State of Change

39th Annual Risk and Insurance Management Society (RIMS) Canada Conference

Victoria played host to the 39th RIMS Canada Conference, held from October 6 to 9. Discussions revolved around everything from risks associated with disaster preparedness, flood, business continuity and reliance on supply chains. The world of risk is quickly changing, the speed of which is perhaps only matched by the evolving continuum of risk management itself.

 Breadth of risk demands risk professional be at the forefront

The speed at which risk is coming at organizations today clearly illustrates the need for risk professionals to be at the forefront of their organizations, RIMS president John Phelps said during the opening ceremonies of the 39th RIMS Canada Conference in Victoria, British Columbia.

“We have risk coming at us faster and bigger than we’ve ever had before,” Phelps noted. “We have risks that hit our companies not in terms of months or years, but in nanoseconds. We have reputation risk that can happen within the blink of an eye, whereas in the past, it required the publication of a newspaper or magazine,” he said.

“If there was ever a time when risk professionals should be at the forefront of their organizations, it’s now. At the same time, the profession is experiencing very significant change,” he added.

Risk today is not solely about speed; it is about breadth. “Risk management” is evolving and a continuum has been created that runs from traditional risk management to enterprise risk management and strategic risk management, Phelps said.

“Never before has there been such opportunity for risk managers to be part of strategic decision-making in their organization,” he suggested. “We have risk that is increasing at a rate and depth that we’ve never seen before coming together with this evolution within the profession for risk managers to become more strategic,” Phelps noted.

“We are in a state of change in this profession, but the change isn’t bad,” he emphasized. “What the future can hold for us in risk management is engaging an entire organization,” Phelps said.

“It’s a profession that will not be computerized out of existence. It is something that is needed in all organizations and embraced,” he added.

Focus on savings alone will not build robust supply chain

Current supply chains may offer lower costs and higher efficiencies, but may not be as robust and able to smoothly respond to failures or stoppages, Darren Meyler, property branch manager for Central Canada at AIG, said during RIMS Canada.

“A supply chain that’s purpose-built for your needs in terms of cost savings may not be the most robust supply chain,” Meyler said.

While supply chains used to be based on simple sourcing logistics and delivery, usually relying on local rather than global suppliers, that has evolved “to the current state where it’s a recognized driver of company margins,” Meyler said.

“Companies that are very good at supply chain management actually use it as a competitive advantage against their competitors,” he pointed out.

“Thirty years ago, if you had a manufacturing plant and went into a warehouse, you’d see a warehouse full of spares and full of extra materials to make the product. Nowadays, companies pride themselves on not needing that because of the cost saving. The challenge is that once you have a bump in the road or a stoppage in the supply of your product, you’ve got nowhere to turn to, you’ve got no spares, no redundancy,” Meyler said.

Leszek Bialy, vice president and head of customer and distribution management for Zurich Canada, said that from 2008 to 2012, the top 10 countries Canada imported from saw imports rise 6%. For countries like China, Mexico and Japan, collectively the increase was about 20%.

“As your organizations, as well as Canadian multinational organizations, expand globally, they expand their footprint, they’re going to source to those suppliers within the natural catastrophe areas,” Bialy explained.

Citing catastrophe events in Japan and Thailand over the past few years, these have produced more scrutiny by insurers and brokers and demand that companies have desired information at hand.

“Understanding the components of a supply chain risk and how it’s approached and underwritten within your organization will depend on how responsible you are and how connected you are to that process,” Bialy said. “It’s no longer that you’re being given supplements from unnamed locations as you were before those events,” he said.

“Definitely, there’s more scrutiny from the standpoint of insurers and reinsurers, there’s more responsibility on your parts in terms of capturing that information,” he told the room full of risk professionals. “If you’re not capturing that information, if you haven’t already seen, you may see that you’re going to struggle in terms of securing the same limits and supplements you were for contingent business interruption as you were before those events took place.”

Floods not going away, costs in flood zones more than fire

Flood is here to stay and stakeholders must get prepared, David Thompson, vice president and operations manager, Toronto Operations for FM Global, noted during the RIMS Canada Conference.

“Fundamentally, the scientists at FM are pretty much convinced that flood is here to stay. It’s not an issue that’s going to get less; it’s an issue that’s going to get more as we move into the future,” Thompson told session attendees.

“When you look at the frequency of natural hazards around the globe, nothing is really changing: earthquakes are still happening at the same frequency, hurricanes are still happening at the same frequency,” he noted. That said, “urbanization is changing everything,” with events now affecting more people.

Gino Brunetti, vice president and division engineering manager at FM Global, suggested flood should receive at least as much, if not more, attention than fire.

“In a flood zone, the likelihood of a flood loss is five to seven times that of a fire loss, so priorities should change maybe – if you’re tagged as being in a flood zone – because that’s what’s going to hit you,” Brunetti said. “Moreover, the severity for the average flood loss is 150% that of fire,” he reported.

“If you take a 35-year facility, in a 100-year zone, there’s a 30% chance in that time period of the site being hit at least once,” Brunetti said.

Flood risk characteristics that impact the type and severity of an event include proximity to water source, susceptibility to flood, basements and flood emergency response plans. “Our losses show that even a plan that’s in the early stages of formulation – clients who have plans that are not even complete – have shown to be effective to mitigate flood losses.”

However, an ongoing challenge is that people still rationalize big flood events. “The reality is that every year, on average, on a global basis, businesses lose about $2.5 billion to flood,” Brunetti said.

The region of Alberta recently hit hard by flooding has had 16 discreet flood events since 1896 that were significant. “We continue to be surprised by these events when we should not,” he added.

Goal is resilience, not just life safety in quake events

Expectations of new buildings, should an earthquake occur, are changing, Mark Pierepiekarz of MRP Engineering, LLC suggested during the RIMS conference.

“We’re expecting life safety. But what we really want is resilience or limited disruption to our life,” said Pierepiekarz. The goal now is “about resilience, getting back our regions, our lives and operations of businesses to pre-earthquake condition quickly,” he told attendees.

Resilience, though, “may mean a different thing to different organizations. It may be a week or a day of downtime for one organization; it may be a month for another. But it’s achievable if that dia logue happens early on,” he added.

“Damaged contents can really drive the business interruption losses and it’s actually quite preventable,” Pierepiekarz said, pointing to the effectiveness of such things as having piping, sprinklers and gas-fired equipment.

“It’s going to take dialogue between the design team and the building owner,” he suggested. “The sea change is going to happen only if the owners start asking for certain performance of their design.”

Said Pierepiekarz, “Mega-events do happen. It is our opinion that mega-disasters, however, are definitely preventable.” He cited measures such as retrofits and early warning systems as two simple ways to help avoid damage.