Understanding your business’s exposure to the “Big Three” natural hazards;
When it comes to natural catastrophes, businesses should think of threats as pieces of a jigsaw. Earthquakes, floods, windstorms (the so-called ‘big three’) – if any parts of the puzzle are missing, that’s the equivalent of leaving gaping holes in your insurance policies and your business is being exposed.
But what does this risk look like in real terms? The Thai Floods of 2011 are a good place to start. These were among the most severe – and costly – in modern history. It’s estimated that more than 800 people were killed and millions affected. In economic terms, the World Bank estimated $46.5 billion in damages by the end of the year.
Both the horror and the practicalities of the event reverberated around the world. Just north of Thailand’s capital is Ayutthaya province, home to the country’s manufacturing industry. Seven major industrial estates (containing more than 800 factories) were inundated there, with floodwaters as high as three metres. The subsequent disruptions to manufacturing supply chains affected regional car manufacturers and caused a global shortage of hard disk drives for many months.
Speaking at this year’s Airmic Conference, Jack Sanderson, FM Global Account Manager, London Operations says the Thai Floods of 2011 highlight that preparing for the worst is crucial:
“80% of the economic damage was estimated to be supply chain-related, either directly or indirectly. There were large manufacturers that had their key suppliers wiped out. But because the event was so widespread, they found that their back-up suppliers were affected by the same event – so that added to the disruption. Large natural hazard events like this can be so global in their affects. To ensure that you are best prepared for an event, we would recommend a full business continuity plan is in place, and also that this is updated constantly whenever there are significant changes to a business.”
Preparing for the unexpected is therefore about understanding your exposures as a business – both known and unknown. Known exposures may be factories, warehouses or key suppliers. Unknown exposures could include suppliers in your chain that you are not aware of (a supplier’s supplier, for example) that may be located in the natural hazard area as well. Unearthing your unknown exposures and being fully aware of them is armour that will protect you if a catastrophe strikes.
Understanding the extent and nuances of your local insurance cover is also vital. “What happens if there is an event at one of your locations on your local policies where the loss amount exceeds the local limit? Or if it’s caused by a peril that’s not included on a local policy? In this scenario you could have trouble adjusting the loss that could result in delays in the loss settlement, delays in the local insured receiving their payment and subsequently delays in the recovery of that local insured. The solution is to make sure you have as much coverage locally as possible and you don’t have stripped down cover,” says Sanderson.
A key factor in the speed of recovery can often be the speed of the loss settlement itself. Multi-layer supply chain coverage is therefore the only way a business can protect itself fully, and it needs to be in place well before a natural disaster happens.
However, according to FM Global underwriter, Charlotte Brennan, robust emergency response plans are also a business’ front line of defence.
“The key thing with any natural hazard is that you have a well thought-out, robust emergency response plan so you can react to any event that occurs. Flood, earthquakes and wind account for just over a third of losses sustained by FM Global’s client’s over a recent ten year period around the globe. With natural hazards, it is not so much a case of if an event happens, but when it happens. So you really do need to be prepared,” says Brennan.
For example, when it comes to flooding, if there is a building entry point, water will find its way in, and this would not be clean water, but rather dirty contaminated liquid that’s carrying debris. The first thing to do is to assess the exposure to the business, for example understanding if the property is in a flood prone area and estimating the flood levels within the building. Once that is done, you can think of practical mitigation options such as dykes and barriers that can stop water infiltrating the perimeter. One of the simplest, yet most effective ways of protecting a commercial building from damage is to elevate stock and equipment above the flood zone, on higher floors.
And then there is earthquake prevention, such as the devastating event that hit Christchurch in New Zealand in 2011. There are simple measures that can help businesses limit quake damage to their buildings – for example, securing equipment such as racking or boilers. Safety shut-off valves can also be installed to cut off gas supplies to a building and stop a fire from breaking out. What’s more, sprinkler pipes can often be damaged in an earthquake, and so sway bracing ensures they will still work in an emergency.
The final part of the ‘big three’ trilogy is wind. When a windstorm strikes, the envelope of a building needs to stay intact. Outdoor equipment should therefore be tethered, roof coverings and insulation need to be secured, and window and door shutters can protect from debris impact and stop the wind getting in and creating a dangerous tunnel effect.
Adriano Lanzilotto, FM Global’s Operations Vice President, says there are many free resources available to businesses as a first port of call:
“Know your exposure, work with adequate professionals (such as engineers and insurers) to understand if you are subject to events like this, do something about these exposures – the human element and physical protection – and do not transfer to an inadequate policy. In terms of resources, a good place to start is the FM Global Resilience Index, which ranks 130 countries based on their resilience to supply chain disruptions, and the Global Flood Map, which identifies flood exposed areas on a worldwide basis.”
These resources are invaluable tools for businesses who want to know more about their exposure to risk. But with the right combination of business continuity and emergency response plans in place, that risk is minimised as the majority of loss is preventable.