Governments have been urged to work with the private sector to formulate their risk management strategies.

At the launch of the World Economic Forum’s Global Risks 2013 report, senior insurance executives advised countries to collaborate with the private insurance market and to adopt models that have been successful in the corporate world.

The effects of climate change have been borne out in an increase in the frequency natural disasters – with speakers pointing to Hurricane Sandy and the 2004 tsunami as prime examples. In addition, more people and businesses are now located in disaster zones.

The population of hurricane-prone Florida, for instance, has grown sixfold in 50 years, while 14 of the world’s largest cities are now in coastal locations. Furthermore, governments are now being relied upon to fund disaster recovery more than ever before. After Hurricane Diane in 1955, the US government paid for just 6% of the cleanup operation. After Hurricane Ike in 2008, the figure had risen to 69%.

John Drzik, CEO of management consultancy Oliver Wyman Group, told GTR at the event that with governments being relied upon post-catastrophe, while simultaneously trying to reduce their fiscal deficits, the private sector should become more involved.

He says: “The private sector can give the tools for quantifying the risk that they bear in relation to natural catastrophe. They can look at the value of the property that’s in either flood zones, hurricane zones or earthquake zones and the severity of damage that will occur under certain scenarios. Governments can do the same, looking at the residual risks that they bear that goes beyond that which the insurers are taking but which is the backstop they’d be expected to provide in those situations.

“They can look at whether that’s a scale they’re comfortable with or whether they need to transfer some of that risk into private markets, because it could create too much disruption if there was a series of natural catastrophe events drawing on that pool of money.

“I think what we’ll see is the techniques around risk quantification and management and the portfolio approach to understanding what risks you want to take versus those you want to transfer. All of that could be brought in to a different, more sophisticated risk management approach for government working with the private sector.”

Drzik advised governments to adopt a “more sophisticated risk management approach” and encouraged the appointment of country risk officers “in multidisciplinary roles to monitor and prioritise the management of risk within a country”. The private sector, he said, should also be involved in the planning and construction of infrastructure that could, potentially, mitigate the impacts of natural disasters.

The World Economic Forum’s report, compiled in conjunction with more than 1,000 experts and industry leaders, ranks countries in order of the effectiveness of their governments’ risk management strategies. Singapore, Qatar, Oman, the UAE and Canada make up the top five, while at the other end of the spectrum, the governments of Venezuela, Argentina, Yemen, Greece and Haiti are deemed to be most ineffective.

The report, released ahead of this month’s annual meeting in Davos, Switzerland, says that the five greatest global risks in 2013 (in terms of impact) are: major systemic financial failure, water supply crises, chronic fiscal imbalances, food shortages and the diffusion of weapons of mass destruction. Both the likely impact and the likelihood of the top five risks have grown over the past 12 months.

The report also warns of the interconnectivity of global risk. Economic, environmental, social, religious, political and structural risks, it argues, are inseparable. In devising risk management strategies, then, businesses and government alike need to be inclusive and comprehensive.

David Cole, group chief risk officer of Swiss Re, says: “Coping with the economic and climate-change crises is unfortunately no longer seen as a continuum, but as opposing choices. The idea has gained ground that we can’t have solutions to both. But we need to go beyond this thinking-in-boxes approach. So because smart risk management is about taking a holistic stance on situations, we should do the same when it comes to the economic and climate-change challenges we’re facing.”