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The Actuary The magazine of the Institute & Faculty of Actuaries

Sovereign default jumps up extreme risk rankings

In ‘Extreme Risks - the 2011 update' Towers Watson has updated its likelihood and impact assessment to reflect the disappointing economic recovery in the developed world, which it believes increases the possibility of further economic shocks. Accordingly it has moved sovereign default from ‘medium' impact to ‘high' impact and recent developments - both economic and political - in the euro area suggest that a break-up of the euro is more likely, so it has moved this risk from ‘very low' to ‘low'.

Tim Hodgson, Towers Watson, said: "This global economic environment continues to be characterised by significant imbalances and consequently is not in very good shape to withstand further major shocks. This ranking lists a number of concerns that could disrupt the recovery and long-term economic developments and aims to help asset owners consider and manage their investment risk beyond the conventional VaR95 level. It should however be noted that even with the best analysis, we will not be able to anticipate all risks. While we have a lost of 15 extreme risks, by definition they are ‘known unknowns' and what might harm asset owners even more are the ‘unknow unknowns'. The important thing is to build our ability to adapt and learn, enhancing the resilience of the system."

The Towers Watson Extreme risks ranking list
1. Depression
2. Sovereign default
3. Hyperinflation
4. Banking crisis
5. Currency crisis
6. Climate change
7. Political Crisis
8. Insurance crisis
9. Protectionism
10. Euro break-up
11. Resource scarcity
12. Major war
13. End of fiat money
14. Infrastructure failure
15. Killer pandemic