After the human and economic loss wrought by SuperTyphoon Haiyan in the Philippines and also the tornadoes in the American mid-West, it isn’t surprising that natural catastrophes have dominated the headlines in 2013.
But the minds of many risk professionals have also been exercised by manmade disasters this year, after a series of deadly events resulted in countless personal tragedies and corporate recriminations.
Manmade risk fall-out
Most companies in high risk industries, such as energy and transportation, have robust policies and procedures in place, and managers are aware that their potential liabilities, personal and corporate, are significant, says David Leckie, a partner at the law firm Clyde & Co who advises corporate clients on preventing and managing the fall-out from manmade disasters.
“All companies, regardless of their business, have legal and corporate governance obligations. Often it is a question of recognising that and allocating sufficient resources to achieve whatever is reasonably practicable in the context of the company’s risk profile, ” he told lloyds.com. “Risk assessment is the key and this can be done for relatively low cost. Once risk assessment has been accomplished, a plan for eliminating or mitigating the risk can be made.”
Companies can get caught up in the fall-out from a manmade disaster that wasn’t even directly caused by them, especially when they have a complex supply chain. Big brand clothing retailers found themselves in the spotlight after the Bangladesh clothing factory collapse when it was revealed that some of their garments were made there.
Reputations on the line
The consequential losses of a disaster can often be much greater than the direct losses from the event, says Roger Bickmore, group business development director at Lloyd’s insurer Kiln, citing the potential for brand damage that followed the Bangladesh disaster.
“Some responded very well, in terms of compensation and formulating a code of practice. They took it very seriously and applied a lot of resources to it, ” he says. “But it highlighted the potentially very risky relationship that can exist between a company and another party further down the supply chain. Reputation damage goes beyond disruption, or business interruption.”
Perhaps surprisingly, the risk of reputational damage is insurable and some insurers including Kiln can address risks to revenue streams or loss of profits in the context of adverse media, with defined perils and triggers.
Clyde’s David Leckie says that companies should take reputation risk management seriously. “It is important to have policies and procedures in place that will control the flow of information – from inappropriate comments in TV interview appearances to internal communications which inaccurately reflect what actually happened, ” he says. “Reputation management includes controlling the release of information, communicating with the media and with clients and suppliers. Media training can be very useful for those who might be exposed to the press or TV.”
What’s the worst that can happen?
With so many different parties potentially affected by manmade catastrophes, the claims scenarios for insurance companies can be complex, often involving property, first and third party liability losses.
To ensure that the market is able to respond to big loss events, Lloyd’s maintains a set of mandatory Realistic Disaster Scenarios [RDS] to stress test both individual syndicates and the market as a whole. Most of the RDS outlined are based on natural catastrophes but there are several examples of manmade events that Lloyd’s insurers use with their models.
These scenarios include a terrorist attack on the Midtown Manhattan area, New York; a fully laden tanker colliding with a cruise vessel carrying 700 passengers, staff and crew in Prince William Sound; an explosion in an energy complex, and; a collision between two aircraft over a major city, anywhere in the world, using syndicates’ two highest airline exposures.
Lloyd’s head of exposure management and reinsurance, Trevor Maynard, says that Lloyd’s RDS represent many thematic scenarios. “We review our RDS periodically and try to think quite widely about how the scenarios can lead to loss. For example, our UK Flood RDS included an element of pollution risk, he told Lloyds.com. “They certainly aren’t the worst possible scenarios and are intended to be plausible yet quite extreme.”
2013 manmade catastrophes
A massive explosion at a fertilizer plant near the town of West, Texas, caused around $100m in insured losses to property.
A clothing factory building near Bangladesh’s capital, Dhaka collapsed, killing 1, 130 people.
An unattended 74 car freight train carrying crude oil ran away and derailed in the Canadian town of Lac Megantic, resulting in an explosion that killed as many as 50 people and destroyed half the downtown area.
A high speed train derailed outside the Spanish town of Santiago de Compostela, killing 79 and leaving 140 injured.
An oil pipeline owned by Chinese refiner Sinopec exploded in the city of Qingdao killing 50 people.
A Maxima supermarket collapsed in the Latvian city of Riga, killing 54 people inside.