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Slide1

PowerPoint Slides

for ProfessorsSpring 2010 Version

This file as well as all other PowerPoint files for the book, “

Risk Management and Insurance: Perspectives in a Global Economy

” authored by Skipper and Kwon and published by Blackwell (2007), has been created

solely

for classes where the book is used as a text. Use or reproduction of the file for any other purposes, known or to be known, is prohibited without prior written permission by the authors.

Visit the following site for updates:

http://facpub.stjohns.edu/~kwonw/Blackwell.html

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 [Slide Master]

W. Jean Kwon, Ph.D., CPCU

School of Risk Management, St. John’s University

101 Murray Street

New York, NY 10007, USA

Phone: +1 (212) 277-5196

E-mail:

Kwonw@stjohns.edu

Slide2

Risk Management and Insurance: Perspectives in a Global Economy 15. Risk Management for Catastrophes

Click Here to Add Professor and Course InformationSlide3

Study PointsRisk analysis

Risk controlRisk financing3

http://www.wmo.ch/pages/prog/dpm/images/collage.gifSlide4

Risk Analysis4Slide5

Risk AnalysisAnalysis of potentially catastrophic events largely identical to those for non-catastrophic event, except:

Devotion of greater time and effort to exploring the susceptibility of the entity’s physical structure to damage.Common reliance more heavily on modelingScenario planning can play a significant role.5Slide6

Susceptibility to DamageDesign features and construction quality

The tradeoff between cost and qualityCauses of damageNaturalHuman-made (e.g., terrorists or disgruntled employees)Age of structuresThe Great Hanshin (Kobe) Earthquake in Japan in 1995InfrastructureTransportation and communication facilities of the affected areaCritical to a prompt and orderly recoveryHurricane Katrina in New Orleans in 2005 in the U.S.

6Slide7

7

http://katrina.house.gov/Slide8

Catastrophe ModelingThe 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”)Primarily for natural catastrophes such as hurricanes, earthquakes, storms, floodsSome for terrorism (e.g., AIR modeling)Widely used by insurers, reinsurers and intermediariesFigure 15.1 for a natural catastrophe model8Slide9

Natural Catastrophe Risk Modeling (Figure 15.1)

9Description of the model in pages 376-377.Slide10

Scenario PlanningAnalysts generate simulation games

that are used by management to consider and develop plans to deal with alternative futuresScenarios bring forth decisions by the ultimately responsible persons.Subsumes elements that are difficult and often impossible to formalize, let alone quantifyCause decision-makers to realize that they consciously or unconsciously likely have a preconceived notion of what the “official future” will hold.Insight 15.1Figure 15.2

10Slide11

Closed Strategic Management Loop11

Construct

Multiple

Scenarios

Devise

Strategic

Plan Based on Scenarios

Implement

Strategies

Monitor the

Environment and Strategic ImplementationSlide12

Terrorism Risk AnalysisProtection priorityHigh priority

Medium priorityLow priorityHazard and vulnerability assessmentDefining threatsIdentifying likely threat event profile and tacticsAssignment of a threat rating12

Go also to

FEMA

for additional information.Slide13

Risk Control13Slide14

Loss PreventionLand use restrictions

Building codesDisaster planningThe U.S. – A Failure of Initiative, a report about government preparedness against disasters – Hurricane Katrina and New OrleansInsight 15.3 (Home Depot’s reactions to the hurricane)The E.U. – The Environmental Integration Manual14Slide15

Loss ReductionCrisis managementThe process of identifying those situations that constitute a crisis, having an organized response to the crisis and ultimately resolving the crisis

The processEngage appropriate employees to consider the range of crisesDevelop responses for each identified crisis, including a master planAssign clear recovery responsibilities to individualsSpeak with one voice and through one high-level personKeep 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

15Slide16

Loss Reduction – Corporate ViewpointThe importance of effective crisis management – “sustainable risk management”

Corporate catastrophes and shareholder valueReputation crises and shareholder valueMass fatality events and shareholder value16

Enterprise Risk

Management

(ERM)Slide17

Loss ReductionInsight 15.4 (Tylenol case)

Insight 15.5 (Boycott)Insight 15.6 (Reputation loss)Figure 15.4 (Reaction of Share Prices to Mass Fatality Events)17

http://img218.imageshack.us/img218/9641/71374286xv4.jpg

Tamper-proof sealsSlide18

Share Price and Reputation Crisis (Figure 15.3)

18Slide19

Share Price and Mass Fatality Event (Figure 15.4)

19Slide20

Risk Financing20Slide21

RetentionRecommended whenInsurance is unavailable or unaffordable

Property owners have the capability of financing losses internallyRetention is often used along with other risk financing options.For example, excess insurance on top of large retentionThe problems with retention are vividly demonstrated when a catastrophe occurs.Especially in developing countries21Slide22

InsuranceRisk 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 eventsFlood damagesEarth movementTerrorist actCountrywide variations exist.22Slide23

Insurance – Catastrophe ReinsuranceOften a risk-financing and loss-sharing arrangement between insurance firms

Several reinsurers that specialize in catastrophe reinsuranceThe CaribbeanThe London market23Slide24

Insurance – Private Risk PoolsA wide array of uses by insurance companiesResidual markets for nonstandard drivers in automobile insurance or employers in workers’ compensation

A case of catastrophic loss exposure – nuclear activityThe World Nuclear AssociationOECD’s Paris Convention on Third Party Liability in the Field of Nuclear Energy of 1960 (amended in 2004)The Price-Anderson Act in 1957 (U.S.)Insight 15.724Slide25

Nuclear Insurance Coverage (Insight 15.7)Facility form (liability) policy

Secondary financial protection policyMaster worker policySuppliers and transporters policy25Slide26

Insurance – Government Risk Pools (CEA)26

$1.0

$3.0

$2.0

$1.0

$1.5

$2.0

Assessment against insurers

Reinsurance

Line of credit

Reinsurance

Additional commitments from insurers

Insurers' Initial Capital Contributions

CEA

(www.earthquakeauthority.com)Slide27

Insurance – Terrorism Risk Australia – Australian Reinsurance PoolAustria –

Terrorpool AustriaFrance – GAREATGermany – ExtremusIsrael – The Property and Tax Compensation FundThe Netherlands – NHTSpain – CCSSouth Africa – SASRIA The U.K. – Pool ReThe U.S. – Terrorism Risk and Insurance Act27

Table 15.1Slide28

Catastrophe Risk Securitization – Cat Bonds28

InstitutionalInvestors

Catastrophe

Risk

SPV

(Reinsurer + Bond Issuer)

Premium

Coverage

Investment

Principal + Return

Insurer (Reinsurer)

Premium

Coverage

Investment Bank

(Bond Underwriting + Rating)

Escrow Account

(Bond Investment)

Not in the book.Slide29

Discussion Questions29

Going Green!Slide30

Discussion Question 1Older 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?

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Discussion Question 2Loss 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?

31Slide32

Discussion Question 3Develop at least two “alternative futures” for how risk management might change for operators of nuclear power plants.

32Slide33

Discussion Question 4If sound crisis management is as important as suggested in this chapter, why do major corporations seem to accord it so little attention?

33Slide34

Discussion Question 5We have described terrorism risk pools in selected countries.

Find the reasons why some governments listed in the table acted upon creation of a terrorism insurance scheme before September 11, 2001.Do you find any other governments offering similar programs? (Hint: Examine Brazil, Finland, Hong Kong and Japan for possible programs.)34