06.12.2016 : Marvin Clough

Are you willing to be exposed?

With the impacts of New Zealand’s recent earthquakes keenly felt by business owners in affected areas, it is only natural to focus on the risks an earthquake could pose to your business.

However, it is the risks not yet seen which can have the biggest impact on the operation of a company. While it is good to have focus on earthquakes, there are many other events that can be a risk to your business: bush fires, cyclones, storms, eruptions … and these are only the natural disasters.

What about a fire by faulty wiring, malicious activity by persons unknown, vehicle accident causing damage to property? The list continues with operational risk, cyber threats, and contamination issues; so it is no wonder the insurance claims have increased from 2012 to 2015 by 15% on claims of $2.2 billion.

Increasing your awareness of risks is good for business.

We manage risks every day.  Wiping up spilt water on the floor, looking left and right when crossing the road, negotiating a contract, installing fire detection systems in a building and so on.  Some risks are governed by legislation, such as installing updated safety guarding on packaging machines, or lowering the speed limits outside a school.  The risk of personal injury is paramount to the decision-making process behind a number of laws.  Imagine driving around town at 80km/h, would this increase the risk of accidents?  Likely so.  

Unintended consequence is also a factor; so while one risk is being mitigated, another risk could be created or increased.  Connecting control systems of a production plant to the internet is great for remote monitoring, but what are the consequences?  Without the right thought process, this could open up your business operations to anyone with an internet connection.  A scary thought.
 

Four questions to help evaluate the outcome of risks to your business


1.    Do you really understand your assets?

An important element to risk is understanding your assets.  While the advent of big data and various financial and asset management systems is leading people’s thinking, there are still organisations that do not understand the basics of their assets.  Without good knowledge of the assets within a building or factory, it is very difficult to defend a position.  Building Information Modelling (BIM) systems are being used, although largely only for new builds.  For existing buildings and plants there can be a lack of clarity in the operations.  

A good place to start is a 3D laser scan of your facility.  Not only do you receive an “as built’ representation of the assets, but this can also be converted to a virtual reality system that is great for training staff away from expensive machines, and can provide scenario modelling for different events. 

What is the condition of your key assets?  Is there major expenditure required?  A great way to look forward at pending costs is a condition assessment,  completed under a structured process coupled with a renewal expenditure profile.

2.    What are your assets worth?

Asset value and asset cost are quite different concepts. In terms of risk, you need to focus on costs. Have you considered a  likelihood and consequence matrix? This matrix is well represented in most businesses.  The key is not only in the consequence, it is also in the data and processes your business will need to have in place to be back in the position you were before the event.  

Industrial special risk (ISR) policy is the most common insurance cover businesses use to provide cover for fixed assets.  Having an up to date valuation schedule of assets is key to provide a robust basis for assigning premiums and to ease the claim process.  Costs change rapidly, and they can be influenced by market factors, exchange rates, and world or local events.

3.    How accessible is your business critical information?

A key lesson learned from the Canterbury and recent earthquakes is that, although your building may be standing, the surrounding area has been blocked off by civil defence and access can be denied for days or weeks.  Business critical information saved on hard-drives is not accessible, and this can leave your business struggling to maintain operations.  I hope staff evacuated from buildings in Wellington have taken heed of advice to not store information on local hard-drives. 

4.    Do you have a crisis management plan?

One view of risk depends on expectations.  In this day and age it is prudent to have an expectation that an event will happen, rather than if, so there are no excuses for not being prepared.  It is still surprising how many companies do not have a basic asset register.  How about a crisis management plan?  What about business interruption?  It is all very well having the business interruption insurance cover, but how will your business operate in an event?  

Risks to business are ever present.  New risks are popping up on a regular basis, and companies have to stay abreast of these risks, whether operational, strategic, or acts of God.

It is human nature to only focus on those events most recent in our experiences, when in reality the chance of another large similar event is low compared to an event of a different kind.

So, are you willing to be exposed?

About the Author

Marvin Clough

Technical Director -Valuations

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