It’s all anyone is talking about and, whilst I really wanted to write about something lighter, I was dragged back to the Reply Risk & Regulatory Academy, which has had the honour to run courses in Cambridge for many years. This led me to an incredible report published by the University there...
These are the opening lines of the Stress Test Scenario developed by the Centre for Risk Studies at the University of Cambridge Judge Business School… In October 2014…
“Nature and mankind are engaged in a continual battle in which new pathogens emerge and are combatted by antibodies and medical treatments that develop in response. An extreme pandemic could, in every nation, overwhelm the healthcare system and inflict massive social and economic damage. We use a pandemic scenario to quantify the effects of such a catastrophe.”
The São Paulo Virus Pandemic Scenario imagined by the Cambridge Centre for Risk Studies envisioned “a fictional strain ‘H8N8’ of an influenza virus.”
In this fiction, the virus kills 19-25 million people worldwide. In financial markets, equities are badly hit. A typical investment portfolio suffers negative returns. The world loses between $7 trillion and $17 trillion of GDP over five years.
The Sao Paulo Virus Pandemic Stress Test Scenariofrom the University of Cambridge Judge Business School
The 53-page report is a compelling read; one that can inform the measures that Executive Teams and Boards of Directors, among others, might wish to consider. In this Blog, I will only point to Section 6, Loss and Direct Impacts and Section 9, Managing the Risk, however, the whole report deserves your thorough consideration.
Section 6 analyses:
“The death toll from the pandemic is likely to be a major focus of the public concern and authority response. It will dominate media attention. However, the main impact of the pandemic is likely to result from the incapacitation – albeit temporarily – of a much larger segment of the population through the illness of infection.”
As we’re seeing across Europe, perhaps with the US set to follow, businesses have already closed in an attempt to curtail the spread of the virus.
Even when businesses re-open, section 6 shows us the effects that even minor absenteeism can have on productivity.
“Absenteeism has a non-linear effect on productivity and may reach a tipping-point where businesses have to close. Studies show that many businesses can operate reasonably well with absenteeism levels below 10%, but beyond 10% productivity drops off disproportionately and with absenteeism of 20%, many vital operations become difficult and some businesses are likely to suspend operations.”
It also includes a fictional example of the impact of the virus on Pomegrenate Inc., a fictional US electronics company; it is hit hard: Its share price falls 25% (well, maybe not that hard after all…); its corporate bonds are downgraded below investment grade.
This would have a knock-on effect on the economy.
“This wave of business suspension and disruption to operations will cause some companies more difficulties than others. Some may fail. Businesses may find that their counterparties are unable to honour their obligations, and this could lead to a spiral of business difficulties and economic failures. Failures could also impact the financial system, with credit and liquidity becoming scarcer. The pandemic could trigger an international financial crisis.”
In section 9, Managing the Risk, the report provides useful recommendations to manage the risk of the pandemic. The report provides guidance for global organizations, insurance companies, investment managers and policy-makers.
The São Paolo report is highly recommended!