Meteo Risk Response©: A smart approach to manage weather related exposures

HELLAND, Eivinda, KJELL, Garatun-Tjeldstøa, FREI, Hanspeterb, GERLACH, Thomasb, and GLINK, Sebastianc

a SwissNor GmbH, Baden, Switzerland, e-mail: info@meteoriskresponse.com b Global Risk Experts AG, Wollerau, Switzerland c MeteoGroup Schweiz AG, Appenzell, Switzerland

Abstract — Economic and human losses due to severe weather conditions are increasing and trending for the worse. This rise, in combination with the increasing complexity of global supply chains is forcing companies to respond. Moreover, an additional public demand for corporate responsibility and transparency is adding to the pressure. An integrated new risk management approach for weather related (flood and storm) exposures to optimize the enterprise risk portfolio in a dynamic way has been developed and is offered by MRR. The developed proposition is a joint effort of three specialist companies: a leading weather service provider, a risk management expert team and IT solution partner. Meteo Risk Response (MRR) provides a strategic competitive advantage by delivering deeper insights into the effects of severe weather exposures and mitigations to minimize property damage and consequential financial losses to large corporate organizations and commercial premises.

Keywords — natural hazards, weather related risk exposure, enterprise risk management, flooding

1 Introduction

Over the period of 1980-2012, three quarters of all natural hazard events and two thirds of the 3.8 trillion USD related economic losses were caused by storm and flood. Asia alone suffered more than 40 % of these losses (Source: Swiss Re / Munich Re / AON Benfield). Severe weather conditions (storm and flood) are on the rise and economic losses are trending for the worse. This rise, in combination with the increasing complexity of global supply chains, forces companies to respond. Aggravating this already severe situation is the additional demand of external groups and organizations for transparency and openness. The focus of this document is on flood risks. However, the approach towards storm risks is similar to the one described.

2 The MRR Approach

The MRR approach integrates the best weather technology, onsite risk assessments, business impact analysis and quantitative risk analytics. The MRR package includes a state-of-the-art MeteoGroup weather station (Fig. 1) and a dynamic risk management software (TERM – Total Enterprise Risk Manager by SwissNor) in a modern web based application.

Figure 1: On-site weather stations

The software embraces the functionalities depicted by ISO 31000 combining loss scenario development, risk analytics, incident analysis, quantification of Earnings at Risk, Key Risk Indicator monitoring, alarm notification, and emergency response plan activation, and various data capturing, modeling (Monte Carlo simulations of earnings at risk), cost-benefit analysis of risk treatment plans and reporting features. The entire MRR approach is schematized in Figure 2 (Source: MRR).

Figure 2: The ‘Meteo Risk Response’ Wheel©

The MeteoGroup’s International’s Severe Weather Centers warn of storm, heavy rainfall, hail, thunderstorms, heavy snowfall and ice storm. The warnings are made up to 48 hours in advance. Warnings are made for the premise location with geo-coordinate precision. A perfectly adjusted 4-step warning concept informs about the intensity of the severe weather to be expected. Affected key personnel at plant level or the organization are warned individually, on-time and dependably. The regional hydrological modeling of the current and forecasted water level is based on hourly precipitation data and local topology. An average reference water level is determined based on historical meteorological data and hydrological modeling, considering multiple influencing factors like geography, topography, location, water sources, precipitation forecasts, etc. Different mathematical models are used to forecast the water level, such as:

  • Meteorological & hydrological forecasting models for studies on precipitation and run-off processes
  • Hydrological and hydraulic reservoir inflow forecasting models
  • Hydrological and hydraulic river/channel models covering the area upstream
  • Water demand assessment models
  • Models describing sediment transport in the catchment area

A risk assessment at the premises leads to related loss scenarios (Fig. 3), such as rising water levels, flash floods or storm surges, in order to develop a function of the loss amount and recovery time based on the water level above the defined reference level. As part of the risk scenario analysis one should undertake a Business Impact Analysis to identify secondary losses, which will certainly occur. A Business Impact Analysis (BIA) of the supply chain identifies which locations, business units or geographical zones that are affected by an event / risk scenario and to quantify the total business impacts on a company. The BIA identifies critical suppliers and key clients, bottlenecks in the production and demonstrates how quickly your business can return to full operation following an event.

Loss scenarios lead to prevention and mitigation activities, as well as tailored alarm, emergency response and recovery plans. Important are alarm level settings and communication to activate the respective emergency response. Other flood exposures like flash flood, spring tides, rising ground water tables are also investigated and evaluated by the risk expert team during the site visit. All developed loss scenarios will comprise details on technical and organizational impacts. Specific risk treatment activities and plans will result, allowing the implementation of changes and/or capital expenditure projects. These on-site activities are a prerequisite for the development of the alarm and the emergency response plans. Depending on the exposure, the on-site work by the risk expert team is time consuming and might require significant resources.

Figure 3: Developing Site-specific Loss Scenarios

The facility-specific vulnerability functions are based on realistic loss scenario developments and the annual exceedance probability information based on historical data. Given this information, a probability distribution function of the loss estimate due to property damages and business interruption is developed which is used for the estimation of earnings variability due to flood risk exposures (Fig. 4).

Figure 4: Probability distribution function of flood severity
Figure 5: Risk Management Dashboard
Figure 6: Current and forecasted water levels and loss estimates (min/max)

The MRR solution package includes a dynamic Risk Management software combining loss scenario development, risk analytics, incident analysis, quantification of earnings at risk, key risk indicator monitoring, alarm notification, and emergency response plan activation, and various data capturing, modelling and reporting features (Helland and Garatun-Tjeldstø, 2014). Some of the features are exemplified below:

  • Risk Management Dashboard: A dashboard solution enables organizations to tailor risk reporting for individual stakeholders, allowing each audience to view Key Risk Indicators (KRI) reaching critical levels and drill down into the details as needed (Fig. 5).
  • Alerting procedure: When a KRI is approaching the threshold levels (Fig. 6), SMS alerts and emails with potential losses and business interruption, emergency response and business continuity plans are sent out to the location’s management and related stakeholders.
  • Activation of Emergency Response plans: The email alerts include a link to the related emergency response plan in the reporting section (Fig. 7).

Figure 6 depicts the historical water level up to current date with a forecast of the further evolution based on actual local weather data and the hydrological models. The forecast of the water level gives early warnings to the corporate risk manager about the current loss estimates and forecasts of earnings at risk at every company location.

Figure 7: Online Emergency Response Plan

3 Integration of MRR in an Enterprise Risk Management Program

Enterprise risk management (ERM) is a holistic risk management approach to risk associated with running a business. All uncertainties impacting a company’s earnings either positively or negatively should be accounted for. Shareholders prefer stable earnings and predictability, which is a sign of good management and a healthy enterprise strategy.

All private companies and public organizations need to have a forward-looking framework that encourages a culture of performance and enhanced risk awareness. The effectiveness of ERM depends on the effectiveness of the organization’s information and communication. Information and communication about risk should be integrated for the organization as a whole, by business unit, by functional unit, for product units and by geographic units. Senior management and boards of directors must be engaged in the establishment of risk management policies and processes, which allow them to gain an overview of the Earnings at Risk (EaR) caused by different risk exposures, and define their risk appetite. To make this possible, one or more senior executives should be in charge of ERM.

Consistency in risk monitoring is an important organizational capability, especially in a changing environment. Having a clear process to make informed decisions improves a company’s resilience. Evidence of situations in which the organization failed to take adequate action and quantifying the value of that failure can be compelling additions to a business case. For example, if a company did not recognize that flood water would rise and failed to secure the locations, the difference between the anticipated and actual costs can be calculated as a loss that could have been avoided if a risk management program was in effect. The early monitoring and alerting procedures provided by the Meteo Risk Response approach ensures the efficiency of the fixed and mobile flood protection systems and the activation of business continuity and emergency response plans to minimize the business impact (Fig. 8).

Figure 8: Cost - Benefit analysis of risk mitigations

Monitoring involves communication of risk both upstream and downstream across the organization. It includes periodic reporting and follow-up on the risks by various levels of management, risk committees, and internal auditors. KPIs and KRIs are a valuable way to monitor key risks linked to improved cash flows and earnings.

A Monte Carlo simulation can be used to model the distribution of the earnings variability over a time period by running multiple simulations. Stochastic processes are used for the occurrence, the size of loss/gain and the potential outcome (loss, no loss, gain) of the risk scenarios defined by different probability distribution functions. The goal is both a decrease of the expected earnings at loss and the decrease of the distribution or tail risk such as earnings at risk (EaR). The Monte Carlo engine has a filter function which enables the users to run simulations for different sets of risk scenarios based on risk exposures (property loss, natural hazards, business interruption, liability, etc.), locations, country, business units, projects or SIC code. The EaR at the corporate level is a result of the Monte Carlo simulations and can be presented as a cumulative distribution of total exposure of earnings at risk (Fig. 9)

Figure 9: Earnings at Risk before and after implementation of risk mitigations

4 Conclusions

The MRR solution package supports the implementation of the Hyogo Framework for Action 2: Identify, assess, monitor and mitigate disaster risks. The on-site weather stations and scenario-specific pre-defined alert levels will enhance early warning and preparation for the event and post-event recovery. Companies and organizations implementing the MRR approach also benefit the local communities by sharing highly reliable weather data and early warnings at no costs.

Meteo Risk Response benefits companies with strategic competitive advantages by providing deeper insights into their businesses regarding severe weather exposures and thereby to make better decisions for all stakeholders. Meteo Risk Response provides an integrated new enterprise risk management approach for weather related exposures in order to optimize the risk portfolio, identify natural hedges, create an optimal risk treatment plan, enhance risk culture and facilitate risk reporting throughout the organization. Benefits of the approach include:

  • Most advanced weather stations with hourly data streaming and forecasting
  • A dynamic risk management software in a modern web-based solution including risk analytics, incident analysis, quantification of earnings at risk, risk indicator monitoring, alarm notification, and emergency response plan activation, and various modelling and reporting features
  • For organizations with multiple sites a triage process will help to identify high risk locations to optimize effectiveness and efficiency of services with the aim to reduce overall cost
  • Loss forecasting and risk treatment of natural hazards by elimination or reduction of probabilities and/or severity of losses
  • Improved budget planning as well as optimization of reserves and insurance solutions regarding natural catastrophe impacts
  • Understanding of dependencies and supply chain vulnerabilities impacting the bottom line and cash flows
  • Facilitating the decision on risk appetite and risk tolerance level
  • Improved reputation and meeting investors’ and stakeholders’ expectations regarding stable earnings, predictability and transparency by proactive Risk Management
  • Sharing highly reliable weather data at no costs (early warning included) with local communities
  • Supports the commitment to corporate social responsibility and climate change impacts

References

AON Benfield, Catastrophe Insight, http://catastropheinsight.aonbenfield.com/Pages/Home.aspx

Helland, E. and Garatun-Tjeldstø, K. (2014) - Optimization of the Enterprise Risk Portfolio, SOA Monograph M–AS13–1

Meteo Risk Response, http://www.meteoriskresponse.com

Munich RE, NatCatSERVICE, http://www.munichre.com/en/reinsurance/business/non-life/natcatservice/index.html

Swiss Re, CatNet, http://www.swissre.com/clients/client_tools/about_catnet.html

Citation

Helland, E., Kjell G., Frei, H., Gerlach, T., and Glink, S. (2015): Meteo Risk Response©: A smart approach to manage weather related exposures. In: Planet@Risk, 2(3): 1-4, Davos: Global Risk Forum GRF Davos.