Risk managers looking to fully cover their commercial property losses and get back into business quickly after a catastrophe need to look way beyond the obvious, dissecting and accounting for a variety of potential coverage gaps, loss control experts contend.
"What we found recently is that our clients are assessing business continuity planning and wondering if there are gaps in the coverage," Allen Melton, Americas practice leader, insurance claims service, with Ernst & Young in Dallas, told National Underwriter at the annual Risk and Insurance Management Society conference in Boston late last month.
With globalization of organizations, there is more of an emphasis on supply-chain risks, he said, citing an example of a chemical company that had been getting a product via rail.
"A big flood happens and floods the rail yard," he said, "so intuitively you would believe there is coverage under contingent business insurance. But the issue was that the railroad wasn't a direct supplier. What we're finding is that some companies are finding out the hard way after these big events that their policies are being tested."
He added that "we're seeing more of an emphasis on thinking through the different issues–the Icelandic volcano is a good example."
Mr. Melton advised risk managers to look carefully at their policy for gaps.
"In this case the railroad was not a direct customer or supplier. They bought the product from the chemical company that contacted directly with the railroad," he said. "You really have to look at the policy to see if something like this would be covered–understanding the supply chain, who the company is contracting along the way and understanding redundancy."
At a time when more companies are trying to trim down to one supplier, he said, "it puts a lot of pressure on that supplier if something were to happen."
Ryan D. Pratt, a senior manager involved with assurance and advisory business services with E&Y in Chicago, raised another key consideration–getting your property claim paid in a timely manner.
Organizations, he said, tend to put their business continuity plan together with more thought to whether buildings and people are protected. However, he added, "where we see the gap is taking that to the next step–identifying the process of how the organization would respond to recovering financially from the insurance carrier."
Mr. Pratt asked, "What's the team going to look like? Who's going to be the face of the company to the insurance company? Is it the risk manager, or someone from a different part of the organization?"
He said that when working with clients to address this issue within their business continuity plans, the procedure is to review their plans, and if there has been a loss, to examine the recovery process.
For most catastrophic events, it could take three-to-nine months to recover physical assets, but the actual claim could go on 12-to-18 months. "Where's the plan to cover that [gap]?" he asked.
Mr. Melton said that while risk managers may prepare for a property's restoration or for an alternate supplier, they often are not thinking about their financial recovery.
"Sometimes the risk manager isn't folded into the business continuity planning process," he said, advising risk managers to get involved in the early stages so they can understand how the business wants to react and do an assessment of the coverage.
Another potential gap involves multiple locations. Indeed, from a catastrophe standpoint, "the first thing that comes up is the concentration of risk," noted Akshay Gupta, a Ph.D. who is principal, engineer and director of catastrophe risk engineering with AIR Worldwide in San Francisco.
He told NU at the RIMS conference that often risk managers tend to ignore the fact of having multiple properties in an area that might be subjected to, or affected by the same natural hazard.
"If you look at each property individually and aggregate it, that loss will be less than what can happen to the group as a whole when a more severe-than-average event happens," he warned.
The reason is that all of the properties in a localized area would be affected to a higher degree than what might be considered on an individual loss basis, he explained.
"So you have to take into account the correlation of the properties," he noted. "A correlation within the properties might come about directly from a natural hazard, because the same hazard would affect all of them, or it may come about from interdependencies from within the properties."
For example, one of the assets might have all of the computer systems installed there, he said, which might mean looking at it differently than the rest of the locations.
"The concentration of exposure and the risk, if you're looking at the tail risk, would be higher if you're looking at the locations together," Mr. Gupta said. If the analysis has already been completed, he added, "ask whether the analysis is being done at the individual level and then aggregated, or is somebody really looking at the aggregate exposure and then analyzing?"
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