Disaster Risk : Risk Management — Case study

Disasters can be broadly classified as ‘Natural’ and
‘Man-made’. The following are a few examples:

According to a United Nation study, the annual economic loss
associated with natural disasters averaged US $75.5 billion in the sixties, US
$18.4 billion in seventies, US $213.9 billion in the eighties and US $659.9
billion in the nineties. Most of these losses were incurred by developed
countries. The study also points out that:

A living example of man-made or industrial disaster is the
Bhopal Gas Leak tragedy that resulted in widespread death and has left many
surviving victims still suffering without resolution of the social or legal
issues and reparation of the damages suffered, even after more than two decades!
The anniversary of the tragedy is still observed in Bhopal and religiously
reported by the media, but little action is taken, it seems, beyond paying lip
service to the cause. Hence, businesses operating in hazardous areas or
involving hazardous materials should look at their own risk exposure and
vulnerabilities, and consider appropriate ways of reducing their risks through
appropriate actions and investments in hazard monitoring and risk mitigation,
and by creating resilience. Many governments and international NGOs have begun
to look more carefully at DRR as an important part of sustainable human
development.

Businesses planning for resilience, through financial and
operational risk mitigation measures, also contribute to the resilience of the
local economic environment. This can be achieved by supporting appropriate
regulations and building social capital, as employers and employees are a part
of the community living in the area where the business operates.

Let us not forget that a disaster, wherever it may occur,
impacts both the social and economic environment of the people living in the
affected area, and also the society at large.

Disaster at micro level adversely impacts the businesses
operating in the area where disaster happens. At the macro level it adversely
affects insurance companies. The hospitality industry in Mumbai, especially the
hotels attacked by terrorists in 2008, have still not fully restored the damage
caused to the infrastructure. The economic loss has been shared by the
shareholders in terms of their expected and actual returns, the government in
terms of loss of tax revenue and costs incurred, and the insurance companies in
terms of the compensations and losses, not to forget the trauma suffered by the
public, especially the inhabitants of South Mumbai. On the other hand, the
businesses of security agencies, suppliers of security personnel and insurance
companies, post 26/11, have increased. The Government of Maharashtra, in
collaboration with the Government of India, is, therefore, adopting DRR
measures.

Coolsip Ltd. is a beverage company that produces and
distributes the Coolcan range of beverages like juices, soft drinks and colas in
Mumbai and across several locations in India and across the Middle East.

The CEO of the company recently attended a seminar on
“Dealing with Disasters” and is wondering whether in the event of a disaster
like a major fire, earthquake or flood or even a man-made one like a terror
strike, the company’s facilities, supply chain, distribution facilities are
well-protected and secured; and whether the company will be able to withstand a
major disaster, especially in view of what happened to the plant in Mumbai
during the 2006 floods.

He consults the CFO on the matter, who is of the opinion that
disasters are practically insurmountable and too large for a company to cope
with and are best left to the government and authorities. The other argument he
put forth was that since its inception 25 years ago, the company or its
facilities have not been affected by any major disaster except once during the
Mumbai 2006 floods, when operations were resumed within two days and losses were
covered by the insurance company. Also, if disaster strikes, with the
authorities and everyone acting swiftly, the situation normalizes in a few days.
In his opinion, the loss to physical assets is insured and, therefore, the
actual loss would work out to be much lesser compared to the elaborate costs of
being prepared for disasters. Therefore, he advised status quo.

The CEO approaches you, an external consultant, for your
views. Give your comments.

The risk management advisor’s first suggestion was that he
should be allowed to:

After assessment work spread over three weeks, the Risk Management Consultant suggested the following ‘Disaster Risk Reduction’ – DRR measures:

    1. Initially, to create a water drainage facility next to the plant in Mumbai to reduce water clogging;

    2. Raising the plinth level of the area in which critical machines were installed to reduce the risk of damage;

    3. Acquire on rent a godown/storage facility outside the plant premises in Mumbai for storing enough finished goods to meet at least 3 days’ demand, in order to ensure continuity of supply to customers. The plant was already carrying four days inventory of finished goods. The additional cost involved was only rent and cost of a few persons. He suggested that HRD be consulted whether some existing persons could be shifted to reduce additional cost. This was to minimize loss of revenue and retain customer loyalty.

    4. The other facility he visited was at Chiplun, a city close to Koyna, an earthquake sensitive area. The suggestion was to consult an architect and ascertain how to strengthen the construction and enable it to withstand earthquake shocks, as mild tremors continue to occur. Even in January of 2010, mild tremors originating in Koyna were felt in Mumbai.

    5. He also suggested a detailed review of electrical installations at both the plants to assess the likely impact of floods and/or earthquakes on them, as damage to the power receiving and/or generating facilities could affect production.

    6. To insure against ‘loss of profit’ by making a ‘loss of profit’ insurance policy.

    7. To consider the possibility of insuring people and property against acts of terrorism.

The CEO and even the CFO who was initially sceptical of the exercise, appreciated and implemented the suggestions. The Risk Management Consultant was also commissioned to carry out a detailed review and suggest DRR measures.