Governments should boost efforts to improve risk management, says OECD

25 February 2009, Paris

Governments should improve how they prioritise efforts to prepare for large-scale disasters and work more closely with the private sector to ensure they can deal with crises quickly and cost-effectively, according to a new OECD report.

‘Innovation in country risk management’, produced in conjunction with Swiss Re and Oliver Wyman, says that in today’s interdependent societies, it can be unclear where one risk ends and another begins, and that individual events can turn into a full-blown disaster. It cites the current financial crisis to illustrate how a crisis in one sector of the economy can have knock-on effects around the world.

“Government efforts to assess large scale risks often focus on specific types of events like a flood or earthquake,” OECD’s Risk Policy Analyst Jack Radisch warned. “There has been a tendency for ministries, departments and regulatory agencies at various levels of government to work in parallel and separate silos. This form of governance is far from optimal in today’s interconnected world where risks are more complex. The current financial turbulence is a telling example of how the management of risks we face in society should be co-ordinated from A to Z.”

Good progress towards a co-ordinated risk approach

The countries covered in OECD’s study include Canada, Japan, the Netherlands, Singapore, the United Kingdom and the United States. Each has set itself a course to establish an ‘all-hazards’ view of potential sources of risk – including natural disasters, major accidents, terrorism or an event such as a flu pandemic. Singapore, for example, has implemented its Whole-of-Government Integrated Risk Management (WOG-IRM) framework, which aims to improve the risk awareness of all its government agencies.

“Looking at risks across the board allows these countries to work more strategically to target limited resources at the exposures they consider a top priority, and it relies on close interaction not only between national, regional and local government but also with the private sector,” said Alex Wittenberg, Partner at Oliver Wyman. “If we consider that over 80% of critical infrastructure is owned by the private sector in most of the nations featured in the report, there is a clear need for extensive public-private co-operation in a number of areas.”

Among the successful measures by the governments concerned is to take pro-active measures to increase public awareness of risks and to heighten peoples’ sense of urgency to prepare, mitigate and take out their own insurance against the hazards they face. The UK leads the way in educating the public about risks by publishing various scenarios in its ‘National Risk Register’; the Dutch government has implemented early-warning systems and stages full-scale simulations to prepare its flood-prone communities for large-scale disasters; and Japanese citizens are encouraged to take part in high-profile ‘National Disaster Prevention’ activities.

Country risk management

One idea to help bring more transparency and accountability to the way a nation manages its risks is to create a ‘Country Risk Officer’ function, similar to the private sector’s Chief Risk Officer.

“The job of this person, group or network would be to co-ordinate the risk assessment and mitigation activities for all hazards, and be the focal point to communicate throughout government how to address the risks on the table,” said Raj Singh, Swiss Re’s Chief Risk Officer.

“This could overcome silo-thinking and deal with any trade-offs between the competing priorities of different government departments. The Country Risk Officer function could also interface as needed with the private sector,” he added.

The approaches taken in the six countries highlighted in the report may not exactly reflect this model, but are similar in attempting to develop a broad view of the entire risk portfolio they face. Approaches include merging or modifying previously separate, central government departments in order to improve the information sharing and integration that is fundamental to risk analysis. Creating a small but influential body under the direct authority of the head of state to coordinate separate government bodies has also proved a workable option.

  • For example, Public Safety Canada (PSC) was created in 2003 to ensure coordination across all federal departments and agencies responsible for keeping Canadians safe from natural disasters, crime and terrorism
  • Since 2001, Japan has had its Central Disaster Management Council, an inter-ministerial body bringing together high level politicians and technical experts to develop and execute the country’s disaster management plan
  • In 2002 the United States merged 22 separate agencies to create the Department of Homeland Security (DHS). The US Homeland Security Council (HSC) advises the President on homeland security, ensures coordination of security-related activities, and promotes the development and implementation of homeland security policy
  • Following events such as the Y2K scare, fuel protests in 2000 and foot and mouth disease outbreaks in 2001, the United Kingdom established the Civil Contingencies Secretariat (CCS) within the Cabinet Office of the Prime Minister

Public-private partnerships for risk transfer

One of the main challenges facing government is making funding available to deal with a disaster, and getting the aid quickly to where it is needed. To strengthen cash flow for large scale disasters, the report suggests that governments should consider not only ‘ex-post’ but also ‘ex-ante’ methods of risk financing. Ex-ante arrangements help societies adapt to the changing risks they face by ensuring that financial relief is in place before a disaster takes place, whereas ‘ex-post’ compensation make public money available only afterwards.

In support of this ‘ex-ante’ approach, OECD identifies a clear role for insurance and other, more recently developed, forms of private risk transfer in helping governments to transfer risk. These include ‘catastrophe bonds’, where a payout to a beneficiary may be triggered when a disaster reaches a pre-defined magnitude. But the study also warns that large government insurance or risk-transfer programmes should only intervene when private catastrophe insurance is too expensive or in short supply.

The report describes other ways the state and the private sector can work together to raise awareness of risks, and how governments can enhance the effectiveness of private markets, for example with better enforcement of land-use plans and building codes. Other ways to boost the availability of private insurance include favourable tax treatment for insurance reserves that are set aside for ‘catastrophe pools’.