At an estimated US$ 15 billion of insurable losses, the 2011 Thai floods are likely to rank as one of the most costly natural catastrophes. Unlike other nat cat events, a significant portion of these insurance claims are related to losses suffered far from Thailand, by companies that outsourced their supply chains to this low-cost manufacturing centre.
One year on, we continue to regularly engage with our clients to help support their recovery through claims settlement, advising on improved business resilience and negotiating on their behalf to limit the impact on renewal insurance costs. However, it is interesting to add a human dimension to the disaster by relaying some of the heroic efforts made to overcome such adversity.
On a recent trip to Thailand, one such story was relayed to us by an American plant manager of a hard disk drive (HDD) component factory, a story that has strong parallels with the parable of Noah. The manager had worked in Thailand since 1986 and remembered the floods of 1987. In the run up to the 2011 floods he was aware of the unusually high levels of water being collected in three upstream dams. When the dams concurrently reached maximum capacity the inevitable release of water led to the downstream floods. These circumstances blur the boundary of whether the flood was a completely natural or partly man-made event.
The Flood is Coming
The manager predicted the inevitable consequences and, like Noah, he tried to warn everyone of the impending flood. The manager put his career on the line by requesting funds from his HQ to buy boats and other supplies—equipment that later multiplied in price as demand over took supply. His predictions finally came to bear and with his foresight he was able to load the majority of his critical manufacturing machines into sea containers stacked two high. Such a sight must have brought ridicule at the time but with hindsight was seen by his company as an action that saved their business.
The story has a bittersweet ending since, what is not commonly known, sea containers are not truly water tight and unfortunately half of his equipment perished. Hence, production was still affected for several months. Since then detailed flood plans have been developed and additional flood protection barriers have been installed at the property and industrial park levels.
At the root of the enormous financial impact was the unquantified complexity and vulnerability of the global manufacturing supply chain. Thailand, for example, is the world’s second largest producer of hard disk drives accounting for approximately 25% of the world’s total production. The flood created a severe restriction not only on HDD capacity but to downstream computer deliveries for many leading brands.
Thailand is also a major player in the auto industry. Indeed, Thailand is the Japanese auto industry’s biggest manufacturing base. The floods affected production centres far from Thailand due to the disruption to the global web of component supply chains.
The Key to Successful Risk Management
We can see the lessons from the flood again reinforcing the key to successful risk management—the need to blend both risk hindsight and foresight. Hindsight should always be valued, studied and embedded into corporate culture to ensure it can outlive the corporate memory cycle. Foresight is what every risk manager craves and can be provided, in part, by the plethora of nat cat analyses and supply chain mapping tools that are now available.
Indeed, in response to this need, Willis has developed a geo-mapping supply chain tool, named Atlas, that combines best available nat cat models and real-time event monitoring capabilities to give risk managers the edge in predicting and then minimizing the impact of events, wherever they may occur, on their global supply chains.
Guest blogger Kevin Snowdon works from our Singapore office, where he is responsible for engineering and risk management services for all of Asia. Kevin started out as a graduate engineer, and entered the insurance and risk management industry in 1989. He has been with Willis since 2000.