Catastrophic risk management

You know the future is unpredictable when the weathermen give up on forecasting extreme weather. A friend of mine, Peter Dugmore, tipped me off about a significant shift that has taken place in TV coverage preceding an extreme event in the US. The recent snowstorms were initially presented as a scenario that was considered a credible possibility.

As the flags went up one by one, the possibility became a probability and the probability became a reality. For some time, the paths of hurricanes have been treated in this way. You have a cone of potential places the hurricane can reach opening up in the days ahead. With constant monitoring of the hurricane's actual strength and course, the cone is adjusted and narrowed until the event is over. It all starts again when the next one is discovered.

How different this is to the famous occasion in October 1987 when a British weatherman famously denied that anything extreme was in the offing the night before one of the biggest storms of the century hit the southern counties of England. Nevertheless, in terms of catastrophic risk management, the current American approach still lacks a critical element which is apparent from the tardy response of municipal authorities to the event when it happens. Citizens in New York are as much up in arms as travellers at Heathrow about the ineffectual clearing of the snow, leading to unreasonably prolonged disruptions.

Ever since Chantell Ilbury and I wrote The Mind of a Fox nearly 10 years ago, we have consistently advocated that you cannot just play scenarios; you have to consider the options available to you and select the best ones in advance. This extension of the scenario planning technique brings the scenarios more alive than just considering them as mere possibilities. Moreover, your response in the event that a scenario materialises is likely to be more swift and effective than action taken in the heat of the moment.

Hence, we are now offering a five-step methodology to clients who wish to undertake an exercise covering potential catastrophes to their business:

1. Identify catastrophic events which could close your operations down in each of your business units and in each region/country in which you have set up shop. Every element of your product range and geographical footprint has its own set of unique risks.

Events can be classified as "internal" where a multiple failure of in-house systems can lead to catastrophe; or "external" where adverse political, economic or natural developments or shocks can cause premature extinction. For example, the range of events can include accidents, civil wars, state expropriation of assets, market collapse, massive disruption of supply chains and earthquakes/flooding.

2. Imaginatively play a scenario on each event highlighting the causal chain which can lead to the catastrophe and the impact on the business of the catastrophe itself. Where possible, select flags which may indicate a rise in the probability of the event occurring such as the abnormal withdrawal of a tide before a tsunami hits the beachfront.

3. With probability of occurrence on the vertical axis and seriousness of impact on the horizontal axis, locate each scenario on the chart so that you have a real feel for the ones you should prioritise in terms of response strategies and tactics. Which are the real catastrophes waiting to happen?

4. Make a list of all the organisations who have relevant roles to perform in the event of a catastrophic scenario materialising. In particular, work out where they fit in the decision-making structure and specifically the people in each organisation to contact as the disaster unfolds. Remember actions taken in the first 48 hours usually determine public perceptions about your competence in handling the event.

5. Just as a catastrophic fire scenario requires preventative measures as well as emergency procedures should it break out in a building or forest plantation, so each catastrophe scenario should carry its own sequence of pre-event and post-event drills. Each option should be subjected to a cost-benefit analysis so that you have the best drills in place to prevent the event happening and to contain it if it happens.

Simple, but very few companies – even among the top multinationals – practice catastrophic risk management. As for the example I quoted at the beginning on extreme weather events, the pieces that are missing are steps 4 and 5. A working relationship has to be forged between the weather experts and the municipalities so that information on potentially catastrophic weather conditions is shared continuously. Equally, the optimum drills to cope with these conditions must be decided in advance, the key players notified and the equipment purchased.

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