walkable and connected communities.

The initial source of capital can be from those institutional investors who have already designated some or all of their portfolio in sustainable or responsible investments. European pension funds and reinsurance companies such as the Government Pension Fund of Norwegian and Swiss Re are likely candidates, as well as the restructured Public Investment Fund of Saudi Arabia and cash-rich firms in the U.S., from Berkshire Hathaway to Apple. Any investor currently earning negative interest in European, Swiss, or Japanese bonds will see an opportunity for enhanced spread without taking on equivalent levels of risk.

Opportunities Abound

There is plenty of opportunity. My colleagues at Long Haul Capital Group estimate there is $1.3 trillion in intra-city rail and mortgage financing alone. After this first generation of founding investors, these four funds have the potential to transform retirement security planning in the U.S. The long-duration assets at the core of these funds are well-aligned with retirement needs, and with their blend of assets, offer workers an attractive rate of return not correlated to the stock market. It is, in other words, now possible to improve retirement security without returning back to the expensive days of defined-benefit pensions.

Structured as B-Corps, these four funds would be able to adhere to a public purpose without requiring a government charter. By working in parallel the four funds could systematically invest in a new economic strategy defined by sustainable, long-term growth. This would reduce the risk to participating investors while effectively taking from Washington the responsibility to invest in the foundation of the economy, a responsibility that, over the last 25 years, both ends of Pennsylvania Avenue have failed to take seriously.

Globally, the widespread migration from countryside to city is creating the same demand opportunity. That means the same basic structure can be adapted to regions seeking investment in more than just extractive industries, for which there is plenty of bilateral and multilateral assistance. As long as nations are willing to deliver the rule of law and ensure their citizens have the right to title, own, lease, and transfer property, this same mechanism can help billions of people build a sustainable pathway into the 21st century.

At the end of the day, investors need to find ways to move capital into the foundation of a global economic transition, or the already-wounded 20th century economy will most assuredly collapse. We are already in the longest bull market in modern history, the product of extraordinary monetary intervention in the West, and extraordinary leverage everywhere. With historic threats darkening the horizon, it is only prudent to adapt—for what cannot be sustained will not be.

The Ecosystem Imperative in Digital Transformation

For the most part, strategists are missing the significance of new ecosystems in digital transformation. Their importance can’t be overstated. Get this concept right, and digital transformation becomes easier to navigate. The companies that don’t understand ecosystems will become the victims of disruption.

Since 2007, smart leaders have attempted to reorganize segments of the economy around business platforms. The best platforms (Apple OS/App Store, Google Android, Alibaba) not only weathered the Great Recession of 2008-12, they prospered. However, since 2015 there have been two new developments that are changing the business landscape.

The first is the ability of China’s tech platforms to aggregate huge user communities and developers around their core business platforms to help rapidly iterate improvements and features that customers say, often on a daily basis, that they want. This can best be described as a form of “participatory capitalism.”

The second is that startups have been able to resource the development of new platforms through the use of “initial coin offerings,” where entrepreneurs pitch a business idea with a built-in community and get those community/customer members to pay for the business by buying “coins” or digital currency.

Both create highly energetic ecosystems of partners and customers that drive value rapidly.

If enterprise leaders don’t begin to adapt to this, they will find large sections of the new economy closed off by adaptive and fast-growing ecosystems that have customers enthusiastically locked in. To adapt, companies need to grasp the philosophy of participatory capitalism and learn new ways of working that allow daily pivots and course corrections.

Participatory Capitalism in China

Platforms during the 2007-2017 period created substantial positive disruption. The research analyst firm Gigaom estimated that the apps revolution (the first phase of the new economy revolution led by the App Store and Android Play) would support nearly 5 million jobs in Europe by 2018.

The second phase of the revolution is much more about the ecosystem.

In the first phase, “ecosystems” were very loosely coupled. If you and I were both developing apps for iOS, there would be no requirement for us to interact. We were part of the same general advocacy space. We added value to Apple and got our returns in revenues.

Today’s ecosystems are different largely because of two new ingredients: They include customers and direct incentives. The disruptive effect was recently noted by the U.S. military in the area of unmanned aerial vehicles or drones:

By relying on large platforms built by large contractors, the U.S. military lacks the small business integration that has given Chinese-based organizations an edge in UAV development.

So much of an edge that China’s drone champion, DJI, owns 85 percent of the global consumer drone market.

There are no secrets to DJI’s success. It has daily interaction with customers to seek out new feature requests; it has a software development kit that lets third parties develop new features; and it rapidly adapts to new use cases that emerge as prototypes go to user groups or that developers have adapted from the core platform.

Critically, there is interdependence and mutual benefit in the ecosystem. DJI uses local engineering facilities for testing; its ecosystem members benefit when contributors improve, say, mapping; and a swarming capability can be reused by everybody. The more the drone improves, the more there is for everyone to experience.

If enterprise leaders don’t begin to adapt to digital transformation, they will find large sections of the new economy closed off by adaptive and fast-growing ecosystems that have customers enthusiastically locked in.

The Chinese Internet of Things platform IngDan, founded in 2013, has a comparable ecosystem culture. It had already helped launch 16,000 IoT projects by May 2016. Its role is to connect IoT startups, globally, with Chinese manufacturers. It also draws large firms such as Intel into its orbit. The effect is comparable to the added value of mobile chip design company Arm Holdings. Arm builds its experience of chip design by focusing on that one element alone and leaving production to others. It amasses mobile chip design excellence in the center of the ecosystem and every participant benefits.

The Recent Rise of new Platforms and Incentivized Ecosystems

The initial coin offering market mentioned above gives startups access to unprecedented cash at terms the conventional finance industry could not even contemplate. The bottom line is cash can be simply a speculative bet on a fast price rise in the coin or token that underlies these projects. But at its best, cash confers a right to participate in a project—on the new credit reporting platform Bloom, for example, users own coin and they can use them to vote on the development of the core platform, specifically the evolution of Bloom’s credit scoring techniques.

Coins can also provide the platform owner with a way to incentivize good or appropriate behavior. In the case of the eco-initiative Earth Token, for example, the coins can be used as a reward for everyday carbon offset activity, a reward that may well rise in value as coins are traded.

Quietly, without even being in stealth mode, these initiatives are creating huge value, driven by the rise in revenues that speculators and first movers are earning from sources such as Bitcoin and Ethereum.

The startup data marketplace IOTA, for example, is now the fourth highest valued of these new coin projects, with a market cap, currently, in excess of $12 billion. What drove IOTA’s market capitalization? The involvement of Microsoft, CISCO, Volkswagen, and Samsung, among other traditional blue chip companies.

Large blue chip firms are only too happy to participate. There is no hands-off relationship as there was with Bitcoin, no sense of unpleasant odor. This is instant business credibility at scale, a topic I wrote about in Platform, Disruption, Wave.

New Ways of Working

Ecosystem capitalism, or participatory capitalism, relies on new ways of working. This is the absolute essence of digital transformation. Change is hyper-paced. For example, Mastercard now tries to capture microtrends that might last only three days, giving them just 12 hours to work up an offer for the market. To get there, enterprises need to revolutionize work.

In a recent book, Flow, Aviva CIO Fin Goulding and I pointed out some key features of that work style.

  1. The end of projects. Project management is part of the legacy liability, therefore work must become less project-based. Smart companies are moving to very short units of work—two days maximum—so that employees are constantly showing work-in-progress and interacting around problems, issues and solutions. That means many of the skills of project management, a backbone of many companies, becomes redundant.
  2. Process co-design through visible work. Work becomes more visible so that work processes can be co-designed by employees. There are no fixed work processes. In Flow, we list over a dozen wall visualizations that let employees co-design the best way to sequence small units of work.
  3. Improved social interaction. Work becomes more social. Decision-making is delegated to the conversations that take place between smart individuals who are interacting daily around visual representations of their work. Good decisions stem from good social interaction at work.
  4. Belief and value. Leaders recognize that people are investing their emotions in rapid-fire ways to bring new value to the firm, quickly and at high quality. Leaders are prepared to accept that they carry a responsibility when people believe in them. In addition, value becomes multifaceted, reaching out beyond simple ideas such as a value proposition or reducing waste, to embrace many perspectives on what adds value and who can judge that.
  5. Customers and ecosystems are in. Enterprises must grow an ecosystem and continue to nurture it, including customers who want to participate.
  6. Continuous everything. Life is dominated by continuous innovation, continuous improvement, continuous learning, continuous adaptation and continuous delivery.

There’s not one piece of technology in that list. It is all about the culture, the culture of a continuous flow of innovation and value. That’s the right aspiration for what ecosystems should create. Continuous everything is the endpoint of digital transformation.

Aviva CIO Fin Goulding contributed to this column.

How Bitcoin Eats the World’s Energy

Can the world afford Bitcoin? The cryptocurrency is enjoying something of a resurgence as investment and central banks weighed its benefits and caused its value to balloon.

But generating Bitcoin requires a truly staggering amount of energy. The electricity used in a single Bitcoin transaction, for instance, could power a house for a month.

Bitcoin mining (the process of generating a bitcoin) now consumes the same amount of electricity every year as Denmark – 33TWh, according to one recent report. An earlier report found that Bitcoin mining uses more electricity than a country the size of Ireland, Serbia or Bahrain.

Bitcoin mining’s energy use is reportedly growing at a rate of 25 percent per month. At that rate of growth, it will consume as much electricity as the U.S. in 2019. And by 2020, bitcoin mining could be consuming the same amount of electricity every year as is currently used by the entire world. Meanwhile, another study reckoned that 60 percent of a Bitcoin miner’s income would be spent on operational costs, including electricity bills.

However, while there has been a lot of talk about how Bitcoin or other cryptocurrencies may eventually replace existing fiat currencies—those issued and traded by governments—one important question seems to have been avoided or ignored by financial wizards and policy makers.

Given the amount of the world’s resources being used to mine Bitcoin, can the world afford it in environmental terms?

Why is Mining Expensive?

Bitcoin is earned by generating blocks, chains of transactions, verifying transactions are correct, and answering mathematical puzzles. While it sounds confusing, the whole system depends on an open, or “distributed,” electronic ledger that, in theory, eliminates the risks of fraud and theft, although there have been cases of huge Bitcoin losses due to alleged criminality.

A new chain is created every 10 minutes or so and, according to a Business Insider article, the use of complicated and energy-intensive algorithms are part of a deliberate ploy to guarantee a degree of exclusivity.

“Bitcoin trades use a lot of electricity as a means to make verifying trades expensive, therefore making fraudulent transactions costly and deterring those who would seek to misuse the currency,” Business Insider said.

Powering Up

The article quotes ING economist Teunis Brosens as saying a single Bitcoin transaction uses 200 kilowatt hours. “This number needs some context,” he says, “200 kWh is enough to run over 200 washing cycles. In fact, it’s enough to run my entire home over four weeks, which consumes about 45 kWh per week costing 39 euros of electricity (at current Dutch consumer prices).”

While this alone seems huge, it is tiny when compared with the energy expended on the daily amount of trades: almost 380,000 on November 27 2017 alone, or 76 million kWh. As the average U.S. citizen used 12,986.74 kWh of electricity in 2014, on that one November day in 2017 alone the power needed for the number of transactions was equal to the annual electricity usage of about 5,850 Americans.

Burning Questions

Bitcoin also uses a lot more power when compared with other transaction systems. A typical Visa card payment, for example, requires 0.01 kWh while another cryptocurrency, Ethereum, uses 37 kWh.

This raises important questions as to the cost benefits of Bitcoin, not only to users, but for the rest of the planet.

As most of the world still relies on coal, gas and oil to produce electricity, the use of energy-consuming algorithms to drive the Bitcoin mining process means we are burning fossil fuels just so transactions can happen.

As well as creating harmful small particulates, or soot, which can get into the lungs and bloodstreams of animals and humans and cause serious illnesses, byproducts from power generation include toxic nitrous oxide and sulfur dioxide emissions, as well as carbon dioxide, one of the main gases linked to global changes in climate.

Is the Digital World Sustainable?

However, although Bitcoin is one of the worst examples of our profligate use of fossil fuels to create wealth, it is not alone. The whole digital world relies on power generation to run the data centers at the heart of the modern economy.

According to 2013 statistics, Google’s data centers used enough electricity to consistently power 200,000 homes, while the amount of power needed to run a large data center would run a small U.S. town. And as we move to driverless cars and other data-intensive “Internet of Things” technologies, the demand for energy will only increase.

It seems that businesses around the world are looking to a digital future while governments are talking of a more sustainable one: how to achieve both goals at the same time needs to be the subject of urgent discussion.

This piece first appeared on the World Economic Forum Agenda blog.

Aviation Mechanic Shortage Looms as Risk for Industry

The aviation industry faces a best-of-times, worst-of-times situation as it moves into the next decade. While airlines are aggressively modernizing and enlarging the global fleet with new, technologically sophisticated planes designed and built post-2000, the long-predicted shortage of aircraft mechanics to service the fleet may be here.

Thanks to aging populations around the globe, aviation and the maintenance, repair and overhaul (MRO) industry are preparing for a rash of retirements among maintenance technicians as those of the baby boom generation reach their sixties. According to an Oliver Wyman report, there are not enough new mechanics entering the profession to make up the difference.

The labor shortage has crucial economic impact. Given the simple law of supply and demand, the shortfall may raise the cost of maintenance for airlines, potentially forcing some carriers to maintain spare planes to avoid cancellations and late departures resulting from maintenance delays.

Forecasted U.S. Commercial MRO Maintenance Technician Demand and Supply by Year

In five years, the industry’s demand in the United States for mechanics will start outpacing supply—a situation where the jobs will be available but the people will not. That gap will continue to widen at least through 2027, when it is expected to reach 9 percent. The problem may emerge sooner in Asia where a bulk of the growth in the aircraft fleet is expected to take place.

Skills ‘Aging Out’

The median age of aviation mechanics in the U.S. is 51, nine years older than the median age for the broader U.S. workforce, according to the Bureau of Labor Statistics. At the same time, relatively few millennials are looking to train as aviation mechanics. When asked why it was difficult to recruit, 51 percent of survey respondents identified wages and benefits as an obstacle.

The MRO labor supply shortage is a great concern of airline and aircraft manufacturer executives. Already, 78 percent of the respondents to a survey of the MRO industry say they are finding it difficult to hire mechanics and the tightening labor market is pushing them to rely on overtime and other stop-gap efforts to keep up with market demand.

Additionally, the shortfall is expected to create expertise gaps as the industry finds itself having to service a fleet that will be divided between older and newer technology aircraft. That reality is exacerbated by the industry’s failure to upgrade its own maintenance and IT systems. The newer planes, specifically, create reams of data, which could make maintenance more effective for service providers with the capability to collect and analyze it.

Training Needed on Emerging Technologies

Tomorrow’s maintenance technicians need to be tech-savvy diagnosticians—something that was not imaginable a few decades ago. The MRO survey of executives identified three emerging technologies vital for the next generation of mechanics, including composite material repair and manufacture (62 percent); collection and reporting of data for advanced analytics, big data, and predictive maintenance (51 percent); and the newest avionics and electrical systems (51 percent).

Eventually, the market will right this supply imbalance by forcing wages and benefits higher. But until then, airlines and MRO providers will have to carefully monitor the situation to avoid getting caught unprepared.

China, Europe and the Belt and Road Initiative

To any observer, the phenomenal rise of China in its evolution from a recipient of aid in the 1980s to its current position as a global economic and military powerhouse, adept at the judicious use of soft power and increasingly “sharp power,” is obvious.

Perhaps this is no more evident as in the 2013 announcement by Chinese President Xi Jinping of the Belt and Road Initiative, designed to revive and reinvigorate land and maritime trade routes between China, Asia, Africa and Europe. As of late 2017, there were 68 countries that had accepted China’s invitation to join the BRI.

But where Europe is concerned, the BRI has received mixed reviews. While China has wanted a closer working relationship with the EU surrounding BRI projects, the bloc’s leadership has been standoffish, insisting that China’s plans to connect with Europe should fall in line with several principles, including market rules and international standards. The EU’s vote against China’s application for “market economy status” at the WTO hasn’t helped matters.

The superlatives concerning the benefits of BRI have been nearly as abundant as comparisons noting it as being emblematic of China’s rise and an alleged U.S decline. These comparisons have grown more fervent with the U.S. accused of ceding its pre-eminence in the Asia-Pacific to China by abandoning its involvement in the Trans-Pacific Partnership, which may have tempered Chinese dominance in the region.

For real success, BRI will need to win the confidence of the private sector and convince them that the political risk inherent in such a grandiose scheme is acceptable. But even risk will provide opportunity for security contractors in both the maritime and land-based projects that China will need to complete for BRI’s success.

Political risk may be a bit more difficult for China in its relationships with powerful regional states such as India. Some states are simply nervous about what a greater Chinese influence in their region would mean. While many desire the economic relationship with China, they do not want Chinese manipulation and pressure to obtain political influence, with reports of this conduct being made by German, U.S., Australian and New Zealand officials amongst others. However, BRI represents an almost irresistible attraction to many in Asia, Africa and the Central and Eastern European states.

China has set the groundwork for BRI in Europe with its 16 +1 strategy of engagement across Europe. The 16+1 is a Chinese initiative aimed at intensifying and expanding cooperation with 11 EU Member States and 5 Balkan countries (Albania, Bosnia and Herzegovina, Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Macedonia, Montenegro, Poland, Romania, Serbia, Slovakia, Slovenia) in the fields of investments, transport, finance, science, education, and culture.

The fear of risk remains with a fear of the Chinese driving a politically motivated competition for Belt and Road Initiative finance.

China Rising on the Back of the BRI

Even if only a portion of the superlatives concerning BRI are realized, then it is feasible that China’s position and influence regionally and globally will be on par with, if not surpass, the U.S. as the preeminent world hegemon. BRI may possibly allow many states to experience a phenomenal improvement in their economies. Apart from Asia, Africa and the U.S., there are the interests of the EU in BRI’s ultimate goal of re-establishing a new silk road into European economies.

The fear of risk remains with a fear of the Chinese driving a politically motivated competition for BRI finance. Some European analysts, such as Malgorzata Jakimow, argue that the Chinese have fueled these fears in the recent past by allegedly punishing Lithuania and Latvia for hosting the Dalai Lama and investing in a loyal Latvia, with other examples being reported.

These instances, as well as the ability of China to provide finance without the incumbent checks and balances that the EU insists on, make China’s money a viable alternative in an era of rising populism and nationalism in CEE states, which reject the EU at the visceral level.

BRI: Lever or a Wedge?

Hungary in particular among the CEE states and under the leadership of Prime Minister Viktor Orban has embraced BRI. Hungary was the first EU state to join BRI, as well as initiate its own “Look East” strategy toward China instead of Western Europe. This policy, though, has not provided the immediate gains that Hungary had hoped for with the China-funded Budapest to Belgrade rail link proving cumbersome to progress.

Though China insists it is not competing with Europe, the propensity to develop bilateral ties with individual EU states (in particular the CEE states) that perceive themselves as underfunded and underappreciated by the old EU states makes limited “red tape” Chinese investment highly attractive. States such as Hungary—where its leader, Mr. Orban, promotes “illiberality”—will not disturb the Chinese on issues the EU would raise with China on human rights issues or other similar issues.

Orban’s Hungary and a number of other CEE states will not disrupt the Chinese narrative that promotes BRI as not only advantageous but also as a benign and altruistic Chinese initiative. It is this capacity of BRI to initiate fractures and wedges in the EU, bypassing EU member states’ obligations and providing attractive economic incentives through bilateral relationships, that has Western Europe concerned. These relationships—amplified by the impact of populist and nationalist movements evident in Hungary, as well as the backlash against the EU, most recently seen in the exit of the UK from the EU—could be a catalyst in further dissolving the will of many CEE states to remain in the EU.

An effective and profitable engagement with China on BRI can only be maintained if states forthrightly disabuse China of the value of any attempt to unsettle established relationships such as the EU or the use by China of its so-called sharp power to secure favorable trade and strategic outcomes.

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