6 Non-Cyber Risks for Technology Companies
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.
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The Doctor as Partner
Professionals helping employees return to work after being on disability or a leave of absence face many challenges. After all, there is a personal story behind each case and each case is unique.
In the end, the best outcome is an employee who returns to the job healthy and feeling well taken care of, while at the same time managing the associated claim costs.
Learn what most employers want from their group disability and life benefits program.
While many carriers and claims managers work toward these goals, in the end they often tend to focus on minimizing costs by aggressively managing claims to get the worker back on the job, or they “fast track” claims, approving everything and paying little attention to case management.
Aggressively managed claims can leave many employees and their doctors feeling defensive and ill-at-ease, creating an adversarial relationship that ultimately hinders return to work and results in higher direct and indirect employee benefit costs for the employer. Fast track or non-managed claims can lead to increased durations, costs and workforce productivity issues for employers.
Is it possible to provide a positive employee benefit experience while at the same time effectively managing disability and lowering an employer’s overall benefit costs?
A Unique Approach
Liberty Mutual Insurance’s approach to managing disability and absence management focuses on building consensus among all stakeholders – the disabled employee, treating physician, employer and insurer. And a key component of this process is a large team of consulting physician specialists, leading practitioners from a variety of specialties, highly regarded experts affiliated with leading medical universities across the country.
“About 16 years ago, our national medical director, Dr. Ed Crouch, proposed that if we worked with a core group of external consulting medical specialists – rather than sending most claims for Independent Medical Evaluations – we could do a better job making disabled employees and their attending physicians comfortable, and therefore true partners in producing better disability management outcomes and employee benefit experiences,” said Tim Kastrinelis, senior vice president, Distribution Partnerships at Liberty Mutual Benefits.
“In this way, our consulting physician and the attending physician are able to work with the disability case manager, the employee and the employer to deliver a coordinated, collaborative approach that facilitates a productive lifestyle and return to work.”
The result of Dr. Crouch’s initiative has produced positive results for the clients of Liberty Mutual Insurance. This consensus building approach to managing disability with consulting physician expertise has helped achieve industry leading client retention results over the past decade. In fact, 96 percent of Liberty Mutual’s group disability and group life clients renew their programs.
“By getting all stakeholders on the same page and investing heavily in consulting physician specialists, we have been able to lower claim costs and shortened claim duration for our group disability policyholders. …In the end, it’s a win-win for all.”
–Tim Kastrinelis, Senior Vice President, Distribution Partnerships, Liberty Mutual Benefits
A Collaborative Approach
In the case of complex disability medical health situations, Liberty Mutual’s disability case managers play a vital role in seeking additional expertise—an area where the industry’s standard has been to outsource the claimant for independent medical examinations.
However, Liberty Mutual empowers its disability case managers with the ultimate responsibility for the outcome of each claim. The claimant and the case manager stay together throughout the life of the claim. This relationship is the foundation for a collaborative approach that delivers a better employee benefit experience and enables the claimant to return to work sooner; which more effectively controls total disability claim and absence costs.
Sending a disabled employee with complex medical needs to an external specialist may sound like a cost-effective path, but it often comes at the cost of sacrificing the relationship and trust built between the employee and case manager. The disabled employee must explain their medical history to a new clinician, which he or she is often reluctant to do. The attending physician may be uncooperative as this move can appear to question his or her treatment plan for the employee.
As a result, the entire claims process takes on an adversarial atmosphere, building major roadblocks to the ultimate goal of helping the claimant return to a productive lifestyle.
Liberty Mutual takes a different approach. Nearly 100 physicians representing more than 30 medical specialties are available to consult with its medical and claims professionals, working side-by-side with case managers.
More than 95 percent of these consulting physicians are in active practice, and therefore up-to-date on the latest clinical best practices, treatment guidelines, therapies, medications, and programs. Most of these physicians are affiliated with leading medical universities across the country. “We recruit specialists from around the country, getting the best from such prestigious institutions as Harvard, Yale, and Duke,” said Kastrinelis.
These highly-credentialed physicians help case managers focus on providing the support needed for the disabled employee to successfully return to work as quickly as appropriate. Their collaborative work with the attending physicians provides the behind-the-scenes foundation that leads to a positive claimant experience, results in a better outcome for the claimant, and more effectively reduces total claim costs.
Coordinated Care Plan
When one of these consulting physicians reaches out to an attending physician, there’s an immediate degree of respect and high regard for his or her opinion. This helps pave the way to working together in the best interest of the employee, improving treatment plans and return to work results.
In this process, the claimant is not sent to yet another doctor; instead, the consulting specialist works with the attending physician to help fill in the gaps of knowledge or provide information that only a specialist would have. Although not an opportunity to direct care, these peer-to-peer discussions can help optimize care with the goal of helping the employee return to work.
The attending physician may have no knowledge of the challenges the employee faces in order to return to work. A return to work plan created in concert with the specialist, disability case manager, employer, and attending physician can set expectations and provide the framework for a proactive and effective return to a productive lifestyle.
“Our consulting physicians bring sophisticated medical expertise to the discussion, and help build consensus around a return-to-work plan, helping us more effectively impact a claim’s outcome and costs, and at the same time provide a better claimant experience,” said Kastrinelis.
“We can work more collaboratively with the attending physician, manage expectations, and shepherd the employee through the process much more effectively and in a much more high-touch, caring, and compassionate manner. Overall, we’re able to produce better outcomes as a result of this consensus building approach.”
“Our approach – including the use of consulting medical experts – helped us significantly reduce disability costs over two years for one large health service company,” notes Kastrinelis. “We cut average short-term disability claim durations by 4.2 days in that time, while increasing employee satisfaction with our unique disability management model and collaborative, partnership approach.
How did Liberty Mutual’s unique approach lower claim costs, reduce disability duration and improve the benefit experience for one customer?
“By getting all stakeholders on the same page and investing heavily in consulting physician specialists, we have been able to lower claim costs and shortened claim duration for our group disability policyholders,” said Kastrinelis.
“Plus, we, the employee, and the employer also get the bonus of creating a better employee benefit experience. This model has shaped our disability and absence management program to more aptly reflect our core mission of helping people live safer, more secure lives. In the end, it’s a win-win for all.”
How does Liberty Mutual provide a superior employee benefit experience?
Tim Kastrinelis can be reached at email@example.com. More information on Liberty Mutual’s group disability and absence management offerings can be seen at https://www.libertymutualgroup.com/business-insurance/business-insurance-coverages/employee-benefits.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.