Resource Constraints Hinder Risk Managers From Preparing For Catastrophes

October 10, 2006

Time and resource constraints are hindering risk managers’ efforts to help their organizations prepare for catastrophes, such as power outages, avian flu or extreme weather, according to the latest Economist Intelligence Unit (EIU) report sponsored by the ACE Group of Insurance and Reinsurance Companies.

Over half of the 225 global risk officers and other senior risk professionals questioned as part of the survey stated that while preparation for high impact but low probability events was important, they lacked sufficient time and resources to develop detailed contingency plans. More than 70 percent said that their organization’s investment in catastrophe risk management had either remained static or increased only slightly during the last three years. A further 40 percent said that they did not regard these events as a priority and that little or no attention was being given to preparation.

“This survey confirms efforts the risk management community is making to ensure their organizations are prepared for catastrophes but highlights the difficult conditions in which they are working,” said Brian Owens, chief catastrophe risk officer at ACE European Group.

“With competing pressures on time and resource, planning is being forced down a short term track. While the effects of today’s problems such as power outages can, of course, be devastating, the world is changing around us and new threats such as avian flu, climate change and terrorism are moving up the agenda. Unfortunately, the survey results suggest that too many European risk managers perceive events such as Hurricane Katrina as something far removed from businesses here. In truth, these global challenges are as relevant to Europe as any other region. Dreadful events like Katrina only confirm the critical importance of effective planning and preparation.”

The role of insurers in catastrophe risk planning was seen as key with over 40 percent of survey respondents saying they had consulted with their insurance company to develop their plans. This importance was further reinforced with over half of those questioned (52 percent) stating that they had “fairly high” confidence that their company’s insurance policies would provide adequate cover in the event of a catastrophe with nearly 11 percent describing their confidence as “very high.”

While time and resource issues are restricting risk managers’ ability to prepare, the potential impact on businesses of some kind of catastrophe is causing real concern within the global risk management community. The risk from power outages was viewed as the most serious. Over 45 percent of those questioned saw the threat as significant. This compared to 42 percent for avian flu. The impacts of other high profile threats such as acts of terrorism or extreme weather events were also cited by 35 percent and 32 percent of respondents respectively as areas of significant concern.

The allocation of adequate resources is crucial for risk professionals and this is borne out by the fact that a variety of tools are being used to manage catastrophe risk. Scenario planning was the most popular tool with nearly 57 percent of those questioned using it. The specialist training of employees was also referenced by 47 percent and the testing of disaster recovery plans by over 46 percent. Lack of resource is clearly still an issue though with 16 percent claiming they use no tools to support their catastrophe planning.

Over 36 percent of those questioned claimed that they revised their catastrophe risk plans once a year with nearly 13 percent saying they revised their plans more often than this. Twenty-one percent only reviewed their plans every two-three years. Again, and more worryingly, almost 13 percent said that they had no catastrophe plans at all.

The EIU Report, “Reputation: Risk of Risks,” is the fifth in a series of reports from the EIU’s Global Risk Briefing, a research programme targeted at senior executives responsible for managing corporate risk. It is based on the findings of a survey among 225 senior executives, responsible for risk management, 36 percent of whom are from companies in the financial services sector. The Global Risk Briefing is sponsored by ACE, Cisco Systems, Deutsche Bank, IBM and KPMG.

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