Preparing for High-impact, Low-probability Events

The frequency of ‘high-impact, low-probability’ (HILP) events in the last decade signals the emergence of a new ‘normal’. Apparent one-off high-profile crises such as 9/11, Hurricane Katrina, the Macondo oil spill and the Japanese earthquake and tsunami were all mega-disasters requiring rapid responses at a global level, marking the beginning of a crisis trend. But lower-profile, persistent events such as flooding, droughts and cyclones have been shown to have equally serious impacts, raising new questions about the way in which we perceive risk and prepare for disruptive events.

These events can manifest themselves not only as ‘black swans’ – which by nature are impossible to predict – but also as known hazards such as floods, hurricanes or earthquakes, which, owing to the low likelihood of occurrence or the high cost of mitigating action, remain un- or under-prepared for. There are also crises such as pandemics which typically unfold over weeks, months or a few years, for which the scope or timing remains unknown even with preparations. Events such as the 2011 drought and subsequent food crisis in East Africa have also raised troubling questions about the way in which the international community responds to ‘slow-motion’ disasters which build up over several or many years.

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The globalization of production and optimization of supply chains have increased systemic efficiencies in the global economy but have exacerbated the speed and scope of contagion in the event of shocks. They pose particular threats to key industries – especially high-value manufacturing – and to the just-in-time business model. The consequences of HILP events spread rapidly across sectors and borders, often with second- or third-order impacts that are hard or impossible to predict. The 2003 SARS outbreak, for example, cost businesses $60 billion, about 2 per cent of East Asian GDP. The devastating earthquake in March 2011 may have lost Japan 10 per cent of its capital stock – equivalent to around 20 per cent of the country’s GDP – with wider knock-on impacts for global companies such as Toyota and Sony, which were forced to halt production.

In an increasingly connected global economy and society more people are (and will continue to be) affected by shocks, irrespective of whether ‘high-impact events’ are actually becoming more frequent or not. To explore our preparedness for HILP events in this context, Chatham House has examined the ash cloud that spread across Europe in April 2010 to draw lessons for other HILP events. In particular the analysis considered the nature of decision-making and coordination before, during and after the ash cloud; the impact of scientific uncertainty; the economic consequences and the role of communications.

Preparing for High-impact, Low-probability Events