climate

Create a Resilient Supply Chain in Spite of Climate Change

In the last year,  there have been 17 natural disasters incurring more than $1 billion dollars in damages. According to experts hosted by The Risk Institute this week at an event on building business resilience to climate change, pre-planning and risk improvement can make a huge difference in loss mitigation.

Scott Anderson, a vice president at FM Global outlined numerous strategies that a company could take on in order to mitigate their risk in the event of a catastrophic weather event. These strategies were much more comprehensive than typical human interventions like sandbags; they are what he called physical flood mitigation — installing metal blockades, floodgates/barriers, etc.

This is much more than fear-mongering, these physical mitigations are scientifically proven to be more effective than human intervention. Take the massive flooding due to a hurricane or stalled rainstorm like Hurricane Harvey in 2017, which dumped nearly 60” of rain in just four days in the Houston area. FM Global clients who had made the recommended mitigations to their facilities only suffered a distraction, rather than devastation during the storm. In contrast, those clients who did not, incurred on average $23 million in damages from physical destruction, as well as in lost revenue.

Can your business afford a $23 million loss?

To illustrate an example of supply chain resiliency, Danielle Virant and Lee Ettenhofer from Abbott Nutrition shared their experience of leading the company through a table-top crisis exercise, which was then able to be acted on during Hurricane Harvey in order to ensure that hospitals — and in one case an immunocompromised baby girl — received the life-saving products they needed.

The key takeaway from their experience with the exercise and the actual emergency is that a plan is only as good as it is current, available, and in writing.

“Institutional knowledge is great, but it’s not so great with that knowledge retires without writing it down first,” said Virant.

Their advice is to set a date on the calendar every year to pull out the plan, review it, and make any changes that way it stays current and can quickly be applied if and when the need arises.

Kirk Pasich, an outstanding L.A. based litigator, shared some fascinating insights on the importance of contract language between the insurer and the insured, saying, “They [the insurer] is nearly always going to win— at least before you call me — when there is vague wording in a contract.”

Proving yet again, that specificity of language is much more important than your 10th-grade self ever thought it would be.

Is your business prepared to deal with climate change?

Two questions to ask to determine if your business has the capacity to be resilient to climate change.

2017 was a banner year.

Well, as far as catastrophic weather events incurring billion-dollar losses go.

According to a recent report, economic damages from weather-related disasters continue to climb towards and sometimes surpass record levels, with more than 800 major events worldwide cause an estimated $130 billion in losses in 2012 alone.

But while many companies are concerned about the cost of such events, they tend to plan for the future based on past trends. In the face of global climate change, 500-year and 1,000-year flood events are becoming more like 10-20-year events.

At a recent event hosted by The Risk Institute, climate researchers from The Ohio State University and industry leader, FM Global, shared their insights into how businesses can do more to mitigate and adapt to our changing climate.

Predicting the severity of climate change on our planet is tricky business, and there’s a lot of variation between scientists as to how bad it’s really going to get over the next 50-100 years, but there is a consensus that it’s going to be pretty bad, any way you slice it.

By 2100, the world’s temperature could increase by 4-6 degrees, which when taken at face-value doesn’t seem like a lot, but David Bromwich, a researcher at the Byrd Polar and Climate Research at The Ohio State University, put it in perspective saying, “During the last ice age when most of America, Europe and Russia were covered by massive ice sheets, the global temperature had decreased by about 4 degrees.”

So yes, 4 degrees can make a huge difference, so what do business need to do in order to prepare?

According to Lou Gritzo, Vice President of Research at FM Global, in order for a business to prepare for climate change it comes down to a couple key questions.

  1. How much are you willing to invest in a given climate change scenario?
  2. How certain are you that you’ve picked the most likely scenario?

A company’s answers to those questions will likely determine their resiliency to climate change and its impacts on their business.

The Risk Institute will dive into the potential answers to those questions at our next session Natural Catastrophic Losses & Resilience on April 12, 2018 from 9am-1pm. Visit our website to register.

Impact of Demographic Change on the Macroeconomy

The next installment of the Risk Series will be Weathering the Storm: Building Business Resilience to Climate Change on March 20, 2018 and April 12, 2018.

At the turn of the last century, the majority of American were involved in agriculture. Today that number is less than 2%. Technological advances shifted the American economy then, it’s happening again, but this time in the manufacturing and service industries.

The Risk Institute welcomed Chris Ryan from ADP and Michael Betz from The Ohio State University on February 21, 2018 to discuss on demographic change impacts the macroeconomy.

Betz emphasized that to understand the digital revolution, it helps if we also understand the industrial revolution of the 19th century and other employment revolutions. 

The Luddite revolution of the 19th century began as cotton gins and steam engines were breaking on to the stage in a big way, able to do the jobs of low skill workers faster and more efficiently. These Luddite revolutionaries called for the end of these machines, but their call was shortlived because they were soon able to find other work and reap the benefits of living in a more productive society.

Throughout history, as worker productivity increased, so too did the median household wage, and so there hasn’t been much sustained resistance to new technology.

So is the digital revolution different?

Both Betz and Ryan say yes.

In the past, low skill jobs were taken over by highly specialized machines and workers were able to retrain and procure new jobs that machines couldn’t do, but with advancements in technology, robotics and artificial intelligence even the highest skilled workers are having a tough time competing.

To compound the situation, since the 1980s, worker productivity has increased exponentially, but the median household income has leveled off, so people aren’t experiencing the financial benefits of a more efficient society.

ADPs data calls this phenomenon the “Fading American Dream.” 

According to their data, a child born in 1940 had a 92% chance of earning more than their parents did. However, a child born in 1985 (so today’s millennials), only have a 50% chance of earning more than their parents.

So what can be done?

Ryan suggests looking forward to the future saying that most employment practices are looking in the rearview mirror rather than looking forward to future trends like liquid pay, the gig economy and work flexibility.

The next installment of the Risk Series will be Weathering the Storm: Building Business Resilience to Climate Change on March 20, 2018 and April 12, 2018.

Financial Flexibility Helps Keep Insurance Companies Solvent

In the face of ever-increasing weather volatility, insurance companies are becoming more adaptive to handle capital challenges and ensuring their solvency. While different divisions within insurance companies would ideally exist within a vacuum, severe price shocks often necessitate that resources flow between them.

In her working paper “How Do Hurricanes Affect Life Insurance Premiums? The Effects of Financial Constraints on Pricing,” Shan Ge, a researcher and PhD candidate at The Ohio State University’s Fisher College of Business and research fellow at The Risk Institute, examines this trend.

According to Ge’s model, a hurricane might result in a severe shock due to a large number of claims to the Property & Casualty (P&C) division while the Life division escapes relatively unscathed. Pricing adjustments can then be made in one division to help transfer needed resources to another division.

“The insurance industry offers a unique setting to study how shocks to financial constraints affect firms’ pricing behavior,” said Ge. “Many insurance companies are organized into groups of commonly owned affiliated companies. Some groups contain both life and P&C insurance subsidiaries, which are subject to unrelated shocks. For example, a hurricane can have a large impact on a P&C business but not directly on a life insurance business.”

In the wake of such an event, the Life division of the company will want to stimulate the amount of incoming capital and could lower the premiums of policies whose initial costs would be covered by the purchase price. Conversely, policies resulting in an initial outflow of capital would see their policies increase.

This increase in capital is important for a couple reasons: First, when assets are deemed too low to meet liabilities (say, when P&C claims spike due to a hurricane), regulators can seize control. Transfer of capital from one division to another can help to prevent this. Also, customers prefer to utilize better-capitalized insurers. This free flow of capital is vital to insurers when faced with heavy losses in one division vs. another.

While hurricanes bring a host of literal emergencies, flexibility of resources in their aftermath can help to mitigate some of the potentially devastating effects. Similarly, insurance companies facing financial shortfalls from such disasters can benefit by applying timely pricing strategy to allocate their resources where they’re needed most.

Shan Ge is a research fellow at The Risk Institute. The Risk Institute at The Ohio State University’s Fisher College of Business exists to bridge the gap between academia and corporate America. By combining the latest research with the real-world expertise of America’s most forward-thinking companies, the Risk Institute isn’t just reporting risk management’s current trends — it’s creating tomorrow’s best practices.