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Building Resiliency in the Face of Climate Change

Climate change demands that companies take a collaborative approach to risk management.
By: | June 2, 2014 • 10 min read

Failing to prepare for extreme weather events cost the United States $1.15 trillion in economic losses from 1980 to 2010, according to the U.S Global Change Research Program (USGCRP). The more telling number comes from a study by Munich Re, which put insured losses for North America during the same period at $510 billion. No doubt government was forced to take on the lion’s share of the rest, but U.S. business also paid out of pocket for a fair amount of the remaining $640 billion in losses.

Here’s another sobering figure. A Business Continuity Institute study indicates that 40 percent of businesses affected by extreme weather for extended periods of time never recover or reopen. It’s likely that for much of the 60 percent that stay open, full recovery is a long and painful process.

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The forces behind these events are gaining steam and they are indiscriminate. From December 2013 through February 2014, drought-stricken California recorded its warmest winter on record. Across the rest of the country, including the South, winter storms were merciless, dealing at least a $15 billion blow to U.S. businesses.

Let the politicians bicker all they want about who or what is to blame for climate change. USGCRP projects another $1.2 trillion in losses through 2050. So for those with boots on the ground and a business to run, it doesn’t matter who’s to blame. Climate change is not a future risk, it’s a right-now risk, and the only question that matters is, “Now what?”

Some of the answers to that may surprise risk managers and other business leaders.

The Chocolate Elephant

Here’s what’s on the table. According to the most recent report from the United Nations’ Intergovernmental Panel on Climate Change, ice caps are melting, sea ice in the Arctic is collapsing, water supplies are coming under stress, heat waves and heavy rains are intensifying, and coral reefs are dying. Coastal communities are under double threat from sea-level rise and from increased acidity as the waters absorb the carbon dioxide given off by cars and power plants. Organic matter frozen in Arctic soils since before civilization began is melting, decaying into yet more greenhouse gases.

Video: A description of the IPCC findings.

Slowing these trends may be possible, but reversing them is not. Therefore, the altered climate — with its attendant storm frequency increases, droughts, wildfires, intense rainfalls, storm surges, the “polar vortex,” the rising sea level and the rest of it — is ours to keep.

Evidence of this mounts daily. Just within the days surrounding the 2014 RIMS conference, wildfires ravaged states on the East and West coasts, tornadoes ripped a path across the South Central United States, and severe floods battered Florida and Alabama. That convergence of calamities no longer seems to strike anyone as shocking. In the years and decades to come, these events are expected to increase in both frequency and severity. In other words, welcome to the new normal.

Superstorm Sandy tested the mettle of many, and served as a wake-up call to those who underestimated the complexity of the climate risks they face. Organizations were brought up short by just how underprepared they really were — and what that could mean to their bottom lines. Risk managers, both public and private, are beginning to parse out what climate change really means and what its total implications are for the organizations they serve.

That task can seem daunting. There are multiple perils involved, which have an exponential impact on possible exposures.

“One of the challenges of climate risk is that for most people, it’s the chocolate elephant — it’s just too big to eat,” said Chris Smy, managing director and global practice leader with Marsh’s environmental practice. That makes it tempting to throw up one’s hands and say, “I can’t solve this.”

The threat seems both too large and too distant. Many reports and articles about climate change include the phrase “by the end of the century …” easily lulling leaders into thinking of it as something that need not be addressed right now, especially when matters such as cyber risk seem so much more immediately pressing.

 Chris Smy, managing director, global practice leader, Marsh

Chris Smy, managing director, global practice leader, Marsh

But the increased frequency and severity of extreme weather events is apparent. At the same time, we’re seeing populations gravitate toward cities, and scientists have concluded that cities are warming at a faster rate than rural areas. These facts alone make for a dangerous combination. The population shift toward urban areas also means that many companies don’t have the option to avoid doing business in exposure-prone areas. They need to be where the customers are.

“You have more frequency and severity, and that is exacerbated by more people at risk and more assets to be damaged,” said Bob Petrilli, head of North America, Swiss Re Corporate Solutions. “It’s a triple whammy — it’s multiple economic issues coming together to make things that much worse.”

In the face of these challenges, a dialogue has begun among both corporations and public entities about the concept of resiliency and how to achieve it. What “resilience” means will be different for every company. But it must encompass both the means to minimize exposures and to plan for all contingencies, as well as a clear roadmap to recovery.

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Assessing exposures surrounding climate risk is a more acrobatic exercise than some risk managers are accustomed to. It will take a deep dive into the “what ifs” of each possible peril, looking beyond clear property risks and into anything that could impact a company’s supply chain, as well as a thorough examination of factors that could create business continuity disruptions. For diligent companies, that sounds like standard best practices, but climate risk gives it a new flavor many have not yet tasted. What if the increased frequency of storms, over time, erodes the reliability of power delivery to one or several of my facilities? Could storm surge threaten any of the key bridges we use to transport products out or bring raw materials in? What if there’s a lack of potable water in the city where my key factory is located, or their food supply is sharply diminished by drought conditions? What if threats to the food or water supply create new diseases that incapacitate a large percentage of my workforce in that region?

“One of the challenges of climate risk is that for most people, it’s the chocolate elephant — it’s just too big to eat.” — Chris Smy, managing director and global practice leader, Marsh

That’s not to say that companies need jump on every risk identified. It’s a matter of eliminating the element of surprise. “The horizon may be different,” said John Marren, director of global risk and insurance management for CSL Behring, at a session at this year’s RIMS conference, “but we wanted to have it all on the radar.”

A New Discussion

As companies confront the real problems posed by climate risk, the more they will be faced with the reality that individual companies cannot effectively mitigate every aspect on their own.

“What we’re finally starting to notice is a shift toward this idea of comprehensive risk management,” said Alex Kaplan, vice president, global partnerships for Swiss Re. “It’s not just about your own resilience but it’s also about the community around you. For instance, if you have, say, a corporation that’s based in a city. They could have state-of-the-art technology and could be insured to the teeth, but the city around them ends up collapsing.”

A poignant and very real example of this, said Kaplan, is the Toyota plant in the Turkish city of Van. “It was up to the most incredible standards of seismic protection. So when they had an earthquake in 2011, the factory was virtually unscathed.” However, Kaplan explained, 600 people in the surrounding community were killed, 6,000 buildings were destroyed and 60,000 people were left homeless. “So even though Toyota was physically OK, none of its workers could get to work. And frankly, even if they could get to work, they probably had bigger problems to worry about.”

The corporation with the best risk management, the best strategy and the best risk transfer still has to be aware of where they’re located and what around them could also be impacted and prevent them from moving forward, said Swiss Re’s Petrilli.

Bob Petrilli, head of head of North America, Swiss Re Corporate Solutions

Bob Petrilli, head of North America, Swiss Re Corporate Solutions

“A corporation can’t really survive and thrive unless it’s in a location that has a resiliency plan, and if you’re not talking about that together, then you’re never going to get there,” he said. “This public-private partnership type of approach and thought process is relatively new to our industry — but I think it is critically important.”

These ideas — which are spreading slowly — represent a fundamental shift in how climate risk is perceived.

“Many of us in the industry have been focusing on not just the idea of resiliency but on this overarching concept of enterprise risk management, but it’s also broader, it’s global, it’s about interconnectedness,” said Lindene Patton, chief climate product officer at Zurich.

However, she added, “People are not accustomed to thinking that broadly.” So, no doubt, there are some that are going to balk at such a bold departure from tradition. Put in perspective, though, it’s only a logical step for companies that are already engaged in their communities from a corporate citizenship standpoint.

“Corporations like to be integrated with the communities they’re in, they support things within the community to raise their own stature,” said Petrilli.

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“But they probably haven’t in the past met with the city or the municipality from a risk management standpoint to discuss things like ‘What if this? What would we do?’ Once that dialogue starts, it becomes more of a ‘We’ve all got a dog in this fight’ conversation.”

Experiencing the pain of losses will increasingly drive organizations toward this perspective.

“A corporation can’t really survive and thrive unless it’s in a location that has a resiliency plan, and if you’re not talking about that together, then you’re never going to get there.” Bob Petrilli, head of North America, corporate solutions, Swiss Re

A good example, said Marsh’s Smy, is how, since Superstorm Sandy, there’s been a lot of activity in the New York tri-state area around trying to prepare, as a region, for repeat events of that magnitude.

“There’s an opportunity for organizations to engage with local government,” he said.

As organizations look through the lens of climate risk as a way to assess their risk profiles, they’ll begin to recognize that there are areas they can’t control, said Smy, “and they may well decide, ‘We can no longer be a bystander.’ Once you reach that conclusion … then there’s action that can be taken.” That may take the form of lobbying for changes, investing money in nonprofits conducting resilience studies, seeking out public-private partnerships, or even investing in infrastructure.

“The more we talk, the more we get to the point where there is a joint approach to an event,” said Petrilli. “It kind of screams for some collaboration.”

At the very least, opening a dialogue will help flesh out the breadth of the exposures so that action plans can be developed around them. “What people are beginning to focus on is sharing information and on the idea of public-private partnerships,” said Zurich’s Patton. “[It’s about] trying to just define these externalities … Does the power work? Can you drive down a road? Can you get gasoline? Is the metro running? Those are all questions we’re not used to asking. We’re used to only worrying about the things that are under our control.”

For risk managers who find that the idea of community partnerships is a hard sell to the C-suite, Patton added that the benefits go beyond managing climate risk. Companies can approach their community’s climate risk issues much as they would any other public service project, she said. “Not something huge, not something that would go outside their economic model, but just a twist in the way that they’re interacting with their communities. It has all sorts of co-benefits that come with it … things like brand, value, advertising. It’s a way to rethink how they get their name out in the community” in a way which is moving toward resilience while delivering other benefits.

Strategic Planning

The nature of climate risk dictates that companies factor climate changes into corporate decision-making just the same way that companies might evaluate market conditions, tax implications, political instability or any other key exposure.

That long-range scope might not be the responsibility of risk management in some organizations.

“That looks a lot more like strategy,” said Marsh’s Smy. “That’s planning, more than managing day-to-day risk.”

Climate risk and resiliency, then, are the place where strategy and risk management are converging. Savvy business leaders will view decisions through the lens of resiliency in order to protect the organization’s interests.

Ultimately, said Smy, this can better position risk managers within an organization. “It creates an opportunity to address something that’s a strategic issue, at the board level, and I think that’s a great opportunity for risk managers to be thoughtful about it and not be kept in the box of insurance.”

“Resiliency is an opportunity for risk managers to elevate their place at the table,” said Andrew Thompson, global lead for catastrophe risk and insurance at Arup.

A true chief risk officer, said Zurich’s Patton, can act as an adviser to other parts of the organization, to help them think more broadly about the effects of climate risk on their decision-making process.

“The goal is to have people — as they’re thinking and planning — ask themselves, ‘Will this make us more or less resilient?’ ” said Max Young, communications director for 100 Resilient Cities, an initiative focused on building global resilience.

Corporate risk management has evolved into a sophisticated function in most corporations, said Petrilli. And now it is being further refined. “It has gone beyond insurance buying and into ERM,” he said.

“Resiliency is an opportunity for risk managers to elevate their place at the table.” — Andrew Thompson, global lead, catastrophe risk and insurance, Arup

“The board of directors needs to know not only what their operations are going to look like in the next year and the next cycle, but also that nothing is going to knock that off track.” And they also need to know that if an event does happen, there’s a well-thought-out plan in place that will maintain the company’s vitality. “That takes real strategic thinking,” he said.

Related R&I Coverage:

Climate Change Hits the Courts

Expanding the Definition of Expected Risks

The Emerging Tort Storm

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Cyber Resilience

No, Seriously. You Need a Comprehensive Cyber Incident Response Plan Before It’s Too Late.

Awareness of cyber risk is increasing, but some companies may be neglecting to prepare adequate response plans that could save them millions. 
By: | June 1, 2018 • 7 min read

To minimize the financial and reputational damage from a cyber attack, it is absolutely critical that businesses have a cyber incident response plan.

“Sadly, not all yet do,” said David Legassick, head of life sciences, tech and cyber, CNA Hardy.

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In the event of a breach, a company must be able to quickly identify and contain the problem, assess the level of impact, communicate internally and externally, recover where possible any lost data or functionality needed to resume business operations and act quickly to manage potential reputational risk.

This can only be achieved with help from the right external experts and the design and practice of a well-honed internal response.

The first step a company must take, said Legassick, is to understand its cyber exposures through asset identification, classification, risk assessment and protection measures, both technological and human.

According to Raf Sanchez, international breach response manager, Beazley, cyber-response plans should be flexible and applicable to a wide range of incidents, “not just a list of consecutive steps.”

They also should bring together key stakeholders and specify end goals.

Jason J. Hogg, CEO, Aon Cyber Solutions

With bad actors becoming increasingly sophisticated and often acting in groups, attack vectors can hit companies from multiple angles simultaneously, meaning a holistic approach is essential, agreed Jason J. Hogg, CEO, Aon Cyber Solutions.

“Collaboration is key — you have to take silos down and work in a cross-functional manner.”

This means assembling a response team including individuals from IT, legal, operations, risk management, HR, finance and the board — each of whom must be well drilled in their responsibilities in the event of a breach.

“You can’t pick your players on the day of the game,” said Hogg. “Response times are critical, so speed and timing are of the essence. You should also have a very clear communication plan to keep the CEO and board of directors informed of recommended courses of action and timing expectations.”

People on the incident response team must have sufficient technical skills and access to critical third parties to be able to make decisions and move to contain incidents fast. Knowledge of the company’s data and network topology is also key, said Legassick.

“Perhaps most important of all,” he added, “is to capture in detail how, when, where and why an incident occurred so there is a feedback loop that ensures each threat makes the cyber defense stronger.”

Cyber insurance can play a key role by providing a range of experts such as forensic analysts to help manage a cyber breach quickly and effectively (as well as PR and legal help). However, the learning process should begin before a breach occurs.

Practice Makes Perfect

“Any incident response plan is only as strong as the practice that goes into it,” explained Mike Peters, vice president, IT, RIMS — who also conducts stress testing through his firm Sentinel Cyber Defense Advisors.

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Unless companies have an ethical hacker or certified information security officer on board who can conduct sophisticated simulated attacks, Peters recommended they hire third-party experts to test their networks for weaknesses, remediate these issues and retest again for vulnerabilities that haven’t been patched or have newly appeared.

“You need to plan for every type of threat that’s out there,” he added.

Hogg agreed that bringing third parties in to conduct tests brings “fresh thinking, best practice and cross-pollination of learnings from testing plans across a multitude of industries and enterprises.”

“Collaboration is key — you have to take silos down and work in a cross-functional manner.” — Jason J. Hogg, CEO, Aon Cyber Solutions

Legassick added that companies should test their plans at least annually, updating procedures whenever there is a significant change in business activity, technology or location.

“As companies expand, cyber security is not always front of mind, but new operations and territories all expose a company to new risks.”

For smaller companies that might not have the resources or the expertise to develop an internal cyber response plan from whole cloth, some carriers offer their own cyber risk resources online.

Evan Fenaroli, an underwriting product manager with the Philadelphia Insurance Companies (PHLY), said his company hosts an eRiskHub, which gives PHLY clients a place to start looking for cyber event response answers.

That includes access to a pool of attorneys who can guide company executives in creating a plan.

“It’s something at the highest level that needs to be a priority,” Fenaroli said. For those just getting started, Fenaroli provided a checklist for consideration:

  • Purchase cyber insurance, read the policy and understand its notice requirements.
  • Work with an attorney to develop a cyber event response plan that you can customize to your business.
  • Identify stakeholders within the company who will own the plan and its execution.
  • Find outside forensics experts that the company can call in an emergency.
  • Identify a public relations expert who can be called in the case of an event that could be leaked to the press or otherwise become newsworthy.

“When all of these things fall into place, the outcome is far better in that there isn’t a panic,” said Fenaroli, who, like others, recommends the plan be tested at least annually.

Cyber’s Physical Threat

With the digital and physical worlds converging due to the rise of the Internet of Things, Hogg reminded companies: “You can’t just test in the virtual world — testing physical end-point security is critical too.”

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How that testing is communicated to underwriters should also be a key focus, said Rich DePiero, head of cyber, North America, Swiss Re Corporate Solutions.

Don’t just report on what went well; it’s far more believable for an underwriter to hear what didn’t go well, he said.

“If I hear a client say it is perfect and then I look at some of the results of the responses to breaches last year, there is a disconnect. Help us understand what you learned and what you worked out. You want things to fail during these incident response tests, because that is how we learn,” he explained.

“Bringing in these outside firms, detailing what they learned and defining roles and responsibilities in the event of an incident is really the best practice, and we are seeing more and more companies do that.”

Support from the Board

Good cyber protection is built around a combination of process, technology, learning and people. While not every cyber incident needs to be reported to the boardroom, senior management has a key role in creating a culture of planning and risk awareness.

David Legassick, head of life sciences, tech and cyber, CNA Hardy

“Cyber is a boardroom risk. If it is not taken seriously at boardroom level, you are more than likely to suffer a network breach,” Legassick said.

However, getting board buy-in or buy-in from the C-suite is not always easy.

“C-suite executives often put off testing crisis plans as they get in the way of the day job. The irony here is obvious given how disruptive an incident can be,” said Sanchez.

“The C-suite must demonstrate its support for incident response planning and that it expects staff at all levels of the organization to play their part in recovering from serious incidents.”

“What these people need from the board is support,” said Jill Salmon, New York-based vice president, head of cyber/tech/MPL, Berkshire Hathaway Specialty Insurance.

“I don’t know that the information security folks are looking for direction from the board as much as they are looking for support from a resources standpoint and a visibility standpoint.

“They’ve got to be aware of what they need and they need to have the money to be able to build it up to that level,” she said.

Without that support, according to Legassick, failure to empower and encourage the IT team to manage cyber threats holistically through integration with the rest of the organization, particularly risk managers, becomes a common mistake.

He also warned that “blame culture” can prevent staff from escalating problems to management in a timely manner.

Collaboration and Communication

Given that cyber incident response truly is a team effort, it is therefore essential that a culture of collaboration, preparation and practice is embedded from the top down.

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One of the biggest tripping points for companies — and an area that has done the most damage from a reputational perspective — is in how quickly and effectively the company communicates to the public in the aftermath of a cyber event.

Salmon said of all the cyber incident response plans she has seen, the companies that have impressed her most are those that have written mock press releases and rehearsed how they are going to respond to the media in the aftermath of an event.

“We have seen so many companies trip up in that regard,” she said. “There have been examples of companies taking too long and then not explaining why it took them so long. It’s like any other crisis — the way that you are communicating it to the public is really important.” &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected] Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]