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Entire contents Copyright © 1999 Business Insurance "Survival after disasters; An RMIS is instrumental when a
company faces 'shock' losses"
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IT'S FUNNY HOW THE ''real world'' hardly thinks about insurance unless a disaster strikes. We received a frenzied phone call from a National Public Radio reporter seeking information on business interruption and contingent business interruption claims relating to the Chicago ''flood.'' That catastrophe, along with the recent California earthquakes and the Los Angeles riots, prompted me to wonder whether the risk management community effectively deals with these unexpected and undesired ''shock'' losses. Furthermore, how would an information system help the risk manager in this situation? In the last year, we have witnessed our share of disasters, both natural and man-made. Recent natural catastrophes included earthquakes in California, flooding in Texas and Chicago, last year's major fire in the Oakland, Calif., area and recent hailstorms. And, from the man-made perspective, the highly publicized Michelangelo computer virus and the rioting in Los Angeles and elsewhere were among recent disasters. Obviously, from an economic standpoint, each of these events has an impact on a company's property, business continuity, personnel and other tangible assets. Each event has generated and will generate many claims, some of which will be insured, while others are self-funded. But, the issue really goes beyond the risk financing question. The real issue behind these events, the substance of risk management itself, is how does an organization or entity properly plan for unexpected catastrophes in order to minimize the impact on its bottom line? And, how does one quickly assess the potential impact on an organization of these catastrophic events? Dealing with these difficult questions can be more easily accomplished through a risk management information system that is comprehensive in scope, has flexible functions and is able to draw upon accurate exposure information. (Of course, if the risk management information system is installed in only one or two locations that are destroyed, all bets are off.) Let's take a look at how such a system could be instrumental in dealing with various unexpected catastrophes: Claims Of course, there will be claims from a disaster -- many of them. Over the past few months, I have emphasized the importance of good claims information systems in terms of management reporting, detailed and accurate data on reserves, settlements and so forth. Obviously, management is going to want to know how claims from a catastrophic event are developing, what their ultimate cost will be and when insurance is likely to pick up some of the claim. Important qualities in an RMIS include speed and accuracy of claims processing and quick but reasonable settlements based on good, solid information, thoroughly documented by a good information system reporting package. On a more sophisticated level, projecting ultimate loss costs can be done using case technology (computer-assisted simulation engineering). A few years ago, I wrote a column on Hartford Steam Boiler Inspection & Insurance Co.'s CASE product and how it is used to project losses at a large refinery or other giant plant when a fire occurs (BI, Dec. 19, 1988). Through the use of CASE graphics tools and quantitative analysis, depending on where the fire took place, one can use the computer to estimate the total loss, including real property and work in progress. However, the true value of an RMIS lies in the non-claims areas, which range from management of certificates of insurance, tracking and asset management to quantitative mathematical analyses measuring the impact of expected losses on a company's cost of risk. Insurance management At this moment, businesses in Chicago and Los Angeles are trying to figure out the extent of loss to their property and equipment, as well as business interruption and contingent business interruption losses. Managers are feverishly reviewing certificates of insurance and hold-harmless clauses as part of this post-catastrophe ritual. The RMIS can reduce the time spent quantifying the nature and scope of loss if it contains a data base module containing certificates of insurance issued or received, locations of products stored in warehouses and lists of hold-harmless agreements and vendors with whom those agreements have been signed. And, depending on how sophisticated the tracking modules are, one can get details, right down to the type of products stored at a burned warehouse. Another key module within the comprehensive RMIS is loss control analysis. The facts gathered from the claims investigation form a good base of data to be analyzed by this module. For example, the effectiveness of any sprinkler systems (or lack thereof) can be quantified by the system, as can the logic (or illogic) of having a fleet of company vehicles dispersed at certain locations through the metro Los Angeles region at the time of the riots. Advanced risk management analysis Comprehensive systems also will go beyond the basic claims, insurance and loss prevention capabilities to assist the risk manager in quantifying losses. The most common is financial analysis/modeling. This uses existing data within the claims data base and combines it with other industry-related data bases for claims, whether using more apparent property-related claims (including business interruption claims) and casualty-type claims that result from disasters allegedly caused by human negligence. The analytical portions of this comprehensive system not only contain the various risk financing methods used by the organization, but also the methodology to measure the impact of catastrophe shock losses on the risk financing method. Borrowing from other modules, the system can identify potentially liable third parties, whose insurance could be brought in to lessen the potential impact of the disaster. All this data can be analyzed within the financial analysis model. Depending on the volume of expected claims, actuarial analysis also can be brought to bear, developing existing and expected claims valued to ultimate. Getting slammed with an unexpected catastrophic loss is a harsh reality facing risk management professionals. Having a comprehensive risk management program in place is paramount to any organization's ability to deal effectively with these shock losses when they occur. Having a well-designed information system that assists risk management when these things occur is even better. It reduces the anxiety level by providing solid information quickly. It gives the information necessary for the risk manager to give troubled senior management (who right now are suddenly very interested in the risk management department). When the risk manager has some answers, it is great -- not only for the organization, but also for the risk management professional and the risk management profession. Copyright© 1992 Business Insurance |