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Do we need to redefine what risk means to our critical infrastructure?

Do we need to redefine what risk means to our critical infrastructure?

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Fukushima was a wake-up call to Europe. The EU realized that stress-tests for critical infrastructure (CI) across Europe did not account for the potential of chain-reaction disasters. The EU has engaged seismologist Dr. Domenico Giardini and his 8-country team to design a new, stress-test framework for critical infrastructure.

XL Group’s Austrian underwriting manager Stefan Rossa discusses the rising probability and impact of severe weather, and how Austria can manage the increased risk to its infrastructure and economy.

Mr. Rossa, have you witnessed cascading disasters in Austria?

Certainly, nobody can forget the floods of 2005, which kicked off 226 landslides in the Austrian Alps. 5 people died, and losses reached USD 700 million in Austria alone. The surface and water channels of the Austrian Alpine were literally redrawn. Austria’s 100-year flood model and 150-year debris-flow model did not anticipate 2005 extremes.

Some people have blamed global warming, and they would be right. In their Austrian Assessment Report 2014, the Austrian Panel on Climate Change (APCC) confirmed that the average temperature in Austria now is 2°C higher than in 1880, whereas the global average has only risen 0.85°C. In fact, the temperature in Austria has climbed a full 1°C since 1980. Ocean temperatures help subdue global heat. Geological features in inland Austria, by contrast, effectively accelerate the warming here. In the Alps, as warming causes the snow to recede, it exposes dark earth underneath, which absorbs heat, further accelerating the warming. By the end of this century, Austrian temperatures could rise another 3.5°C based on these trends.

Does that mean we should expect increasing deluges in Austria?
That is exactly what it means. Warming combines with existing meteorological factors to produce more frequent extreme weather events, including heat waves, storms, and floods. Austria has to learn to cope with the increasing impact of global warming by raising standards, flood standards, for one. They also need to be reevaluated at more frequent intervals, to assess the evolving risk.

The Danube region was practically submerged in the floods of 2005, and it was hit hard again last year. Dr. Giardini and his EU STREST team are studying LP-HI events. The 2005 floods and landslides would have qualified before, but now those kinds of events are not necessarily even considered low probability. The probability is high that susceptible regions will be struck repeatedly by volatile weather and heavy destructive force.

In that case, what kind of disaster qualifies as low probability, high impact (LP-HI) event?
Today, an LP-HI event would be something like the Rhine dam in Vorarlberg (Western Austria) giving way—literally cracking or breaking—under the pressure of excessive rainfall and floods.
Historically, high flood protection standards in Vorarlberg have attracted a concentration of national and international firms. Big names in furniture, lighting, plastic, textiles, cable cars, and, not least, chocolate and beer, have essential factories there. Vorarlberg, with USD 20 billion annually, trails only Vienna and Salzburg as the biggest contributor to the national GDP. Vorarlberg is Austria’s second biggest exporting region, exporting 70% of its production. It is also home to several major tourist centers.

Would you call the Vorarlberg region CI, according to Dr. Giardini’s broader definition of CI?
Dr. Giardini’s definition is more accurate, isn’t it? We are redefining CI risk in terms of both probability and impact. A dam disaster in Vorarlberg could start by knocking USD 20 billion off of the national GDP. Multinationals could find their international supply chains and businesses interrupted. A major disaster in Vorarlberg is also likely to affect bordering Switzerland and Liechtenstein. I would say Vorarlberg contributes economically to a level that it qualifies as CI for Austria.

How can Austria protect CI, including vital economic regions?
2005 was a decisive year, not only for Austria, but for the Alpine-Rhine region. Various projects and authorities have been striving to address the evident safety deficit in existing flood and building standards. The Rhine dam broke in 1927, releasing a flood that inflicted terrible loss of life and property. We can expect a lot more of this type of catastrophe, unless we raise standards.

The 100-year flood standards, unfortunately, are no longer sufficient. Deluges like those in 1910, 1927, 1999 and 2005 already exceed the 100-year flood calculations, and they will be coming faster and more furious in this century. We need to build to withstand the 300-year flood. Volatile weather is hard to predict, but the warming trend indicates that our 300-year flood might be more like a 150-year flood in terms of impact. It might visit us next year. If it comes before we are prepared, it could submerge the entire Rhine region, and inflict long-lasting damage and a tragic loss of life.

Can risk experts from the insurance industry help the government develop better disaster prevention?
Yes, of course, and we are already working closely with legislators, regulators, and the Austrian Insurance Association (VVO). To overcome this level of disaster threat, we have to plan and act beyond mere financial compensation in the event of loss. The economy will ultimately depend greatly on the development of more powerful protection measures, like higher flood-protection standards.

Insurers provide critical assistance in achieving these goals. We offer detailed, historical data and analysis of catastrophic risk, with an emphasis on accumulated portfolio risk. This is relevant to regions where industrial concentration constitutes a threat to CI, in the event of a cascading disaster.

In Austria, the debate continues over the initiative to mandate comprehensive, private-household coverage for natural catastrophes. Until now, the public sector has carried a large share of the compensation burden, but public funds have reached their limits. Disasters in other European countries have proven that without robust insurance solutions, government funds are inadequate to compensate loss in cascading disasters. It is also impossible for them to budget for unpredictable disaster scenarios with any degree of accuracy.

Numerous other European countries—the UK, Spain, Norway, Sweden, Belgium, and Switzerland—have implemented insurance disaster models to successfully mitigate potential loss, and help CI recover quickly after disasters. In fact, the VVO has already recommended to Austrian federal authorities an affordable insurance model which would cover losses for floods, landslides, storms, and earthquakes. The fact that 100-year weather extremes have become almost annual events in one form or another should be decisive, both to adopting this coverage and to enacting much more stringent loss-prevention legislation.

How can risk engineers and underwriters help businesses get a much bigger, more detailed, and better quantified overview of the connected risks which could impact their businesses in a cascading disaster?
We are already working intensively with customers all over the world to help them protect their businesses against the increased frequency and magnitude of natural disasters. Safety and operational continuity are the primary goals. So, above all else, underwriters and risk engineers work with risk managers to minimize risk and prevent loss, especially loss of life. Underwriters and risk engineers analyze site-specific exposures and risks, geographical elements (dams, rivers), and risks from adjoining or nearby facilities, all against a background of scientific hazard modeling. Only after all possible preventive measures have been addressed, do we create tailored insurance coverage for remaining risk.

However, insurance risk experts need to be involved at the public level, directly advising authorities, as well as helping to educate citizens. Currently the VVO is working with scientists, environmental regulators, and specialist organizations to revise the comprehensive, flood-hazard map for Austria. Both the EU and Austrian authorities have also announced their commitment to better informing citizens about the rising risks of natural catastrophes. Austria also declared in its 2011 flood report that a partnership with the insurance industry will be vital, both to educating the public and to protecting endangered areas, so that they can remain habitable and economically viable.

The potential impact of cascading disasters on CI clearly demands an integrated, super-regional solution including stress-testing, protective measures, and insurance coverage. The STREST project should help draw the attention of authorities, businesses, and citizens to this urgent theme. Stakeholders can then take up the EU’s STREST recommendations on new risk analysis and stress-testing.

How has business changed for XL Group, since the disasters in Japan and Thailand?
XL underwriters and XL GAPS risk engineers have been working especially hard to help customers conduct much more in-depth analyses of their global portfolios, and the potential impact of cascading disasters on their supply chains. Worldwide suppliers of hard drives and other critical electronics components were put out of commission in both Japan and Thailand, globally disrupting business. In both cases, industrial concentrations in the affected regions qualify as part of the national and global CI. Losses far exceeded coverage limits. It was a crucial lesson in value distribution, alternate suppliers, and overall loss prevention.

Are you optimistic about creating an action plan for vulnerable areas, before a LP-HI event can strike?
Absolutely, but there is no time to waste. The world’s attention has been focused on the earthquake hotspots, like Japan and California, but the threat of cascading disaster is much closer to home. CI in different regions will be affected by different forms of cascading disaster, but every region is sure to get its turn. I look forward to the recommendations Dr. Giardini and his team offer for expanding stress tests. It will help us find solutions to protecting citizens, businesses, and economies in Europe, and around the world.

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