When the Levee Breaks: A Deluge of Risk for Your Business

July 2017

Many Canadian businesses are reeling from Mother Nature’s latest curveball, and others are at least taking note. Last month’s heavy flooding in several parts of the country was just the latest in a series of events that may signal a trend, according to Canada’s insurance industry.

The Insurance Bureau of Canada reported a record $4.9 billion in insured damage from natural disasters in 2016.

In Canada, it said, federal disaster relief spending rose from an average of $40 million a year in the 1970s to an average of $100 million a year in the 1990s. From 2010 to 2016, federal disaster relief spending rose even more, to an average of more than $600 million a year. In 2013, federal spending hit a then-record $1.4 billion.

Globally, too, natural disasters –– from flood, fire, and hurricane to volcanic eruption –– are serious business. In 2016, total economic losses from natural and man-made disasters ran to US$158 billion worldwide, according to Swiss Re sigma, a European publication serving the insurance industry.

Disaster 2011: The Global Village Strikes Back

In truth, this year’s Canadian floods are the tip of the risk iceberg. Six years ago, auto manufacturers around the world received a wake-up call.

First, in March, the Tōhoku earthquake and tsunami struck Japan, bashing its manufacturing capacity and sending ripples worldwide. Then, in July, devastating floods in Thailand once again underlined our economy’s interconnectivity, as companies in the West struggled to source core systems in the automotive and other industries.

To many observers, it became clear that “lean and mean” inventory strategies had taken their toll. In their pursuit of financial efficiency, businesses had narrowed their margin of error.

Greater global integration had only sharpened the risk, as Canadian business leaders lost control over ever more vulnerable supply chains. The upshot? Disruption.

In response to the two disasters, many companies changed direction. From increasing inventory to diversifying production to standardizing parts, they adapted by implementing new approaches to risk management.

But managing risk doesn’t eliminate it. For businesses that depend on global supply chains, risk has only become more complex.

See No Risk, Fear No Risk?

Despite the heavy risk load, evidence points to a rose-coloured view – at least among the general Canadian public. An April study by the University of Waterloo surveyed Canadians living in areas designated by the federal government as high-risk for flooding. Only 25 percent realized they are vulnerable, and only six percent knew they are located in a designated flood-risk area.

In the business community, leaders have increasingly recognized that ultimate responsibility for all risk management comes from the top. In BDO Global’s wide-ranging Global Risk Landscape 2017 report, 500 C-suite and senior experts from 55 countries were surveyed – with some surprising results.

Download the report

According to 72 percent of respondents, the world has become a riskier place. But in last year’s survey risk perception stood at 87 percent. All this despite increased political, social, and economic instability.

The Disaster Response

Your organization’s mettle is tested in times of crisis, but after business returns to “as usual” – or at least quasi-usual – long-term needs will reassert their primacy.

Come tax time, inventory losses need to be examined by independent professionals with the requisite broad expertise for whichever jurisdiction governs: Canada, the U.S., Mexico, or overseas.

A natural disaster may also force you to ask critical questions. You most likely already had a business continuity plan in place, but a disaster offers real-life data to either support its effectiveness or reveal its inadequacies.

How will you backfill for a vendor affected by a hurricane? How long can you function competitively without a secondary option? If you are forced to slow down production, how will you communicate the message?

While many companies decided to upend strategy after the 2011 disasters, others chose to tinker. Some C-suite leaders reviewed their original approach of minimal inventory – and decided to stand pat. The additional cost, they said, simply couldn’t be justified. Some then chose to respond in other ways.

Whichever solution they chose, the assessment was the key. Because compounding a natural disaster with man-made indifference is a risk not worth taking.

For more information on how BDO’s Risk Advisory team can help you manage the risk around natural disasters, contact our National RAS Partner, David Prime.