By MATTHEW BRODSKY, senior editor/Web editor of Risk & Insurance®
The news reports coming out of the massive Chilean earthquake of 2010 were upbeat: the damage and loss of life could have been much worse; just look at Haiti. Yet for wine drinkers, the news wasn't nearly as positive. Initial reports from Chilean vineyards was that damage to this year's vintage and years past was profound, perhaps even a major setback for an entire industry that was starting to make inroads in sophisticated wine circles in the United States, Europe and elsewhere.
In August, Risk & Insurance® spoke with Mark Lingan, loss control manager in Santiago for the Chile branch of global insurance company Chubb, to get a sense for how his clients have fared. Chubb has been insuring wineries in Chile for a long time. The carrier's experience in the field has led it to insure the better risks in the business, which generally performed better than average during the event, but Lingan's experience with his clients still is revealing. Good news, wine lovers. Get your bottle opener out now.
That's not to say that the Chilean wine industry didn't take a hit.
"The losses that the wineries suffered were above what we expected," Lingan confided, estimating that they were 20 percent higher than what modeling and other factors led Chubb to believe.
Simply put, earthquake preparations and overall condition of wineries wasn't as good as expected.
For the wine business in the South American country in general, according to Lingan, the main losses were related to leakage. Interestingly enough, for Chubb's clients, that wasn't so much the case. Only about 40 percent of losses for Lingan's clients were related to leakage. The other 6 percent, he told us, came from losses with infrastructure, tanks and bottles. If you want to break down the leakage losses, though, 90 percent of it was due to tanks, 7 percent bottles and about 3 percent barrels.
Sound like a mishmash of losses where trends will be hard to discern.
One lesson that sticks out from Lingan's experience in the post-earthquake mess for the entire industry has to do with tanks: the fact that tanks of all types--tall, short, high-volume, low-volume, legs, without legs, anchored, not anchored, elevated off concrete, not elevated--had issues.
"We found all types of tanks failing," he said. It was particularly surprising with anchored tanks, the old assumption being they'd perform better in a quake. Not so.
Even stranger was the fact that, like the buildings around Chile that survived the temblor thanks to strict, modern building codes, wine tanks have local standards for earthquake resistance too. Underwriters assumed that the tanks met these codes. Well ... no.
After some investigation, it turned out that the earthquake standards require tanks to be constructed with more steel than otherwise. More steel means more cost. Because Chilean wineries were not pushing hard for it, said Lingan, competition between tank manufacturers instead led to cheaper tanks produced with thinner shells, or with not very strong legs, or weak foundations.
The quake taught a thing or two about how wineries stored their barrels too. The primary rack system for storage is a metal rack that holds two barrels next to each other. That structure then supports the rack and two more barrels stacked on top.
"That's good when there's no earthquake," Lingan said.
Other support systems, such as one that holds four barrels across with a square base, behaved better. And rack systems engineered for quake risk do exist. But as the case with tanks, these tend to be more expensive. Instead, the trend was that many barrels tumbled. Much of the wine was saved, reported Lingan, but losses were still steep.
Problem is that any lost wine is wine that doesn't make it to store shelves and into customer's cellars, fridges and bellies. And though it could have been worse with barrels, when you add up all of the wine lost in the earthquake, across the industry the number reached 125 million liters. In dollar terms, the loss suffered by the industry ended up in the $430 million range
"If we are not in the supermarket, the Argentine or the New Zealand or the South African wines will be there and we will lose our market," said Lingan.
But perhaps this will not happen. As Lingan explained it, the industry was able to rebound in two big ways. To meet agreements with their distributors for wine to be shipped this year, the wineries bought bulk wine from other wineries. Added cost, yes. Loss of market share and broken contracts, hopefully not. And as for this year's vintage--what would be bottled in 2010 and sold in later years--Lingan said that this wine was largely preserved for most of the industry. The beautiful thing was that the tanks for this year's vintage were empty and waiting for the juice. Overall, according to Lingan, the Chilean wine industry was able to rapidly recover its capacity to bottle and dispatch wine.
And another silver lining: whereas before clients might not have been giving "much ears and eyes to what we were recommending," said Lingan, now they are.
In its underwriting, Chubb is also facilitating the learning. Chubb put a new clause in its insurance policy for its winery clients so that it only covers tanks that are certified to comply with the Chilean or other advanced earthquake engineering standard. (This had only been a recommendation before.)the policy was amended with a similar requirement for barrels in three levels or more.
Sounds like a good idea for a wine-growing region where quakes are as much a certainty as a hangover after too much red.
September 1, 2010
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