Minimizing risks for global catastrophes

Managing catastrophe risk is one of the biggest challenges facing any company’s risk manager. For multinational companies, the challenge of managing catastrophe risk is especially daunting. In the United States, risk managers have access to the latest information and tools to help them manage the risk of earthquakes, windstorms, floods and even manmade catastrophes such as terrorism. However, in many areas outside the United States, this information may be sketchy. Without detailed hazard maps and good catastrophe models, it is much harder for multinational companies to manage their exposure to natural and manmade catastrophes.

To address these issues, multinational companies should first select an insurer with a global network of offices and loss control services to help them identify and mitigate their risk. Then, by matching locations to their relative exposure to catastrophe perils and developing advanced business recovery plans for all locations, companies can limit their losses and more quickly return their operations to normal.

The information gap

Before a multinational can begin to manage its catastrophe risks, it must have reliable information regarding locations prone to certain catastrophes. Unfortunately, in many foreign countries it can be very difficult to get even the most basic information, such as the exact address of a company’s facility and how vulnerable it may be to a catastrophe.

While there is information available about the places that are susceptible to earthquake or windstorm, there is very little information about flood risk. Many companies are familiar with the detailed U.S. government flood maps that provide them with reliable information about the potential flood risks for locations in the United States. Although some European countries have flood maps, those maps may not provide the detail found in U.S. maps. In some cases, these European maps may provide nothing more than a location’s proximity to a body of water and its elevation level. In some cases, the information on these maps may be outdated or may fail to reflect new developments in a region that could affect flooding patterns.

In many developing countries, hazard maps do not exist or are only just beginning to be developed. Without reliable hazard maps, multinationals run a much greater risk of unknowingly moving operations into a catastrophe-prone area.

Inferior construction and infrastructure

The lack of reliable information extends beyond hazard maps. It may also be difficult to obtain information about the construction and systems used to protect buildings in many non-U.S. jurisdictions.

Buildings in foreign countries may be more vulnerable to a loss because of inferior construction standards. As a result, these buildings may be less able to withstand a major earthquake or windstorm event. In the United States, construction codes and the quality of construction can vary from state to state and even from county to county. But in some developing nations, there may not be any construction codes at all.

The infrastructure (such as the electrical or communications grids) in developing countries may be less reliable than in more established nations like the United States, and it may take longer to get systems back up and in working order.

Risk to suppliers and workforce

Although it is important for a company’s property to be well constructed and protected from catastrophes that is not enough. The potential for problems extends to a company’s suppliers and even its employees.

Even if a company’s foreign operations are up and running after a catastrophe, its suppliers may not be. With thinner supply chains and just-in-time inventory management, an effective business recovery plan examines not only a company’s owned facilities, but also their interdependencies.

A company’s own employees are also at risk. If a company’s facilities survive a catastrophe, but none of the employees are able to show up for work because of damage to their own homes, the company could still suffer significant financial loss. While this problem could happen in just about any country, the risk may be greater in developing countries where housing and infrastructure are often inferior.

Insurance and loss control

When it comes to insurance, companies should have property, business interruption, extra expense and contingent business interruption insurance to protect the revenue stream. Through an integrated global program that blends local admitted insurance with a master policy containing difference-in-conditions/difference-in-limits protection, multinationals can gain access to terrorism or catastrophe insurance pools, such as those available through governments in Australia, Spain, the United Kingdom and other countries.

When selecting an insurance carrier, multinationals should choose an insurer with a global network of offices. Strong loss control and claims handling capabilities are also important. A multinational that is working with an insurer with strong loss control services can take advantage of the insurer’s risk engineers, who can survey the buildings to ensure they have been well constructed and meet building codes. The carrier can provide invaluable on-the-ground assistance, acting as the “eyes and ears” for risk managers who may not be able to get out to every location in every foreign country.

Risk mitigation practices

Because state-of-the-art catastrophe models do not exist outside the United States, many insurers lack crucial information about the potential for catastrophe losses and may be uncomfortable accepting too much risk in foreign countries. It may not be possible for companies to obtain the catastrophe insurance they want at a price they deem reasonable. Multinationals, therefore, cannot rely on insurance alone to help them mitigate their risks.

One of the simplest steps a multinational can take to mitigate its risk is to try to avoid placing too many assets in catastrophe-prone areas. Even though hazard maps are often lacking in detail, it is often still possible to determine whether a country or region is particularly prone to certain catastrophes.

Multinationals also should make sure they have a business recovery plan in place, which provides a framework for returning operations to normal. Through the planning process, companies can identify and manage hazards associated with a disaster, thereby mitigating the effects of such an event. This should include developing a plan that would allow for a company’s other facilities to take on the responsibilities of any facility damaged in a catastrophe.

Multiple challenges for multinationals

Multinational companies face serious challenges when it comes to managing their catastrophe risk. It can be difficult to identify safe locations for their operations and also to buy sufficient catastrophic insurance protection commensurate with the exposure presented. Inferior construction and unreliable infrastructure also can leave multinationals more vulnerable to a loss.

By working with an insurer with a global network of offices, emphasizing loss control, and developing and testing a rigorous business recovery plan, multinationals can minimize the risk to their foreign facilities and limit their potential losses from a catastrophe.

Topics Catastrophe Carriers USA Profit Loss Flood Construction