Weather and Risk - When Does Drought Drive Exposures?
May 13, 2021

Does the idea of a 20 year drought get your attention? That is, 20 years of seriously subnormal precipitation, of reservoirs becoming mud puddles, of lowering water tables, of what soil scientists call permanent aridification? How might that impact your operations? Now might be a good time to ask that question because the western states are in year 20 of a mega drought here in 2021 - and not just an ordinary drought but what meteorologists call a "hot drought", a lack of rainfall combined with unusually high temperatures.

What impacts might an ongoing lack of water have for various types of businesses? This takes some thought because droughts are not like hurricanes or tornadoes. They don't hit you like an artillery barrage. Droughts are sneaky. Each year is a little worse than the previous year, but like the lobster in the slowly warming pot of water, you may remain blissfully unaware of the full danger until you're... well... cooked.

Here are a few considerations:

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Fire risks - the last two seasons of wildfires in California have amply underscored the growing fire risks as everything gets drier and drier. But the current drought is not limited to the golden (brown) state; it embraces the Rockies and points west*.

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Energy risks - as California has also shown, drought makes the electric grid more stressed and fragile, so the threat of energy interruptions goes up.

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Process risks - many manufacturing processes require lots of water**. How might this impact your supply chain?

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Habitation risks - long term drought is not pleasant***. How might this impact needed skilled labor pools or the willingness of key hires to relocate to drought-stricken areas?

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Inflation risks - what impact might drought have on costs, both the costs of materials for operations and the cost of living for your employees? How might these added costs get passed into your pricing structure?

 
Forbes recently ran an incisive overview of the current drought. If you have operations or major supply exposures in the west, you might want to read more on this topic. Have you had discussions, for example, with suppliers about their drought exposures and their plans to manage these exposures?

Most anthropologists think that a prolonged mega drought ended the Pueblo cultures in the American Southwest and there is paleoclimate evidence that one drought episode in this area lasted for 1200 years. This is a subtle threat but a very real one. It is a commonplace among historians that the story of the American West can be written in two words: gold and water - and without water, you can't refine gold.

*Note that the drought does not stop at the border. Drought now covers about 85% of Mexico as well. Do any of your supply chains involve operations in Mexico?
**A major food company was recently charged with over drafting its allotted water amount in Southern California. Serious fines and suspension of operations are pending.
***Your faithful correspondent survived the seven-year California drought in the 80/90s. It became highly disruptive of normal life as well as adding significant costs to every trip to the grocery. Electric bills went through the roof.


 
What drought did to the pueblo culture.
 

Retail Auto Insurance Is Changing Rapidly - What Might This Mean for Fleet A/L?

The old adage about the weather in New England may now be applicable to the auto liability business - if you don't like it, wait a minute. New data are becoming available describing what is - and is not - happening on the nation's highways during COVID. While the early information is based on retail auto programs, it may hold some useful hints for developments in commercial A/L as well. Let's take a look at some of the new stats hot off the press.

The folks at CCC have just issued their 2021 Crash Course Report in which they explore recent stats looking for clues to new driving patterns and risks. As the report's author puts it, "in many ways, the pandemic environment has given us some idea of what the future may look like and what that means to our industry [auto insurance]." The report notes that long commutes by car have often been replaced by shorter trips which change the timing and density of traffic patterns.

A new analysis by Fitch Ratings looking at recent auto carrier results offers some trenchant observations on highway speeding. The retail auto carrier, Metromile, and CCC also have some choice words on this topic:

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Metromile said speeding at 75 miles per hour or more was 74% higher from January to March 2021 compared to the previous year.

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CCC noted that the National Highway Traffic Safety Administration reported the fatality rate per 100 vehicle miles traveled increased to 1.42 in the first half of 2020 compared to the same period of the prior year.

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Fitch noted that the National Safety Council reported that automobile crash fatalities increased 8% in 2020 despite a 13% reduction in miles driven.

 
In another sobering note, Fitch added: "Declines in frequency were offset somewhat by more rapid growth in claims severity of 8%-10% for physical damage and 12%-13% for bodily injury. Underwriters point to accidents occurring at higher speeds in less crowded traffic conditions and distracted driving as contributors to these severity trends."

All of this, of course, begs the question of what are you doing with currently available geospatial analytics to control the fleet risks reflected in these reports? ITL ran an excellent - and short - essay of this topic recently. This analysis focuses more on geospatial data in solving public safety problems involving urban traffic, but the concept applies equally to engineering exposure controls for regular fleet routing. From the article: "Technology is making it possible to improve traffic safety in ways unimaginable just a few short years ago. Accelerated geospatial analytics allows analysts and planners to ask questions, and draw conclusions, from billions of lines of data, receiving those answers in milliseconds."

What these observations mean for your fleet operations and risks will depend on what kind of fleet you have and where your people primarily drive, but the major point is that traffic patterns and thus exposures are changing-- pretty much like everything else in our COVID-addled world. All we can do in risk management is to try to stay on top of what's happening today. These new reports and geospatial software apps may help. As Hamlet tells Horatio, "The readiness is all."

I'll bet you never thought that Shakespeare is all about risk management.


 
Example of Geospatial traffic analytics: Granular GPS data combined with Machine Learning-derived 1m landcover allows transportation planners unprecedented insights into travel behavior (data courtesy of Xmode & Microsoft).
 

 

Quick Take 1:
So What Does the Future Look Like Today?

William Gibson, the inventor of cyberpunk fiction, observed not long ago that "the future is already here, it's just not evenly distributed yet." Are you getting your fair share? Well, the new 2021 Future of Claims Study from LexisNexis might help you see what's on offer and what you want on your dinner tray. While the report focuses on carriers and retail insurance programs, most of the trends discussed have broad application.

The report begins, rightly we think, by noting that users are becoming much more comfortable with virtual and self-service options, as various aspects of the insurance process capitalize on innovations in other areas of commerce. The adoption of technology in all aspects of insurance and risk management is accelerating. The report looks, for example, at new first notice of loss applications and new ways of acquiring claim related data. Reassuringly*, however, the report notes that "the human touch still matters."

Perhaps the most eye-catching note is this:

         

Prior to the shutdown, fewer than 15% of claims were handled virtually. Based on our conversations with carriers, as soon as the first shutdown was implemented, virtual claims handling increased to nearly 100%. Almost a year later, virtual clams handling has settled to a level of a little over 60%.

 
While this report does not address the handling of complex commercial programs, the survey of new developments and directions may be useful in helping to visualize where you want your services to be going. The general directions are not surprising, but the speed of new adaptations certainly is. To this long-time observer of the industry, insurance and claims handling seem to have found a cache of steroids and nothing will be the same again. The bottom line for claims programs may well be - muscle up or get out of the way.

*We assume that you, dear reader, are not a machine and will find this gratifying.


 
Warning: not all expectations of the future pan out, as in this 1890s vision of the year 2000.
 

 

Quick Take 2:
Greenwashing?

Is greenwashing on your risk radar? Is risk management being routinely involved in ESG (Environment, Sustainability and Governance) declarations and published policies? While the article in a recent Wall Street Journal issue focused on the growing role of compliance in keeping ESG efforts on the rails*, the risk dimensions are enormous. Consider this from the article:

         

"Over the last couple of years, [ESG] has become a mountaintop of risk," said Dave Curran, who leads the law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP's sustainability practice. "Lawyers and compliance executives are getting more and more involved in everything from pressure-testing disclosures, to analyzing processes and procedures, to tracking, measuring and monitoring these programs."

 
ESG is one more new face of risk for the 21st Century. The article goes on to examine two recently upgraded programs, one at Western Union and one at Dell. The kicker, for our purposes, occurs towards the end of the item: "Some compliance officers and corporate governance experts think there is room for compliance to take on an even greater role in ESG as the function's responsibility for managing nonfinancial risks of all kinds grows [emphasis added]." Interesting question, no? Where does your organization stand on this issue? What should the role of the traditional risk manager be in addressing ESG exposures? How fortunate we are to be saved from the rigors of boredom. Must be a terrible slog to have to fight the same dragons every day.

*Ever notice how even the business press tends to talk about everyone but the risk manager? Perhaps our cloak of invisibility works too well.


 
Why does the edge of the world keep moving?
 

 

Say It Isn't So...

The wine business in Europe had been struggling, then this:

      

Earlier this month [April] came another hazard: spring frost, which some are calling the worst since 1947. Around a third of yields have been lost, with some producers reporting 100 per cent damage. The world's most famous wine-growing regions, including Champagne, Côte du Rhônes, Burgundy and Provence have all been affected, as well as parts of Italy and Spain.

 
No one ever said the end of the world had to happen all at once. It might just as well be on the installment plan. What's next?

 

Words to Remember

Speaking of weather (see above), here are two oddly congruent views on how weather interacts with who we are and what we do from two radically different writers:

Climate change is sometime misunderstood as being about changes in the weather. In reality it is really about changes in our very way of life.
-- Paul Polman (former CEO of Unilever, founder of Imagine)

A change in the weather is sufficient to recreate the world and ourselves.
-- Marcel Proust (Remembrance of Things Past)

Now, how about a madeleine cookie and a cup of lime flower tea?

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