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Geopolitics of pandemics: Diagnosing threats to organizational resilience

Credit, Political Risk and Terrorism
COVID 19 Coronavirus

By Lucy Stanbrough | February 21, 2020

Given the interconnectedness of risks today, a national or local crisis can have global implications. Expanding beyond China and into the global system, coronavirus is no exception.

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About our COVID-19 coverage

In our ongoing coverage of the COVID-19 outbreak, experts from across Willis Towers Watson share insight into what you need to know to manage your business and employees and reduce your risk.

Similar to Severe Acute Respiratory Syndrome (SARS) and MERS (Middle East Respiratory Syndrome), which caused global public health emergencies, coronavirus, now referred to as COVID-19, concerns authorities because it has led to many hospitalizations and deaths. It has no confirmed cure or vaccine at this time. This public health emergency is already causing ripples globally.

The geographically dispersed physical locations of premises, complex supply chains, mobile workforces and customers raise a number of key issues that can have significant consequences for organizations.

Interrelated risks require an integrated response

What’s apparent is that the connections — the direct and indirect relationships between events and themes — are as important as the risks themselves.

New perspectives on challenges bring fresh opportunities to respond, and a conscious geopolitical risk approach provides a way for organizations to identify and understand how they may be impacted, in order to mitigate the risks and seize new opportunities.

We view the spread of COVID-19 and its global impact through the following six lenses:

  1. 01

    People risk

    Health, safety and security issues pose clear risks to both employees and their families — risks associated with loss of labor, absenteeism and reduced technical or management capacity, as well as dealing with stranded employees.

    We have outlined organizational guidelines covering travel advice for employees and considerations for assessing organizational preparedness.

  2. 02

    Investment and return

    Exposure across multiple geographies means geopolitical drivers of risk can be diverse.

    The extension of the Lunar New Year holiday and travel restrictions has kept factories, offices and shops closed. This has led to a slump in China’s daily crude oil consumption — an estimated 20% by Bloomberg — that has caused OPEC members to consider oil production cuts.

    Uncertainty around pandemics can see businesses close, markets impacted by consumer confidence, supply chain shortages and credit risk for life and health insurers from mortality and morbidity risks. Will asset managers and pension funds continue to invest in China if they continue to see regular outbreaks? What will be the impact outside of China? Hyundai announced it was shutting its South Korean auto plants on February 5, 2020.

    In order to protect assets and investments, the diversity of risk must be critically considered and appropriate risk management tools deployed.

  3. 03

    Business resilience and value chain

    When risks materialize as incidents and events it is crucial to have effective business continuity practices implemented.

    Companies and factories in several major Chinese cities and provinces have been ordered to halt their operations, with the exception of organizations that are playing a role in containing the outbreak, such as medical equipment, pharmaceutical companies, supermarkets, and utilities and logistics companies. Disruptions in Chinese businesses are already impacting companies’ access to component parts for phones, cars, appliances, semiconductors and medical drugs.

    Understanding and mapping supply chain dynamics below Tier One suppliers and having alternate agreements in place to cope with new and extended city lockdowns and delayed restarts, is one way to manage these disruptions.

  4. 04

    Climate and environmental

    The risks presented by climate and environmental factors, including pandemic risks, can be better understood with advanced analytics.

    Early on, many of the patients in the outbreak of respiratory illness caused by COVID-19 in Wuhan had some link to a large seafood and live animal market, suggesting an animal-to-person spread. Later, a growing number of patients reportedly did not have exposure to animal markets, indicating person-to-person spread.

    By modeling environmental events and physical assets, risks to property and people can be quantified and managed. This will be increasingly important as land-use changes bring more animals into contact with people through habitat disruption.

  5. 05

    Cyber risk

    From state-sponsored cyber warfare to the industrial internet of things, geopolitically driven cyber risk is ever present.

    Malicious actors have taken advantage of anxiety around COVID-19 to spread files containing malware inside spoofed documents. The current examples are aimed at Japanese firms, targeted due to proximity to China. As the infection spreads, we expect to see other examples emerge.

    Risk managers should refresh company policy, ensure antivirus software is up-to-date and contact employees to alert them to the threat, as phishing attacks may be more successful due to the fear of infection. Hackers are always on the lookout for vulnerabilities to exploit.

  6. 06

    Reputational risk

    Impacts on brand and reputation can affect a company’s ability to attract customers, recruit talent or even to gain an operating license in a country.

    Managing and communicating pandemic risks will be a critical component of trust and the duty-of-care to customers. The tourism and hospitality industry are likely to see wider impacts as uncertainty and further travel restrictions come into force. At a local level, a false rumor started on social media regarding a supermarket employee in Houston, Texas, U.S., led to concerned customers avoiding the store, business losses and concern about the local area.

    Trust between nations, industry and consumers as citizens are repatriated and quarantined will be a new dimension to international policy, and another item on the list of considerations for HR professionals.

    Companies should monitor national updates from health officials and governments and take steps to safeguard employee and customer welfare. Prospective employees, clients and the world are watching in real time. Release the facts you have as quickly and clearly as possible; be honest about what you don’t know; and be sure to link to the relevant third-party sources.

Business impacts

For now, the locations where future cases of COVID-19 occur cannot be predicted, and we do not know the degree of threat posed by the new virus; however, work is underway in labs across the world to produce and distribute real-time diagnosis kits that can be shared with domestic and international partners.

A lack of pre-established responses can escalate costs. For example, research by the World Health Organization after the outbreak of Ebola in West Africa found that it could have cost $5 million to contain when it was first detected in Guinea in 2014, but this figure increased to $1 billion just eight months later.

Countries have responded to COVID-19 by restricting flights, channeling landings to designated airports and establishing monitoring protocols for citizens they evacuate from affected regions. This represents a step-change in the way potential pandemics are regarded and controlled in their earlier stages. Some of the control methods have not been validated, and some experts believe that these efforts will delay but not diminish the spread of COVID-19.

The International Maritime Organization has allowed trade in and out of China to continue, a position welcomed by the International Chamber of Shipping. The impact on ports will not be fully measurable until ports announce their throughput numbers at the end of the first quarter, but weekly data indicates a 20% drop in vessel calls at key Chinese ports.

Using science for resilience

With little known about this instance of COVID-19, it is sensible business planning to have contingencies in place, based on the best available science. It is important to consider a range of scenarios for pandemics, because each virus has its own characteristics of infectiousness, virulence and method of spread.

  • The Center for Systems Science and Engineering at Johns Hopkins University has built a dashboard that tracks globally confirmed cases of COVID-19.
  • Research papers are emerging that have analyzed the characteristics of the first 425 people in Wuhan who contracted the virus, and a modeling forecast has appeared in The Lancet on the potential domestic and international spread.
  • The Cambridge Centre for Risk Studies at the Judge Business School, University of Cambridge, is a partner of the Willis Research Network that produces an annual study — the Cambridge Global Risk Index — that has seen pandemic risks consistently in the top five threats since the index began. Their pandemic threat estimates a potential $48.6 billion of GDP@Risk* in part due to the potential infection vector [link requires registration] provided by airports and international travel and trade. The Cambridge Centre for Risk Studies has made a range of scenarios accessible at varying levels of severity for stress testing potential business impacts. Examples include a highly infectious influenza virus and an Ebola contingency scenario.

Geopolitical risk management requires innovation

As the geopolitical landscape changes, so must the way in which we respond. Innovation is critical to help prevent and protect against business risk events and must go beyond enhancements to traditional insurance coverage. 

That means new ways of working, financing, protecting and responding — not just within organizations, but reaching out to governments and industry to get multiple eyes on issues. For example, recognition of the challenge of funding a timely response during the Ebola crisis led to the development of the Pandemic Emergency Financing Facility housed at the World Bank. 

The facility was designed to provide an additional source of financing to help the world’s poorest countries respond to cross-border, large-scale outbreaks. This concept could be replicated in other industries, allowing for an injection of cash flow through the duration of the outbreak, or the triggering of pre-established business continuity plans via smart contract solutions.

Outbreaks of new communicable diseases are typically seen as a rare, one-off events. However, climate change, global travel patterns, technology advances, animal-borne diseases and the rise of multi-drug resistant organisms all significantly impact the frequency and scale of events. We will explore these themes in future insight blogs as the situation develops.

*GDP@Risk is the average annual loss (also known as the “expected loss”) to a selected location’s economic output from each threat or threat category. Another way of thinking about GDP@Risk is the amount a city would have to save each year to pay for the costs of the disruptive events in the long run, averaged out over time.

Author

Lucy Stanbrough
MSc, BSc
Research Manager
Willis Towers Watson Research Network

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