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Risk Management and Insurance Perspectives in a
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Risk Management and Insurance Perspectives in a
Global Economy15. Risk Management for
Catastrophes

• Click Here to Add Professor and Course Information

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Points to Ponder

• Risk analysis
• Risk control
• Risk financing

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• Risk Analysis

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Risk Analysis

• The analysis for events that hold a catastrophic
  potential are largely identical to those for
  non-catastrophic event, except
• Risk managers devote greater time and effort to
  exploring the susceptibility of the firms
  physical structure to damage.
• Such corporations commonly rely more heavily on
  modeling to estimate the probable effects of
  natural catastrophes on their businesses.
• Scenario planning can play a significant role.

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Susceptibility to Damage

• Design features and construction quality
• The tradeoff between cost and quality
• Causes of damage
• Natural
• Human-made (e.g., terrorists or disgruntled
  employees)
• Age of structures
• The Great Hanshin (Kobe) Earthquake in Japan in
  1995
• Infrastructure
• Transportation and communication facilities of
  the affected area
• Critical to a prompt and orderly recovery
• Hurricane Katrina in New Orleans in 2005 in the
  U.S.

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Catastrophe Modeling

• The use of computer-assisted mathematical
  techniques to estimate possible losses associated
  with catastrophic events
• Use of site and specific property characteristics
  (the so-called exposure data)
• Primarily for natural catastrophes such as
  hurricanes, earthquakes, storms, floods
• Some for terrorism (e.g., AIR modeling)
• Widely used by insurers, reinsurers and
  intermediaries
• Figure 15.1 for a natural catastrophe model

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Natural Catastrophe Risk Modeling (Figure 15.1)
Description of the model in pages 376-377.
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Scenario Planning

• A strategic planning method in which analysts
  generate simulation games that are used by
  management to consider and develop plans to deal
  with alternative futures
• Scenarios should bring forth decisions by those
  who are ultimately responsible for making them.
• Subsumes elements that are difficult and often
  impossible to formalize, let alone quantify
• It is intended to cause decision-makers to
  realize that they consciously or unconsciously
  likely have a preconceived notion of what the
  official future will hold.
• Insight 15.1
• Figure 15.2

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Closed Strategic Management Loop
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Terrorism Risk Analysis

• Protection priority
• High priority
• Medium priority
• Low priority
• Hazard and vulnerability assessment
• Defining threats
• Identifying likely threat event profile and
  tactics
• Assignment of a threat rating

Go also to FEMA for additional information.
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• Risk Control

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Loss Prevention

• Land use restrictions
• Building codes
• Disaster planning
• The U.S. A Failure of Initiative, a report
  about government preparedness against disasters
  Hurricane Katrina and New Orleans
• Insight 15.3 (Home Depots reactions to the
  hurricane)
• The E.U. The Environmental Integration Manual

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Loss Reduction

• Crisis management
• The process of identifying those situations that
  constitute a crisis, having an organized response
  to the crisis and ultimately resolving the crisis
• The process
• Engage appropriate employees to consider the
  range of crises
• Develop responses for each identified crisis,
  including a master plan
• Assign clear recovery responsibilities to
  individuals
• Speak with one voice and through one high-level
  person
• Keep employees, customers, other stakeholders and
  the public well informed by honestly and openly
  sharing the nature of the difficulty and what the
  organization is doing about it

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Loss Reduction

• The importance of effective crisis management
  sustainable risk management
• Corporate catastrophes and shareholder value
• Reputation crises and shareholder value
• Mass fatality events and shareholder value

Discussion based on Knight and Prettys works
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Loss Reduction

• Insight 15.4 (Tylenol case)
• Insight 15.5 (Boycott)
• Insight 15.6 (Reputation loss)
• Figure 15.4 (Reaction of Share Prices to Mass
  Fatality Events)

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Share Price and Reputation Crisis (Figure 15.3)
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Share Price and Mass Fatality Event (Figure 15.4)
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• Risk Financing

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Retention

• Recommended when
• Insurance is unavailable or unaffordable
• Property owners have the capability of financing
  losses internally
• Retention is often used along with other risk
  financing options.
• For example, excess insurance on top of large
  retention
• The problems with retention are vividly
  demonstrated when a catastrophe occurs.
• Especially in developing countries

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Insurance

• Risk financing capacity for catastrophic loss
  exposures remains a major concern for the
  insurance industry internationally
• Insurance policies often exclude coverage for
  many catastrophic events.
• Nuclear-related events
• Flood damages
• Earth movement
• Terrorist act
• Countrywide variations exist.

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Insurance Catastrophe Reinsurance

• Often a risk-financing and loss-sharing
  arrangement between insurance firms
• Several reinsurers that specialize in catastrophe
  reinsurance
• The Caribbean
• The London market

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Insurance Private Risk Pools

• A wide array of uses by insurance companies
• Residual markets for nonstandard drivers in
  automobile insurance or employers in workers
  compensation
• A case of catastrophic loss exposure nuclear
  activity
• The World Nuclear Association
• OECDs Paris Convention on Third Party Liability
  in the Field
• of Nuclear Energy of 1960 (amended in 2004)
• The Price-Anderson Act in 1957 (U.S.)
• Insight 15.7

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Nuclear Insurance Coverage (Insight 15.7)

• Facility form (liability) policy
• Secondary financial protection policy
• Master worker policy
• Suppliers and transporters policy

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Insurance Government Risk Pools (CEA)
Source CEA (www.earthquakeauthority.com)
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Insurance Terrorism Risk

• Australia Australian Reinsurance Pool
• Austria Terrorpool Austria
• France GAREAT
• Germany Extremus
• Israel The Property and Tax Compensation Fund
• The Netherlands NHT
• Spain CCS
• South Africa SASRIA
• The U.K. Pool Re
• The U.S. Terrorism Risk and Insurance Act

Table 15.1
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Catastrophe Risk Securitization Cat Bonds
Not in the Book!
CatastropheRisk
InstitutionalInvestors
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• Discussion Questions

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Discussion Question 1

• Older facilities often are more susceptible to
  damage than newer ones. Explain why this is so
  and make a case for why the government should not
  require that the owners of such older facilities
  to upgrade them to contemporary structural
  standards?

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Discussion Question 2

• Loss mitigation is a fundamental factor in better
  managing the physical environment risk. What
  aspects of loss mitigation do you believe offer
  the most promise for the future?

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Discussion Question 3

• Develop at least two alternative futures for
  how risk management might change for operators of
  nuclear power plants.

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Discussion Question 4

• If sound crisis management is as important as
  suggested in this chapter, why do major
  corporations seem to accord it so little
  attention?

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Discussion Question 5

• We have described terrorism risk pools in
  selected countries.
• Find the reasons why some governments listed in
  the table acted upon creation of a terrorism
  insurance scheme before September 11, 2001.
• Do you find any other governments offering
  similar programs? (Hint Examine Brazil, Finland,
  Hong Kong and Japan for possible programs.)