Trend Watch - Disasters & Other Events

In 2017, a study titled ‘Finance’s role in Operational Risk Management: CFO Research on Building a Resilient Company’ explored the top operational risks experienced by over 100 CFO’s or senior most financial executives at US-based companies. Besides system failures and data breaches, natural disasters was rated the third highest concern for CFO’s, with over 66% of respondents feeling they were ill-prepared to recover from a natural disaster. This sentiment was echoed just a year later as part of the Global Risks Report 2019 from the World Economic Forum, in partnership with Marsh & McLennan Companies and Zurich Insurance, which found that natural disasters were listed amongst the top three risks by likelihood and in the top five by Impact.

Whilst natural disasters are often unpreventable in that they are freaks of nature, there is certainly plenty that firms can do to manage and mitigate the risk. For risk event data between 2007 and 2018, firms on average recovered just 15% of all ‘Natural Disaster’ losses. This average was significantly boosted by one firm’s ability to recover over 85% of a flood loss in 2015, thanks to appropriate insurance coverage. Removing this exception, firms recovered just 9.32% of all ‘Natural Disaster’ losses, 17% lower than the average for all remaining level two risk categories. This highlights the importance of understanding your coverage and the associated coverage gaps in your firms’ insurance policies.

In fact, some insurance policies are written to cover loss of profits due to system outages or general business disruption and firms should continually assess what risks and exposures exceed the traditional scope of insurance in these instances. Updating maximum probable loss estimates on an annual basis also allows firms to better determine policy values and ensure there is appropriate coverage.

Furthermore, a poor business continuity process and/or an inappropriate disaster recovery plan are often common drivers for inflated loss amounts. In 2015, one firm lost over £45,000 after a government issued terror alert forced employees to work from home. The underlying cause, a lack of awareness of the business continuity process which ultimately hampered productivity, resulting in a loss of business. An effective recovery plan should identify all potential exposures and risks, including sources of financial, regulatory and/or operational detriment. Time and cost estimates required to resume or restore a fully operational business should also be determined, as well as the likely impact on third parties and suppliers.

We’d love to get your feedback on this trend and welcome members to provide their insights and thoughts. Please contact Ciaran for more information.