Catastrophe Risk Management - Best Practices

Catastrophic events such as epidemic infections, terrorist attacks, warfare, nuclear power plant failures, hurricanes, earthquakes, tornados, floods, hazardous material incidents, and cosmic hazards jeopardize and threaten human being on a global scale. According to a recent study by the world’s largest reinsurer Munich Re, economic losses[/i] from natural catastrophes was $45 billion in the first half of 2013. Floods in Europe, Canada, Asia and Australia dominated the natural catastrophe losses with around 47% of overall losses and 45% of insured losses.[/i]

The preparation for catastrophic events is crucial and a critical component of the insurance industry’s risk management strategies. Catastrophic risk management strategies must be regularly reviewed, tested and updated to ensure complete preparedness for the upcoming risk.

Risk management and preparation for the event beforehand reduces and mitigates the impact of the loss. Insurers use Geographic Information Systems (GIS) and catastrophic models to assess and handle catastrophic risks, and make informed risk management decisions. Geographic Information Systems contains complete geographical information. It is basically a comprehensive database that associates the property’s address with location using advanced geo-coding technology while Catastrophe models evaluate property characteristics, replacement value, and policy terms and conditions for obtaining accurate loss estimates.

Geographic Information Systems (GIS) and Catastrophe Models​

Geographic Information systems are effective tools in predicting damage and assessing post-disaster damage using geographic perspective. The insight from GIS technology help companies understand the places of concern and develop strategies to address the risk.

Catastrophe models help insurers’ gain thorough understanding of the risks and evaluate potential losses from catastrophic events. The reliability of these models lie on the high quality exposure data - location, property characteristics such as building construction, occupancy etc. and replacement values. The results of exposure data analysis combined with results of catastrophe models are analyzed using GIS technology to map property characteristics with catastrophic risks. Further exposure data analysis helps in predicting the intensity and frequency of the event.

Models can have deterministic and probabilistic approaches. Deterministic modeling is scenario based approach where simulation of historical and predetermined events is allowed with known characteristics. This approach can help the management in estimating the time of an event. Probabilistic modeling provides much more information as compared to deterministic modeling. Using this approach, the management of the company can estimate the probability of various levels of loss.

Most insurers use a single model to determine the probable maximum loss for a catastrophic event. More recently, insurers have started using multi-model systems to better insulate themselves against potential losses from catastrophes. Multi-model system promotes informed and proactive decision making. However, choosing between models with different methodologies and approaches is difficult.

Best Practices for mitigating catastrophic risks​

As companies globalize, they get more vulnerable and hence it is critical to take informed decisions to mitigate catastrophic risk financially. The following best practices help insurers to take cost-effective decisions for the enterprises.

? Understand the magnitude and frequency of losses​

Insurers must not think in terms of return periods. If they do so, they will fall in the trap of under buying or overbuying insurance and ignoring or underestimating the risk. It will also mislead companies with little information about the probability of the risk.

The best practice to manage and mitigate catastrophic risk is to understand the probability and the impact of the problem to insure them from its occurrence. The companies must be educated, especially in disaster prone areas to formulate emergency response and reduce the impact of the disaster. Knowledge of the potential effects of the risk will result in significant cost savings, advantage against competition and will also help improve brand reputation in the market.

? Design and develop risk mitigation strategies​

Risk mitigation strategies offer a clear picture of the perils, locations and business operations vulnerabilities. The strategies developed beforehand will help companies identify the overexposed areas and optimize the use of resources. Individuals responsible for developing and designing strategies will help in preparing companies for each phase of post disaster response enabling them for immediate recovery from the event.

? Collect high quality exposure data during the underwriting process[/i][/b]

Organizations should implement a plan to improve the quality of exposure data. Exposure data quality is significantly important for property insurers dealing with catastrophe risk. Without reliable and high quality exposure data catastrophic modeling decisions are skewed. Organizations must maintain high quality data to win more business and generate effective management decisions.

? Identify Catastrophe Risk Appetite[/i][/b]

A company’s risk appetite is the reduction in the income from a catastrophe in a year. The company must identify and understand how much loss an insurer can absorb without any impact and the uncertainty around it. The maximum amount of loss that the company can tolerate within a period must be decided beforehand by the management of the company.

? Evaluate beforehand the ability to pay catastrophe loss[/i][/b]

Businesses must establish a contingency plan to deal with the cash demand at the time of a catastrophic risk. The contingency plan must

? determine the size and timing of the cash that may be required

? determine the dependability of the system on the cash available with the business

? determine the gap between the catastrophic cash requirements and actual cash available

? determine the willingness of the system to dispense cash at the time of urgency

? develop a plan to make sure that enough cash is available at time of the catastrophe by reducing other spending

Prepare for the future​

Losses from catastrophes have mounted in the past three decades. In such a complex environment, property/casualty insurance companies must aim at mitigating catastrophic losses and provide sophisticated risk assessment techniques. Mitigating, quantifying and understanding catastrophic losses ensures effective decision making. From a workflow perspective, companies must adopt an aggregation engine with an advanced mapping interface that utilizes the latest Geographical Information Systems (GIS) technology and catastrophic modeling techniques to reduce vulnerabilities from extreme events.

 

[Swaswati Borpuzari]

Catastrophe Risk Management: Best Practices​

Catastrophe risk management is a critical component of any comprehensive risk management strategy, particularly for businesses and organizations that operate in regions prone to natural disasters or other significant disruptions. The potential impact of catastrophes, such as hurricanes, earthquakes, floods, and pandemics, can be devastating, leading to loss of life, property damage, and financial ruin. Effective catastrophe risk management involves identifying, assessing, and mitigating these risks to minimize their impact and ensure business continuity. Here are some best practices to consider:

​

The first step in managing catastrophe risk is to identify and assess the potential threats. This involves:

• Conducting a Comprehensive Risk Analysis: Evaluate the likelihood and potential impact of various catastrophes on your organization. This includes natural disasters, technological failures, and other events that could disrupt operations.
• Understanding Geographic and Environmental Factors: Consider the location of your facilities and the environmental conditions they face. For example, if you are in a coastal area, hurricanes and flooding may be significant risks.
• Analyzing Historical Data: Look at past incidents to understand the frequency and severity of potential catastrophes. This can help in predicting future events and preparing accordingly.

​

Once risks are identified, a detailed plan should be developed to manage them. This includes:

• Creating an Emergency Response Plan: Outline specific actions to be taken during a catastrophic event. This should include evacuation procedures, communication protocols, and roles and responsibilities.
• Establishing a Business Continuity Plan: Ensure that critical business functions can continue or resume quickly after a disaster. This may involve backup systems, alternative work locations, and supply chain redundancies.
• Insurance and Financial Planning: Secure adequate insurance coverage to protect against financial losses. Additionally, set aside emergency funds and establish lines of credit to ensure liquidity during a crisis.

​

Physical and structural measures can significantly reduce the impact of catastrophes. Consider:

• Building Codes and Standards: Adhere to or exceed local building codes and standards, especially those related to seismic and wind resistance.
• Regular Maintenance and Upgrades: Regularly inspect and maintain your facilities to ensure they can withstand potential threats. This includes reinforcing structures, improving drainage systems, and upgrading critical infrastructure.
• Technology and Equipment: Invest in technology that can help monitor and manage risks, such as early warning systems, resilient communication networks, and backup power supplies.

​

Preparation is key to effective response. Ensure that:

• Employee Training: Conduct regular training sessions to educate employees on emergency procedures, first aid, and the location of safety equipment.
• Drills and Simulations: Regularly perform drills and simulations to test the effectiveness of your emergency response plan. This helps identify gaps and areas for improvement.
• Community Engagement: Collaborate with local communities, emergency services, and other stakeholders to build a resilient network that can respond quickly and effectively during a disaster.

​

Proactive monitoring can provide valuable time to prepare and respond. Consider:

• Weather and Seismic Monitoring: Implement systems to monitor weather patterns, seismic activity, and other relevant data. This can help in predicting and preparing for potential disasters.
• Real-Time Alerts: Set up real-time alerts to notify key personnel and stakeholders about impending risks. This can include text messages, emails, and automated phone calls.
• Data Integration: Integrate data from various sources to create a comprehensive risk picture. This can include satellite imagery, sensor data, and social media reports.

​

Clear and timely communication is essential during a catastrophe. Ensure that:

• Communication Channels: Establish multiple communication channels to ensure that information can be disseminated even if primary systems are down. This may include satellite phones, two-way radios, and social media.
• Crisis Communication Plan: Develop a crisis communication plan that outlines how information will be shared with employees, customers, and the public. This should include pre-approved messages and spokespersons.
• Transparency and Honesty: Maintain transparency and honesty in your communications to build trust and credibility.

​

Financial stability and operational continuity are crucial for recovery. Consider:

• Contingency Funding: Set aside contingency funds to cover immediate expenses during and after a disaster. This can help in maintaining operations and paying for repairs.
• Supply Chain Diversification: Diversify your supply chain to reduce dependency on a single source. This can help in maintaining operations even if one supplier is affected.
• Contractual Protections: Include force majeure clauses in contracts to protect against financial losses due to unforeseen events.

​

Recovery is just as important as preparedness. Focus on:

• Recovery Plan: Develop a detailed recovery plan that outlines the steps to be taken to restore operations. This should include timelines, resource allocation, and key performance indicators.
• Debrief and Review: After a disaster, conduct a thorough debrief to review the effectiveness of your response. Identify lessons learned and areas for improvement.
• Continuous Improvement: Use the insights gained from post-disaster reviews to refine and improve your risk management strategy. This is an ongoing process that should be regularly updated.

​

Ensure that your risk management practices comply with legal and regulatory requirements. This includes:

• Regulatory Compliance: Stay informed about local, national, and international regulations related to disaster preparedness and response.
• Legal Protection: Consult with legal experts to understand your liability and obligations during and after a disaster. This can help in protecting your organization from legal challenges.

​

Incorporate sustainability and environmental considerations into your risk management strategy. This includes:

• Green Building Practices: Implement green building practices that not only reduce the environmental impact but also enhance resilience to natural disasters.
• Environmental Impact Assessment: Conduct environmental impact assessments to understand how your operations may contribute to or mitigate potential risks.
• Sustainable Supply Chain: Promote sustainability in your supply chain by working with suppliers who also practice risk management and environmental responsibility.

Conclusion​

Catastrophe risk management is a dynamic and multifaceted process that requires ongoing attention and effort. By following these best practices, organizations can better prepare for, respond to, and recover from catastrophic events, ensuring the safety of their employees, the continuity of their operations, and the protection of their assets. Effective risk management not only mitigates the negative impacts of disasters but also enhances the overall resilience and sustainability of the organization.

 

[Dhruv Bindhani]

Catastrophic events such as epidemic infections, terrorist attacks, warfare, nuclear power plant failures, hurricanes, earthquakes, tornados, floods, hazardous material incidents, and cosmic hazards jeopardize and threaten human being on a global scale. According to a recent study by the world’s largest reinsurer Munich Re, economic losses[/i] from natural catastrophes was $45 billion in the first half of 2013. Floods in Europe, Canada, Asia and Australia dominated the natural catastrophe losses with around 47% of overall losses and 45% of insured losses.[/i]

The preparation for catastrophic events is crucial and a critical component of the insurance industry’s risk management strategies. Catastrophic risk management strategies must be regularly reviewed, tested and updated to ensure complete preparedness for the upcoming risk.

Risk management and preparation for the event beforehand reduces and mitigates the impact of the loss. Insurers use Geographic Information Systems (GIS) and catastrophic models to assess and handle catastrophic risks, and make informed risk management decisions. Geographic Information Systems contains complete geographical information. It is basically a comprehensive database that associates the property’s address with location using advanced geo-coding technology while Catastrophe models evaluate property characteristics, replacement value, and policy terms and conditions for obtaining accurate loss estimates.

Geographic Information Systems (GIS) and Catastrophe Models​

Geographic Information systems are effective tools in predicting damage and assessing post-disaster damage using geographic perspective. The insight from GIS technology help companies understand the places of concern and develop strategies to address the risk.

Catastrophe models help insurers’ gain thorough understanding of the risks and evaluate potential losses from catastrophic events. The reliability of these models lie on the high quality exposure data - location, property characteristics such as building construction, occupancy etc. and replacement values. The results of exposure data analysis combined with results of catastrophe models are analyzed using GIS technology to map property characteristics with catastrophic risks. Further exposure data analysis helps in predicting the intensity and frequency of the event.

Models can have deterministic and probabilistic approaches. Deterministic modeling is scenario based approach where simulation of historical and predetermined events is allowed with known characteristics. This approach can help the management in estimating the time of an event. Probabilistic modeling provides much more information as compared to deterministic modeling. Using this approach, the management of the company can estimate the probability of various levels of loss.

Most insurers use a single model to determine the probable maximum loss for a catastrophic event. More recently, insurers have started using multi-model systems to better insulate themselves against potential losses from catastrophes. Multi-model system promotes informed and proactive decision making. However, choosing between models with different methodologies and approaches is difficult.

Best Practices for mitigating catastrophic risks​

As companies globalize, they get more vulnerable and hence it is critical to take informed decisions to mitigate catastrophic risk financially. The following best practices help insurers to take cost-effective decisions for the enterprises.

? Understand the magnitude and frequency of losses

Insurers must not think in terms of return periods. If they do so, they will fall in the trap of under buying or overbuying insurance and ignoring or underestimating the risk. It will also mislead companies with little information about the probability of the risk.

The best practice to manage and mitigate catastrophic risk is to understand the probability and the impact of the problem to insure them from its occurrence. The companies must be educated, especially in disaster prone areas to formulate emergency response and reduce the impact of the disaster. Knowledge of the potential effects of the risk will result in significant cost savings, advantage against competition and will also help improve brand reputation in the market.

? Design and develop risk mitigation strategies

Risk mitigation strategies offer a clear picture of the perils, locations and business operations vulnerabilities. The strategies developed beforehand will help companies identify the overexposed areas and optimize the use of resources. Individuals responsible for developing and designing strategies will help in preparing companies for each phase of post disaster response enabling them for immediate recovery from the event.

? Collect high quality exposure data during the underwriting process[/i][/b]

Organizations should implement a plan to improve the quality of exposure data. Exposure data quality is significantly important for property insurers dealing with catastrophe risk. Without reliable and high quality exposure data catastrophic modeling decisions are skewed. Organizations must maintain high quality data to win more business and generate effective management decisions.

? Identify Catastrophe Risk Appetite[/i][/b]

A company’s risk appetite is the reduction in the income from a catastrophe in a year. The company must identify and understand how much loss an insurer can absorb without any impact and the uncertainty around it. The maximum amount of loss that the company can tolerate within a period must be decided beforehand by the management of the company.

? Evaluate beforehand the ability to pay catastrophe loss[/i][/b]

Businesses must establish a contingency plan to deal with the cash demand at the time of a catastrophic risk. The contingency plan must

? determine the size and timing of the cash that may be required

? determine the dependability of the system on the cash available with the business

? determine the gap between the catastrophic cash requirements and actual cash available

? determine the willingness of the system to dispense cash at the time of urgency

? develop a plan to make sure that enough cash is available at time of the catastrophe by reducing other spending

Prepare for the future​

Losses from catastrophes have mounted in the past three decades. In such a complex environment, property/casualty insurance companies must aim at mitigating catastrophic losses and provide sophisticated risk assessment techniques. Mitigating, quantifying and understanding catastrophic losses ensures effective decision making. From a workflow perspective, companies must adopt an aggregation engine with an advanced mapping interface that utilizes the latest Geographical Information Systems (GIS) technology and catastrophic modeling techniques to reduce vulnerabilities from extreme events.

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