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What could a post-COVID-19 world look like? Part II

Risk & Analytics|Cyber Risk Management|Investments
Climate Risk and Resilience|COVID 19 Coronavirus

By Frederick Gentile and Lucy Stanbrough | April 15, 2020

This article looks at the long term impact of COVID-19 through lenses such as business resilience, climate and geopolitics.

As we look at a post-COVID-19 world through lenses such as business resilience, climate and geopolitics, it is important to recognize that challenging times may be ahead. However, the prudent organizations will look at the pandemic from a proactive stance and imagine how they can create benefit and value for themselves as well as their clients.

Business resilience

A common concern within the context of COVID-19 is supply chain continuity.

Southeast Asia is especially vulnerable to the economic risks associated with COVID-19 mainly because the region’s supply chains, labor flows and tourism industries depend so heavily on China, where the virus originated. Meanwhile, the threat to public health from the spread of the virus brings political risks for the region’s governments, and countries with weak healthcare systems, would struggle to deal with severe COVID-19 outbreaks.

As supply chains are curtailed and labor flows are interrupted, GDP growth across Southeast Asia is forecast to slow. Wealthier states are likely to resort to costly fiscal stimulus to mitigate the economic effects of COVID-19. However, the region’s tourism industries will likely take a significant hit. Exposure to global supply chains could be crucial to how long it takes sectors and countries to recover. Supply chains may be slower than many domestic sectors to recover because they are more likely to encounter bottlenecks as different countries remove travel and business restrictions at different rates. Countries reliant on trade will be vulnerable to disruption long after the virus passes.

Supply chain impacts will linger longer than the COVID-19 outbreak.

Supply chain impacts will linger longer than the COVID-19 outbreak, and this implies that equity market volatility will remain high. Emerging Market (EM) assets and commodity markets initially bore the brunt of the fallout from the outbreak of the COVID-19 virus, but since the last week of February developed markets have also been hit by the selloff. Markets are almost pricing in a global recession but if the outbreak ends by April-June, there is a high chance that this impact will be reduced.

Investor sentiment will hinge on the magnitude of the damage to activity in China and to global supply chains, as well as when cases of the virus peak outside China. Amid worldwide fears about the impact of the COVID-19 outbreak, the US Federal Reserve (Fed) cut its main fed funds rate by 50 basis points, but Fed Chair Jerome Powell warned – perhaps unnecessarily – that while the cut should reduce the cost of capital and prevent a further tightening of financial conditions, it would not "reduce the rate of infection" or "fix" supply chains1.

In the next few months, the phased restart of plants outside Hubei (and the slower progress of plants within Hubei) is likely to lead to challenges in securing critical parts. As inventories are run down faster, parts shortages are likely to become the new reason why plants in China cannot operate at full capacity. Moreover, plants that depend on Chinese output (which is to say, most factories around the world) have not yet experienced the brunt of the initial Chinese shutdown and could likely experience inventory “whiplash” in the coming weeks. We are seeing incredibly complex supply chain dynamics reveal themselves, and this will be one of the greatest slow burn risks.

What effect will COVID-19 have on the Korean economy? Even prior to the virus' spread to South Korea, Korean companies such as Hyundai were temporarily shuttering domestic production of automobiles due to the unavailability of auto parts made in China and used in production in South Korean plants3. Such supply chain disruptions, along with slowing domestic economic activity resulting from self-protection measures and reduced public dining and social activities, will drive the domestic economic impact of COVID-19. It remains to be seen whether any stimulus funds will provide a sufficient cushion for the businesses and local economies affected by the outbreak.

Perhaps the biggest uncertainty for supply chain managers and production heads is customer demand. Customers that have pre-booked logistics capacity may not use it; customers may compete for prioritization in receiving a factory’s output; and the unpredictability of the timing and extent of demand rebound will mean confusing signals for several weeks.

The immediate, if indirect, consequences of the supply chain issues may be clear, but a further consideration is that in some cases the effect may be felt several years later as Boeing found out after the 9/11 terrorist attack. In this instance when Boeing’s orders for a new plane started to roll in - six years after the attack - they found out that their principal supplier of specialized nuts and bolts had laid off half its workers and could not keep up with demand5. From a supply chain perspective, the 9/11 terrorist attack, while vastly different in terms of event, impacted four American companies in three different industries across different timeframes and in different ways.6

When the global system gets up and running – whenever that may be – who will be left standing, who is going to disappear, and who will need time to warm back up?

Climate and environment

The current and reported geographic spread of COVID-19 offers an interesting perspective in terms of a correlation between territories in the southern hemisphere, with a markedly lower number of cases, compared to those in the northern hemisphere.7 It is of course too early to say and possibly also influenced by other factors such as population density, reporting capability and travel patterns.

It has also led to some suggestions that regions with hotter climates may be more resistant to the virus. The important thing to note is that it is too early to make any assumptions around this, and the WHO has added two ‘myth buster’ infographic cards to their website around these topics8:

There is no reason to believe that cold weather can kill the new coronavirus.”

The WHO,
2020
  • From the evidence so far, the COVID-19 virus can be transmitted in ALL AREAS, including areas with hot and humid weather. Regardless of climate, adopt protective measures if you live in, or travel to an area reporting COVID-19.
  • There is no reason to believe that cold weather can kill the new coronavirus or other diseases. The normal human body temperature remains around 36.5°C to 37°C, regardless of the external temperature or weather.
  • The scientific community is actively collaborating to share insights, and as more data emerges this will help to refine assumptions and build up pandemic models that reflect the characteristics of this virus. This is leading to a communication challenge, where efforts to open up models to help coordinate within the scientific community, are resulting in these outputs making their way to audiences they were not intended for – the general public.

What it does flag is the importance of modelling environmental effects on your business model and having access to experts who can translate those effects into business insights. This is reflected in the broad people, capital and risk expertise that makes up our Climate QuantifiedTM proposition.9

This is incredibly relevant for climate risks and considering pandemic risks. Outbreaks of new communicable diseases are typically seen as a rare, one-off events. The interconnected elements of 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 events10.

The ‘Minsky Moment’ described by the Bank of England for climate risks11 – mixing economic disruption, policy responses, and overnight shift in market sentiment – is happening now, at scale, for COVID-19. We are also starting to see stress test examples emerge from various groups that will continue to be improved as the event unfolds, such as the six scenarios from the 2 Degrees Investing Initiative12.

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 provided by airports and international travel and trade13. The Cambridge Centre for Risk Studies has made a range of scenarios accessible at varying levels of severity for stress testing potential business impacts, and has started a new hub dedicated to COVID-19 analysis.

In a post-COVID-19 world, it will be critical to maintain momentum and interest in this area especially as this could accelerate the broader appetite towards environmental, social and corporate governance. Climate risks act as a threat multiplier14, and should be considered across all business operations – and we should remember that we can respond to stresses, and think about how to make changes to move to a more resilient state while we have the opportunity. For example, future climate scenarios may change disease spread and again this should be factored in when considering investment/territorial strategies, risk appetite, strategic business model developments.

Reputation and trust

COVID-19 will produce winners and losers. The larger impact on the aviation, leisure and hospitality industries have already been touched on in this paper but food retailers may see an actual increase as people exaggerate their buying patterns for fear of supply drought. Pharmaceutical companies, especially COVID-19 testing kit and pain relief manufacturers, are likely to boom during this period but also engineering companies and consortia whose normal production has been substituted by emergency medical equipment such as ventilators.

The media, as one would expect, is fully engaged providing 24/7 news. A golden thread linking all this activity is reputation. When some form of normality is restored governments and organizations will be judged according to how well they managed under pressure.

Companies may be viewed through the lens of social and moral responsibility and as such how policies in areas such as employment, pay, pricing and supply are established and communicated may define how perceptions are shaped in the future. False media should be anticipated, and requires extra mitigation and attention during such information rich scenarios.

Geopolitical implications

We started 2020 in a world where areas that were once regarded as predictable and stable became volatile, and changes in international policy were bringing new uncertainty to long running conflicts. In the release of their ‘10 Conflicts to watch in 2020’ report, President and CEO of Crisis Group, Robert Malley, summed up the challenge; “the understandings and balance of power on which the global order had once been predicated – imperfect, unfair, and problematic as they were – are no longer operative.” 16 COVID-19 brings new dynamics and the global ripples are continually happening.

A post-COVID-19 world could see the formation of a new geopolitical landscape.

A post-COVID-19 world could see the formation of a new geopolitical landscape. Despite the huge impact COVID-19 has had on major economies some countries have moved quickly to support stricken nations like Italy by providing vital equipment such as ventilators, personal protective equipment (PPE) and blood.

This kind of collaboration sets the scene for closer trading and political links over time. Conversely, actions such as offers for exclusive rights to a COVID-19 antivaccine to be used only for a particular country exacerbates relations both within and between geographies17.

Currently, the WHO global case numbers suggest that over 87% of the world’s confirmed cases are now in Europe and the Americas, with 7% in the Western Pacific and SE Asia regions. WHO recorded deaths across the world suggest that 91% of deaths have occurred in Europe and the America’s, whilst 4% have occurred in the Western Pacific and SE Asia17. Although the inference may be clear, there are many nuances such as reporting protocols, average population ages and different strategic responses by countries, so comparisons need to be put in their contexts and time, and international cooperation will be needed to understand the full picture.

Whatever the case, post-COVID-19 nations may retreat to a more protectionist stance, especially as a potential global recession begins to bite.

Multinational businesses with many operations centers, multiple markets and complex supply lines are going to need to be vigilant to finance, economic and trade risks that area going to emerge as a result.

For more on the long-term implications of COVID-19 read on to the next article in the series.

Each applicable policy of insurance must be reviewed to determine the extent, if any, of coverage for COVID-19. Coverage may vary depending on the jurisdiction and circumstances. For global client programs it is critical to consider all local operations and how policies may or may not include COVID-19 coverage.

The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal and/or other professional advisors. Some of the information in this publication may be compiled by third party sources we consider to be reliable, however we do not guarantee and are not responsible for the accuracy of such information. We assume no duty in contract, tort, or otherwise in connection with this publication and expressly disclaim, to the fullest extent permitted by law, any liability in connection with this publication. Willis Towers Watson offers insurance-related services through its appropriately licensed entities in each jurisdiction in which it operates.

The information given in this publication is believed to be accurate at the date of publication shown at the top of this document. This information may have subsequently changed or have been superseded, and should not be relied upon to be accurate or suitable after this date.

*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.

Footnote

1 https://www.nytimes.com/2020/03/03/business/economy/fed-rate-cut.html

2 https://www.thejakartapost.com/news/2020/03/26/chinas-factories-reopen-only-to-fire-workers-as-virus-shreds-global-trade.html

3 https://www.nytimes.com/2020/02/04/business/hyundai-south-korea-coronavirus.html

4 https://www.cfr.org/blog/long-term-impacts-coronavirus-south-korea

5 https://www.coursehero.com/file/p8fdqj/He-said-Boeing-is-already-seeing-improvements-but-expects-the-supplies-to-be/

6 https://www.amazon.co.uk/Political-Risk-Businesses-Organizations-Anticipate/dp/1474609821

7 https://www.ecdc.europa.eu/en/geographical-distribution-2019-ncov-cases

8 https://www.who.int/emergencies/diseases/novel-coronavirus-2019/advice-for-public/myth-busters

9 https://www.willistowerswatson.com/en-GB/Insights/trending-topics/climate-risk-and-resilience

10 https://www.willistowerswatson.com/en-GB/Insights/2020/02/geopolitics-of-pandemics-diagnosing-threats-to-organizational-resilience

11 https://www.bankofengland.co.uk/-/media/boe/files/speech/2018/a-transition-in-thinking-and-action-speech-by-mark-carney.pdf

12 https://2degrees-investing.org/wp-content/uploads/2020/03/Stress-testing-COVID-19.pdf

13 https://cambridgebusinessriskhub.com/erm/auth/linkedin?next=%2Ferm%2Fportal%2Fpublication%2Fcgri_2020_exec_summary

14 https://www.acq.osd.mil/eie/downloads/CCARprint_wForward_e.pdf

15 http://news.sky.com/story/coronavirus-16319bn-grocery-stockpiling-spree-ahead-of-lockdown-11966036

16 https://foreignpolicy.com/2019/12/26/10-conflicts-to-watch-2020/

17 https://www.who.int/docs/default-source/coronaviruse/situation-reports/20200419-sitrep-90-covid-19.pdf?sfvrsn=551d47fd_4

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