The Fury of Anais
Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.
Buddy Welch, an analyst with the National Hurricane Center at Florida International University in Miami, is finishing his second cup of coffee on the morning of August 22, 2017 as he monitors a tropical wave formation off of the western coast of Africa.
Buddy looks over to his colleague Jonathan Schell.
“Hey Jon, will you come look at this a second?”
“Sure, what is it?” Schell says before walking over to Buddy’s desk and looking over his shoulder.
“Look at that,” Welch says, pointing to the satellite images on his monitor.
“That’s a very strong wave,” Schell says, watching the evidence of the strong tropical wave moving off of the coast of Africa.
“Could be the strongest thing we’ve seen all summer,” echoes Buddy.
“By far,” the two scientists say at the same time.
“We’ve got very warm water in the Atlantic right now,” Jonathan adds.
He and Buddy continue to monitor the tropical wave for signs of strengthening and possible convection. Forecast models indicate that conditions are ripe for the wave to organize quickly into a tropical storm and thereafter, a hurricane.
The tropical wave does become a tropical storm, dubbed “Anais,” and bolstered by unusually warm ocean water, it intensifies as it moves across the tropical Atlantic toward the Caribbean and the United States.
On August 26, Anais is upgraded to a hurricane in the tropical Atlantic, east of the Eastern Caribbean.
As the hurricane moves through the Caribbean, past Hispaniola, the National Hurricane Center notifies residents and emergency managers up and down the Eastern Seaboard that Anais poses a very real and severe threat.
Several days later, on the 1st, Anais buffets the Bahamas with high winds. It spares the Bahamas a direct hit and instead veers north- northwest and, now classified as a Cat 4, with maximum sustained winds of 150 mph, takes dead aim at the coast of North Carolina.
Ray Bonner, risk manager for the City of Norfolk, Va. is one of those who takes heed.
Bonner immediately convenes Norfolk’s crisis management team, which is more sophisticated than many because it has a “business resilience” subcommittee that is dedicated to coordinating with municipal officials in the event of a natural catastrophe. The committee’s mandate is to help businesses open as soon as possible in the aftermath of a major storm.
“This hurricane could hit every coastal city from Wilmington, N.C. to Boston,” Bonner tells his assembled crisis management team.
“We can’t be sure that we’ll get much help from neighboring emergency responders if that’s the case,” he tells the committee.
On Labor Day, September 4, Anais strikes Wilmington, N.C. as a Cat 4. The storm cripples the Wilmington power grid and causes 13 deaths.
All Fall Down
Despite the damage done by Anais in Wilmington, Bonner and other members of Norfolk’s crisis management team are frustrated by what they see as a lack of sense of urgency in some quarters to evacuate as necessary and take proper precautions. Perhaps distractions due to end-of–summer Labor Day plans are partially to blame, they reason.
Well before the hurricane made landfall, Bonner and risk managers from other East Coast cities got on a conference call to discuss the storm’s potential impact and how each city might coordinate with the other to assist in recovery.
“This could end up being every bit as bad as Hurricane Sandy,” said Elizabeth Acres, the risk manager for Boston, Mass.
“Or worse,” said Jay Baker, the risk manager for New York City.
“You ever heard of the Norfolk/Long Island Hurricane of 1821?” Baker says.
“No,” says Acres and others simultaneously.
“I’ll send you the link,” he says. “Path of Anais looks very similar to the path of that 1821 hurricane.”
On September 5, Anais, still a Cat 4, hits Norfolk. Without losing strength, the hurricane continues north, striking Cape May, N.J., New York City and Connecticut in turn.
The storm is every bit as damaging as Hurricane Sandy was, and causes historical levels of wind and flood damage throughout the Washington, D.C. to Boston megalopolis.
Back in Norfolk, Bonner, along with the city’s emergency response coordinator Jim Christopher, is touring flooded sections of the city on September 7 in a zodiac that’s equipped as an emergency response boat.
They’re touring one of the city’s business districts, which is still inundated with three feet of water. The zodiac reaches the end of a block and Christopher eases off on the throttle.
The two men stare at the devastation in the deserted business district in silence. They can see dresses and hats floating, half-submerged in the gray flood waters, through one of the few intact store windows.
“I don’t see when these businesses can re-open,” Bonner says.
“I don’t see when we even get into these shops to have a look at them,” Christopher says.
On September 12, Bonner again gets on a conference call with his fellow risk managers from cities in the Northeast. Accompanying them on the call is Ray Harbridge, a Northeast Regional Director for the Federal Emergency Management Agency.
Boston’s Elizabeth Acres leads the dialogue with Harbridge.
“Ray, can you update us on the timeline for any funding assistance we might get from Washington?” Acres says for openers.
“We have no answers in that area Liz,” Harbridge says.
“We’re dealing with an unprecedented level of damage to the six largest cities in the East,” Harbridge said.
“First impressions are that we have millions of people affected,” he said.
“And that’s not even getting into the business impact,” Bonner said.
“That’s correct,” Harbridge said.
“We’ve got to concentrate on housing and medical care for those most vulnerable and those displaced,” he said.
“I know you’ve got plenty of worries on your end, but you’re going to have to rely on your own resources for the foreseeable future. I really don’t know when we see a way clear of all this,” he said.
“Let’s face facts folks,” New York’s Jay Baker said after Harbridge, extremely pressed for time, hung up.
“We still haven’t received federal reimbursement for Hurricane Sandy damage and expenses in some cases, and we’re five years out from that.”
“We’re going to be at this a long time,” Boston’s Acre said.
“You can take that five years from Sandy and double it,” Baker said.
Ever since he heard the first indication from the National Hurricane Center that Anais should be watched, back in late August, Ray Bonner’s mind had been turning on something.
When Hurricane Sandy struck New Jersey and flooded Lower Manhattan in 2012, it caused a permanent shift in Bonner’s thinking.
Before Sandy, the idea that a major hurricane would come near enough to cause substantial damage in New York was thought to be a “Black Swan” event, something with an extremely low possibility, albeit having potentially devastating consequences.
After Sandy, Bonner began to think about ways to mitigate the costs of a major hurricane strike. He’d begun discussions with the City’s budget director and its finance committee on the possible purchase of layers of reinsurance that could help the city defray not only the costs associated with hurricane clean-up and repair, but the lost property tax and business income tax revenue should the region’s homes and businesses take a big hit.
Presentations Bonner made on the Norfolk/Long Island Hurricane of 1821 to city finance officials left them unmoved, though. It wasn’t that city leaders were callous to Bonner’s concerns. But pressing matters like negotiations with unionized police and firefighters took up most of their attention.
Norfolk’s finances were basically sound. Bonner’s attempts to sway city leaders to a different way beyond floating bonds and raising taxes on the back end in the event of a catastrophe just couldn’t gain any traction. City officials felt that they had things under control and didn’t want to start piling on new expenses like insurance premiums.
Six months after Anais struck, analysts released data that showed the storm caused $40 billion in wind damage and $70 billion in storm surge damage to cities and towns from Wilmington, N.C. to Boston.
What Bonner considered a real threat after Sandy struck turned out to be true after Anais. Norfolk city finances, which had previously been solid, began to deteriorate.
Twenty percent of the Norfolk/Virginia Beach region’s housing stock was rendered uninhabitable by Anais. Reductions in property tax revenue, coupled with business tax revenue reductions, were creating budget deficits in Norfolk and in every other city that was hit by Anais.
That public sector pain was being repeated in the private sector. Loss of mortgage interest and principle payments, a lynchpin of the banking system, led to the failures of dozens of regional banks and severe limitations on the revenue of the larger banks.
In 2021, four years after Anais hit, the Rand Corporation released a study, titled “The Anais Effect” which estimated that the economic damage from Anais restricted growth in the Northeast by seven percent from 2017 to 2021.
Rand Corp. researchers estimated that by 2027, 10 years after the storm, an “Anais Recession” — the first ever regional economic recession connected to a natural catastrophe — would limit growth on an annual basis in the Northeast by five percent.
Risk & Insurance® partnered with Swiss Re Corporate Solutions to produce this scenario. Below are Swiss Re Corporate Solutions’ recommendations on urban and corporate resilience, and a reminder about the company’s global expertise in the areas of Nat Cat modeling and disaster preparedness. This perspective is not an editorial opinion of Risk & Insurance®.
The 1821 hurricane struck the mid-Atlantic and Northeast United States at a time in history when human population and concentration of value were dramatically lower than present day. In fact, only 136,000 people lived in Washington and New York at the time. If a major catastrophic event like the 1821 Norfolk Long Island Hurricane was to happen today, it would cause 50% more damage than Sandy and potentially cause more than $100 billion in property losses stemming from wind damage and flooding from storm surge.
That’s just one part of the story, however. Taking into consideration lost tax revenue due to destroyed homes and business, lower real estate values and other economic considerations, the broader economic impact would grow to over $150 billion. That’s well above the aggregate losses of all storms which recently impacted the Eastern United States, including Hurricane Sandy.
With an eye toward a future event that could dwarf Sandy in terms of insured and economic losses, Swiss Re has published a new report that analyzes the 1821 hurricane and how a repeat event would impact the region today. Download the report at: http://media.swissre.com/documents/the_big_one_us_hurricane_web2.pdf
To prepare for such a future event, large scale urban resilience must be at the forefront of the risk management community. Of course, protecting lives should be the highest priority for city authorities seeking to improve their disaster preparedness. Beyond that, municipalities and businesses – large and small – must work together to ensure critical infrastructure and supply chain redundancy. This can be accomplished, in part, by more fully understanding the geographic hazards via advanced modeling techniques using Swiss Re’s CatNet® tool.
CatNet® – Advanced Modeling
Combining satellite imagery with Google MapsTM and Swiss Re’s proprietary historical data, CatNet® allows risk management professionals to analyze worldwide natural hazard exposures. CatNet® features:
- Natural hazard atlas
- Country-specific insurance data
- Disaster statistics
This allows risk managers to prepare local, regional and cross-regional risk profiles to assist management in disaster preparedness. The result is a more informed viewpoint about a company’s or city’s insurance considerations and potential enterprise risk management gaps. An organization’s disaster preparedness can be further enhanced by partnering with local authorities, businesses and municipal leaders to ensure community-wide resilience.
Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.
Part One: Cocky Sons of Guns
With a steady, fluid motion, Ray Fines stretched his six-foot-two-inch frame to its limit and smacked the tennis ball toward his opponent Robert Gailey on Gailey’s ad-court side.
Fines served with a lot of top-spin, so the shorter Gailey had to hop a little on his return, but he reached out and backhanded the ball masterfully down Fine’s forehand side for a winner.
Someone whistled appreciatively from the grassy court-side banks of the hard-surface courts at San Diego’s Corona del Playa Country Club: Neither Fines nor Gailey looked over.
For one, they were both well-paid executives with the highly successful niche luxury automobile manufacturer Charing Motors, based in San Diego. The company’s 2014 revenue was $850 million.
It was fair to say success had gotten to their heads a little bit and they tended to be socially unapproachable.
They were also two of the club’s top players and were used to people watching them play.
“Game and set,” Gailey said as Fines trotted over to pick up the ball.
“One more?” Fines asked, looking over to Gailey and hoping for a chance at revenge.
“Nah, we need to get set up for the barbeque tonight,” Gailey said. “I’d better get back to the house or I’m going to be the one getting grilled.”
After showering, Gailey and Fines stopped in the clubhouse for some sparkling water and freshly squeezed orange juice, fortified with raw vegan supplements. They were quietly hydrating when Gailey, flipping through the news feeds on his mobile phone, stopped.
“Hmmm,” he murmured.
“What?” said Fines, Charing Motors’ risk manager.
“Looks like there’s a sizable tropical storm heading for mainland China. Could turn into a typhoon,” said Gailey, the company’s procurement director.
“We don’t have any suppliers there,” Fines said.
“No, we don’t,” Gailey agreed.
“But some poor son of a gun does. Looks like it’s headed right at the Pearl River Delta. Lots and lots of tech suppliers there,” he said.
“First we miss Tohoku, now we luck out on this. We must be doing something right,” Fines said.
Charing Motors, back in its infancy, had escaped the supply chain damage that many auto manufacturers suffered when an earthquake and tsunami devastated Japan and its economy in 2011.
“Evidently so,” Gailey said, looking up from his mobile phone and flashing a suntanned, winning smile at Fines.
Part Two: A Stunning Revelation
Three weeks later, Gailey and Fines were in a conference room, hunched over a speaker phone.
“Good morning,” Gailey said as the other caller beeped on.
“Good afternoon,” said the caller in Taipei, acknowledging the 15-hour time difference between Taipei and San Diego.
After some brief and awkward preliminaries, Gailey got to the point.
“We’re concerned about these delivery delays we’re seeing, Dr. Wu,” Gailey said. “We’re looking at a three-week backlog as things stand, and I’m not confident the delays won’t get even longer,” Gailey said.
There is a long pause.
“Are you with me, Dr. Wu?” Gailey said.
“Yes. I’m with you,” said Dr. Wu.
Dr. Wu, who earned his Ph.D. at Carnegie Mellon University in Pittsburgh, is the chief executive officer of Paramount Technologies, which assembles the collision avoidance and cruise control components for Charing Motors.
“We … it’s hard to explain but we are conducting an investigation into our suppliers. We have some suppliers in the Pearl River Delta in China and we are uncertain as to their status,” Dr. Wu said.
Fines punched the mute button.
“Pearl River? I didn’t think we had any exposure there,” Fines said.
Gailey unmuted the phone.
“Pearl River, you say? That area was heavily damaged by Typhoon Lei, was it not?”
“Yes sir, substantial damage. We have multiple suppliers there we fear have been heavily damaged,” Dr. Wu said.
“Well how long until you? …” Fines began but was cut off by Dr. Wu’s response.
“We cannot offer a timeline on when our investigation will be finished,” Dr. Wu said.
Robert Gailey and Ray Fines just look at each other. In the space of one conversation, their confidence level in the short- to mid-term success of their company plummeted.
Part Three: The Flood in Bao ‘an
Wearing rubber boots, Vince Yee sloshed across his factory floor at the semi-conductor manufacturer Yee Industries in Bao ‘an, causing a pair of two-foot-long grass carp that typhoon flood waters stranded in his shop to swim for cover.
Yee grimaced at the sight of the river fish in his once-pristine manufacturing facility. He climbed up on a flight of concrete steps. Gaining that perch gave him enough elevation to sit down and light a cigarette.
Yee exhaled cigarette smoke and looked out over the water-covered factory floor. Here and there, employees moved about in vain attempts to hoist expensive machinery up on blocks in an effort to lessen the water damage.
It’s Yee that supplies the semi-conductors to Dr. Wu’s Paramount Technologies, without which Wu will not be able to assemble the collision-avoidance technology for Charing Motors’ luxury sedans.
Yee takes another long drag on his cigarette and his cell phone vibrates as he sees a water snake working its way under a water-soaked piece of equipment that cost him $750,000.
“Hello?” Yee says in a dour tone of voice.
“Yes, this is Vince Yee. Yes, Dr. Wu.”
Yee looks out over the factory floor as Dr. Wu talks. From his expression, Yee would rather throw his phone in the flood water then listen to what Dr. Wu is asking him.
“No. No. I have no flood insurance,” Yee said.
“You can’t even get flood insurance down here. I’m 30 centimeters above sea level, Dr. Wu. You know that.”
Yee grimaces in frustration and anger as Dr. Wu asks him another question.
“Your guess is as good as mine, Dr. Wu. It will be a bloody miracle if I ever get back into business at this rate. But I’ll let you know. Good bye.”
Yee turns off the cell, runs his free hand over his face and hair in frustration and then flips his cigarette butt into the flood waters.
Part Four: Searching in Vain
Lee Ackles, Charing Motors CFO, leans back in his office chair and looks away from Robert Gailey and Ray Fines toward the San Diego Harbor.
“I’m just trying to get my head around this and I don’t think I can,” Ackles says to Gailey and Fines, when he brings his gaze back from the water.
“From what you’re telling me, our collision-avoidance system supplier really doesn’t know at this point where it can get the semi-conductors it needs to finish our product,” Ackles said.
“That’s correct,” Gailey said bravely.
“We’ve determined that a lot of their suppliers are single-source. Many of them were in the Pearl River Delta which was so heavily damaged by the typhoon in May.”
“Five months ago,” Ackles said, looking at Gailey and Fines like they had no brains.
“Correct.” It was Fines that managed to speak this time.
“And what have you found out in the past five months?” Ackles asked.
“There’s a lot of variation in product specs, even the names of the products in some of these Asian countries,” Gailey said.
“The semiconductors we’re looking for are really hard to find in Taiwan, Thailand or even mainland China right now,” Gailey said.
“We hope to have this thing nailed down in another month but as it stands, we can’t complete production on the CM-5 or the CM-7 until we do,” Gailey said.
“The CM-5 and the CM-7,” Ackles said. At this point he clicked his mouse and looked at some data on his screen.
“We’re looking at a real punch in the gut unless we can get it done much sooner guys,” Ackles said.
“Paramount Technologies, that’s the company in Taipei?” Ackles asked. He clicked and looked at his computer screen again.
“Wow, $4 million in billings to us last year. Get on a plane, go see Dr. Wu and company and get us a quicker answer. Both of you. Go tomorrow.”
Part Five: A Visit to the Delta
Robert Gailey and Ray Fines are passengers in a 1969 Piper Cherokee 6/260 that is winging its way along the Pearl River toward the Bao ‘an location of Yee Industries. The Piper is equipped with twin pontoons and makes a perfect river landing.
Jackie Chen, the Piper Cherokee pilot, turns and smiles toothily at Gailey and Fines from behind yellow-tinted sunglasses after his plane drifts up to the dock outside of Yee Industries and is secured by a Yee Industries employee.
“Just like I said, gentleman, smooth as silk,” Chen said, mimicking the smooth descent and landing of the plane with his hand.
Gailey and Fines both try forced smiles but just clamber out instead.
Walking up the path to the Yee Industries factory, Fines scanned the property and saw little sign of activity.
“Doesn’t look like they are even close to operational,” Fines said.
“Who knows,” Gailey said as they reached the factory door.
Entering the factory through an open side door, Gailey and Fines encounter a factory floor that is now dry, but shows no indication of being able to achieve full production anytime soon.
In one corner, six employees are sitting around a table hand-fashioning some semiconductor parts.
“Can I help you gentlemen?” said Vince Yee, as he approached the Americans.
“We’re looking for Vince Yee,” Gailey said.
“I’m Vince Yee,” said the factory owner.
“I’m Robert Gailey and this is Ray Fines. We’re with Charing Motors out of San Diego in the U.S.”
Yee stared at Gailey and Fines blankly.
“You’ve heard of Charing Motors?” Fines said.
“No. Never heard of it,” Yee said.
Gailey and Fines pause as this latest piece of information resonates.
“We make cars,” Gailey said.
“You want to buy this factory? You could make cars here in China,” Yee said.
“That’s not what we had in mind,” Fines said.
The conversation with Yee yielded one piece of productive information. After looking at the specs of the semiconductors Charing Motors needs to assemble its collision-avoidance system, Yee gave Fines and Gailey the name of a Pearl River manufacturer still at full production.
This manufacturer, though, is upstream in Panyu.
“Can you take us to Panyu?’” Gailey asked Jackie Chen as he and Fines get back to the Piper Cherokee.
“Can I take you to Panyu? I was born in Panyu,” Jackie Chen said with a chuckle.
“Just get in and fasten your seatbelts.”
As the Piper Cherokee takes off, Ray Fines and Robert Gailey avoid eye contact, neither of them knowing how soon they’ll be able to get the part they need to keep crucial manufacturing processes going.
It will be a full year until Charing Motors can resume full production. The privately held company recorded a 40-percent revenue drop for fiscal year 2015.
Risk & Insurance® partnered with FM Global to produce this scenario. Below are FM Global’s recommendations on how to prevent the losses presented in the scenario. This perspective is not an editorial opinion of Risk & Insurance®.
1. Demand more from first and second-tier suppliers: It’s not enough to trust that your first and second-tier suppliers have an adequate knowledge of their suppliers’ property-CAT exposures and resilience. Insureds, working through their brokers and carriers, should create contractual certainty with their suppliers that their supply chain will be resilient in the event of a natural catastrophe or some other supply chain interruption.
2. Identify at-risk locations: Locations such as the Pearl River Delta of China is a prime spot for property losses, business interruption and supply chain problems due to the extremely high concentration of technology, automotive and telecommunications parts suppliers in natural hazard-exposed locations. As vulnerable as it is, however, the Pearl River Delta is just one example of a super-exposed location that could result in substantial business interruption should a windstorm, earthquake, flood or some other event transpire.
3. Involve the claims executives: In mapping out business interruption, property and supply chain risk and risk transfer options, make sure to involve the claims executives from your carrier in the discussion. Involving only the broker and the carrier at renewal time could result in an incomplete understanding of your company’s claims recovery chances in the event there is a loss.
4. Pinpoint single-source suppliers: One of the most vulnerable parts of your supply chain is that occupied by single-source suppliers. The use of single-source suppliers in some cases might be unavoidable, but identifying those parts of your supply chain that are single source and addressing them with specific risk management strategies is a good idea.
5. Everyone gets hit: Never assume that just because you haven’t suffered a substantial property, business interruption or supply chain loss that you won’t. An increasing complexity of global supply chains and economic forces that dictate business establishment in natural hazard-exposed areas almost guarantees, that sooner or later, your company will face a peril of one kind or another.
Global Program Premium Allocation: Why It Matters More Than You Think
Ten years after starting her medium-sized Greek yogurt manufacturing and distribution business in Chicago, Nancy is looking to open new facilities in Frankfurt, Germany and Seoul, South Korea. She has determined the company needs to have separate insurance policies for each location. Enter “premium allocation,” the process through which insurance premiums, fees and other charges are properly allocated among participants and geographies.
Experts say that the ideal premium allocation strategy is about balance. On one hand, it needs to appropriately reflect the risk being insured. On the other, it must satisfy the client’s objectives, as well as those of regulators, local subsidiaries, insurers and brokers., Ensuring that premium allocation is done appropriately and on a timely basis can make a multinational program run much smoother for everyone.
At first blush, premium allocation for a global insurance program is hardly buzzworthy. But as with our expanding hypothetical company, accurate, equitable premium allocation is a critical starting point. All parties have a vested interest in seeing that the allocation is done correctly and efficiently.
“This rather prosaic topic affects everyone … brokers, clients and carriers. Many risk managers with global experience understand how critical it is to get the premium allocation right. But for those new to foreign markets, they may not understand the intricacies of why it matters.”
– Marty Scherzer, President of Global Risk Solutions, AIG
Basic goals of key players include:
- Buyer – corporate office: Wants to ensure that the organization is adequately covered while engineering an optimal financial structure. The optimized structure is dependent on balancing local regulatory, tax and market conditions while providing for the appropriate premium to cover the risk.
- Buyer – local offices: Needs to have justification that the internal allocations of the premium expense fairly represent the local office’s risk exposure.
- Broker: The resources that are assigned to manage the program in a local country need to be appropriately compensated. Their compensation is often determined by the premium allocated to their country. A premium allocation that does not effectively correlate to the needs of the local office has the potential to under- or over-compensate these resources.
- Insurer: Needs to satisfy regulators that oversee the insurer’s local insurance operations that the premiums are fair, reasonable and commensurate with the risks being covered.
According to Marty Scherzer, President of Global Risk Solutions at AIG, as globalization continues to drive U.S. companies of varying sizes to expand their markets beyond domestic borders, premium allocation “needs to be done appropriately and timely; delay or get it wrong and it could prove costly.”
“This rather prosaic topic affects everyone … brokers, clients and carriers,” Scherzer says. “Many risk managers with global experience understand how critical it is to get the premium allocation right. But for those new to foreign markets, they may not understand the intricacies of why it matters.”
There are four critical challenges that need to be balanced if an allocation is to satisfy all parties, he says:
Across the globe, tax rates for insurance premiums vary widely. While a company will want to structure allocations to attain its financial objectives, the methodology employed needs to be reasonable and appropriate in the eyes of the carrier, broker, insured and regulator. Similarly, and in conjunction with tax and transfer pricing considerations, companies need to make sure that their premiums properly reflect the risk in each country. Even companies with the best intentions to allocate premiums appropriately are facing greater scrutiny. To properly address this issue, Scherzer recommends that companies maintain a well documented and justifiable rationale for their premium allocation in the event of a regulatory inquiry.
Insurance regulators worldwide seek to ensure that the carriers in their countries have both the capital and the ability to pay losses. Accordingly, they don’t want a premium being allocated to their country to be too low relative to the corresponding level of risk.
Without accurate data, premium allocation can be difficult, at best. Choosing to allocate premium based on sales in a given country or in a given time period, for example, can work. But if you don’t have that data for every subsidiary in a given country, the allocation will not be accurate. The key to appropriately allocating premium is to gather the required data well in advance of the program’s inception and scrub it for accuracy.
When creating an optimal multinational insurance program, premium allocation needs to be done quickly, but accurately. Without careful attention and planning, the process can easily become derailed.
Scherzer compares it to getting a little bit off course at the beginning of a long journey. A small deviation at the outset will have a magnified effect later on, landing you even farther away from your intended destination.
Figuring it all out
AIG has created the award-winning Multinational Program Design Tool to help companies decide whether (and where) to place local policies. The tool uses information that covers more than 200 countries, and provides results after answers to a few basic questions.
This interactive tool — iPad and PC-ready — requires just 10-15 minutes to complete in one of four languages (English, Spanish, Chinese and Japanese). The tool evaluates user feedback on exposures, geographies, risk sensitivities, preferences and needs against AIG’s knowledge of local regulatory, business and market factors and trends to produce a detailed report that can be used in the next level of discussion with brokers and AIG on a global insurance strategy, including premium allocation.
“The hope is that decision-makers partner with their broker and carrier to get premium allocation done early, accurately and right the first time,” Scherzer says.
For more information about AIG and its award-winning application, visit aig.com/multinational.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with AIG. The editorial staff of Risk & Insurance had no role in its preparation.