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					   15. Risk Management for
              Catastrophes




                        Dr. Jan-Juy Lin
Dept. of Risk Management and Insurance
                   ETP course, CNCCU
Points to Ponder


 RM process for a catastrophe and
 Crisis management

 Risk analysis: what is a catastrophe
 Risk control: loss mitigation
 Risk financing: retention and
 transfer
                                    2
Risk Analysis
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 firm’s 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.

                                                     4
Susceptibility to Damage

 Design features and construction quality
   Designing structures should base on the physical
   environment.
   The tradeoff between cost and quality often tips
   in favor of economy. (high-rise building, Taipei
   101)
   Causes to damage:
      Natural (e.g., earthquake, flood, storm)
      Man-made (e.g., terrorism, disgruntled
      employees)

                                                  5
Susceptibility to Damage

 Age of structures
    Old urban area become target risks for
    catastrophic events – urban renewal project
    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.

                                                    6
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”)
 The intent of cat modeling is to lead to a
 greater understanding of the potential impact
 of catastrophic events on the firm or region.


                                              7
Catastrophe Modeling

 Primarily for natural catastrophes such as
 hurricanes, earthquakes, storms, floods,
 Some for terrorism (e.g., AIR, RMS, EQE )

 Widely used by insurers, reinsurers and
 intermediaries
    Figure 15.1 for a natural catastrophe model
 Models made based often on imperfect and
 incomplete information.
                                              8
Natural Catastrophe Risk Modeling (Figure 15.1)




                                                  9
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: combination of the fact and
   possible societal trends.
 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

                                                  10
Scenario Planning

 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 (Royal Dutch/Shell Case)
     Insight 15.2 (AT&T Case)
     Figure 15.2 (closed strategic management loop)
 Scenarios help to envision alternative future
 environments – the possible general shape of
 potential futures.

                                                     11
Closed Strategic Management Loop



                       Construct
                        Multiple
                       Scenarios


                                      Monitor the
            Devise                   Environment
           Strategic                 and Strategic
          Plan Based                Implementation
              on
          Scenarios




                       Implement
                       Strategies



                                                     12
Terrorism Risk Analysis

 Protection priority
   High priority (loss of life, severe injury)
   Medium priority (impairment of core functions)
   Low priority (a slight and temporary impact)

 Hazard and vulnerability assessment
   Defining threats
   Identifying likely threat event profile and tactics
   Assignment of a threat rating

                                                         13
Risk Control
Loss Prevention

 Land use restrictions
   Limit large concentrations of people and property
   value in hazard-prone areas.
   The most difficult to implement
   Sometimes zoning provisions are compromised
   by economic pressure.

  Q: What is the major obstacles do you think for the
   Zoning in Taiwan?
   “Nail Houses” issue in China
                                                    15
Loss Prevention

 Building codes
   Not always fully enforced – Hurricane Andre in
   1992, 25% of the insured losses failed to meet
   the region’s building code.
   Several countries have undertaken efforts toward
   standardization. E.g., the EN Eurocodes




                                                 16
Loss Prevention

 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 Depot’s reactions to
     the hurricane)



                                                  17
Loss Prevention

 Disaster planning (continued)
   The E.U. – The Environmental Integration
   Manual
     Environmental considerations need to be
     integrated into disaster management
     plans.
     Emergency responses should be based
     on a needs assessment and incorporate
     environmental considerations.

                                          18
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
                                                   19
Loss Reduction

 The process (continued)
   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


                                                 20
Loss Reduction

 The importance of effective crisis management
    “sustainable risk management”
   The unanticipated crisis usually is the most
   challenging to manage.

 Corporate catastrophes and shareholder value
   Two groups: recoverers and non-recoverers –
   refer exclusively to the effects of the catastrophe
   on the firm’s share price.


                                                     21
Loss Reduction

 Reputation crises and shareholder value
   Reputation is a key to corporations.
   Recoverers and non-recoverers – depending on
   how to deal effectively with the aftermath.

 Mass fatality events and shareholder value
   Sensitivity, compassion, logistical care, efficiency




                                                     22
Loss Reduction

 Insight 15.4 (Tylenol case: J&J)

 Insight 15.5 (Boycott: Brent Spar Incident)

 Insight 15.6 (Reputation loss: Anderson LLP)

 Figure 15.3 (Reaction of Share Prices to Reputation
 Crisis)
 Figure 15.4 (Reaction of Share Prices to Mass
 Fatality Events)
                                                  23
Share Price and Reputation Crisis (Figure 15.3)




                                                  24
Share Price and Mass Fatality Event (Figure 15.4)




                                                    25
Risk Financing
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
                                                 27
Retention

 The problems with retention are vividly
 demonstrated when a catastrophe occurs.
   Especially in developing countries
   In developed countries, the rebuilding
   process may be delayed due to the lack of
   insurance or private financing.




                                           28
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.
                                                 29
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



                                           30
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
    OECD’s Paris Convention on Third Party Liability in the
    Fieldof Nuclear Energy of 1960 (amended in 2004)
    The Price-Anderson Act in 1957 (U.S.)
       Insight 15.7 (Nuclear Insurance coverage)

                                                              31
Nuclear Insurance Coverage (Insight 15.7)

  Facility form (liability) policy
    The primary coverage
  Secondary financial protection policy
    An excess coverage
  Master worker policy
    Radiation tort claim of nuclear workers
  Suppliers and transporters policy
    An excess coverage over the operator’s facility



                                                      32
Insurance – Government Risk Pools (CEA)

                                                Assessment against insurers
             $2.0

                                                Reinsurance
             $1.5

             $1.0                               Line of credit


             $2.0
                                                Reinsurance



             $3.0                               Additional commitments from insurers



             $1.0                               Insurers' Initial Capital Contributions

    Source: CEA (www.earthquakeauthority.com)
                                                                                          33
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


                                                   34
Discussion Questions
Discussion Question

 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?



                                                  36
Discussion Question

 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?

 Provide an example of loss mitigation each
 for natural disaster and human-made error.



                                              37
Discussion Question

 If sound crisis management is as important as
 suggested in this chapter, why do major
 corporations seem to accord it so little
 attention?
 If 7-11 (convenient chain store) receives a
 warning that one kinds of the goods on the
 shelves has been added cyanide somewhere
 in Taipei, how to manage the crisis in your
 opinion?

                                            38

				
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