Facing up to water risks

Mitigating risk is what the insurance industry is all about, but in these complicated times, insurance experts and company heads are challenged to confront a wide array of risks.

They have to consider natural disasters; international terrorist attacks; dramatically rising oil prices; global climate change; pandemics; a housing market collapse; human health and environ-mental risks associated with nanotechnology; and massive water shortages.

In a recent survey we conducted of Fortune 1000 executives, 92% said their companies have taken some steps to prepare for one or more of these eight crisis situations. Around four in 10 said their companies have prepared for terrorist attacks or a pandemic.

Fifty-eight per cent of those surveyed have begun to prepare for natural disasters and 55% have done the same for a steep rise in oil prices. While this result is encouraging, many of the same executives may be surprised to learn they are overlooking an even more imminent, potentially more catastrophic, disaster.

The same study, which was conducted in June, revealed that very few executives believed it likely that access to water for drinking and manufacturing will be significantly reduced; that the housing market will collapse; or that a pandemic will occur in the next five to 10 years.

Yet roughly four in 10 executives believe if any of these “less likely” crisis situations were to occur it would have a “catastrophic” or “severe” impact on their businesses.

Despite the impact a crisis such as reduced access to water would have, a very low percentage of executives have taken steps to prepare for the “less likely” risk possibilities. For example, nearly half (47%) of the executives interviewed say access to water is critical or very important to the day-to-day operations of their companies.

Forty one per cent say if they were faced with a severe water shortage it would cause a complete or partial shutdown of their businesses. However, only 17% have taken any steps to prepare for reduced access to water.

Yet the industry doesn’t need a crystal ball to see that a water shortage is one of the more likely short-term scenarios. Less than 3% of the world’s water is now reachable and fit for human consumption – a figure that is shrinking.

There are already significant water shortages in much of the world: the Middle East regularly faces water issues, as does the south west US and China.

Water-related costs are climbing, as manufacturers must treat both source water and waste output to improve quality. Even non water-intensive businesses are being affected as suppliers pass on their own water-related costs.

Absolutely no industry will be immune to a water shortage. Manufacturing, mining, farming – even office-bound sectors such as financial services – will suffer should drinking water dwindle in supply.

“Yet the industry doesn’t need a crystal ball to see that a water shortage is one of the more likely short-term scenarios

For example, the recent floods in England left several cities without drinking water for 72 hours. Try to imagine the impossibility of running your business without water for a single day.

Despite these facts, many companies have overlooked preparations. The Fortune 1000 executives surveyed believe the main reasons companies do not take steps to prepare for crisis situations are that the risk is perceived as not relevant to their company (44%), too large to manage (28%), or too costly to mitigate (32%).

None of these is an excuse – inaction will surely prove to be more costly and overwhelming in the long run.

What can the insurance industry do to prepare for the inevitable? As with so many of the problems facing the world today, the first step to finding a solution is knowledge.

Marsh Inc recently formed the Marsh Center for Risk Insights as a working forum for experts to identify, debate and tackle the most critical global business risks – with water being one of the newest threats on the horizon.

Work done by center member Carol Browner shows that changes in the global climate, along with rising consumption levels, will dramatically alter water distributions and availability over the coming decades.

According to Browner, businesses need to take time to identify the challenges and opportunities posed by local and regional changes in water availability.

Businesses must apply the same steps to preparing for water shortages as they have for terror attacks or natural disasters. For example, three-quarters of those surveyed say their companies have prepared business continuity plans, while two-thirds have prepared communications or information flow plans.

Sixty-three per cent of executives say their companies have prepared evacuation plans, 60% have established meeting places for staff or executives, 59% have taken out insurance policies, and 60% have practiced or drilled what to do in an emergency. It is critical that these tactics are applied to preparing for an eventual water shortage.

Water shows all the signs of becoming the oil of the future, with all the geopolitical jockeying and jousting that implies.

Only acknowledgement of the fact that a water shortage is a reality and a willingness to search for the upside of risk will allow businesses and the insurance industry alike to prepare for and overcome any water-related crisis.

John Merkovsky is executive director of the Marsh Center for Risk Insights