TT Talk - Changing climatic risk
Everyone is well aware of weather conditions in their locality; those with responsibility for operating cargo facilities are likely to be acutely conscious of changes in local climatic conditions. Many will have seen tidal surges, wind microbursts and unprecedented rainfall become more common.
Operators of warehouses, terminals and port areas need to keep 'fresh' their assessment of the changing risk profile in relation to climate experience in order to protect personnel, operations, equipment, fixed property and infrastructure, and importantly customers' goods.
"Operators of warehouses, terminals and port areas need to keep 'fresh' their assessment of the changing risk profile in relation to climate experience"
Meteorological understanding is doubtless advancing and the related technologies to assist managing risk are equally widely available. The capability to monitor, record and predict weather patterns will continue to develop. However, none of this will physically protect your operation, but, when utilised as an integral component of your ongoing risk assessment, may inform decision-making, such as where to position equipment, how best to stack empty containers and what would strengthen procurement specifications.
Whilst many storm events are considered geographically seasonal - such as those in the Tropics - the entire supply chain industry globally must take adequate steps to prepare for isolated severe weather events. Typically wind strength is most ferocious in coastal areas. However, it is often the surge and flood risk that can cause greater problems, both on the coastline and further inland.
Further, recent months have seen extraordinary volumes of rainfall over short periods in various parts of the globe, resulting in flash flooding and causing significant damage, including to warehouse facilities and cargo stored within them. The fact that more rain fell on a particular day than any other in recorded history does not assure legal defence if a claimant can demonstrate deficiencies in your operational risk assessment or inadequacies in the steps you took in advance of the weather event.
The associated losses of such incidents can be far reaching; water is unforgiving and has the ability to penetrate and cause significant damage. Flood water is inevitably dirty, increasing damage and in many instances creating health challenging situations.
"Water is unforgiving and has the ability to penetrate and cause significant damage"
TT claims data over the last three years suggest that inland operations were subject to damage in 32% of cases, illustrating (unsurprisingly) that operations positioned on or near a coast are more susceptible to weather related incidents (68% of cases). 16% of claims notified through the period involved heavy rainfall that overwhelmed drains and guttering causing flooding to buildings and storage facilities. Property damage through strong winds and microbursts featured in 74% of weather related claims through the period.
Whilst not exhaustive the following areas could provide a sound basis for assessing the risk to your business.
- General operations - Taking account of the operational activities your business undertakes, consider exposures in relation to storage, in-bound and out-bound distribution, co-packing, self-store, vehicle parking etc. How would your operation be affected in the event of your premises being flooded?
- Location - Since storm surge is a significant risk - for yards and warehouses - consider proximity to sea level or a river/other watercourse. If your operation is exposed to potentially high winds, precautions also need to be considered regarding, for example, the stack height of containers.
- Weather data - Source reliable local historic weather data and any trend analyses to consider the likelihood of heavy rainfall and flooding.
- Cargoes - Operational plans for cargo storage need to take account of specific sensitivities of the cargo or packaging (eg. bagged or non-palletised), as well as general vulnerabilities from site layout (eg. warehouse racking). Evaluate these risks, including considering your emergency plan to move/secure cargo.
- Aggregation risk - Consider the total value of the cargo you are storing and what exposure you might have (without regard to trading conditions) if it were all damaged in a single event. Ensure that your insurer is aware.
- Business continuity - What measures are required to protect vehicles and mobile handling equipment, any office premises and equipment, as well as maintain communication/IT/OT capability? How quickly would your business return to full operational capacity?
- Property - Who is responsible for upkeep and maintenance of buildings and infrastructure? Is preventative maintenance undertaken (and recorded), such as unblocking drains and guttering? Are defect resolution procedures clear (and followed)? Does the drainage capacity remain sufficient in light of emerging weather data and accounting for any site alterations (eg. extended roof area)?
- Contractual obligations - In the event of flooding or storm damage, aside from any damaged cargo, would you be able to satisfy your contractual commitments to your customers? Consider both acceptance/processing of further deliveries as well as distribution of existing stock. Are your standard trading conditions properly incorporated in your general business dealings? Assess your potential exposure and the limits of liability under both standard terms and any special contracts. Beware any financial penalties for non-performance which will not be covered by insurance.
- Insurance & financial resilience - It is imperative that your insurer has a sound understanding of your operational activities, your property, what cargo you are storing, what equipment is on site at any given time and a reasonable valuation of it all. Note, however, that studies have shown that there is likely to be a significant difference between an 'insured loss' and the full 'economic loss', the latter including various indirect costs, such as lost management time and reputational damage.
Extreme weather events can be challenging to predict - and even effective forecasting may only provide a matter of hours for the respective operators to react. It is important to ensure that adequate risk assessments are undertaken across the full breadth of your operation in order to understand thoroughly the various risks and, where appropriate, develop mitigating actions and controls, together with effective continuity plans to protect your business.
Further reading: TT Club's Windstorm II: practical risk management guidance for marine & inland terminals.
We hope that you have found the above interesting. If you would like further information, or have any comments, please email us, or take this opportunity to forward to any colleagues who you may feel would be interested.
We look forward to hearing from you.
Risk Management Director, TT Club