Three ways businesses can safeguard against extreme weather
It was recently reported that 2015 was the warmest year on record. Furthermore, a new global temperature forecast from the UK's Met Office says that 2016 is likely to be even warmer than 2015.
This forecast underlines a long-term trend, where 15 of the 16 hottest years since records began in 1880 have all been this century.
The record temperatures set in 2015 are due to a combination of human-induced warming, as well as the presence of El Niño (the prolonged warming of the Pacific Ocean sea surface temperatures that affects the climate all over the world). El Niño has been explained as the cause of many extreme weather events around the world recently, such as droughts in parts of Africa, in India and Pakistan, and flooding in many parts of Europe and the US.
While many of these global events are associated with El Niño, there is little doubt that the on-going pattern of a warmer climate sees a greater risk of extreme weather conditions. Higher temperatures have given rise to weather phenomena such as hurricanes, cyclones, tornadoes, typhoons and floods.
The number of Category 4 and 5 hurricanes worldwide nearly doubled from the early 1970s to the early 2000s. Moreover, both the duration of tropical cyclones and their strongest wind speeds have increased by about 50 percent over the past 50 years.
What risks do these weather changes represent for European businesses?
These kind of extreme weather events have exacted a heavy toll. According to the United Nations, the economic toll of these disasters has reached nearly £1 trillion the last 10 years.
With the potential damage these events can bring, building resilience should be top of mind for European businesses. If a business is not prepared for extreme weather conditions, it could find itself confronting property damage, which could lead to business interruption and loss of revenue.
This notion of ‘resilience’ is increasingly viewed as a competitive advantage because when faced with a catastrophe, those businesses that are prepared to deal with natural catastrophes are the quickest to return to normal operations.
For severe weather events, evacuations, power outages, inaccessibility, infrastructure and property losses are among the possible headaches. But even less intense weather can cause serious issues, particularly in an organisation’s time-sensitive supply chain. For a European company with Asia-based parts suppliers, for example, even a moderate typhoon in the Pacific can have major repercussions on the high street when the firm can’t deliver its products on time.
So what steps can businesses take to safeguard their operations from the increased threat of weather related events?
1. Thoroughly audit your supply chain
The first step for organisations is to ensure that they are managing the risks beyond their own operations. Just because you’ve outsourced the process, it doesn’t mean you’ve outsourced the risk. For instance, a European based company could still be vulnerable to business interruption from a typhoon in the Philippines, if one of its key suppliers is located there.
A wise rule for companies to follow is to work with their full network of suppliers to ensure that the right loss prevention procedures have been implemented. Companies that don’t develop relationships with suppliers will often find themselves becoming unstuck by severe supply chain disruption.
One step that companies can take to protect themselves from supply chain disruption is to audit all their business relationships and build a network of preferred and alternate suppliers with contrasting risk profiles. For instance, never have both a preferred and alternate supplier that are vulnerable to the same flood loss. Having alternate relationships (with alternate risk profiles) will ensure that a company is never too reliant on a single supplier.
Businesses should also be aware that their own risk prevention strategies would be scrutinised by other members of the supply chain ecosystem. Therefore, it is important to map your position in the supply chain hierarchy and proactively communicate your business continuity plan to all relevant parties.
2. Take ownership for building business resilience
The concept of building business resilience is often labelled as purely a ‘risk management’ procedure. However, the responsibility for building resilience shouldn’t be placed solely upon the risk manager.
Building resilience is more than a box-ticking exercise, it represents the mind set of an entire organisation. Business leaders have a big role to play in building this mind set, and they must take ownership in developing resilience with a long term view of the business, not just their own tenures.
Sustained resilience needs to be an integral part of corporate strategy, to protect them from loss of market shareholder value, reputation and more.
3. Having a plan B in place for when the unavoidable does happen
Sometimes, it can be difficult to avoid disruption from large-scale weather related events, such as typhoons, hurricanes and tsunamis. When an unavoidable loss does occur (be it directly or through disruption of one of your key suppliers) every minute is precious, and businesses need to be able to get back on their feet as quickly as possible.
A quick response can help minimise the consequences. To successfully accomplish this, companies must have two measures in place before the disruption occurs. The first is a business continuity plan. The second is an insurance programme with ample and stable capacity that can reimburse a company for operational and financial losses directly attributable to an interruption of business activities.
Business Continuity Plan
A business continuity plan should be both broad and deep, covering a wide range of contingencies: disaster recovery, the safety of employees, the retrieval of back up business data, emergency communications, the possible relocation of business operations to an alternative location, and the sourcing of goods from alternative suppliers. By working with business continuity experts, companies can better understand the risks they face and better prepare themselves to prevent, control and mitigate them.
When it comes to your insurance programme, it pays to know how your policy will respond, should you ever face an insurable loss. Do you know whether your insurer has the financial strength to pay for your loss? Does your insurer have the stability, so you can be confident it will be around should you have a claim? Additionally, does it have a history of paying claims, promptly and fairly? Speed of response is also critical as sales will be lost if a business is unable to function.
By Philip Johnson, Vice President - Operations Manager, London Operations at FM Global
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