Rewiring the risk society: How society changes will reshape financial risk management

Abstract

Since the publication of Ulrik Beck’s ‘The Risk Society’ in 1986, which provided an analysis of how modern society should manage risks created by human activity, there have been significant demographic changes and technological innovation. This paper provides an insight into some of these changes by highlighting four main drivers that could have a major impact on the supply and management of financial services in the future. The first driver is demographic changes, which includes higher life expectancy, an ageing society and low fertility rates that could create pressures for the financial industry, especially on the supply of pension and life insurance products. Immigration, however, could mitigate some of these trends, as it may introduce a brain gain in some of the countries mostly affected by the ageing phenomenon. The second driver is technological changes. A high rate of innovation, an increasing speed of communication and a transition towards a society dominated by algorithms, machine learning and, in the future, artificial intelligence, could disrupt the financial services industry. Thirdly, society is changing substantially. A lingering sense of uncertainty, spawned by the financial crisis and the introduction of new technologies, have created a sense of mistrust towards the financial system. A growing sense of economic inequality and more insular global governance may create a growing sense of dissatisfaction. The impact on the financial industry is likely to come from bottom-up initiatives such as peer-to-peer and alternative lending platforms. The fourth driver is governance of the financial system. The rules of the game will have to adapt to these changes, including a revision of regulatory frameworks and, for risk managers, a review of current models and assumptions that are based on the past and often do not account for today’s more technologically advanced system. The paper therefore suggests that a series of paradigm shifts are needed in order to ensure an adequate management of risks in the financial sector. Risk practitioners will need to review their current practices in light of the existential risks created by the four main drivers highlighted above. In summary, risk management practices need to be rewired to meet these challenges.