Modern finely tuned subcontracting and supply chains are extremely susceptible to disturbance. These cause customers bigger and bigger losses, and often the root cause is weather phenomena. For example, flood damage to a subcontractor may cause serious problems to a company.
Senior management should be very much aware of not only the flood risks of their own production plants but also those of their subcontractors. Finding out about dependency risks is part of good risk management, although it may require a fair amount of effort.
Property and business interruption losses caused by weather phenomena are an increasing problem, the effects of which can be reduced with proper risk management.
Server and back-up server in the same cellar
If’s International Claims Manager Mike Freeman told at the Risk Management Day for major corporations in March in Helsinki about a case that raised some eyebrows.
“The control systems of a fully automated giant logistics centre had been outsourced to a subcontractor who had in turn outsourced this contact to another contractor. The servers that controlled the logistics centre were located in a basement. During heavy rain the server room flooded which paralysed the information systems and the entire logistics centre for quite some time.
Surprisingly the backup server was also located in the same basement causing a much more extended interruption period.
The same may also apply to your own premises that are exposed to flood and earthquake risks but also to any subcontractors and their subcontractors.
“It is crucial for If's major customers that they can trust If’s ability to obtain the best information about flood risk and to assess the risks in each location. This will enable us to assess together what an optimal insurance package should contain,” says Reinsurance Manager Tommi Valkama of If.
Contingency plans more and more important
The insurance business operates only under certain conditions. Insurance companies
cannot do better than their customers in the long run. “It is a great advantage for us that we have companies like Munich Re as reinsurance partners. They keep a close look on rainfall changes regionally and also over time.”
However, just recording rainfall data is not enough. As the climate changes, contingency
plans become more and more important, because also the subcontractors and their subcontractors must have such plans. “Every sector must be ambitious to bring their contingency plans up to date. The need for them increases steadily,” said Valkama.
Weather phenomena and dependency risks used to be local When Carl von Linné visited a copper mine in Falun, Sweden in early 1734, he observed with interest and concern that the air was polluted. A thick sulphurous smoke hovered over the small town and its coughing inhabitants.
However, he did not have to go far to breathe clean air again, because the pollution was very local. Researchers of today are concerned about two long-term global problems. One concerns the depletion of the ozone layer and the other an increase in carbon dioxide content in the atmosphere.
For example, the climate is forecast to warm up faster in the Nordic countries than the global average. The winters will probably be warmer and rainier. The sea level rise is also forecast to accelerate.
Heat records have been broken in recent years in the Nordic countries, elsewhere in Europe and around the world. The south is suffering from drought, threatening food production and causing, among other things, extensive forest fires.
When rainfall increases in the north, flooding is more common, spring floods start earlier, accompanied by coastal flooding, related to rising sea levels. Elsewhere in the world, fiercer hurricanes and tornadoes are forecast, as are floods affecting wider areas.
Business interruption caused by flooding more common
“When the weather gets warmer, nature will react to it, and the lives of people and businesses change. Vegetation and animal territories move further and further north. Conditions for food production in the Nordic countries, northern parts of Russia and Canada will improve,” said meteorologist Lea Saukkonen of the Finnish Meteorological Institute who spoke at the Risk Management Day for major corporations.
“However, the challenge is how the plants will adapt to new climate conditions. Forestry, for example, may be challenging, because the tree sapling planted today should cope with climate change right up to logging,” she added.
Climate change will increase flood areas, as a result of which many companies will have to re-asses the location of their production plants already in relatively short term. Plans concerning production and storage buildings may assume, for example, that the risk of flooding is low on a mountainous highland area, although higher rainfall will increase landslides considerably.
Local changes may be very painful. “Whenever a flood takes a major production plant by surprise, many jobs will be lost. The plight to the people who lost their jobs is often increased by loss of their homes to the same flood and the fact that once the flood is over, the same or similar company is unlikely to be built in the same place,” said Mike Freeman.
As the example told by Mike Freeman showed, building a storage building outside the flood zone is not enough if the servers of a highly automated storage facility and also their back-up systems are located in a flood-risk area even in the same building and, to top it all, in the cellar.
Image of the world’s sources of carbon dioxide becoming clearer
Some sceptics still claim that this global warming is quite natural. “Such a view is totally opposite to scientific research findings" says meteorologist Lea Saukkonen.
She says that carbon dioxide molecules in the atmosphere can be subjected to isotope analysis to determine accurately the extent it derives from fossil fuels. Fossil carbon is released into the atmosphere when people use fossil fuels, such as oil, natural gas or coal.
Fossil carbon has been buried underground for millions of years and has therefore not been subjected to cosmic radiation. Carbon found in nature, on the other hand, has been under cosmic radiation all the time. These two types of carbon can be told apart.
“It makes very little difference in terms of atmosphere and climate change where the CO2 comes from. Only its amount is significant,” said Saukkonen. The objective of the Paris Agreement is to slow down climate change so that the planet warms by less than two per cent. The plan is that the agreement that was signed in 2015 will be applied after 2020.
The image of the world's carbon dioxide sources and carbon sinks are getting clearer all the time. By 2020 we should have reached the stage where new satellites will chart large areas at a time, instead of the current measurements taken only in specific locations.
New observation methods and increased calculation capacity will enable us to collect and process a much larger amount of data.
Good to remember when things go wrong
During extreme weather, the damage usually extends to traffic connections and other infrastructure, for example. This means that connections are lost, preventing you from getting to the plant or storage facility, even of the plant itself was functioning.
If’s global network consists of local insurance companies that are the best in their respective countries. In each loss and especially after serious dangerous situations, If always works in
close cooperation with local service providers.