On Identifying Risks

At the dawn of this blog in summer 2023 (edit: I meant 2022!), I wrote about how to identify emerging risks. Things like underwater mortgages in the mid-2000s, a spate of odd respiratory disease cases in late 2019 and early 2020, and a pullback of home insurers from areas viewed as high-risk for climate change now. 

I want to revisit these how-to points because I added them as an afterthought to the bottom of an essay last summer, and I think they deserve a bigger spotlight. (Most of you weren’t here then, either, and I’m glad you’re readers now! Thank you). These remain my guideposts for identifying emerging risks and at least trying to steer clear of or, when possible, mitigate them.

So, how do we find needles in haystacks before they stab us? 

In general, important anomalous risks start under the radar. But an important anomaly isn’t “a needle in a haystack,” at least not for long. It’s often hundreds of needles, all surfacing at once, glinting in the sunlight if we’re willing to look and accept what we see. And there’s a window of time to identify the problem and act to mitigate it before the haystack bursts into flame. 

These emerging, anomalous risks tend to have a few characteristics:

1.They are unusual. They break from the patterns of the past. Maybe something is happening in a different location than usual, or at a different time of year (like low Antarctic sea ice levels at the height of winter now), or in greater numbers than expected. The key is the noticeable divergence from past patterns. 

For example, in looking at climate data, scientists began to notice divergence from long-term range-bound fluctuations in the 1990s or even earlier. That was a flag, one we could have heeded as an opportunity to take early action. 

2. They are suddenly widespread in small numbers. Early in 2020, it was easy to think of the Covid outbreak in Wuhan, China, as contained by harsh lockdowns. But then cases popped up in Iran, in Italy, and all over the world. That was a massive flag, and global and local health organizations could have acted earlier. (It’s still uncertain whether we could have contained Covid, since it’s so contagious. But we squandered some opportunities to try before it evolved to make that impossible.) 

With climate change, temperatures aren’t rising in lockstep everywhere, and that may always be true because climate isn’t a single monolithic entity; it fluctuates day to day, season to season, year to year, place to place. But on average, more places are recording higher temperatures than ever before. Warming is widespread. We could have acted earlier when we saw this trend, before we recorded the eight highest global average temperatures in history in the last eight years. Expect this trend to continue in 2023 and 2024. 

(As a side note, despite the undeniable heat trends, corporations are still dawdling on real action and likely will keep dawdling until mandated to take action. What will be the tipping point that finally spurs massive action?) 

3. They seem relatively ignored or dismissed. The biggest risks may not be pre-built into models, or the assumptions used may not match what will actually happen. (I’d like to see companies’ 2019-era projections for office attendance during a pandemic.) It takes some time to adjust and account for emerging risks. Many poorly performing individual mortgage securities in 2006 and 2007 were largely ignored, buried under mounds of models that predicted better outcomes for large bundles of those same securities.

There are many other examples in history. By August 2001, a “stream of warnings” was flowing in to intelligence agencies (both unusual and relatively widespread chatter). It was identified and flagged up the chain. But that risk was ultimately dismissed, and we lost a possible opportunity to mitigate the 9/11 attacks.

Now we see multiple home insurers retreating from areas at high risk for wildfires and floods, which are likely to become more frequent because of climate change. Yet, if you’re not directly affected as a homeowner and don’t follow the financial press, you might not think too much about future insurance coverage in your day-to-day or even in your moving decisions. This 2022 Allied US Migration Report¹ shows that the top inbound states were: Arizona, South Carolina, North Carolina, Tennessee, and Texas.

Does climate change still qualify as an emerging risk? 

Well, it was an emerging risk in the 1990s, and now the haystack is on fire. Yet, climate change is still treated as an emerging risk by many people and companies, and the response—how we will collectively deal with it—is still very much emerging. 

More broadly, I hope these steps will help you identify risks early and take action to avoid the worst impacts if you can. And the sooner we see risks and take action to mitigate them (which, at an individual level, may mean working directly on a problem, donating to organizations working directly on problems, or speaking up in favor of corporate or political action), the less severe the eventual impact of risk is likely to be. 

1. Allied is a large moving company, so their data is likely a decent sample. So much has changed since the 2020 census that relying on that data already feels outdated.