6 Non-Cyber Risks for Technology Companies
The Risk List is presented by:
Building Resiliency in the Face of Climate Change
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.
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.
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.
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.
“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.
“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.
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:
Managing Patient Safety in a New Health Care World
Much like regular screenings, exercise and a healthy diet, patient safety in health care institutions should be thought of as preventive medicine.
“Patient safety aims to relieve the burden of fixing mistakes by taking steps to prevent them from happening in the first place,” said Aileen Killen, head of casualty risk consulting, AIG.
With the right strategies and protocols in place, human error in delivering patient care can, to some degree, be factored out, mitigating the risk of things like falls or medication mistakes. And the outcomes-based reimbursement model enforced by the Affordable Care Act provides extra incentive to improve patients’ overall experience and reduce readmission rates.
Some challenges stand in the way, though, of achieving better safety.
For one thing, increased consolidation in the industry has brought risks associated with integrating disparate safety cultures and ensuring continuity of care if patients are moved to a new doctor. The trend of shifting more care out of main hospitals to ambulatory sites instead also creates concern that those outpatient facilities are not up to the same safety standards as larger organizations.
Finally, advancing technology — while offering great promise to eventually make health care more efficient and error-free — presents significant risks in its implementation while doctors, nurses and other health care professionals learn how to best use it.
Lexington Insurance, a member of AIG, is meeting the demand for more innovative tools to navigate the changing environment with a suite of safety assessment programs that identify problem areas and provide recommendations for improvement.
Assessing Safety Culture
The first step in overcoming any challenge is assessing the situation in order to create the best strategy.
“Every health care organization should aim to become a ‘high reliability organization,’ or HRO,” said Brenda Osborne, division executive, health care, Lexington. “It’s a term borrowed from the airline and nuclear power industries, in which any employee has the right to shut down operations if they spot a safety issue.”
Lexington’s Best Practice Assessment tool allows organizations to compare their own protocols against evidence-based best practices and identify weak spots in their safety culture.
“We survey employees and ask if they feel free to speak up to people in authority,” Killen said. “If they can all say yes, you’re on the road to a safety culture. Then we drill down into specific high-risk areas.”
Clients can conduct specific assessments for error-prone areas like the emergency department, obstetrical department and operating room.
We give organizations recommendations on how they can improve in areas where they are deficient, and we can benchmark their performance against the best practice as well as against other institutions that have done the same assessment,” Killen said.
Those benchmark comparisons are key for securing leadership buy-in. Executives often need to see what other institutions are doing in order to feel confident in their decisions to make changes or invest more heavily in patient safety measures.
If another competitive hospital has better staffing ratios, for example, benchmark stats will show that and support the C-suite’s decision to hire more nurses to achieve a similar ratio.
“What it basically does is give the risk management, patient safety and quality improvement staff a roadmap for which areas to focus their activities for improving patient safety and risk management at their organization,” Killen said.
Acquisitions and Physician Employment
The flurry of merger and acquisition activity in the health care industry creates new risks for large hospital networks that acquire physicians’ practices. The integration of different patient safety and risk management practices can prove difficult.
“You have to take multiple approaches and mindsets and meld them into one fluid organization,” Osborne said. “That has a big impact on physicians’ ability to treat patients and deal with the appropriate hand-offs.”
“Patient hand-off is one of the biggest safety challenges,” Killen said. “Assigning a patient’s care to a different doctor leaves room for gaps in communication, which is so critical to making the correct diagnosis and keeping a medication schedule.”
Lexington’s Office Practice Assessment tool scores acquired practices on 14 different domains, including risk management and patient safety, communication, infection control and prevention, incident reporting and medication safety, among others. Recommendations are provided for any domain that scores less than a perfect 100 percent.
“We’ve been able to go in and help these growing organizations benchmark each of these acquired physician offices to show where they are at in terms of their safety protocols,” Osborne said. “It helps risk managers know where they need to start.”
Another major challenge for patient safety is the movement of care away from main hospitals to ambulatory care settings, an area that previously did not concern hospital-based risk managers very much.
“Historically, there has not been a big focus from a patient safety standpoint on outpatient services,” Osborne said. “The office practice assessment that AIG’s been doing for the last two or three years has actually put us out in front. Few other resources out there can assist hospital-based risk managers in dealing with outpatient-type services.”
“Now more people are thinking about safety in ambulatory areas, and we have more knowledge and experience there,” Killen added.
The same office assessment tools that survey physician practices can also be applied to ancillary services like ambulances, blood banks, and outpatient surgery centers, though benchmarking is not yet available for these sites.
Adapting to new technology is an ongoing challenge for health care risk managers.
“Everyone thought electronic health records were going to solve all our patient safety issues, but they’ve come with some unintended and dangerous consequences,” Killen said. Employees may accidentally order medications for or even discharge the wrong patient, for example, if they have multiple records open at once.
The upside to technology advancements, though, is more streamlined documentation and more opportunities for communication between doctors and patients via telemedicine, which is slowly growing in popularity for remote and elderly patients.
“When we’re underwriting, we look at these areas of growth in technology and the many ways it can be applied,” Osborne said. “We consider all the pros and cons.”
Lexington’s dedication to improving safety in health care shines through in their thorough assessment tools, expert recommendations, and attention to insureds’ changing risk management needs.
“Our unique tools help insureds identify risks and minimize potential claims,” Killen said.
“These services are homegrown and developed by a lot of very knowledgeable people over a period of time,” Osborne said. “They’re not available out in the market, and only Lexington insureds have access to them.”
For more information about Lexington Insurance’s risk management services for the health care industry, please visit www.lexingtoninsurance.com.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Lexington Insurance. The editorial staff of Risk & Insurance had no role in its preparation.