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Risk Scenario

A Dim View

An earthquake decimates a retailer's servers and its supply chain.
By: | August 4, 2014 • 9 min read
Risk Scenarios are created by Risk & Insurance editors along with leading industry partners. The hypothetical, yet realistic stories, showcase emerging risks that can result in significant losses if not properly addressed.

Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.

All’s Well That Begins Well?

Darryl Korn shook off his loafers and propped his bare feet next to an errant branch of rosemary on the stone wall that separated his patio from the long slope down to the Missouri River. As the light faded, he sipped the Provencal rosé in his glass and let the fruity dryness of the wine pucker his mouth into a happy grimace.

Scenario_DimView

Korn, the CEO of Heaven’s Gardens, a Midwestern retailer based in Jefferson City, Mo., specializing in high-end patio and lawn furniture and accessories, was literally in his element.

A wood fire burned not far away in one of his company’s stone pizza ovens. Just a few minutes now and the flatbread he’d made with his own hands would be in there bubbling.

With his wife and children in town seeing a movie, this was one of those moments he wished he could capture; peace of mind, how rare it was.

It was the sight of the dying light on the river that got him thinking about work again. River: flood risk.

Korn’s workday included a review of his company’s risk management program with his risk committee. Most CEOs wouldn’t sit in on such meetings, but Korn did.

Korn felt great about the meeting. He reflected on how the company documented and ranked all property risks, flood, named storm, earthquake and tornado on a matrix broken down by zip code.

The company also worked with its carrier on an engineering risk assessment that provided the carrier with crucial information such as the age of the buildings and the construction materials they were composed of.

Scenario Partner

Scenario Partner

With operations bordered by Idaho, Utah and Arizona to the West and Tennessee, Kentucky and Ohio to the East, the company was particularly keen on showing underwriters its crisis management and business continuity muscle in the wake of a tornado, flood or earthquake.

Transparency and good data, that was the way to good coverage at the best price, Korn told himself, secure that he had mastered risk management wisdom that people at the C-suite level, even in mid-2015, didn’t usually concern themselves with.

Equally satisfying to Korn was the risk committee’s report on the company’s financial and operational resilience risk management strategy. From interest rate swaps to alternate energy suppliers in the face of catastrophe, it was all there.

***

The underwriter for Heaven’s Gardens, Hammond Kresley of regional insurer Butte Mutual, was enjoying a similarly peaceful sunset from his deck across the river. Although, being an underwriter, Kresley had a single malt in his hand.

Butte Mutual’s property portfolio, which roughly mirrored Heaven’s Garden’s geographic focus, was also broken down and ranked by zip code and degree of risk. Just as it did with Heaven’s Garden, Butte Mutual worked with many of its property insureds to provide risk engineering services that provided a deeper dive in the underwriter’s quest for transparency and good data.

Butte Mutual’s confidence in the diversity of its book of business and its approach to risk engineering was such that it had aggressively sought out new property business in this rate-challenged environment.

The company considered its approach to data, engineering and underwriting a differentiator, something that allowed it to take on business that its competitors wouldn’t dare to.

Darryl Korn was setting down his glass of rosé to slide the pizza in the oven when it hit. As his wine glass fell and shattered and the plate glass windows on the back of his house cracked, Korn initially thought the region was being bombed. It took seconds until he realized that for the first time in his life, he was experiencing an earthquake.

The earthquake was a 6.9 on the Richter scale on the New Madrid Fault, severely damaging numerous regional companies.

Scrambling for Information

Thankfully, Korn and his family escaped injury in the rare Missouri quake, but his company didn’t.

Scenario_DimViewYes, everyone knew about the New Madrid Fault. But no one thought it would rupture, or at least not at this intensity.

One of the cruelest twists for Heaven’s Gardens was that the facility which housed its servers– which the company boasted to underwriters was well out of reach of a flooding Missouri River or any of its tributaries– was badly damaged in the quake.

Store managers and operations staff accustomed to digital communication with headquarters were knocked off line and were slow to get important information to headquarters.

Thus, exquisitely bad data clouded company leadership’s perspective for the first few days after the quake.

“I don’t think we lost a single major supplier, “the company’s logistics chief, Raif Heck, told Korn and other leadership the day after the quake.

But due to poor communications, the company learned two days later that Heck was wrong.

Two of the metal fabricating companies that supplied Heaven’s Gardens with its grills and additional oven hardware were severely damaged. Ten Heaven’s Gardens stores in Missouri and Illinois were also hit hard.




Two of the damaged stores were in St. Louis, which meant the loss of key sales producers.

After suffering a delay due to bad information, the company scrambled to identify alternate hardware suppliers, but the process dragged on and on. Even undamaged stores suffered delays in reopening due to overwhelmed municipal inspectors being unable to visit properties quickly enough to issue certificates of occupancy.

The inspection delays got so bad that Korn himself got on the phone with the deputy mayor of St. Louis.

“There’s not a single crack in those structures,” Korn said, in one of several instances where he completely lost patience with the chaos all around him.

“No way can we issue certificates of occupancy until we get those properties inspected and we are still days away from that,” the deputy mayor replied.

“Days?” Korn exclaimed.

****

“Days.” said Hammond Kresley, in a meeting with the Butte Mutual reserving oversight committee (ROC), as it tried to get a handle on what sort of reserves it was going to need to set aside to cover insured quake losses and business interruption losses.

That screeching sound they all heard was Butte Mutual’s aggressive underwriting program — that it built up and justified over years — grinding to a halt.

Until it could get a handle on its quake losses, the carrier wasn’t going to take on any new business that looked even remotely risky.

A month after the quake, Heaven’s Gardens was seeing double-digit sales drop-offs in its undamaged stores due to its supply problems. The company prided itself on locally sourced materials and simply didn’t have the backup suppliers to keep it going in a meaningful way.

Quake damage to retail sites and first- and second-tier suppliers was something the company had known was possible. What was so maddening was the fact the company had paid a good deal of money for a risk engineering assessment and now all of that looked like it was going to waste.

The risk engineering assessment was great from a premiums paid and eventual claims perspective, but not much use with business recovery. Not from this rare earthquake event anyway.

It was like the company was blind where it most needed vision. What exactly was down and how bad was the damage? That was the problem.

Permanent Impairment

By the summer of 2016, a mere year after the ῀M 6.9 quake that rattled Missouri and Illinois, Heaven’s Gardens, from a revenue perspective, had lost 15 percent its pre-quake size.

Scenario_DimView

When it came to design and product execution, the company was spot-on with its approach to functional, rustic outdoor furnishings. Its “locally-sourced” mantra was also golden.

But that ended up mattering little to frustrated customers who couldn’t pick up the equipment they’d ordered due to supply delays. Brand loyalty still meant something in this country, but not so much that somebody who ordered a pizza oven in April was happy to get it in October.

A year after the quake, the company still hadn’t found the second of two grill and fittings suppliers that met its local sourcing and design criteria.

Competitors to the East and West, some of them whose design couldn’t hold a candle to what Heaven’s Gardens produced, moved in to pick up pieces of the company’s business.

***

It took Butte Mutual six months to determine something that should have been good news but wasn’t. It turned out that the carrier had more than enough reserves to comfortably withstand insured losses from what became known as the “Hannibal Cannibal,” the quake named for its epicenter in Hannibal, Mo.

But a lack of visibility into its property portfolio meant the carrier failed to take the aggressive action it needed to take in these market conditions.

Deprived of the fullness of its topline growth potential, Butte Mutual survived, but its tepid growth for the next three years was off-putting to shareholders.

The company should have been a regional carrier star and instead became a mediocrity.

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Risk & Insurance® partnered with Esri to produce this scenario. Below are Esri’s recommendations on how to prevent the losses presented in the scenario. This perspective is not an editorial opinion of Risk & Insurance®.

1. Engineer success: Using GIS to determine property vulnerability on the front end of a catastrophe is a well-accepted practice. But what about the back end? Consider leveraging access to high resolution geographic information from ArcGIS that can provide disaster damage assessment on the back end, mitigating the chance of overwhelming field staff and supporting faster and more efficient response to your property customers.

2. Protect against data and communication losses: Depending on access to your own company’s physical data storage and communications infrastructure following a disaster could be severely shortsighted. Consider ArcGIS cloud and mobile solutions that house data and provide communications capabilities outside of your natural threat footprint.

3. Ask more of business partners: Using location information Heaven’s Garden constructed reasonably sound business continuity and disaster recovery plans for each of its facilities. But its network of suppliers lacked this same insight. As a consequence, the company suffered supply chain failures that greatly inhibited its ability to recover from the New Madrid earthquake.

4. Demand and ensure better transparency: Using ArcGIS post event data and imagery gives you visibility in real time to property damage and other crucial information in the aftermath of a disaster. Settling for a listing of possibly affected properties categorized by ZIP code is an outmoded method of assessment that will not be looked at favorably by underwriters and will be a boon to your unimpacted competitors.

5. Speed of recovery: Risk managers and their organizations cannot place enough emphasis on speed of recovery. Stories are emerging post-Superstorm Sandy and other recent disasters about risk managers who through preparation and boldness got on the loss scene and had their businesses back up in a fraction of the time that it took competitors. Nothing is holding you back but conformity.


Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

High Net Worth

High Net Worth Clients Live in CAT Zones. Here’s What Their Resiliency Plan Should Include

Having a resiliency plan and practicing it can make all the difference in a disaster.
By: | September 14, 2018 • 7 min read

Packed with state-of-the-art electronics, priceless collections and high-end furnishings, and situated in scenic, often remote locations, the dwellings of high net worth individuals and families pose particular challenges when it comes to disaster resiliency. But help is on the way.

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Armed with loss data, innovative new programs, technological advances, and a growing army of niche service-providers aimed at addressing an astonishingly diverse set of risks, insurers are increasingly determined to not just insure against their high net worth clients’ losses, but to prevent them.

Insurers have long been proactive in risk mitigation, but increasingly, after the recent surge in wildfire and storm losses, insureds are now, too.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy,” said Laura Sherman, founding partner at Baldwin Krystyn Sherman Partners.

And especially in the high net worth space, preventing that loss is vastly preferable to a payout, for insurers and insureds alike.

“If insurers can preserve even one house that’s 10 or 20 or 40 million dollars … whatever they have spent in a year is money well spent. Plus they’ve saved this important asset for the client,” said Bruce Gendelman, chairman and founder Bruce Gendelman Insurance Services.

High Net Worth Vulnerabilities

Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

As the number and size of luxury homes built in vulnerable areas has increased, so has the frequency and magnitude of extreme weather events, including hurricanes, harsh cold and winter storms, and wildfires.

“There is a growing desire to inhabit this riskier terrain,” said Jason Metzger, SVP Risk Management, PURE group of insurance companies. “In the western states alone, a little over a million homes are highly vulnerable to wildfires because of their proximity to forests that are fuller of fuel than they have been in years past.”

Such homes are often filled with expensive artwork and collections, from fine wine to rare books to couture to automobiles, each presenting unique challenges. The homes themselves present other vulnerabilities.

“Larger, more sophisticated homes are bristling with more technology than ever,” said Stephen Poux, SVP and head of Risk Management Services and Loss Prevention for AIG’s Private Client Group.

“A lightning strike can trash every electronic in the home.”

Niche Service Providers

A variety of niche service providers are stepping forward to help.

Secure facilities provide hurricane-proof, wildfire-proof off-site storage for artwork, antiques, and all manner of collectibles for seasonal or rotating storage, as well as ahead of impending disasters.

Other companies help manage such collections — a substantial challenge anytime, but especially during a crisis.

“Knowing where it is, is a huge part of mitigating the risk,” said Eric Kahan, founder of Collector Systems, a cloud-based collection management company that allows collectors to monitor their collections during loans to museums, transit between homes, or evacuation to secure storage.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy.” — Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

Insurers also employ specialists in-house. AIG employs four art curators who advise clients on how to protect and preserve their art collections.

Perhaps the best known and most striking example of this kind of direct insurer involvement are the fire teams insurers retain or employ to monitor fires and even spray retardant or water on threatened properties.

High-Level Service for High Net Worth

All high net worth carriers have programs that leverage expertise, loss data, and relationships with vendors to help clients avoid and recover from losses, employing the highest levels of customer service to accomplish this as unobtrusively as possible.

“What allows you to do your job best is when you develop that relationship with a client, where it’s the same people that are interacting with them on every front for their risk management,” said Steve Bitterman, chief risk services officer for Vault Insurance.

Site visits are an essential first step, allowing insurers to assess risks, make recommendations to reduce them, and establish plans in the event of a disaster.

“When you’re in a catastrophic situation, it’s high stress, time is of the essence, and people forget things,” said Sherman. “Having a written plan in place is paramount to success.”

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Another important component is knowing who will execute that plan in homes that are often unoccupied.

Domestic staff may lack the knowledge or authority to protect the homeowner’s assets, and during a disaster may be distracted dealing with threats to their own homes and families. Adequate planning includes ensuring that whoever is responsible has the training and authority to execute the plan.

Evaluating New Technology

Insurers use technologies like GPS and satellite imagery to determine which homes are directly threatened by storms or wildfires. They also assess and vet technologies that can be implemented by homeowners, from impact glass to alarm and monitoring systems, to more obscure but potentially more important options.

AIG’s Poux recommends two types of vents that mitigate important, and unexpected risks.

“There’s a fantastic technology called Smart Vent, which allows water to flow in and out of the foundation,” Poux said. “… The weight of water outside a foundation can push a foundation wall in. If you equalize that water inside and out at the same level, you negate that.”

Another wildfire risk — embers getting sucked into the attic — is, according to Poux, “typically the greatest cause of the destruction of homes.” But, he said, “Special ember-resisting venting, like Brandguard Vents, can remove that exposure altogether.”

Building Smart

Many disaster resiliency technologies can be applied at any time, but often the cost is fractional if implemented during initial construction. AIG’s Smart Build is a free program for new or remodeled homes that evolved out of AIG’s construction insurance programs.

Previously available only to homes valued at $5 million and up, Smart Build recently expanded to include homes of $1 million and up. Roughly 100 homes are enrolled, with an average value of $13 million.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work.” — Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“We know what goes wrong in high net worth homes,” said Poux, citing AIG’s decades of loss data.

“We’re incenting our client and by proxy their builder, their architects and their broker, to give us a seat at the design table. … That enables us to help tweak the architectural plans in ways that are very easy to do with a pencil, as opposed to after a home is built.”

Poux cites a remote ranch property in Texas.

Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“The client was rebuilding a home but also installing new roads and grading and driveways. … The property was very far from the fire department and there wasn’t any available water on the property.”

Poux’s team was able to recommend underground water storage tanks, something that would have been prohibitively expensive after construction.

“But if the ground is open and you’ve got heavy equipment, it’s a relatively minor additional expense.”

Homes that graduate from the Smart Build program may be eligible for preferred pricing due to their added resilience, Poux said.

Recovery from Loss

A major component of disaster resiliency is still recovery from loss, and preparation is key to the prompt service expected by homeowners paying six- or seven-figure premiums.

Before Irma, PURE sent contact information for pre-assigned claim adjusters to insureds in the storm’s direct path.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work,” said Curt Goetsch, head of underwriting for Ironshore’s Private Client Group.

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“If you’ve got custom construction or imported materials in your house, you’re not going to go down the street and just find somebody that can do that kind of work, or has those materials in stock.”

In the wake of disaster, even basic services can be scarce.

“Our claims and risk management departments have to work together in advance of the storm,” said Bitterman, “to have contractors and restoration companies and tarp and board services that are going to respond to our company’s clients, that will commit resources to us.”

And while local agents’ connections can be invaluable, Goetsch sees insurers taking more of that responsibility from the agent, to at least get the claim started.

“When there is a disaster, the agency’s staff may have to deal with personal losses,” Goetsch said. &

Jon McGoran is a novelist and magazine editor based outside of Philadelphia. He can be reached at [email protected]