By: Volker Von Widdern, Principal of Strategic Risk at Riskonet Africa

Gauteng is facing a critical summer as Rand Water warns that the province’s water storage may soon be depleted. Considering the worsening crisis, leading risk consultancy Riskonet Africa is urging businesses to take immediate action and review their risk exposures, risk mitigation plans and insurance coverages to ensure their mitigation programs  account for potential operational disruptions caused by water shortages.

“Risks become a crisis when the impact is imminent, and it appears that few feasible responses are available,” says Volker Von Widdern, Principal of Strategic Risk at Riskonet Africa. “Right now, there is immense pressure on risk managers to guide their organisations through this crisis. Unfortunately, these shortages are far from over and will worsen, especially as we prepare for a scorching summer.” According to Von Widdern, insurance alone is not a solution to water shortages, particularly as utility service failures due to perils like fires and floods are increasingly being excluded from coverage.

Von Widdern explains that the crisis has been building for some time, driven by three core issues. “Inadequate development and maintenance of bulk water infrastructure is a key factor,” he explains. “For instance, the planned expansion phase of the Lesotho Highlands Water Project is approximately 10 years behind schedule.” He also points to a lack of foresight in the province’s water management plans. “We’re dealing with an absence of scenario planning to properly inform demand forecasts, particularly considering high levels of population growth and migration to metropolitan areas,” he says. Additionally, he highlights the disruptive effects of climate change, which are altering rainfall patterns and causing unprecedented droughts.

Risk managers cannot rely on local government to provide solutions but must instead take proactive steps informed by a comprehensive strategic risk approach. “Current risk management and insurance models won’t suffice in addressing this growing crisis,” says Von Widdern.

As households increasingly turn to rain-fed tanks, which have become the “new solar,” rain harvesting, and strategic water storage may become the next major risk management intervention for corporates. This involves assessing opportunities to create new water resevoirs at business parks based on collected rainwaterand borehole water based on approved extraction. Water could then be transported by tankers across these areas. The cost of such an intervention is far lower than the loss of gross profit from curtailed operations and the expense of sourcing emergency water supplies, when community needs take priority.

Another important point is that many companies and individuals are turning to boreholes. However, they need to be aware that boreholes are regulated by local, provincial, and national legislation. One may not simply install a borehole without the relevant approvals and permits.

In terms of insurance, the main alternative for risk transfer regarding extreme weather events is the parametric insurance market. This market is based on a chosen weather index—such as wind, rain, or temperature. While parametric insurance is not a solution for delays in infrastructure development, it can provide funding to address the costs of securing water or mitigating the impact of constrained business operations if water shortages are caused by severe drought.

“Organisations often underestimate the severity of water shortages on their daily operations and supply chains,” Von Widdern cautions. “This scenario is an excellent case study of what strategic risk management can achieve when the relevant tools are fully deployed.”