The latest risk management news

Risk managers have been busy testing their pandemic plans as a new and potentially deadly strain of flu rapidly spread around the world.

The outbreak of influenza A (H1N1), or swine flu as it was termed by the media, is believed to have started on a pig farm in Mexico. The disease regularly causes respiratory problems in pigs but the virus does not normally infect humans. What makes this outbreak rare, but not unique, is the documented cases of human-to-human infection.

Within days of the virus being detected in Mexico the first cases were reported in the US and Canada. The US Department of Health issued a nationwide public health emergency as the number of cases of flu, particularly in New York schools, began to increase. The first person to die of the disease outside of Mexico was an infant girl in Texas who had returned to the US from Mexico.

When the first evidence of human-to-human transmission emerged and the number of countries affected began to rise the World Health Organization (WHO) raised its alert level. This was the signal for most countries and organisations to start implementing their pandemic preparedness plans.

Combined with the alarming speed at which the virus spread, another attribute of the outbreak was the powerful sense of panic it instilled around the world. Up to 10 countries reportedly banned the import of pork products despite continued reassurance and advice from the WHO that swine flu could not be transmitted by eating well-cooked pork products. The media fanned the flames of panic by amplifying official public pronouncements of worst case scenarios. The new strain of flu is believed to be responsible for 66 deaths around the world, dramatically less than the average number of deaths attributable to the usual flu season.

As it stands, 39 countries have officially reported 8,480 cases of the new flu strain but most victims have suffered only mild flu symptoms. Nevertheless, the apparently mild affects should not lead to complacency. Even mild flu pandemics can bring extended staff absence both through direct illness and the closure of schools and childcare facilities.

Although the disease has yet to prove characteristically deadly this could mean that there are several H1N1 strains and that the milder strain has the highest human-to-human transmissibility. A stronger, more deadly, strain of the flu could also re-emerge later in the year. In a crisis meeting, WHO director general, Dr Margaret Chan said: “Influenza viruses are notorious for their rapid mutation and unpredictable behaviour.”

Further, Britain could be most at risk to the spread of the disease, according to one risk consultant, because of its high population density, urbanisation and busy airports. Britain’s Business Continuity Institute (BCI) added that the country could be hit hard by major staff disruptions at a time of weakness caused by the recession. The situation could be made worse by the poor state of preparedness among UK organisations. Only a third of UK companies have a plan in place to cope with increased staff illness, reported the BCI. Organisations of all sizes were advised to put in place business continuity plans to fully prepare themselves for a pandemic, which could seriously affect staffing levels.

For those organisations that do not have a plan in place there are some essential steps that need to be considered, said Lyndon Bird, director of the BCI. Companies should prioritise what processes are essential to keep their business running, he advised, adding that some staff may need to work from home or different office locations.

“Companies should plan against absence levels of at least 25% and up to 50% for periods of between two and four weeks,” he said.

They may also want to reduce the likelihood of infection for certain individuals with key skills, by implementing travel restrictions or reducing human contact. Communication with staff and flexibility will be important, said Bird, because employees will be anxious and have their own problems. Risk managers may wish to review insurance policies to make sure they have cover for business interruptions. “If you are well prepared then you are more likely to be able to respond faster to the initial disruption, maintain a level of continuity and return more quickly to normal business operations,’ added Bird.

A survey of UK-based risk managers, including around 75 FTSE 100 companies, conducted by Airmic, revealed a better level of preparedness from large organisations, but serious concerns were still evident. The main concerns in relation to a possible flu pandemic related to potential losses of staff and disruption to customer service. Asked to list their top two concerns, 54% said “loss of staff through illness” and 46% said “inability to serve customers”. General economic disruption (26%), supply chain disruption (23%) and staff catching the virus from colleagues (22%) were the next biggest fears.

As for plans to deal with these problems, over three-quarters (77%) of UK risk managers had set up a committee to review their situation and nearly four-fifths (79%) had appointed an individual to co-ordinate their pandemic plan. Perhaps reflecting the size of their organisations, 76% of Airmic members said that they had a pandemic continuity plan in place. But only 30% had access to anti-viral medication for staff.

About half of the sample had restricted overseas travel and a similar proportion were ready to implement a work from home policy if the situation deteriorated. Eighteen percent said they had plans to restrict internal meetings.

“Organisations should treat current events as a ‘dress rehearsal’ and remain prepared,” said Airmic chairwoman and chief risk officer of DLA Piper, Julia Graham.

Companies should test their plans and keep an eye on the media and some international organisations, such as the Centers for Disease Control and Prevention and the WHO, to be prepared for a possible second flu phase.

Piracy and hijack

Pirate attacks have become an increasingly common threat for traders navigating some dangerous stretches of water off the east coast of Africa. Recently pirates demanded $2m for the safe release of Richard Phillips, captain of the US merchant ship Maersk-Alabama. Unfortunately for the pirates, the US navy dispatched a warship which was able to free the hostage. One of the captors is being charged with piracy in a US court.

Heroic high-sea rescues of this type make incredibly compelling stories for the media. Piracy has long been romanticised by storytellers. But the problem is much more than a juicy media tale. The risks are real. Pirate attacks have rocketed in the Gulf of Aden: gunmen raided 130 ships last year, with 50 successful hijackings, and as many as 200 mariners are in the custody of the pirates, according to the Piracy Reporting Centre.

Ungoverned state

There are a number of reasons for this surge. For one, Somalia, which borders the Gulf on its northern and eastern shores, is a largely ungoverned state. The pirates who operate from the shores of the country have a free reign to launch attacks and return home with their bounty, safe in the knowledge that they will not face prosecution.

Poverty is another major incentive. It may be easier for a young man to pick up an AK-47 or join the crew of a pirate ship than go out and find a “real” job, which are few and far between.

The Horn of Africa is also one of the busiest waterways for shipping in the world. Around 16,000 ships traverse its waters each year and 11% of seaborne petroleum passes through the Gulf on its way to the Suez Canal.

International navies patrol a narrow corridor of water, about 500 miles, but that means most of the merchant ships passing through tend to bottleneck in these protected waters. As the ships cram together, they are sometimes forced to slow, which puts them at greater risk of attack from the high speed and well-armed pirate vessels. Some estimates put the global takings of the kidnap industry at about $500m a year – making piracy one of Africa’s most successful business models.

But there is another major and obvious reason why piracy has become such a booming industry. It is because commercial shipping companies pay ransoms.

Although the recent Maersk-Alabama case ended without a ransom being paid, this case is the exception rather than the norm. Would-be pirates living in Somalia think the potential gains far outweigh the risks. Most ransom demands are between $1m and $4m per ship, says Chubb, a kidnap and ransom (K&R) insurer. That is a huge honeypot. Paying ransoms also seems to make sense to the ship owners. The K&R market is competitive and for a premium, companies can buy specialist kidnap, ransom and extortion insurance, which, subject to policy limits, terms and conditions, reimburses the policyholder for the pirates’ ransom demands and pays for hostage negotiation expenses. The policies even cover the costs of a security team to take the ransom to the pirates.

Shipping companies purchase insurance, pay ransoms and often incidents go unreported. Who can blame them? As long as all goes well, the ransom resolves the problem.

In the long term, however, this just contributes to the problem. It also represents a dangerous feedback loop. If kidnap and ransom insurance is easily available and more people buy and use it, that encourages pirates to pursue ransoms by hijacking ships, in turn increasing the risk to other ships, which forces people to buy more insurance.

Premiums increase

This is what is happening. A surge in piracy is encouraging ship owners to seek protection for their vessels, and the increased risk is forcing premiums up. Ship owners navigating the Gulf of Aden are seeing insurance premiums for kidnap and ransom increase tenfold, according to Aon Risk Services.

This means owners could be paying a $30,000 premium for $3m of cover for one journey.

A military response to the pirates can be welcomed as it discourages other acts of piracy. But if governments need some advice about the ways to stop piracy they could look to Lord Palmerston, British foreign secretary in 1841: “Taking a wasps’ nest … is more effective than catching the wasps one by one.”

To solve the problem altogether the international community needs to take action on land and help ungovernable states like Somalia recover from its problems.