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The art, and science, of micro risk mitigation

From geopolitical uncertainties to technological and demographic shifts, business leaders are called on to manage multiple accelerating ‘megatrends’ that are reshaping industries completely.

But in focusing on the big issues, companies can’t lose sight of the many and often connected micro risks that can pose significant threats to business resilience.

Viewed in isolation, micro risks such as a fire incident at one manufacturing site may not seem to be catastrophic. Yet when examined as part of today's interdependent network, it quickly becomes clear that a single vulnerability could have large-scale and global repercussions. The blaze at a semiconductor factory is just one recent example of how micro risks can impair an already heightened global chip shortage and hamper operations at large. 

Businesses can never prepare for every eventuality. But by learning to identify and effectively manage a broader range of micro risks, leveraging some of the new tools and expertise developed by insurers and risk engineering experts, companies can mitigate risk at a more granular level and be more resilient.

A connected, and complex, world

Today's interconnected global economy and complex trade networks combined with the rapid emergence of micro risks means a breakdown or stoppage affecting a single segment of the supply chain - whether a port in China or a parts manufacturer in Thailand - can cripple global production output for extended periods. Hence, companies must not only look at mitigation measures at their facilities, but also monitor the entire supply chain ecosystem, from procurement to distribution, for multiple micro factors across several categories: 

Natural perils

Climate change is raising the risk exposure of assets and facilities due to the increasing likelihood of natural disasters. While major events tend to get the most attention, smaller, more isolated incidents can have far-reaching consequences if they affect critical manufacturing centres, such as Hsinchu in Taiwan which is a major source of the world’s semiconductors. 

Swiss Re research indicates that the number and economic impacts of ‘secondary peril’ events, including severe storms, wildfires, drought and flooding, are increasing. This accounted for over 70% of the USD 81 billion in insured losses from natural catastrophes last year. making it an essential component to be factored into the supply chain and risk planning.

Companies can’t only consider loss prevention methods for their own sites. Events such as the Tohoku earthquake and the 2011 Thai floods demonstrated how natural perils could cause damage to suppliers across vast geographical areas, and shortages of essential components for industries like automotive and electronics.

Business interruption driven by man-made disasters

Beyond natural perils, incidents resulting from human error or oversight such as fires or explosions can bring physical damage to core business facilities and quickly derail a company’s operation.

As the vaccination rate rises and the world gradually opens up, we may also see heightened accident risks in rushed restarting of business operations. Swiss Re's Sonar report indicates that the pandemic has led to maintenance budget cuts and mothballed facilities in many industries. For high-hazard facilities like oil refineries, chemical plants, mines or power plants, impaired maintenance could lead to catastrophic loss events.

Incidents or failures can also create additional liabilities and risk exposure if they impact third parties. For example, a fire or explosion in a manufacturing facility damages not only the company’s production lines, but also its neighbouring facilities.

Emerging, and unexpected, risks

The last 18 months have been a constant reminder of the necessity to plan for the unexpected. Covid-19 outbreaks affecting major ports and production facilities have shown companies’ vulnerabilities to pandemic control measures. With crews hindered from performing their duties, this could trigger a series of complications logistically and ultimately depress consumer demand when product supplies are seen as unreliable or unavailable.

Cybercrime is another risk factor that may start with a localised incident but creates far-reaching financial and reputational consequences. This danger has risen significantly as more companies adopt digital working strategies, putting added pressure on network security.

During the early stages of the pandemic, around 500% increase in phishing attacks was reported in the UK and the US.  In addition, delivery setbacks due to cyber-disruption to critical systems, as happened with the Colonial Pipeline ransomware attack earlier this year, may incur regulatory penalties as well as material losses.

The growing priority placed on sustainability by governments, investors and consumers means failure to account for ESG-related micro risks, internally and across the supply chain, can result in negative perceptions, regulatory scrutiny, product boycotts or other forms of disruption. In 2017, for example, two ESG-related incidents affecting a leading global meat exporter brought production and shipments to a near-standstill and derailed the company’s planned IPO.

Risks linger post-production

Risk does not disappear even when production is complete and goods are successfully shipped to the end-user. Faulty products that result in recalls, property damage or personal injury to customers may provoke regulatory sanctions, financial penalties and long-lasting reputational damage.

When multiple jurisdictions are involved, risk calculations grow even more complicated. Manufacturers expanding operations and looking to establish new facilities must keep abreast of the latest industry and data protection practices, as well as varying regulatory requirements, to avoid compliance, reputational and other risks.


Formulating a response

Taken together, the range of potential micro risks companies need to monitor can seem daunting. But it’s important to remember that a lot of these risks are inter-linked. Regardless of the risk, the most effective response is to become more anticipatory, and to strive constantly to improve risk management plans and capabilities, adopting where possible the practices and approaches developed by experts. 

In an environment where risks are evolving, the risk engineering services (RES) function plays a vital role in risk mitigation now and for the future. Our risk engineers partner with corporates and their risk managers, identifying and assessing key risks of insurance buyers. Applying internationally recognised engineering standards and best practices, we can address how specific micro risks in a supply chain or industry can impact companies' viability. Our in-house research and development enable us to identify shifting trends and future risk landscapes, allowing corporates to leverage the resulting advisories and risk assessment tools for more effective risk mitigation programmes. 

In the following weeks, we will share more risk engineering insights for natural, man-made and product recall risks. As the range and complexity of risk continue to expand, it's vital for risk engineers to help businesses strengthen their risk migration at the micro-level and lay a broad foundation for a more resilient business.

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