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Demand surge and storm surge: the waves wiping out your supply chains

Recent events, such as the grounding of container ship Ever Given and supply shortages during the global pandemic, have highlighted the interconnectivity between organizations in different parts of the world and the stress put on global supply chains in times of uncertainty

As a result, businesses may have looked at risk intersection and evaluated their supply chains and the steps required to get products out the door and into the hands of customers. This reassessment likely considered myriad factors, including new ones brought to light in the pandemic, like how the lumber shortage raised toilet paper prices. 

Yet, when putting together your enterprise risk management framework, did you account for the impact of climate change on your supply chain? You've probably thought about a surge in demand but what about a storm surge?

Extreme weather and increased risk

Climate change means more extreme weather events across the world. According to the Swiss Re Institute's recent sigma, global economic losses from natural catastrophes were USD 190 billion, USD 94 billion of which was uninsured. Australia experienced unprecedented drought, wildfire and storms, and Asia witnessed deadly and catastrophic floods from monsoon rains. The US was hardest hit, with hurricanes pummelling large stretches of the East Coast, wildfires ravaging the West, and a record number of convective storms striking the Midwest. 

In 2020, secondary perils, like severe convective storms and wildfires, accounted for over 70% of natural catastrophe insured losses. Hailstorms are among the costliest secondary perils, with the market showing rate increases, higher deductibles and lower sub-limits. As a result, some businesses in hail-prone areas are using parametric policies to fill gaps in their coverage, which can also offer added protection against other perils, like named windstorms

Last year's active hurricane season broke records, yet as the storms largely avoided densely populated areas, losses were much smaller than they could have been. Even lower category storms hitting densely populated areas could have resulted in greater losses, as proximity to a storm is often a better indicator of what you may experience than a storm's category. In either case, we should be prepared. This year's forecast is a higher than average probability of a major hurricane impacting the Caribbean, the Gulf of Mexico, and the US eastern coastline.

As the risk of severe climate change rises, businesses face significant physical threats. These threats may expand beyond a business' footprint into its suppliers as well as its second and third tier suppliers.

For example, wildfires in California shut down rail lines and trucking routes, causing significant breaks in supply chains, disrupting business up and down the chain. 

This event is unlikely to be an anomaly. Since we live, build and work in the areas most at risk to climate change – cities and towns along coasts, rivers, forests or wildland – people and assets will continue to be in harm's way.

Climate Change and a shrinking economy

Climate change is poised to have a lasting negative impact on our economy. The Economics of Climate Change, a recent publication from the Swiss Re Institute, found that if the Paris Climate Agreement and 2050 net-zero emissions targets aren't met, the world economy could shrink by 10% in the next thirty years after large productivity and income losses.

Failure to act will mean more severe weather, including cold-driven climate catastrophes like the Polar Vortex in Texas. At the same time, moving to a low-carbon economy comes with its own set of transition risks, like changes in how societies deploy resources, use technology and adopt regulation. Transition risks can cause asset devaluation and leave certain sectors particularly exposed. 

All corporates are faced with tackling these issues in their enterprise risk management framework to identify which challenges to address. Starting the journey of climate risk engagement can be daunting and is often complicated by willful bias, but addressing climate change is becoming increasingly urgent, as recent research shows.

Building supply chain resilience

Comprehensive protection starts with truly understanding your supply chain – both upstream and down – so you can keep your business running in the face of natural catastrophes.

Even organizations that are adept at managing and mitigating climate risk in relation to their own operations may overlook climate risk further down their supply chain. For instance, when assessing a key supplier for a long-term purchase agreement, it becomes crucial to understand how resilient potential partners – and their suppliers – are to extreme temperatures or weather events, both in the short- and long-term. 

It's not enough to know who you vendors are, you also need to know where your vendors are – and where your vendors' vendors are. Then, when you meet with Risk Engineering Services for a risk assessment, get into the details about your locations as well as the locations involved in sourcing all of the materials involved in production. Planning and mitigation can go a long way in making your supply chain – and ultimately your business – more resilient.