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You are here: Home / Archives for Risk management / Insurance

29 May 2014 By David McEwen

Operational resilience – what a changing climate does to your risk profile

Lighthouse Storm - croppedThe field of enterprise risk management involves identifying and classifying hazards according to their likelihood of occurrence and the level of impact to the organisation should they occur. This yields a matrix view of risks, with differing treatment or control approaches depending on which quadrant they fall into. These approaches include acceptance (of low probability, low impact risks) and controls that reduce either the likelihood of occurrence or level of impact.

Risk transfer mechanisms such as insurance have also been a mainstay of organisations’ risk mitigation strategies. Insurance coverage is often effective for risks where the main impact is financial loss and the inherent likelihood of the risk is low and unpredictable.

Meanwhile, business continuity planning has traditionally focused on lower probability / higher impact contingencies that can’t easily be treated with other mechanisms, but is always complemented by insurance.

Add climate change into the mix and the scenario changes. The scientific consensus is that our atmosphere and oceans are warming due to the sharply increasing concentration of greenhouse gases (which have increased by over 25% since consistent record keeping began a mere 50 odd years ago). A range of human activities are blamed for this incredibly sudden rise including the burning of fossil fuels (chiefly coal, oil and gas), emissions of various other greenhouse gases used in industrial and manufacturing processes, deforestation and other deleterious changes in land use.

Climatic changes are lagging the build up of GHGs but we are already starting to see noticeable increases in the frequency and severity of extreme weather events such as storms, heat waves, droughts and so on. Global mean sea levels are also on the rise, while water supplies and other critical infrastructures are looking increasingly fragile. Ocean acidification from atmospheric GHGs dissolving in sea water and a range of other impacts are adversely affecting eco systems that currently feed billions of people.

The US National Climate Assessment Report released earlier this month puts it bluntly: “Climate change, once considered an issue for a distant future, has moved firmly into the present”.

Global reinsurers’ data tells the story starkly with record numbers of disaster events and (inflation adjusted) damage bills in the last decade.

It is only a matter of time before this becomes unsustainable and the insurance industry moves to deny – or make unaffordable – cover for events that are increasingly likely and predictable as a consequence of climate change. Indeed, in many parts of the world insurance premiums have risen at well beyond the pace of inflation over the last decade.

Operational resilience and business continuity planning in a world without affordable or effective insurance cover suddenly takes on a whole new dimension of strategic importance.

Talk to Adaptive Capability today about safeguarding your business’ future.

Filed Under: Climate Change Adaptation, Climate Change Mitigation, Insurance, Operational resilience, Risk management

20 May 2014 By David McEwen

Class action for climate change

Flooded stepsIn what could be a sign of things to come, US based Farmers Insurance is reported to be suing 200 councils in Cook County, Illinois for their failure to adapt storm water and other flood defenses to cope with the increased intensity of heavy precipitation events. Following major flooding in April 2013, the general risks insurer is claiming elevated levels of loss due to the municipal authorities’ lack of preparedness.

Key to their case is the assertion that the need for councils to adapt for the severe weather was predictable and therefore maintenance and upgrade work should have been up to date. Their argument has some merit given that the defendants in the case had adopted the Chicago Climate Action Plan some years before the flood, a document that anticipated just the type of extreme weather experienced last year.

This case will be watched with concern, since a verdict in favour of Farmers’ could have global repercussions. Access to insurance to cover unforeseen events is one of the bedrocks of our financial and commercial systems. If councils can be found wanting when it comes to flood defenses for events that are now seen as predictable, what does it mean in turn for organisations or individuals seeking to claim on their insurances for damages sustained in future extreme weather events?

While the result will not be known for some time (and the defendants will argue they have government immunity from prosecution), the case should be taken as a wake up call for organisations everywhere. If your operations and supply chains are exposed to extreme weather, you could be at risk. Insurance companies may eventually cease providing cover while in the meantime hiking premiums to cover the increasing likelihood of high payouts.

Another potential avenue for climate change litigants is to target organisations whose actions could be seen as exacerbating the onset of climate change leading to extreme weather events (major greenhouse gas emitters being an obvious but not exclusive case in point). In this case, however, it is an uphill battle for plaintiffs to prove causation between a particular set of emissions and specific damages.

An ironic factor in this case is that in trying to do the right thing by acknowledging the threat of climate change, preparing adaptation plans and commencing a costly program of infrastructure upgrades, these councils have unwittingly set themselves up for this suit. Clearly the insurance industry represents a key stakeholder group with which organisations should consult, advise and negotiate when approaching adaptation initiatives.

Talk to Adaptive Capability today about safe guarding your business’ future.

David.McEwen@AdaptCap.com

Filed Under: Insurance, Risk management

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