Natural catastrophes cost $160 billion in 2018: companies must be ready to mitigate these risks

Hundreds of natural catastrophes killed more than 10,000 people in 2018 and caused damage and losses amounting to $160 billion, according to re-insurer Munich Re.

The number and severity of these incidents should also prompt companies to thoroughly review their own business resilience, continuity and crisis management plans relative to natural disasters.

The highest single loss of life was caused by the September earthquake and tsunami in Indonesia, where 3,100 people died, while the incident with the biggest financial impact was the ‘Camp Fire’ wildfire in California, at $16.5bn, closely followed by Hurricane Michael, again in the US, which cost $16bn.

Half of the global losses were not insured, leaving businesses, farmers, householders and governments picking up the bill.

Munich Re says there are clear indications that man-made climate change has influenced wildfires in California and the high cost of the damage is partially as a result of high-value real estate developments near forests.

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The Woolsey Fire in the Los Angeles celebrity residential area of Malibu destroyed 1,600 homes and mansions with damage amounting to $5.2bn. Fires in 2018 in California cost a total of $24bn, of which $18bn was insured.

In Europe – agriculture was hit hard with wildfires and drought, causing poor harvests, lack of animal feed for the coming winter, causing increased costs for farmers with its knock-on effect on food price trends. The overall cost was $3.2bn, with only a small proportion of the losses insured.

While Munich Re looks at increasing frequency, scale and costs of global ‘natcats’ – natural catastrophes – from an insurance and underwriting perspective, their reports and data are also very useful source material for risk management professionals in business and industry.

In addition to deciding on their level of insurance for natcats, companies must ensure natural risks feature in Enterprise Risk Management (ERM) programs and that their implications are thoroughly worked through.  A systematic review of risks should include:

  • Floods (especially operations in flood plains to or close to tidal areas, especially in places likely to suffer storm surges from hurricanes or tropical storms)
  • Wildfires
  • Hurricanes/cyclones/tropical storms
  • Drought – especially in water stressed areas where a company’s use of water as an input to production could cause trouble with community access to drinking or agricultural water
  • Other severe weather – eg snow, extreme cold

Companies should pressure-test their ability to maintain their operations in the face of any of the above that are relevant.

Employees and their families could themselves also become the company’s weakest link if their homes are damaged, cut-off or destroyed by a weather-related event.  Staff traveling are also at directly risk from natcats– as illustrated by the grounding of 110,000 flights due to the 2010 eruption of the  Eyjafjallajökull volcano. Having procedures that are well-understood by colleagues globally will contribute to both business continuity and the employer’s duty of care to staff.

A valuable method to test the company’s resilience is through scenario planning – using a natcat as the scenario for a crisis or resilience exercise on a corporate, country, business or location level.

In addition, it’s worth mapping how natcats could affect suppliers in countries and regions that are more exposed to these incidents. Suppliers can, and in many cases, must be involved in exercises. This is especially the case for those that are critical to the company’s operations and whose absence from the supply chain would seriously interrupt customer supply. Getting to know partner companies’ resilience levels and procedures will save time and contribute to a more agile, confident and effective company response.

Lines of communication should also be tested during exercises, with one or multiple methods of normal communications made inoperative in order that alternative comms channels (eg sat phones) can be established and be in place in case the company needs to respond for real.

CrisisManagement offers a world-class crisis management service to clients on resilience strategy, planning and tactics. We also undertake crisis readiness audits, as well as testing crisis plans with ‘as live’ scenarios delivered through bespoke workshops by crisis management professionals.

Our team comprises highly experienced consultants with backgrounds in corporate resilience, ERM programs, policing and the military. We have led teams that have undertaken contingency and business continuity planning, as well as crisis response to natural and man-made catastrophes, including the Japanese tsunami and nuclear disasters, floods, hurricanes, terrorist attacks and the Arab Spring movement. More information from adam.roscoe@crisismanagement.ch.

Photo credits: Heading Photo by Kevin: Mt. San Miguel. San Diego wildfire as seen looking south from Santee. Original can be viewed here

Satellite photo by Stuart Rankin: Edited Landsat 8 image of the Camp Fire on 9 November 2018, in Northern California. The city of Paradise is in the middle of the flames. Original can be viewed here

Both photos published under Creative Commons licence

 

 

Mega risks and disasters – a resilient company will get back on track faster

Businesses are increasingly expected to prepare for, and manage the effects of major disasters and they play an integral role in disaster risk mitigation and recovery.

We produced a blog for 6-Group on what businesses should be doing to ensure they are resilient and therefore become partners of choice for their customers if disaster strikes.

Photo, thanks to ‘Jessica Lea/DFID’

 

 

The Presidents Club: the sound of British businessmen in five-speed reverse

20-20 hindsight is a great thing…

Bear with me on this, because the fallout from this dinner is a great crisis, business ethics and risk management case study.

Case study scenario: Bosses of company X are invited by supplier Y to a charity dinner as their guests where they will be treated to entertainment costing around £1,000 each at the men-only event. The guest list is packed with clients and competitors in the industry. Should they attend? End of scenario.

The ticket price of £1,000 would be ‘trigger one’. It would prompt a deeper dive into whether attendance is a good idea, initially relative to the UK Bribery Act and the Gifts and Entertainments clause of ISO 37001, the anti-bribery standard.  At a rough guess, the invitations should have been rejected at this stage by many guests, as attending the event, with this ticket price, could be seen to represent a significant potential compliance issue. Whereas they probably wouldn’t take a £1,000 bung for a business favour, a dinner ticket worth a grand needs careful handling. Alternatively, executives could be offered the chance to pay for their own tickets to avoid any whiff of a business ethics issue.

But if the company still considered allowing executives to accept the invitation, it should have a policy on, and a process to evaluate, offers of gifts, entertainment etc and give or refuse approval to attend on the company’s behalf.

‘Trigger two’ would follow, once due diligence had established the real nature of the event (men only except professional hostesses), aside from its charitable fund-raising.  And perhaps it would be good if men AND women were involved in this due diligence.  At this stage, it would probably be a ‘no’.

But in a broader context, if any scenario identifies a risk as having potential to hit the company, it must decide what to do against clear criteria.  Should it mitigate the hazard, avoid it or share it (insure against it)?

Avoiding it is the only option. It’s almost impossible to ‘share’ the risk of attendance at the Presidents Club dinner by insuring against it – and post-hoc mitigation attempts by those invited have been hilarious and represent some are excellent examples of throwing fuel on the fire.  Companies refuse to comment (their name is already in the Financial Times), so they’re guilty by association.  Individuals, including politicians say they were invited, but claim they left early (presumably before any of the harassment or groping got underway); some said they weren’t aware of any bad behaviour and others say that although they were invited, they weren’t there.  It’s the sound of British business in five-speed reverse… 

Anyone who thought a dinner like this couldn’t possibly be the subject of headlines of the Financial Times – for consecutive days – and that the Presidents Club itself would be dead in a day and a half following these revelations – needs a reality check.

So what should have happened?

A company wanting to avoid reputational damage and possibly a big-ticket legal item, like being the wrong side of the UK Bribery Act, should have implemented a systematic and arm’s length approach to event due diligence, which may include the following:

  • A diversity of people should review events the company is involved in on a strategic basis – and a case-by-case
  • The review needs to thoroughly determine the type of event – by using multiple sources
  • It needs to evaluate whether the cost of the tickets offered are in line with its own gifts and entertainments policy. If it doesn’t have one, it needs to get weaving PDQ…
  • On a company basis, it should avoid the hazard and not attend the event, as mitigation is also almost impossible. Mitigation, in this case, would be like choosing new material for the deck chairs on first day of the first voyage of the Titanic
  • And finally: Executives should do their own risk management 15 second test, by answering this question: “What would my kids think if they knew everything about the event I’m about to go to?”

As my old news editor used to say: “If in doubt (lad), leave it out.”

Carillion, the government and when someone else’s problem becomes yours

The situation with Carillion seems to support the old adage: “If you owe the bank £100, it’s your problem, if you own the bank £10m it’s the bank’s problem.”

In this case, last week’s theoretical, but realistic prospect of the melt-down of Carillion looked like the banks, bondholders and shareholders would have a problem, but this morning, the UK government has a huge problem.
Carillion has, after all, taken on a lot of risk from the government, simply because running contracts in return for money is a form of accepting risk.  But the level of exposure the government faces became clear as this turned from a corporate finance problem to a government headache.
To appreciate the scale of the challenge, this link shows just one aspect of the government’s exposure to the company – in the defence area.  In the recent past, the government also continued to award contracts worth hundreds of millions to the company, despite one, then another profit warning.  Perhaps the intention was to keep cashflow flowing, in the hope that the company would turn around and continue to manage these risks on behalf of the government.
The cash didn’t keep flowing and the company hasn’t turned around.
The government has now ‘crystallised its responsibilities’ and in solving company’s problems, ministers now must decide how they want to manage the coming few days, weeks and months.  They have a few options:
  • temporarily re-nationalise some of the service contracts, therefore maintaining continuity of service (in defence and prison contracts this is particularly important)
  • at a corporate level, hope for and encourage debt for equity swaps and plough on while restructuring on an ongoing basis
  • find trade buyers for some of the businesses or contracts and inject some funding for an interim period on critical strategic infrastructure projects in order to maintain continuity and retain key staff
  • JV partners of Carillion take over contracts (maybe with government guarantees)  in a way that ensures continuity on contracts
  • a mix of the above
  • none of the above, or anything else the government has planned with the administrator
The extent to which government-led crisis and contingency management planning has been going on – and for how long – will be directly related to how ‘bumpless’ the transfer is between Carillon and a new solution, like those listed above.  I’d expect any JV partners to have been working overtime since September (the last profit warning from Carillion) to ensure an orderly transfer of responsibilities.
Compounding the woes, lurking in the background is the spectre of the government’s pension lifeboat having to take over the 28,000-member scheme, which reports a deficit of £580m. Costs could end up being more than twice that, but either way, it’s additional angst for the government and politically another point of exposure.
We do know that the pension situation, and the scope and scale of government work that was contracted out to Carillion, will clearly mean the taxpayer will take a hit on this insolvency. The unknown is how and how much it will cost.
Lessons for crisis management?  A business would undoubtedly have n process by which it identifies big-ticket potential hits to the organization in a systematic way – via an Enterprise Risk Management process, for example.  In this case, they will have generic, adaptable plans to activate if a supplier or a customer goes out of business.  The plans will be developed on a risk basis (how likely how damaging), including from a ‘worst-case, what if’ scenario planning perspective, and contingencies will be put in place in good time.
So how will we know whether the government (and constituent departments that contract with Carillion) has been through a similar exercise?  If they have, while the first few days will naturally be a bit ragged, the stabilising solutions should be ready to implement relatively quickly and smoothly.  If it hasn’t planned or planning is incomplete, expect a more extended period of uncertainty as solutions are more obviously invented and cobbled together on a tactical, case-by-case basis.
And finally, the plunge in the company’s worth from £2billion to Friday’s closing valuation of £61m reminded me of the time the company I worked for took a 60% hit on the share price in one day, and then fell further to just over one Swiss Franc.  The national financial magazine here characterised the situation thus: “Question: What’s the difference between [the company’s] share price and a sausage? Answer: You can eat a sausage.”
Cruel, but in that case, the company recovered, stabilised and thrived, but it was scary.
[Thanks to Terry Robinson for allowing his photo above to be used via a Creative Commons licence]