Risk Management in Times of Crisis: The Importance of Risk Aggregation and Risk-bearing Capacity
The COVID-19 pandemic and other geopolitical crises have revealed major weaknesses in how many companies manage risks. Although the World Economic Forum has regularly warned about the risks of pandemics and geopolitical developments in its annual global risk reports, they have only played a minor role, if any, in the risk management process. Yet it is these global developments with their countless interdependencies that have had major effects on the current risk situation and the future success of companies.
Due to today’s grave developments and their potential economic effects, aggregating risks and analyzing a company’s specific risk-bearing capabilities has moved into the spotlight. After all, without a systematic aggregation of individual risks in light of their interdependencies and the overall risk-bearing capacity, it is impossible to make a fact-based assessment if the company’s existence is in jeopardy or it has the finances to cover its total risk. There is also no real benefit-risk analysis, a basic principle for making business decisions amidst uncertainty.