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Service Spotlight

The Value of Quantifying Industrial Risk Exposure

In this Q&A, the U.S. CEO of a global risk consultancy discusses why measuring loss expectancy is critical to understanding exposure.
By: | June 19, 2018 • 5 min read

The saying goes, “You can’t manage what you can’t measure.”

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Risk managers can relate. Attaching firm figures to loss potential and probability provides a road map to a company’s most significant exposures and serves as a starting point for prioritizing risk management strategies. However, many lack the resources to accurately enumerate their exposures.

In heavy or complex industries, a property loss can not only incur significant expenses related to repair or replacement. It can halt operations partially or completely for an extended period of time. Estimating extent and duration of those impacts and developing a plan of action to mitigate the consequences is key to avoiding substantial business interruption losses.

Torsten Leske, CEO at AXA Matrix Risk Consultants North America — which focuses on property risks for industrial companies — describes how quantification is a necessary next step after risk identification.

R&I: What are the top risks facing industrial facilities?

Torsten Leske, CEO, AXA Matrix Risk Consultants North America

Torsten Leske: Property damage and business interruption resulting from fire, machinery breakdown, or natural catastrophes are potential exposures with significant loss potential faced by many industrial companies.

The potential business interruption loss is often greater than the property loss itself, especially when there are interdependencies between sites in more complex production chains.

In industries such as the automotive or aeronautical sectors, for example, parts are manufactured at several different sites and then assembled at other locations. So if something happens at one site, it can have a tremendous impact on other sites as well.

R&I: Are companies in this sector doing enough to mitigate these risks?

TL: An important issue is lack of accessibility of information and transparency into the extent of potential losses. Many companies don’t have a reliable way to quantify their exposure, which is the first step in determining how to prioritize risk management strategies.

R&I: Why is quantifying exposures so important?

TL: Attaching values to an exposure not only helps risk managers prioritize risk improvement decisions, it also enables them to demonstrate return on investment to their financial managers or the board of directors and more effectively argue for their support. Companies need tools to measure loss expectancy and compare that to the cost of implementing effective risk mitigation strategies.

This helps clients see where their money can be invested best to ease exposure. If you have a limited budget for capital improvements, you want to get the most benefit out of every dollar and achieve savings in the long run. Quantifying loss expectancy allows you to see calculate potential savings before you invest.

R&I: What tools do you use to measure loss expectancy?

TL: One tool we utilize called IsoRisk allows us to benchmark exposure at different sites or manufacturing tools, taking into account the vulnerability of a facility or tool to a loss, and the severity of a potential loss at each site. It thus provides a visual representation of a risk cluster that allows risk managers to easily identify the most exposed assets.

These tools also provide valuable help to risk managers internally to win support within their own organization, and externally to provide information to insurance markets.

Another tool called CITRAN graphs the loss expectancies of identified exposures against the capital expenditures needed for risk mitigation. The tool simulates loss expectancy reduction by available budget, thus helping to prioritize risk improvement investments.

It can also be used to determine a needed Capex to remain below a defined loss expectancy, which can be based on a client’s risk appetite and its current or planned risk transfer solutions. This is a powerful tool aiding risk managers in their decision-making process.

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Different risk scores by site, division, or group are proposed to the client to provide benchmarking with other sites or against peers. These tools also provide valuable help to risk managers internally to win support within their own organization, and externally to provide information to insurance markets.

R&I: Who makes these recommendations, and how?

TL: An experienced loss prevention consultant will do a complete assessment of an industrial facility. A typical loss prevention survey starts with an opening conference with senior management followed by a complete facility tour both inside and outside including the roof area.

Emphasis will include reviewing process hazards, warehousing and utilities. Fire protection equipment will be physically inspected and management loss prevention protocols will be reviewed.

An exit conference with senior management will be conducted at the end of the visit to give feedback on the main exposures identified and propose recommendations on how to improve the risks. Any recommendations will be discussed and confirmed in writing in a loss prevention report after the survey.

Most of our engineers have been working in the consulting field for many years. The average experience level that we have is between fifteen and twenty years, at least.

Most of our engineers have been working in the consulting field for many years. The average experience level that we have is between fifteen and twenty years, at least. Most of our engineers have worked previously in the industry in different capacities, and have varied engineering backgrounds, including fire protection, mechanical, civil and electrical engineering.

Although we do offer desktop consulting services, what our clients find as a far greater value to them is our approach and dedication to working in the field, hand-in-hand, on-site, in-person.

R&I: How do you track the effectiveness of these recommendations over time?

TL: When working with a new client, the first year is typically focusing on risk assessment, identification and quantification of exposures, and proposing risk mitigation strategies.

We start seeing substantial improvements after working with a client for several years providing continuous support for improvement of human element programs, implementation of recommendations, and prioritization of risk mitigation measures.

Typically resurveys are conducted in annual frequencies and progress is measured through completion of recommendations and improvement of risk scores. An online recommendation follow-up system is used in close interaction with the client to keep permanently abreast of any progress made.

Risk improvement and priorities are presented at least annually during stewardship meetings with the corporate risk management organization. Long-term partnership with our clients has proven to be one of the key elements for success of continuous risk improvement. &

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

High Net Worth

To the High Net Worth Homeowner: Build a Disaster Resiliency Plan You Can Be Proud Of

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]