Lessons Learned From Chile: The Risk Management Redux

Risk managers have lessons to learn about earthquake exposures out of Chile too.

By MATTHEW BRODSKY, senior editor/Web editor of Risk & Insurance®

It's been said that the Chile earthquake of February 2010 was a reinsurance event. And as we saw in our cover story on the topic, reinsurers (and primary underwriters) apparently have a lot to learn about quake exposure going forward. But much of the $8 billion-plus in insured losses from Chile occurred to businesses there. Local smallish ones sure, but also larger sophisticated Chilean companies and also multinational corporations.

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So it stands to reason that companies everywhere can learn from those losses. The following are two major lessons out of the Chile quake--two among many of course.

THE BUILDING CODE LESSON

We all have heard the lesson coming out of the comparison between the Chilean quake and the disaster that befell Haiti in January of this year. In magnitude, the Haitian event was smaller yet hundreds of thousands more people died than in Chile and whole neighborhoods of buildings ceased to exist. Why? Building codes. High rises and other modern buildings in Chile, built after the 1960 monster quake, survived this year's 8.8-magnitude event and countless inhabitants were saved.

Yet with building codes, there continues to be a major disconnect between the public and business expectations and what building codes are actually for, according to Andy Thompson of the engineering consulting and design firm Arup. In short, codes are designed to save those thousands of lives--not your investment. Case in point is the damage to nonstructural elements of business offices, factories, hospitals and other facilities that shut them down, leading to major business interruption losses.

Major corporations might have expectations that they'll be able to use their facilities after a quake if they're built to superior building codes. Not so, Thompson said. In fact, the more hardened a facility gets structurally, the more noticeable will be the nonstructural insufficiencies.

"And we will see it quite a bit after a major earthquake in California," Thompson said.

The lesson: make sure that building codes for nonstructural elements are met and are not a "second thought," Thompson said. To be cost-effective, focus the effort on critical and other important locations.

THE CLAIMS LESSON

In the mad rush after news reports spread out of Chile like fault lines in the hours and days after the quake, any reinsurer, insurer and especially multinational corporation with insured properties in Chile wanted to know what shape those properties were in. As is the case with most catastrophic events, this need to know is often thwarted, for days, even weeks, as the slow logistics of disaster take over. And from talking with industry experts, the claims process for Chile, even months after the main event, has still been slower than expected. Therein lies some other lessons for risk managers. Seek out claims help that has the capabilities to get you the needed information and assistance as soon as possible.

When it comes to multinationals working in foreign lands, the key could be a third-party administrator with international reach and local capabilities, or making sure such an adjusting firm is written into your insurance policy at least.

Listen to Kevin Frawley, senior vice president for the Americas operations at Crawford & Co., describe how his firm was able to handle Chile. Crawford has a Chile subsidiary and was able to get Crawford corporate people on the ground a week after the event, as well as leading adjusters and account managers from London.

"We have pretty experienced and language proficient people there on behalf of Crawford," he said.

But perhaps the key variable to that equation is the local team. From Frawley's reporting, it's apparent that the Chileans were running the show, working with the Chilean primary carriers and the government, with the Crawford people working alongside with their international insurance and reinsurance clients.

The local operation is essential in Chile because of the sophisticated insurance and regulatory environment, which is "very well coordinated" to make sure outside firms worked within local rules and with local carriers and adjusters.

"In Chile, understand the sophistication of the market and the requirements to work within the regulatory framework, and if not, at your own peril," Frawley said.

The same could be said for multinationals and their risk managers working in earthquake country anywhere in the world that don't comprehend the total risk to their enterprises.

September 1, 2010

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