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Risk & Innovation

Black Swans: What Pandemics Can Teach Us About Risk Management

May 17th, 2017

Overview

Black Swan events—those out-of-the-blue, large-scale occurrences that might only be rationalized with hindsight—can cause massive destruction. What distinguishes Black Swans from other disasters or crises is their unpredictability, stunning scale and the shock factor that accompanies them. Whether it be events such as World War I, the rise of the Internet or the September 11th attacks, companies must not only mount an effective response but also simultaneously deal with the impact of being blindsided by an inconceivable event of staggering proportions. While it might be impossible to predict the event type, it is possible to prepare for the event’s impact. Pandemic risk gives us an opportunity to look more closely at what preparing for the impact looks like.

Addressing the risk of pandemics can be vital to building a more resilient business. Leading scientists and philanthropists such as Bill Gates have warned of the need to confront the possibility of a major pandemic hitting in the very near future. And in Pandemic: Tracking Contagions, from Cholera to Ebola and Beyond, author Sonia Shah makes a compelling case that the next pandemic is not a matter of if, but of when, and how big.

The impact of such an event, whether occurring naturally or as the result of bioterrorism, could be significant: The 1918 Spanish flu pandemic, which infected 500 million people worldwide and killed between 50 million and 100 million—or 3 percent to 5 percent of the world’s population at the time—offers a valuable point of reference. In the ensuing century, our world has been confronted with H1N1, H5N1, SARS, Ebola, and, most recently, Zika. Although none has emerged on the scale of the Spanish flu, that doesn’t mean that it can’t happen again.

Experience and planning can help businesses keep their heads during the swirl of uncertainty surrounding pandemics. Given the alarming regularity of outbreaks over the past century, companies should use the outbreaks as a model to reduce the impact of such large-scale events and better prepare for the full range of disruptions they might encounter.


In Depth

Companies face an ever-growing array of potentially disruptive events that must be managed—many, of course, related to technology and a digitally connected world. And while global supply chains and just-in-time inventories can reduce costs and increase efficiency, they can also extend businesses’ exposures. This could allow a catastrophe in another part of the world halting production and sales at home.

As countries and other stakeholders have had to address the risks from the recent string of outbreaks, their strategies have also become more effective. “Developed economies have learned lessons from previous incidents and are able to better restrict spread of diseases and minimize the overall impact to human populations,” said Ciara Jackson, Ireland-based director and agri-food and beverage practice leader at Aon Risk Solutions. Businesses use such methods to inform their supply chain strategies and governance, assess continuity plans, and improve resilience.

A Growing Threat for Businesses

Population growth, increased urbanization, and more frequent and improved global travel, among other factors, have all raised the probability of the spread of disease. And the globalization of trade has only served to increase the exposure of people and supply chains to pandemics.

“Globalization has made pandemics a bigger threat,” said Alex van der Wyck, chief operating officer of Aon’s EMEA Specialty practices, which works with multinational organizations across various industries. He explains that while “pandemic risk/health crisis” is ranked at number 51 in Aon’s 2017 Global Risk Management Survey, the effects of a pandemic can be far-reaching. “There is a business-continuity element here as a Black Swan event can have disastrous repercussions, whether it involves supply chain disruption, employee safety, crisis management, or even damage to a brand. These risks, which have ranked much higher within the survey, are all interconnected.”

The Ebola outbreak of 2014–16 is a striking example of a pandemic’s potential impact and how it can vary across industries. Mining, energy, and agriculture companies with operations in Africa suddenly had to deal with travel restrictions and safeguarding employees’ health. Meanwhile, healthcare, transportation, and hospitality companies located or working in the affected regions had to consider the potential effects of quarantines and other health restrictions and guidelines.

More recently, the spread of the Zika virus around the world sent governments and businesses scrambling to respond.

Preparation Is Essential

As with many other Black Swan events, successfully dealing with a pandemic requires a company to be ready to quickly customize its response to the specific characteristics of the event. For pandemic risk, this approach means taking advantage of business continuity planning and using tools such as Aon’s Pandemic Flu Characteristics comparison exhibit as a baseline. This point of reference can help companies accelerate their understanding of how to adapt their plans to address the unique characteristics of the pandemic on the business, employees, suppliers, and markets.

“It’s not just about the disease and its symptoms; it’s also about the way the disease is transmitted in populations and gaining an understanding of who is at risk,” said Nancy Green, executive vice president, leader of Aon’s Infectious Disease Response Task Force, and author of Aon’s white paper ‘Keys to Success in Managing Black Swan Events.’

“Organizations should consider strategies to protect their employees and businesses from large-scale risks such as pandemics,” Green said. “An appropriate business continuity management program can prepare them to deal with the impact of a worst-case scenario event and help them anticipate the kinds of decision-making challenges that might arise.”

Such a program should include the following components:

Strategy and governance—Businesses should review and update pandemic contingency plans regularly. “I spent 10 years in Indonesia, and that time reinforced the importance of including Black Swan events such as pandemics in business continuity and crisis management planning,” van der Wyck said. “As it related to pandemics, we considered every facet of an outbreak to devise an effective response, from overall operations and processes—including potential relocation of key staff—down to specific medical supplies and safety garments stored within offices. Every two years we would review our clients’ business continuity plans to be sure they supported emergency preparedness at their various operational sites.”

Business continuity plans and policies should also align with local, state and federal response frameworks to enhance awareness of, and coordination with, government decision-making authorities and action steps that can augment the organization’s own response strategies.

Businesses should also conduct a comprehensive review of business contingency risks and insurance policies for relevant coverages and draw up policies and procedures, including travel restrictions or guidance, to protect their staff.

Operations—Businesses should take actions to enhance the resilience of the areas and functions critical to keeping their doors open. To avoid disruptions to manufacturing, for instance, executives could increase stock levels and prequalify domestic and international suppliers.

The plan should also include additional options for technology providers that can either step in and replace vendors affected by the pandemic or support alternative work strategies including remote workers, teleconferencing, and emergency operations. Companies with a mobile workforce or concentrations of workers in higher-risk nations should also create systems to monitor and care for employees who may develop symptoms.

Communications—When a pandemic occurs, access to reliable information and a plan to disseminate the latest reports across the organization take on added importance, so getting information to employees, suppliers, customers, and others to help guide decision-making is crucial. Companies should establish direct lines to health agencies and local governments to get information about the characteristics of the virus. Managers should also ensure that they are educating employees on the disease’s symptoms—and, for example, advising them not to come to work sick.

The Broad Benefits of Pandemic Preparation

Addressing the risk of pandemics by developing a preparation plan is a no-regrets move. “Although these events do not occur often, when they do they have high severity,” Jackson said. “Before something like a pandemic takes place, organizations and their leadership teams should have business continuity and crisis management plans in place and test and refresh them periodically.”

What’s more, this deliberate and thorough reexamination of an organization’s preparedness can not only address gaps in planning but also instill a mind-set of agility and resilience from the C-suite down through the enterprise—attributes that can be a boon in any sort of crisis, no matter the size.


Talking Points

“Eisenhower famously said that ‘in preparing for battle, I have always found that plans are useless but planning is indispensable.’ So also with the pandemic threat.” – Lawrence H. Summers, former director of the National Economic Council under President Barack Obama and professor at and former president of Harvard University

“Whether it occurs by a quirk of nature or at the hand of a terrorist, epidemiologists say a fast-moving airborne pathogen could kill more than 30 million people in less than a year. And they say there is a reasonable probability the world will experience such an outbreak in the next 10-15 years.” – Bill Gates, Microsoft founder and philanthropist

“If you think about all the things that could very quickly devastate a population, devastate a country, pandemics is really near if not at the top of that list.” – Dr. Ashish K. Jha, director of the Harvard Global Health Institute

“In the next 20 years, 30 years, there will be a pandemic, and it will have the potential to bring humanity to its knees.” – Dr. Larry Brilliant, epidemiologist, former director of Google.org


Further Reading

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