Cometh the rain

Every cloud has a silver lining, but with the winter floods there were a lot of clouds, but only one comfort: it could have been a lot worse. Peter Davy reports

In February, the UK Met Office confirmed the country had suffered the wettest winter on record. The heaviest rainfall since at least 1766 in England and Wales left whole regions under water and 6,500 homes and businesses affected. Much of it overlapped with what catastrophe risk modelling group RMS described as “the most severe sequence of storms since 1990” in December and January. As a result, the Association of British Insurers estimates UK insurers will pay up to £1.1 billion. Ratings agency Fitch estimates losses up to £1.2bn.

These sums are significant – but manageable for insurers, according to Fitch, and a lot less than some recent previous losses. The 2007 floods left insurers with a £3bn bill and impacted 48,461 homes and 6,896 businesses, according to the Environment Agency. The Confederation of British Industry (CBI) says figures up to mid-February showed no signs factory output or orders had suffered.

That’s broadly in line with findings at business continuity services group Sungard. As Daren Howell at Sungard Availability Services, says: “While it captured a lot of headlines, the actual impact of flooding on business has not been as great as it has been in the past.”

That is reflected in the number of invocations seen by SunGard and other providers of disaster recovery facilities. In 2007 it saw 10 businesses forced to use its disaster recovery centres. This time, no businesses invoked.

It was a similar story at IBM. Tony Perry, IBM’s managing consultant for business continuity and resiliency services, says: “There were a couple of alerts and standbys for customers who were concerned things could get even worse, but nobody actually had to invoke.”

Much of that is down to the regions hit, with initial flooding mostly affecting Cornwall and rural Somerset and avoiding major towns or industrial sites. Though it spread to the Thames Valley it was still largely confined to residential property or agriculture rather than wider businesses

Part of it is also down to flood defences. Releasing their report in February, the Met Office and Centre for Ecology & Hydrology noted the “relatively modest” level of property flooding – “a tribute to the general effectiveness of flood defences”, the organisations wrote.

It is also partly a tribute to businesses’ preparedness, according to Martin Caddick, head of PwC’s resilience team: “Lessons were learned from previous floods,” he says. PwC’s surveys show steady improvement and increasing attention to business continuity. “It is more pervasive. When we audit people’s plans now they are typically a lot more comprehensive and thematic than they used to be.”

However, while businesses can give themselves some credit for the way in which the floods were handled, there is a limit to how much comfort businesses should take from the experience. Leaving aside any potential impact from climate change (with a recent study in the journal Nature Climate Change claiming average European flood losses of €4.9bn a year could almost quadruple to €23.5bn by 2050), the UK is already particularly vulnerable to flood damage. Risk analytics company Maplecroft’s recent report ranked it seventh in the world for exposure to financial damage caused by floods (and first for “extra-tropical cyclones” – the windstorms that battered the country over the winter).

Flooding in the Thames Valley was an apt reminder that a significant amount of the UK economy is based in areas that are susceptible to flooding, says Dr Richard Hewston, principal environment analyst at Maplecroft.

At FM Global, vice-president and operations manager for Northern Europe Tom Roche, argues businesses need to start thinking about flood risk differently. Presently, they are too prone to discount a one-in-one-hundred year risk of flooding.

“A 100-year event is really telling you there is a one per cent chance every year that you will flood,” he says. “Over the lifetime of the building that means more than a 20 per cent chance you will see a flood.”

The company usually advises clients to protect to 0.2 per cent – against 500-year events.Smaller businesses, too, continue to be an area of weakness. The Federation of Small Businesses estimates the sector lost more than £830m because of the floods. It also says some are struggling to find insurance and proposes they be incorporated into Flood Re.

SMEs remain the most likely to need to improve their preparedness for flooding, according to Lyndon Bird, technical director of the Business Continuity Institute. It is not necessarily because of a lack of sophistication, he says, but just due to their nature.

“Large businesses are often inherently resilient,” he says. “If they have multiple locations they don’t have all their eggs in one basket. If you are a small business providing a service to a relatively local community in Somerset, on the other hand, there is no benefit in having an office in Leeds that might be protected from the floods.”

Taking a wider view

Even for large businesses, though, levels of preparedness are probably mixed. The challenge remains that flooding impacts areas – whole regions – rather than just individual businesses.

“Wide area damage events have a very different impact to events such as a fire at an individual premises,” explains Caroline Woolley, EMEA Property Practice leader at Marsh. Businesses, she says, need to look at their networks not just in terms of the value chain but also the infrastructure and community. That means their suppliers, customers, staff, infrastructure and communities.

Failure to do so can potentially cause a number of problems. One persistent problem for insurance is non-damage business interruption. Traditional BI cover is linked to property damage – so if the business is not actually flooded it won’t be covered, even if it is unable to deliver goods because the roads are. For some the message has still yet to get through.

“Traditional policies are based on loss as a consequence of damage, not loss as a consequence of events,” warns Woolley. Similarly, suppliers’ extension clauses to BI covers usually only cover first tier suppliers.

The failure to take a wider view also impacts business continuity planning. This can be seen in the reliance on virtualisation, according to Mike Osborne, managing director of business continuity firm Phoenix. He says a number of businesses have built in extra server capacity when virtualising their systems in recent years to provide potential for failover to a virtual server. Sometimes it’s considered to serve as a replacement for disaster recovery space. It doesn’t, he says.

“The ability to failover within the same building is clearly not the same as disaster recovery centre,” says Osborne. “Virtualisation is absolutely fantastic as a technology but if you are not spreading that virtualised load over more than one building, you still have a single point of failure in the building itself and the infrastructure that supports it.”

The same is true of home-working, too. Not only is this difficult to manage over the extended periods that some areas have been flooded this winter, but it again fails to take account of the regional impact: many home workers will be dependent on the same infrastructure as the business premises.

Sungard’s Howell says: “To some extent we’ve become quite reliant on single forms of resilience such as the virtual desktop. The lessons of the wind and the flood this time round is that if your business continuity plan relies on people working from home you have a big problem if there’s no communications and no power for the whole region.”

The damage to railway lines and long periods without power in some regions showed the potential for problems.

It’s one reason Perry always suggests clients do a distribution analysis of employees’ home post codes to see which are in high risk zones. It is just another example of taking a wider focus.

As Perry says: “No business is an island – even if, I suppose, in some cases a few of them are right now.”

The big freeze

The cold snap in the US that saw record low temperatures around the country shared some characteristics with the UK floods.

On the one hand, the impacts – cancelled flights, life threatening temperatures, power outages and closed roads – undoubtedly had an effect. On the other, it was limited compared to the past – this time by duration. Business weather intelligence group Planalytics estimates that January’s polar vortex, which saw parts of the Niagra Falls freeze, cost US$5bn – against US$25bn to US$30bn for a similar event in 2010.

While widespread (with temperatures below zero in all 50 states), it was relatively short-lived, according Tim Morris, managing director for Europe at Planalytics.
Despite this, businesses have taken note – partly because it wasn’t just January’s cold snap that impacted trade. There have been a number of cold snaps in different regions of the country, with snow on the East Coast again in March.

“It is the whole winter that has caused an issue here,” says Morris. Overall, it’s estimated the harsh winter has cost US$50bn over a typical year, about half of which will not be recovered, reckons Morris.

Again, the events have raised specific problems for businesses both in terms of their preparedness and in terms of insurance. With the latter, for instance, it’s been important for businesses to be clear about their policy’s definition of an occurrence, according to Duncan Ellis, US property practice leader for Marsh: if three different pipes on the premises burst over the course of the day they need to know if it will be counted as a single occurrence with one deductible or three, for example.
“Make sure you have a good understanding of how your deductible is applied,” he recommends.

For future years, however, the real danger for businesses is not that they won’t be ready if it happens again, says Morris, but that that is all they will be ready for.
“Companies have a horrible tendency to plan for very recent history,” he says. “We tend to make assumptions that what happened last year is likely to repeat.”
In fact, the opposite is true. “Even if it was only the coldest in four years, the chances of it being as cold or colder next year are pretty slim,” says Morris. They need to plan more widely.

“Maybe it won’t be a heat wave next year, but businesses have to plan for something different rather than assume it will be the same.”

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