Why ‘Risk’ Is the Word of the Year
The president is a walking, talking, tweeting risk factor for the world
This August, the California utility Pacific Gas & Electric (PG&E) made a small bit of insurance history when it sold the first catastrophe bond specifically designed to cover risk from wildfires. Companies facing significant financial exposure to natural disasters can use catastrophe bonds to transfer some of that risk to investors. Bondholders benefit because they collect attractive interest rate payments for each year that passes without a catastrophe until the bond reaches maturity. But if a catastrophe hits that passes a contractual threshold — in the case of PG&E’s bond, major wildfire damage for which the company itself is shown to be responsible — the bond can plummet in value, and investors may lose some or even all of their money.
Those who bought PG&E’s offering were betting that nothing catastrophic would happen over the three-year life of the bond, despite the reality of climate change-related increase in wildfires in California in recent years. They were wrong. This fall’s devastating Camp Fire in Northern California burned more than 18,000 structures and killed at least 85 people, making it both the most extensive and the deadliest wildfire in the state’s history.
Because investigators suspect that the fire was started by PG&E equipment, the utility may be held financially liable for the inferno. That’s disastrous for PG&E, but it’s even worse for investors who bought the company’s catastrophe bond. By December, the price of the bond had fallen to just 5 cents on the dollar, down 95 percent from mid-November. The catastrophe bondholders bet big on risk — and lost.
2018 was the year when the risk that had built up in our economy, our politics, our society, and our climate could no longer be ignored. A bull market that had been growing steadily for almost a decade turned volatile. The political instability that brought us Trump and Brexit worsened. A rogue Chinese scientist bucked international consensus to bring the first genetically-edited babies into the world. And a slew of sobering reports and unnatural disasters made it clear that the long-term risk of climate change had quite suddenly become immediate. Risk is defined as the possibility of losing something of value, and in 2018 it feels as if we stand to lose everything.
As long as there has been uncertainty about the future, there has been risk. But what’s changed is the way globalization and the internet have intertwined those risks, leaving all of us far more exposed. Once a mega-typhoon hitting Japan would have hurt the Japanese and no one else. But when Typhoon Jebi walloped the country in early September — the strongest storm to strike Japan in 25 years — the multibillion-dollar losses disrupted supply chains for companies headquartered thousands of miles away.
When the American libertarian Cody Wilson unilaterally decided to upload to the internet designs for 3D printable guns —to which the Trump State Department dropped its opposition in July — he defanged gun control laws and put us all at greater risk. A landmark report published this fall reminded us that climate change is the ultimate interconnected risk, the shared product of 7.7 billion people choosing to burn carbon that will warm the climate for all of us — although the consequences will not be shared equally.
Global warming offers the best way to understand how risk has sharpened in 2018. Weather was the first uncertainty that humans strove to predict. The insurance industry arose to help farmers and merchants hedge against the threat that droughts and storms posed to their business. Today, global insurers hold premiums worth more than $5 trillion, and while they take advantage of the latest advances in computer modeling to enhance their forecasts, at bottom, insurance companies do what they’ve always done: try to use the past to predict the future.
But now we’re discovering what happens when yesterday is no longer a reliable guide to tomorrow. As climate change outpaces even our most dire projections, insurers and others are struggling to keep up, injecting additional risk into an industry meant to minimize it. Investors who bought PG&E’s wildfire catastrophe bond believed they were making a smart bet, but climate change could raise the bar of risk higher than anyone can meet. Thomas Buberl, the chief executive officer of the French multinational insurance firm AXA SA, said in Davos this January: “If you go much further to 2020, 2030, we can clearly say that at a scenario between 3 and 4 degrees [of warming], it’s not insurable anymore.” That’s exactly where we’re headed — a world too risky to be insured.
Smart insurers know that when risk rises in one area, you hedge by reducing risk in another. But our politicians are doing the opposite. President Donald Trump is a walking, talking, tweeting risk factor for the United States, inflicting his personal volatility on the rest of us. The trade war he unilaterally began with China is the single biggest risk facing a global economy that was already unsteady. His decisions have actively worsened the risk from climate change, rather than reduced it. There is no risk, economic or geopolitical, that Trump can’t seem to help but aggravate.
In business, Trump always managed to escape the consequences of his own appetite for risk. We won’t be so lucky. But even a capable political class would struggle to handle some of the risks that arose this year. The world’s biologists were mostly in agreement that using the new technology of CRISPR to gene edit babies was far too risky to pursue now. Yet they were helpless to prevent the Chinese biophysicist He Jiankui from performing exactly those experiments. His act demonstrated that emerging technologies like gene editing are risky, not just because of their unpredictable and possibly dangerous global effects, but because of the way these new tools empower individuals. It’s difficult enough to control technological threats like nuclear weapons that demand the resources of an entire state. What hope do we have of controlling technologies that only require one person with training — especially if that person is convinced he is acting for the good of the world?
Intentions don’t matter in risk, however — only consequences. This is what we must learn: In a world as connected and complex as ours, the cost of the wrong action at the wrong time can be incalculable. It might even be infinite. 2018 saw the continued emergence of one last kind of risk: existential risk. Where conventional risk is the chance that something will go wrong and something will be lost, existential risk is the possibility that everything will go wrong and everything will be lost, up to and including the human race.
Our world has always faced the danger of annihilation from a cosmic accident like an asteroid or a geophysical catastrophe like a supervolcano eruption — two threats that have wiped out life on this planet time and again in our deep past. But what’s changed is that humanity is now an existential risk to itself. Nuclear war, climate change, disease, biotechnology, even artificial intelligence — our options to end the world are only growing. And that’s a risk we can’t hedge against.
But we have this much to hold onto as 2018 draws to a painful close. If risk everywhere is on the rise, that’s in part because we now have the ability, more than ever before, to see the darkness coming. That’s a responsibility, but it’s also an opportunity. Our ancestors had no choice but to blindly stumble into the future. We can do better and we can be wiser. We’ll always live with risk, but we don’t have to be ruled by it.