Severe weather—the kind that results in catastrophic insurable losses—is on the rise. In 2024 alone, a record-breaking number of weather-related losses across Canada were valued at $8.5 billion. As we adapt to this new normal, it’s critical for businesses to have a thorough understanding of their weather-related exposures.
This can be achieved through a thorough self-risk assessment that can help you identify your company’s weather-related vulnerabilities and inform targeted mitigation strategies. The resulting document from this exercise is called a ‘Risk Registry’ (or risk log, risk register), a centralized, living document that identifies, tracks, and manages all potential weather-related risks.
What does a self-risk assessment require?
For an effective self-risk assessment, a few key components are recommended.
- An assessment team with the right mix of staff and management. Consider who can speak to risks in each area of the business (not all contributors will be needed at every step of the process). It’s important that each member of the team feels empowered to highlight specific risks without fear of management reprisal.
- A risk registry template. There are a variety of risk registries available online that are essentially spreadsheets with column headings. The registry is developed as you follow the six self-risk assessment steps (included below in this article). They may include:
- risk number
- risk name
- description
- risk probability
- risk severity
- owner
- mitigation
- progress
- status.
- A third-party facilitator (optional). An objective expert can keep the process focused, ensure the equality of all participants, and verify that risk scenarios are credible. Some facilitators will keep a record to help with a rough draft of the risk registry.
- A commitment to an ongoing risk mitigation process. When complete, the risk registry should be considered a living process and reviewed every year.
Six steps to an effective severe weather self-risk assessment
Our risk specialists have developed a six-step process to guide your self-risk assessment.
1. Identify risks
Your risk assessment team will first identify all credible, weather-related risks to either your business’s location(s) or processes. This may include physical damage and revenue interruption risks due to events such as wildfire, power loss, floods, hailstorms, or windstorms. Consider past weather events in your geographical area as a baseline and account for the increasing likelihood of severe weather.
Questions to ask about each type of exposure include:
- Can it happen?
- Where could it happen?
- What parts of the business would be affected?
- Could it have different severities?
2. Quantify risks
With the risks identified, it’s time to quantify them based on the probability and severity of a potential loss. This can include:
- monetary loss due to physical damage or business interruption
- liability of loss to staff or others injured at the location
- reputational risk.
Example
Risk event: Major riverine flooding (e.g., a 1-in-50-year flood event) impacting a manufacturing plant.
Quantification:
- Likelihood: Based on historical data from local conservation authorities and hydrological models, the plant assesses the annual probability of a flood reaching its critical operating level as 2% (or a 1-in-50-year event).
- Financial impact:
- Direct property damage: Estimated cost to repair flood-damaged machinery, infrastructure, and replace ruined inventory: $1,500,000.
- Business interruption: Estimated lost revenue and additional operating expenses due to a 3-month shutdown for repairs and cleanup: $2,500,000.
- Total quantified impact: $4,000,000.
Quantification provides a clear, measurable understanding of a risk, allowing you to prioritize mitigation investments, budget for potential losses, or assess insurance needs more effectively.
3. Avoiding risk
This phase involves considering probable risks that could be avoided and the steps to do that. For example, relocating flammable assets from a high-risk wildfire zone or critical operations from a flood plain during rainy seasons could eliminate those risks rather than simply mitigate their impact.
While these may not always appear feasible or financially realistic, the exercise of coming up with avenues to avoid risk often yields new ideas that could contribute to risk mitigation.
4. Reducing/controlling risk
When all possible risks have been avoided, turn your attention to implementing mechanical and human controls to reduce or control existing risks. For example:
- adding permanent flood protection, such as raising a foundation or installing flood walls or berms (mechanical)
implementing staff-led operational controls, such as temporary flood barriers or sandbags (human). - It’s important to strike a balance between mechanical and human controls—mechanical controls may require expensive capital expenditure, while human controls can place staff at higher risk.
5. Transferring risk
There are two components to transferring risk:
- Assess your ability to transfer risk onto another business entity, such as a supplier or customer. For example, if your business operates a warehouse or facility in a flood-prone area, you could enter into a consignment inventory agreement with a key supplier. This would ensure the supplier retains ownership of their goods stored in your facility until they are used or sold.
- Determine how you can transfer any remaining possible risk to insurance. Risks that cannot be avoided, controlled, reduced, or transferred elsewhere should be transferred to an insurance carrier.
6. Accepting risk
It’s important for the risk assessment team to accept the risks that cannot be avoided, reduced, controlled, or transferred elsewhere—even to an insurer. Risk acceptance is generally regarded as the insurance policy deductible and uninsurable acceptance.
This step is always the last to be considered because it is more cost effective in the long run to avoid, eliminate, control, or transfer a risk so that the cost of insurance is truly being applied to the required risk areas.
Risk self-assessments should be done annually
Be sure to convene the risk assessment team on an annual basis to evaluate and update the weather-related risk registry. Try to time it before your insurance renewal so you can update your insurer on the status of the risk reductions you’ve implemented the previous year, which could result in better insurance terms.
Aviva’s Risk Management Solution (ARMS) specialists are here to help
If you’re looking for support in conducting a risk self-assessment, our risk consultants can provide expert advice and resources. Reach out to us at arms.canada@aviva.com.
Source:
IBC - 2024 shatters record for costliest year for severe weather-related losses in Canadian history at $8.5 billion
