Resilience Is Elusive When It’s Needed The Most

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The world has endured a lot recently – a pandemic, supply chain disruptions, inflation, and natural disasters. Having learned from these trials, has the world become more resilient in the face of climate and business threats? Unfortunately, the numbers show there is a long way to go.

In fact, the world is arguably becoming less resilient. Although business owners are making some of the easier improvements in resilience (promising better years in the near future), others will take years to execute and yield results. These measures need to be started now to reverse the trend.

Rising Financial Losses

Over the last decade, global insured property damage and business interruption losses from natural catastrophes have risen 5% to 7% per year on average, with natural catastrophe losses amounting to estimated $1.5 billion (U.S.) in the first 11 months of 2022, according to Swiss Re.

It’s tempting to attribute these rising financial losses to climate-driven storms, but they’re certainly not the sole source. The number of natural disaster events (defined as those with the potential to cause significant impact to life or property) across the globe has been fairly constant over the last 10 years.

In the U.S., hurricanes are typically the peril that produces the greatest losses. However, in 2022 the Atlantic hurricane season was actually slightly less severe than average, with fewer major hurricanes.

Similarly, the frequency of severe storms hasn’t trended upward either, as the following charts document. Since 2013, there has been no significant increase in wind, tornadoes, or hail, as measured by severe weather days in the 50 states.

The takeaway: Factors other than climate-driven weather are driving up financial losses. Consider the following:

More Property Is In Harm’s Way

Development continues to increase along the coasts, with more construction directly in wind and flood zones. As the density increases, the value of each block and acre rises; and there’s less undeveloped land to absorb rainwater even as sea levels rise, and storms become wetter. Expect more of the same: Redfin Realty reports that 4 of the top 10 migration destinations in the U.S. are cities in hurricane-prone Florida, including Miami, Tampa, Cape Coral, and Northport-Sarasota.

Values have increased in wildfire-exposed areas as well. The 50 U.S. counties with the largest share of homes facing high heat risk saw their populations increase by an average of 4.7% from 2016 through 2020 due to positive net migration, Redfin reports.

And The Harm Costs More Every Day

Rebuilding a destroyed property costs more than ever because of inflation (prices are currently around 6% higher than 12 months ago). Rising prices are fueled in part by supply chain disruptions due to pandemic restrictions, shortages, surpluses, and pent-up demand.

Even as the pandemic’s severity wanes, the supply chain is still in turmoil. More than 7 in 10 companies are dealing with global supply chain disruptions right now and 58% are trying to work through ongoing transportation capacity shortages, according to a new Supply Chain Management Review survey. Nearly half of those surveyed (49%) are facing challenges with increasing ocean freight rates, and about 48% say port congestion is one of their biggest obstacles in 2022.

Critical Equipment Takes Longer To Get

For global companies, an electrical transformer is a bellwether for supply chain disruption. A grid-sized electrical transformer is used to step up power after generation and step it down for local distribution. Transformers play a role in 90% of the electricity consumed in the U.S., and they are getting older. Replacements take longer to procure.

In a typical example, lead time for a transformer ordered by a New England business rose from four months in 2021 to 21 months in 2023. This is not just an isolated case for a specialty unit. As the global supply of transformers has ebbed, prices have risen many times over.

Nine Ways To Weather Supply Chain Upheaval

The only near-term solution to ongoing disruption is vigilance. Financial and operations executives, as well as on-the-ground risk and facilities managers, need to double down on risk assessment, mitigation and management. Here are six ways.

  1. Audit all facilities to understand the hazards they are exposed to. Look beyond the facilities you own and understand risks at major suppliers’ and customers’ properties. Do anything you can to assess your second- and third-tier suppliers as well.
  2. Quantify discrete risks by the likelihood and severity of potential losses, as well as each location’s role in business continuity and profit. Prioritize actionable loss-prevention investments and make a five-year plan to shore up these risks.
  3. Develop backup plans for procuring critical materials, components, and supplies in the event of a disruption. Just-in-time supply chains are impressive as long as they don’t get so lean that you’re vulnerable to any manner of disruption. Adopt a just-in-case mindset to become more resilient. Order raw materials, equipment, and supplies earlier than usual, and carry a little more inventory.
  4. Future-proof your properties by considering not only today’s hazards but those the climate and population shifts will introduce in the coming decades. Seek expert guidance on the climate’s projected effects at each site, specifically for flooding and wildfire. Make sure the guidance you use includes estimates of uncertainty. Predicting the future is difficult.
  5. Shore up maintenance skills and look into advanced monitoring. Given supply chain constraints and soaring costs of new equipment, your organization may want, or need, to do more repair work than ever. Monitoring that equipment, and using advanced analytics to identify incipient failures, will help.
  6. Cultivate relationships with equipment vendors. Ensure that the makers of your most expensive, critical machines – including power-generation and process equipment – are ready to make your organization their priority in the event of any glitches or disasters.

The last few years have been challenging, but that doesn’t mean that 2023 has to be just as disruptive. The goal is not simply to protect the value you have today, but to position yourself for a resilient and prosperous tomorrow.

In the longer term, it’s very clear that resilience (both the near-term items here and longer-term measures, including improvements in land use and construction quality) is no longer becoming an option or a luxury for companies that want to make strategic investments. It’s becoming a necessity to reverse a trend of ever-increasing losses.

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