Business interruption risk profiles

Business interruption risk profiles

Nov 24th, 2021

Riskope’s ORE deployments generally include quantitative convergent business interruption risk profiles. These are based on “as usual” and, very importantly, on divergent scenarios. They allow for tactical and strategic corporate planning while facing, for example, climatic uncertainties.

It is not rare to see a client smile at our scenarios descriptions. In particular, when they include hazards that may be interpreted as “far fetched”. Indeed, the dominos effects that intervene in those cases, due to the interdependencies within the considered system may seem “incredible”. In addition and very unfortunately clients generally have a very distorted view of what 1/100 or 1/1000 mean.

Just to quote an example, our quantitative risk prioritization of a large company covering North America with over forty operations indicated that logistics impairment (ingress/egress) due to “natural” hazards ranked within the top five intolerable risks for that company. Like usual no one truly believed our analysis… But then fires, snow storms and flooding happened.

Those smiles are the motivation behind:

Atmospheric river and quantitative risk assessment

Recently, we have seen B.C. being hit by an atmospheric river that caused massive damages to highways railroad and dikes. Interestingly, our publications above, cited case studies that closely apply to what has occurred. Indeed they gave quantified convergent business interruption risk profiles of considered fictitious businesses.

We demonstrated the characterization of “new normal” and extreme events. In addition we showed how quantitative risk assessments allow to better understand the risk landscape and to formulate rational mitigative roadmap.

As a result:

  • buffer stocks risk based optimization,
  • optimized Force Majeure contractual clauses and finally
  • rational insurance coverage decisions

become a reachable goal for any industry and organization.

Furthermore, the importance of the explicit integration of interdependencies and uncertainties was demonstrated using real-life examples. These reiterated the need to break informational silos hindering balanced approaches. For example, looking at hazard categories such as:

  • cyber hazards,
  • natural, and finally
  • man-made (including sabotage, terrorism)

in isolation is misleading and leads to squandering mitigative funds. Industry and governments need convergent approaches for a sustainable, rational and profitable future.

In the published case stories

We compared business interruption risk profiles for a railroad leading to a shipping terminal in three different cases with no buffer at the terminal:

  • base case with “business as usual” hazards;
  • divergent flooding;
  • compounded divergent flood and dams effects.

In the figure below we see the corresponding business interruption risk profiles. The base case (blue dotted line) is displayed for comparison with the other profiles. The divergent flood alone and divergent flood and dams flooding (orange dotted line) diverge from the base case. The dams flooding significantly alters the risk profile towards the longest business interruption durations.

Business interruption risk profiles

Figure: Comparison between business interruption risk profiles. Blue: no buffer (base case). Brown dashed: no buffer with divergent flooding on railroad. Orange dotted: no buffer with divergent flood and dams effects.

The next step is to include “what if” scenarios encompassing risk based buffer stocks. These new analyses may show that the cost of a buffer implementation of a certain volume may be competitive against more traditional risk transfer techniques such as insurance.

In summary, armed with this type of analyses, a company can find a path to sustainable operations even in presence of divergent and interdependent exposures. The roadmap may include a thoughtful blend of:

  • mitigation,
  • risk acceptance (setting the tolerance to a certain level and thus accepting some losses),
  • buffer stocks maintenance (if feasible at the Terminal, of course), and finally,
  • a layered business interruption insurance.

The approach explained above allows to make this risk-informed decision making, and finally to add value to the company, while giving solid arguments to negotiate with insurers, if denials are lurking.

Closing remarks on Business Interruption risk profiles

Industries and societies have focused on increasing efficiency and creating interconnected systems in order to foster productivity. But they have forgotten the side effects which are deeply rooted in the interconnectivity and the interdependency.

Those are: a reduction of resilience and a proneness to systemic risks such as climate change and cyber related ones.

Systemic shocks therefore become not only more common and intense but also propagate further due to cascading probabilities and amplification of consequences.

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Category: Consequences, Hazard, Mitigations, Probabilities, Risk analysis, Risk management, Uncategorized

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