Don’t forget fire, flood and natural disasters

Risk managers may have plenty to be dealing with courtesy of the Covid-19 pandemic, but experts at a Commercial Risk webinar have warned risk managers cannot afford to forget about the traditional risks too. Risk managers are inevitably discussing supply chain risk alongside threats from the pandemic and cyber incidents, but they must not forget the ‘classic’ risks of fire, flood and natural disasters. Martin Schachtschneider, head of business development at BELFOR Deutschland, told risk managers attending a webinar organised by Commercial Risk that with, companies’ resilience at a low ebb, the impact of such physical risks would be greatly increased. He warned that Covid-19 is causing plenty of problems, including late notifications. “There is a point of no return with a physical incident,” he warned. “The damage will not stop because the fire is extinguished. There will be consequential damage and to hesitate can mean a total loss. A few days of hesitation could mean you lose three weeks of a month. “It is not just about stakeholders’ money,” he continued, “it is about people’s jobs. So, I would like to encourage people to focus on physical risks.” Mr Schachtschneider said it is no surprise that people are more focused on the pandemic. “After the 2017 hurricane season, everyone was talking about weather-related disasters. You could see that in global risk reports. It is reasonable that everyone is now thinking about pandemic and cyber risks. It is always the risk driven by personal experience and the most recent incidents [that is top of mind],” he added. On the question of whether supply chains might be dramatically changed in the wake of the pandemic, Mr Schachtschneider said: “Questions of where to source products or where to build plants are usually driven by financial concerns and not the risks. But people forget very fast, so I am not sure there will be much change.” Mark Wing, a partner at Clyde & Co, added: “The newness and suddenness of the way in which the risks transformed has bumped up visibility of pandemic and cyber risks.” But like Mr Schachtschneider, he stressed the need to keep a weather eye on physical risks: “One concern has been that coming out of some of these lockdowns may increase the physical risks – for example, reopening a factory quickly to service the client potentially creates more risks of breakdowns, etc.” Mr Schachtschneider said: “We have seen that some losses increased during lockdown – for example, where a small oil or water leak became a major incident because there was no one at work to spot it. In the first lockdown, we saw a lot of major fires in German production plants, which I suspect were consequences of the lockdown.” There were also some physical challenges for Belfor, courtesy of travel restrictions. As Mr Schachtschneider explained: “We are in 55 countries but there are still [unreachable] parts of the globe for us. For example, a client suffered a major incident in Morocco when it was closed and there was no way to bring in staff or tools for a restoration job.” Looking ahead, Mr Wing said risk managers should be alive to an increased risk of claims against companies: “You are seeing disputes already between companies as a consequence of the pandemic, where a company is unable to fulfil obligations or to trade. There have already been a couple of disputes in the UK, for example, between landlords and tenants. “However, I think a lot of these questions are yet to be raised. It is only when you start to unwind from the pandemic and you start to see businesses get back to some semblance of normality, that you will see these problems emerge. There are a lot of distressed companies around and that inevitably leads to challenges and litigation. It is on the horizon, if for no other reason than it will be a tough economic climate.” He added: “When you are seeing an economic downturn, there is always a concern around fraud and spurious claims. All of what is traditionally seen as a result of tough economic conditions should be expected, with the added complications of all that the pandemic has brought with it. I think the next year will be a challenging one for a lot of people.” Mr Schachtschneider suggested that risk managers have a lot of knowledge of risk transfer and risk evaluation, but he warned: “If you haven’t seen a real fire damage or been on site after a flood, it is really difficult to estimate. Often, the risk management and insurance departments are a bit too far away from the claims side and I would prefer for them to be more involved in the claims side. People are measuring two sides of a problem but estimating the third side.” There are consultants and risk engineers in place to measure and assess risks, but at the end of process people are still underestimating some of the risks. Flood is not just water, he pointed out. It is also mud and everything with it, which could include oils, chemicals or bio-contamination, and even live animals and snakes. That dirty water then gets into every machine and computers. Everything has to be dismantled and properly cleaned. Mr Wing agreed that most supply chain disruptions arise from a more localised specific incident, whether that is a fire or a flood occurring on the factory floor or during construction. He warned, however, that while an event may be specific to one premises, it has an impact not only on the property owner but on all of those who do business with them. “Although these intangible risks are increasing and relevant, traditional physical risks remain as high as they have ever been. Unexpected events bring home the weaknesses in the chain,” he said. Mr Wing suggested that risk managers should think of the impact a significant event could have along the supply chain. “The most impact is of course on the company itself but, in terms of factoring risks, to what extent will that impact on your supplies and your clients? Think about the neighbours – there could be a liability risk. A fire or flood might create an obstruction and close an area down,” he said. Once identified, there are a series of risk mitigation strategies, he added, but from a legal perspective the easiest way to control some of those risks is if you are in a direct contractual relationship with that party. Mr Wing stressed: “It is important to be comfortable and understand where any liability will sit. Also, it is important to ensure that the third party has sufficient insurance to cope with those responsibilities.” He said that too often when negotiating a contract, price, timing and ownership take priority and sometimes that risk element is overlooked. “Remember that a loss may be considerably larger than the available insurance and then you are in the position of suffering the loss and the rights of redress are very limited,” explained Mr Wing. Mr Schachtschneider pointed to the automotive industry, where he said insurers are asking more questions about the long and complex supply chain. He said companies are usually able to answer those questions but he said risk managers must also consider what it means. “For example, you know who the suppliers are and where they are, but do you know what could happen to them?” he asked. And Mr Wing warned that he is seeing an increase in litigation after a failure of the supply chain, as consumers find new ways to join class actions. Finally, he said, do not forget about climate change. “In terms of supply chain-specific risks, it is worth factoring in climate change,” he said. “It is not of immediate concern but litigation around climate change is worth keeping an eye on, along with how others along the supply chain are impacted.”

Don’t forget fire, flood and natural disasters

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