Managing Risk in a Certainly Uncertain World
Managing Risk in a Certainly Uncertain World
Historic drought in the Midwest, scorching temperatures across the country, a rare “derecho” that slammed Washington, D.C. and Superstorm Sandy make extreme weather events a top-of-mind issue for business and consumers alike. The Washington State Department of Ecology earlier this year released a report entitled “Preparing for a Changing Climate”, an integrated response plan for the impacts of climate change on our state (http://www.ecy.wa.gov/climatechange/ipa_responsestrategy.htm).
The report is a response to the reality that more frequent natural catastrophes may be “the new normal”, placing individuals and organizations at higher risk. Scientists predict current weather trends will continue and in some cases accelerate, posing significant risks to human health, forests, agriculture, supplies of fresh water, coastlines, and other natural resources vital to Washington State’s economy, environment, and way of life.
Businesses would benefit from following the state’s lead in preparing for the impacts of climate change. Prudent leaders should take steps to understand and quantify the risks to their businesses, make adjustments where possible, and mitigate inescapable consequences through insurance or other innovative methods.
Below are three steps CEOs, CFOs and risk managers can take to prepare for an uncertain future, where the critical questions are not if, but when, will climate-driven catastrophes strike, and how devastating willtheir impacts be to operations.
Step 1: Perform a risk analysis to identify exposures based on the organization’s susceptibility to likely impacts of climate change. For instance, are you a manufacturer that relies on cheap power to produce yourgoods? How would a tripling of energy costs impact your bottom line? For fruit or vegetable growers, what would happen if water rates tripled, or access was rationed? How will warming oceans affect a commercial fishing company’s catch?
Forward-thinking organizations are working to better understand natural disasters and their potential to disrupt business. Three years ago, I-5 was closed for a week due to flooding between Seattle and Portland. The entire Kent Valley braces for the impacts of the winter and spring rains, which seem to increase in intensity and frequency each year. If your business involves transportation, warehousing or manufacturing in or near flood-prone areas, you would be wise to establish and test contingency plans now, rather than hoping for better weather.
By looking ahead and considering a wide range of possible scenarios, smart businesses can position themselves to protect, if not expand, their businesses now and in the years to come.
Step 2: Insurance companies are (understandably) reviewing their approaches to offering policies, coverages and limits. And you can be sure that rates will go up commensurate with increased risk and likelihood of claims. Only after you have completed a thorough risk assessment can you create a proper cost/benefit analysis of available insurance coverage.
Step 3: In addition to traditional insurance policies that transfer financial impacts of hazard losses, there are new and innovative ways for companies to hedge climate risk. There is a wide range of products – forwards, futures, options, swaps – designed to enable buyers to reduce risk associated with adverse or unexpected weather conditions. These products are available to address an array of weather events, including temperatures, snowfall, frost and hurricanes, in many parts of the United States and the world.
Now is the time to take a serious look at your exposure to climate-related risks. Considering a range of potential futures enables you to make adjustments that may help you avoid material adverse impacts, and could position you to thrive in a changing environment. A rigorous assessment will also prepare you to make more informed choices regarding insurance or other hedging tools designed to address unanticipated or unavoidable climate-related losses.
Mark Twain is well known for the adage, “Everyone complains about weather, but no one does anything about it.” Today, organizations can challenge Twain’s maxim by deploying a wide range of risk management tools and techniques to evaluate, control, and finance weather risks.
Seth Shapiro is a senior vice president and risk strategist at Kibble & Prentice, a USI company. He can be reached at 206-441-6300 or firstname.lastname@example.org