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Today, risk managers not only need to consider the direct impact on an enterprise, but also the wider implications a major catastrophic event may have at the local, regional or even national level.

For instance, in the aftermath of Katrina, communications and transportation systems across the Southeast were severely damaged, causing widespread disruption to communities and businesses across the United States. Oil production in the region was significantly reduced as rigs and production facilities underwent major repairs. This ultimately contributed to increased gas prices and altered consumer spending across the country.

What would be the economic implications if a similar event occurred in a major business and financial center?

Models suggest that a direct hit by a major hurricane on the New York metropolitan area could lead to considerable damage to the transportation infrastructure and communication systems, making it difficult, if not impossible, for goods to reach markets or for people to get to work. Such events highlight the undeniable interdependency of business and community. In an extreme event, they must rely on each other to provide an effective and timely response to save lives, preserve property and re-establish everyday life and business.

PLANNING BEYOND INSURANCE

The consequences of a large occurrence, such as the recent wildfires or 1992's Hurricane Andrew, bear out the limits of traditional insurance. Insurance by its definition is a mechanism to spread the effects of an occurrence (legal or natural) among many individuals through pooling. But when the entire community is impacted by the same event, its ability to respond through formalized insurance pooling or loss sharing is compromised, especially when multiple coverage areas, such as personal lines, commercial lines, automobile and workers' compensation, are affected simultaneously. Studies have noted an upward trend in the past 60 years of both the number of catastrophes and the volume in losses that result.

While the traditional insurance claims process plays a key role in financing the improvement and rebuilding of the affected area, strong community and government cooperation is essential for recovery efforts at all levels. A holistic risk management and business-continuity plan must work in concert with the appropriate governmental authorities at every stage of response, from emergency triage to stabilization and recovery, to help protect the well-being of employees, as well as the interests of the organization and the community at large.

Catastrophe planning in today's business environment requires establishing predetermined agreements, protocols and coordination with governmental authorities, as well as a detailed outline of the emergency leadership hierarchy within the organization to maximize decision-making efficiency and timeliness. Moreover, a risk management challenge of this magnitude involves regular practice, testing and updating to keep pace with organizational developments and the evolving global business landscape.

ADVANTAGES OF MODELING AND EXPERIENCE

Over the last several years, modeling technology has grown into a powerful and reliable tool in the development of any risk management program. While the exact occurrence of a catastrophe is nearly impossible to predict, modeling technology can assess the potential risks of a large-scale disaster across multiple locations, allowing risk managers to gain valuable insights into risk exposure and complex scenarios--particularly those involving supply chains, which rely heavily on interdependencies and contingent relationships with suppliers and customers in locations worldwide.

Beyond the insurance and organizational benefits, catastrophe modeling can be applied communitywide. Extreme-event modeling on a communitywide basis is an underused asset that community and business leaders should embrace when planning for extreme events. And insurers, brokers, risk managers, and other risk or public-safety professionals need to explore how modeling and planning can be better coordinated.

Modeling can provide an accurate basis on which recovery and emergency response planning can be tested and improved before the actual emergency takes place. Extreme-event modeling can provide insight into how the catastrophe may unfold, allowing both community and business leadership to develop detailed, flexible and coordinated plans that will benefit all constituencies, should the extreme event occur.

Knowledgeable brokers and insurers also play an important role in the management of catastrophic risk and organizational planning, providing a wealth of resources--such as modeling technology, risk assessments, and financing, benchmarking, safety, regulatory compliance and training--from which organizations can build comprehensive risk management strategies.

The mitigation and extreme-event planning expertise of the insurance community is among the best available and is key to developing a well-rounded program based on expert insight and experience. The insurance industry can help with solutions that business and community leaders may need to go beyond what the insurance product itself can provide. This is evidence of the insurance industry's willingness to partner with its clients to build solutions that keep everyone safe, prepared and able to respond appropriately to a crisis.

THE BROAD VIEW

As major disasters of recent years have taught us, it is no longer sufficient for a risk manager to look only at the direct impact of a catastrophic event on a single location. Rather, we must expand our view of risk management to include a much broader perspective that encompasses the entire community and neighboring locales.

The terrorist attacks of Sept. 11, 2001, caused a disaster in lower Manhattan whose impact is still felt today. In the context of the devastation of Sept. 11, the loss that may occur from a disaster with large geographic potential is almost too great to contemplate.

For example, a major hurricane could impact hundreds of square miles around a densely populated metropolitan area. In such instances, not only must risk managers confront the issues threatening business functions, the impact on employees must be addressed as well. Employees would suffer the destruction of their homes and the infrastructure of their communities. Children could miss weeks of school. Roads and highways might become unusable and hospitals inundated with casualties.

The challenge to businesses then becomes twofold: One is to be prepared to mitigate loss and solve the business issues. Just as important is the role a business can play in assisting the community. If a business can recover, it provides a basis to help keep employees in the community and provides some of the means to recover. It also makes a statement that this business is highly responsible and a reliable partner in the community. Also, a business that recovers quickly is more able to go beyond community outreach and cooperate closely with governmental authorities, charities and other organizations that support recovery efforts.

Advanced modeling technology, insurer and broker expertise, and established relationships with local and regional authorities are the building blocks of a modern risk management strategy. A sound and tested risk mitigation program that coordinates each constituency and a solid insurance program are essential to the timely resumption of normal life and business activity. The more serious the event, the more important it is to work together beforehand and have all the pieces in place.

GARY KERNEY is assistant vice president of ISO's Property Claim Services division.

KENNETH RADO is director of risk management and planning at ISO.

April 15, 2008

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