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 seth.shapiro@kpcom.com

 

Virgin on Business: Celebrating Boeing and the Interstate

Virgin on Business: Celebrating Boeing and the Interstate

If nothing else, significant anniversaries give us reason to pause and ponder.
| FROM THE PRINT EDITION |
 
 

Round-number-anniversary stories are an overused tool in the journalism workshop, maybe because they’re still helpful in pausing to assess where we are, how we got here and where we’re going.

In the case of two such round-number anniversaries being marked this year, those questions about where we’ve been and where we’re going have literal application because they pertain to two hugely significant developments in transportation, both important to this region, although only one is closely identified with it.

This year, Boeing celebrates the 100th anniversary of its founding and the interstate highway system marks 60 years since its official launch.

It is possible to overstate the significance to Seattle of Bill Boeing’s venture into aviation. It’s not true that without Boeing there wouldn’t be a Seattle, at least one that anyone would have heard of. Seattle was already someplace by 1916, thanks to the port and the railroads — the earlier contributions of two other modes of transport to Seattle’s creation — and events like the Klondike gold rush. Boeing didn’t emerge as the world’s preeminent commercial-aerospace company until well into its middle age.

But would the Seattle region have grown to the size it is and the importance it claims without being one of the world’s centers of aerospace design and production? Would it have developed the tech industries it thrives upon today without the foundation Boeing laid? Would it be a home to a thick portfolio of nationally significant companies? That’s highly debatable and quite doubtful.

As for where we’re going, wherever it is, we’ll likely get there by plane for a long time hence. For all the talk of hyperloops and other technologies, the airplane is still a remarkably efficient, productive and safe method of getting people and stuff from one place to another. There may be revolutions in design, materials and propulsion to rival the transition from propeller to jet, but short of teleportation, the airplane’s place in transportation is secure.

Much less secure are Boeing’s and Seattle’s places in that future. A lot of airplane-building rivals have come and gone in 100 years, and more are coming. It would be nice for both if Boeing and Seattle were still relevant to the discussion of the aerospace industry when the 200th anniversary of Boeing’s founding occurs. 

Meanwhile, the interstate highway system gets little love and a lot of abuse these days, credited with urban demolition, suburban sprawl and desecration of the countryside, not to mention the intangible crime of encouraging Americans to race to their destinations while ignoring the joys and sights of the journey.

Some of the blame is earned; much of it is silly. For people and things, the destination usually matters more than the journey. The interstates rendered the destination possible by making the journey faster and safer, even more enjoyable. And lamentations about not seeing or appreciating the country when viewed from the interstate are sometimes wrong. Take the drive on I-82 between Ellensburg and Yakima, or on I-90 just west of Snoqualmie summit, and try not to be impressed by either the scenery or the engineering feats.

Your cargo, however, is not on a sightseeing trip. It has places to be and work to do, which underscores the massive contribution the interstate system has made as an incredibly powerful economic engine. The modern American supply chain is a wondrous thing; it doesn’t happen without a network of limited-access divided highways, which, by the way, took a lot of traffic off city streets and rural roads, improving life for many.

Unloved as Interstates 5, 90 and 405 are for their congestion, noise, unsightliness, etc., and as expensive as it’s going to be to expand, rebuild and maintain them, give them credit for making urban life possible.  

Monthly columnist Bill Virgin is the founder and owner of Northwest Newsletter Group, which publishes Washington Manufacturing Alert and Pacific Northwest Rail News.