The power of prevention: de-risking the future

Veronica Scotti

On environmental, social and economic issues, nations face a set of ticking time bombs – and unless they take preventive action, their people and public finances will suffer. At the Global Government Finance Summit 2019, civil servants discussed how governments can avert these looming dangers. Matt Ross reports

“The world is getting more complex; some of the stressors are increasing – and some new stressors are coming to the fore,” said Veronica Scotti.

In a recent World Economic Forum survey of 1000 decision-makers from the public, private, voluntary and education sectors, she explained, “nine out of 10 respondents expected worsening economic and political confrontations between major powers in the short term, and are concerned over the 10-year horizon by extreme weather and climate change. So there’s a short-term pressure point, and a very long-term, structural pressure point; both need to be addressed.”

As Group Managing Director and Chairperson of Public Sector Solutions for insurance firm Swiss Re, Scotti spends much of her time examining “contingent liabilities”: the social, economic and environmental risks that threaten to damage communities and burden governments over the coming years. Speaking at the Global Government Finance Summit – an annual gathering of senior finance department and treasury leaders, hosted this year in Paris by the French Ministry for Economy and Finance and supported by Swiss Re and EY – she warned that these risks are growing around the world, endangering developed nations as much as the developing world.

Rising risks

The effects of climate change, for example, have led to more wildfires in many parts of the world. Hurricanes and flooding are also on the rise – a particular worry, given the “concentration of assets” along nations’ coastlines. Natural catastrophes caused £350bn of losses globally in 2017, Scotti said; and most of these costs “ended up on the public’s sector’s shoulders”.

Health issues represent another long-term and rising threat to developed nations, due in part to behavioural issues. Type 2 diabetes – which is linked to obesity – affects one in ten adults globally, said Scotti, and costs the US well over $200bn annually. Meanwhile, scare stories about immunisation have led to declining coverage: “If you look at the current debate about measles in the US, advanced economies are apparently going through a crisis moment; and that’s very much related to belief sets that have emerged, despite all the scientific evidence pointing in the opposite direction,” she commented.

These issues are storing up problems for governments, said Scotti. “Over the last 10 years the warning signs are getting stronger – and there’s a growing consensus on the need for action,” she commented. “If there isn’t a concerted set of actions to intervene and mitigate these risks, the costs of inaction will continue to grow. What’s really required is a risk management framework at country level – and very few countries today have that.”

Don’t respond, avert

Finance ministries have a vested interest in supporting the promotion and development of country risk management frameworks, Scotti said, as they must address the damage these problems cause to investor confidence. And she argued for “governments to put prevention, mitigation and adaption measures on a par with disaster response and recovery.” Research by Swiss Re has found that 40-65% of future losses can be averted very cost-effectively through smart preventive work, she added.

For example, public awareness work and river or sea barriers can cut the costs of flooding. Immunisation can drastically reduce the risk of pandemics. And the risk of developing type 2 diabetes can, she said, “be more than halved by simply changing lifestyle choices.”

However, Scotti warned that “whilst the benefits of preventive work have been demonstrated, that evidence isn’t necessarily translating into proportionate actions at scale.” The UK’s Department of Health and Social Care, she said, reports that the government spends £97bn (US$117bn) on health services and £8bn (US$10bn) on preventive measures. And while the UK does a decent job on disaster prevention compared to many countries, she argued that more can be done: “Despite the clear evidence that a dollar spent on prevention saves the need to spend multiple dollars on post-disaster costs, the budget is still heavily tilted towards post-disaster.”

Funding prevention

Part of the challenge, she acknowledged, is finding the right mechanisms to fund and prioritise preventive activities. “The political choices are tough, because when you have an emergency situation you have to take care of your population first,” she said; the funding and policy decisions required to avert theoretical future risks, however, often lose out to more immediate concerns.

One way of resolving this conundrum, said Scotti, is to set aside guaranteed funds – specifying that they must be split between prevention and response programmes. “That allows the long-term activities required to de-risk a system to be sustained over time,” commented Scotti, highlighting Mexico’s comprehensive approach to preparedness and recovery. “Every year, Mexico allocates budget to disaster prevention and response funds,” she noted. “And the latter – called FONDEN – uses risk transfer instruments to leverage the fund, ensuring that money is available at short notice when disasters occur.”

Another approach uses dedicated taxes to fund prevention or reduce risks: levying charges on, for example, sugary drinks, carbon emissions, plastic bags or tobacco both deters problematic behaviours, and raises money to cope with their consequences. Regulation is another useful tool: just as mandatory planning rules and construction standards have dramatically reduced buildings’ propensity to catch fire or collapse, they can be used to minimise future risks and costs – cutting carbon emissions and improving flood resilience, for example. And when the worst does occur, dedicated taxes can be used to fund disaster recovery work: Japan levied an additional income tax after the 2011 earthquake and tsunami, said Scotti, and Australia has imposed flood recovery taxes.

Markets need managing

Finally, governments can intervene in markets where commercial coverage has become inaccessible or unaffordable, strengthening and broadening public resilience. After a series of floods sent insurance premiums soaring in the UK’s flood-prone areas, Scotti explained, the government teamed up with insurers to create Flood Re: a firm that bases insurance premiums on the customer’s tax band, rather than their property’s exposure to risk of flooding. Introducing a levy on home insurance nationwide, and committing to a 25-year flood risk management programme, the UK ensured that every household can access affordable cover. “Without such an intervention, those pools of uninsurable risks would accumulate and accumulate,” noted Scotti. “As a result of this mechanism, the citizen won’t go unprotected.”

Insurance market schemes, however, have their limits. As Scotti acknowledged, insurers can’t protect nations against the risk of inter-state conflicts; and this extends to digital warfare. Estonia is continually at risk of hacking by state actors, noted Veiko Tali, Secretary General of Estonia’s Ministry of Finance, “but I cannot imagine the insurance sector being able to price this risk.”

Scotti agreed: even if the threat of attack could be assessed, it wouldn’t be possible to price the policy without access to top secret information on the potential client’s cyber defences. “Cyber risk, when it comes to government as the insured, is a highly questionable proposition,” she said.

In these fields, perhaps, nations must rely on some of the preventive and responsive operations established at the very dawn of government itself: their diplomatic and intelligence services, and their armed forces.

As the event drew to a close, facilitator Andrew Kakabadse – Professor of Governance and Leadership at the UK’s Henley Business School – asked delegates what lessons they’d be taking away with them. And the over-arching lesson, it seemed, was a revived understanding of finance departments’ key roles in addressing many of governments’ broader problems. The event had covered a wide range of challenges facing nations around the world – improving economic growth and resilience; enhancing productivity; monitoring public sector performance; promoting digital transformation; and minimising future risks – and in every case, the work of finance professionals and national treasuries will play a crucial role in defining governments’ ability to address them.

Kakabadse, for one, went away heartened by the experience. “One of the things I learned was the level of quality in government,” he commented. “I hadn’t previously been exposed to that, and it was both sobering and eye-opening to see the level of skill and competence that was presented.” The next task, he suggested, is to integrate finance professionals’ work more closely with those of their peers and colleagues across national civil services. “I’m going to take away the need for greater interfacing across government,” he said. “With all these skills and abilities, how do we get that buy-in and leadership across government?”

Related Posts

• 

  Watch: how to boost a nation’s resilience
  Watch: how to boost a nation’s resilience
• 

  COP28: a year on from climate change funding breakthrough, poor countries eye disappointment at Dubai summit
  COP28: a year on from climate change funding breakthrough, poor countries eye disappointment at Dubai summit
• 

  New foundations: why cross-sector partnerships on infrastructure are key to building a greener future
  New foundations: why cross-sector partnerships on infrastructure are key to building a greener future
• 

  UK civil service review proposes giving ministers a greater role in some appointments
  UK civil service review proposes giving ministers a greater role in some appointments