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Does your risk plan take water scarcity into account?

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The views expressed in this article are not necessarily those of the FIA. The article below was supplied by 2018 FIA partner, AIG South Africa.

Water scarcity has immense implications for companies, and should be top of mind for risk management departments.

More than 50 percent of the cities reporting into the Carbon Disclosure Project in 2017 cited declining water quality as one of the emerging “serious risks” they faced. Declining water quality is just one aspect of the growing challenge of water scarcity, as South Africans do not need reminding.

Cape Town’s Day Zero may no longer be imminent, and the Province’s dams might be fuller than they have been in a while, but water scarcity is set to remain a challenge both in that region and in the rest of the country as a whole. While the Western Cape’s dams might be at 60 percent the dams in the Eastern Cape are reportedly worryingly low so it is feasible to expect restrictions to continue.

The one positive takeaway from the Cape water crisis is that it has provided companies and households with a crash course in the realities of water scarcity. We all now know that we have to rethink the way we live and do business when it comes to this most vital of elements.

The media focus is usually on the supply of basic supplies of water for drinking and washing, with rather fewer column inches exploring the impact on businesses where water is essential to production itself.

Agriculture and the food and beverage sectors are obviously highly dependent on supplies of clean water. In the Western Cape, four of the top five exports fall into these sectors, and large volumes of water are needed relative to unit output. Irrigation is said to consume up to 65 percent of the total water. Other manufacturing processes are also critically dependent on water.

An ancillary risk related to water scarcity in these sectors is the absolute necessity of maintaining hygiene. The listeriosis outbreak earlier this year is a timely reminder of the devastating impact of poor hygiene on the food and beverage industries. Clearly, maintaining good hygiene while consuming less water will require new thinking and processes, and the dynamic relationship between water use and food safety has to be factored into the company’s risk profile.

Less well-recognised, perhaps, is the risk that water scarcity poses to a property itself. Many commercial premises of all kinds are protected from fire by automatic water sprinklers that are connected to the main supply. One of the first things municipalities do to curtail water consumption is to reduce water pressure, which in turn may make the sprinklers less effective—or prevent them from working at all.

Unexpected impacts like this need to be factored into risk planning, and will certainly affect insurance cover. Companies should certainly be discussing these and other possible impacts with their brokers, who are likely to have good advice to offer.

Reducing mains pressure is likely to have another impact on companies and their employees. Because the water infrastructure is old, depressurisation makes the whole system much more vulnerable to contamination from potentially impure ground water.

In conclusion, the risks posed by water scarcity are complex, and can be unexpected. They will vary from company to company, and between industries. Companies should consider carefully all the ways in which water scarcity could impact them, and put risk-mitigation plans in place. This will be hard enough for big companies, but for smaller ones it could be a very big ask. Insurance professionals can offer some assistance in scoping the risks, but it is certainly time for companies to collaborate by sharing information and, even better, working together to create shared solutions.