Nassim Nicholas Taleb popularized the concept of a Black Swan event in his highly acclaimed book, The Black Swan.
Taleb characterized a Black Swan event using the following three criteria
The temptation for Government, Business and other leaders to label COVID-19 as a Black Swan event is compelling.
By labelling it a Black Swan, they do not have to confront the uncomfortable question of; why were we not prepared for this?
By labelling it a black swan, we can brush away concerns that none of our risk management reports or dashboards mentioned pandemic. When voters, regulators, investors and other key stakeholders ask the uncomfortable questions; labelling COVID-19 a black swan event provides an easy answer.
This would be fine except for one very import thing; it is not a Black Swan event.
Simply stated, COVID-19 is not an outlier. It is within the realms of our regular expectations, and there are several similar events in the past.
One could also add to this list the various outbreaks, many relatively localized, of bird flu and swine flu that have occurred regularly over the last 20 plus years.
Bill Gates also hightlighted the risk of a virus-driven global pandemic in 2015 via a Ted Talk he gave in light of the Western African Ebola virus epidemic.
Additionally, a global pandemic, such as COVID-19 can hardly be called a Black Swan and outside the realm of regular expectations when;
So if COVID-19 is not a Black Swan, how should we categorize it?
Prehaps rather than a Black Swan, we should categorise COVID-19 as a Gray Rhino.
In the context of risk management, the concept of a Gray Rhino was introduced by Michele Wucker in her book; THE GRAY RHINO: How to Recognize and Act on the Obvious Dangers We Ignore.
Wucker characterized a Gray Rhino as a highly probable, high impact yet neglected threat.
Could a global pandemic, such as COVID-19 be considered a highly probable event? Would such an event be high impact? Was this is a threat that was neglected? I think the answer to each of these questions is yes.
Highly probable – as already stated, there have been several similar events as COVID-19, including SARS and MERS both of which are strains of coronavirus.
High impact – again, the effect from similar previous events and the current crisis demonstrates the high impact nature of this event.
Neglected threats – given the number of governments, particularly those in the ‘western’ world which had a global pandemic on their national risk registers or had ‘war-gamed’ this risk, and given the apparent lack of preparation done, it is clear global pandemic was a neglected threat.
While I have set out a series of steps that can be taken in response to the COVID-19 crisis here (insert link), below, I would like to set out some thoughts on how and where to include ‘Gray Rhinos’ risks within your Enterprise Risk Management framework.
Many business and risk leaders will naturally feel, in light of COVID-19, that Gray Rhinos type risks should be included in regular board and executive risk reporting packs. However, for many firms, this is probably not the right approach.
Regular Board and Executive risk reporting should focus on those risks directly related to delivering the firm’s strategy; including delivering specific objectives, maintaining the right level of capital and liquidity and protecting operational performance in their ‘normal’ operating conditions. At this moment, pandemic might be regarded as normal operating conditions however it is probably better to make use of an emerging risk report or dashboard to include highly probable, high impact risks.
Alternatively, (and my recommended approach) pandemic and other similar Gray Rhino type risks could be included in scenarios. For many firms, the use of scenarios within their Enterprise Risk Management framework is often limited to meeting regulatory obligations such as the ICAAP, ILAAP and SREP.
However, extending the use of scenarios and wargaming to ‘stress’ your business strategy, business model and operational resilience in the face of Gray Rhino risks, can add significant value to firms.
Four areas where incorporating scenarios into your Enterprise Risk Management framework adds values include;
So COVID-19 is not a Black Swan event but it does add a new phase to the risk management lexion – Gray Rhino and as is often said, one should never waste a good crisis. Once we have got through COVID-19, use this experience to strength your approach to risk management, and if I can leave you with two recommendations they would be;