Why businesses are underestimating SA’s climate threat

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JEREMY MAGGS: The severe storms that have battered Cape Town and surrounding areas and have helped trigger a national disaster declaration across six provinces, I think are a reminder that extreme weather is no longer an occasional disruption. It is now a serious business risk.

The key question is: are South African businesses, municipalities, insurers preparing properly, or are we still treating weather shocks as a once-off emergency.

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Let me put that to Volker von Widdern, who is the strategic risk director at the consultancy Riskonet.

Volker, welcome, and when storms can shut roads, as we’ve seen, cut power, damage property in a matter of hours, do you think that extreme weather now should sit higher on every organisation’s risk register?

VOLKER VON WIDDERN: Absolutely. Hi Jeremy, and to all your listeners.

Firstly, I agree with the point that the events are considered as isolated instead of on a systemic and prepared strategic basis and yes, the forward-looking requirements here are much, much more evident, based on what you’ve seen now about two successive major storms hitting the Cape.

There’s much more to consider. But yes, that is the point.

I’ve just come down Route 62 three weeks ago and really enjoyed the scenery and so forth, only to then receive a picture of the entire road having been washed away.

This is the national road in one of the valleys, and that just shows how quickly and how severely water accumulates in those areas.

And I think that’s a really good indicator that we’re not understanding the power and the cumulative effects of major storms.

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JEREMY MAGGS: So there’s an underestimation in many respects of severity. I guess businesses would just be planning for “bad weather” when they should really be planning for operational disruption and even financial loss. Maybe a recalibration of thinking is needed in that respect.

VOLKER VON WIDDERN: Yes, if one thinks of a flood, I don’t think we all think about the geography of the flood. If you now think of the Western Cape and an agricultural environment, and it equally applies to a mining environment.

But let’s start with agriculture first as the example. That is a connected value chain – so one grows, one stores, you have servicing, the environment, you need to move things around in terms of logistics.

So if a flood comes in and [production] has been wiped out for that valley, and maybe some storage facilities are also flooded, maybe some mechanical repairs.

So all of the responses that you would normally require to help you out of it may also have been damaged, and that kind of full-scale flood and impact assessment I think isn’t happening.

A similar kind of thing could happen with tourism because now, just with going back to that road example, there’s probably a big fall-off in bookings. People can’t get around as easily. The casual visitors aren’t there.

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Many of the game parks and so on are flooded, and roads are inaccessible, or you can’t go and do game viewing, and that’ll take several months to clear up.

I was actually thinking about this and saying, well, how do we consider weather as a strategic risk and how would that impact either tourism, agriculture and the like, and how would we respond to that?

In that context, I don’t think individual businesses are thinking in terms of those kinds of strategic risk assessments.

JEREMY MAGGS: And to that point, Volker, many companies, I imagine, genuinely don’t know the cost of being unable to trade for two or three days or even longer.

VOLKER VON WIDDERN: Yes, and our insurance policies only protect us for our own damage and not supply chain damage. So there are provisions in an insurance policy for customers and suppliers, and invariably they are defined as first tier and also within a limited geography.

Now, if you’re in a regional environment and your customers and/or suppliers have also been affected and you haven’t properly identified those in your value chain and you haven’t properly listed them, you may be missing cover that you really need.

Scenario planning and proper risk assessment for significant weather events is really important, and I don’t think it’s being done adequately by any means.

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JEREMY MAGGS: Let’s get some practical advice here then. What should a sensible storm readiness plan include, Volker, beyond sandbags and emergency numbers and just hoping the lights stay on?

VOLKER VON WIDDERN: Yeah, we know we can’t stop a river from flooding and water levels just rising, so sandbags are hardly going to address that kind of thing.

It’s really understanding the economic effects and really making sure that within that context, maybe we’ve thought about the economics firstly differently because it’s across your value chain and there are multiple people in your value chain who will be affected as well as yourselves.

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So thinking about those things and not assuming that, oh, well, we’ll just go down to the [fuel station] and pump the water out with a generator when the [fuel station] may also be flooded and access to diesel may not be available.

So one has to look at all your dependencies and criteria in terms of response plans. Then I think the second part is that parametrics have been in the risk business for decades, 10, 20 years.

Parametrics may now really be coming to the fore.

So if we looked at, let’s say, an important agricultural value, the Huguenot Valley, the Worcester, Wellington areas, and that they may need to think about parametrics as a common form of protection because if the whole valley is flooded, all of the people who have an economic interest in that area will need some money and some help.

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I think that then can be done with the departmental, the Western Cape government, or even if it’s a gold mine or a mine that’s flooded in another area, parametric and weather-based risk transfer mechanisms, I think, are becoming more and more important now.

JEREMY MAGGS: That is so critical, Volker, because municipalities, logistics operators, property owners, I imagine, often plan in silos, where you’re suggesting, I think, the real risk is systemic and more and more interconnected these days.

VOLKER VON WIDDERN: Yes, so we would look at it and say, well, who are all of our partners in this? And of course, local government and regional or provincial government are. Do they have a plan? What is their plan?

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Of course they have some plans, but those plans would normally call out – and we’ve just seen that the Western Cape has been declared a national disaster area. Well, then how long does it take for the money to come?

If it takes three or six months and I’m standing there waiting for the money to come, what level of grant or subsidy will I or our business get or our region get? You may only get 20% or 50% of what you need. Do we even know that?

How much of the difference between the grant and the total loss estimate should we be thinking about from an economic impact point of view? I’m not sure that’s happening.

JEREMY MAGGS: Just a final question, for smaller businesses, Volker, the biggest danger is often not the storm itself, but the cash flow shock that follows it. As a result of that, do you think repeated climate-related claims are starting to push up premiums, exclusions or excesses for businesses in high-risk areas? Are we starting to see evidence of that?

VOLKER VON WIDDERN: Yes, and definitely that’s a very important point to make sure that smaller businesses do have the right cover. So it’s clear that reinsurers have started limiting their cover for what they call special perils.

Now, the irony is special perils is where insurance started – flood, storm, wind – those are called special perils, including lightning and hail.

So in a reinsurance treaty now there’s a limit to the amount of cover automatically provided for certain locations.

If you want the full cover, you have to actually declare it and make sure it’s confirmed.

So now it’s not as automatic that when you’re insuring your factory or your warehouse or whatever, that all the cover you’re looking for is actually going to come through. So that is a very important thing.

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There may also be a financial limitation to the amount of cover that you get. So you may declare R100 million as your warehouse, but that may be only for one claim, and the claim and the capacity won’t be reinstated after the first claim, and here we’ve seen two major storms in the Western Cape in two months.

JEREMY MAGGS: Thank you very much indeed. Volker von Widdern is the strategic risk director at the consultancy Riskonet.

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