Language around flood risk can create false sense of security - FM Global

Language around flood risk can create false sense of security - FM Global | Corporate Risk & Insurance

Language around flood risk can create false sense of security - FM Global

For organizations around the world, the potential for a business premises or site to be hit by a flood is high on the risk agenda.

According to the World Economic Forum (WEF), in today’s global economy floods are increasingly interconnected with a number of other risk factors.

Take Thailand, for example: as the world’s second-largest producer of electronic components and a major manufacturer of parts for automakers, when severe flooding hit the country in 2011 it had a “huge knock-on effect across the global supply chain,” said the WEF – which estimates that economic losses from the flood came in at more than US$45 billion, and only a third of that was insured.

For today’s risk manager, assessing flood risk is about more than just physical damage. But much of the language surrounding the risk can lull risk managers into a false sense of security, says commercial property specialist FM Global.

“Some of the language around flood, for example when we talk about the one in 100-year or one in 500-year event, lends itself to the exposure being more remote than it is,” Andy Bryson, operations engineering manager at the firm, told Corporate Risk and Insurance.

“If you’re looking at a hugely valuable supply chain, that becomes a much more immediate and real risk than just thinking that there’s a 1% chance of [a flood] happening each year, or that because it’s a one in 100-year event it won’t happen in your lifetime. It’s a sort of gambler’s fallacy that really undermines the urgency of doing anything about the flood exposure,” he said.

With a wealth of data at our fingertips today, the assessment of flood risk has come a long way – providing risk managers with solid evidence to make a compelling case to the C-suite.

“The advent of far more accurate flood mapping and far more accurate analysis of data enables risk managers to be much better armed when talking to their own organizations about where and how to mitigate the potential for flood,” Bryson said.

A savvy risk manager will use the information available to them as leverage to create better resilience plans within their organization, he went on to say.

“In the face of adversity, how an organization recovers and deals with that adverse event, can be a true measure of how successful that business is,” he explained. “If a risk manager is aware of that potential for interruption to production and is able to convince their business to do something

proactive about managing the impacts of a potential event, that’s only going to feed into the organization’s resilience.”

In the face of a more interconnected risk landscape, a flood event can ultimately hit a business’s market share, profitability and reputation – causing uninsurable losses. With that in mind, resilience plans should take priority over resorting to an insurance policy.

“From the point of view of managing the whole event, the insurance policy is just one part of it,” Bryson said. “As a risk manager, I would try and limit my opportunity to go to the policy in favor of actually getting the organization to do something proactive to avoid the loss in the first place.

“You can’t stop the flood happening, but to limit the impact on the overall business as a result of that flood event is absolutely critical."