Preparing for the Unexpected:
How Catastrophe Risk Management Benefits the Company and the Community

By Frank J. Coyne

Preparing for the unexpectedIn today's deeply interconnected global marketplace, businesses and communities depend on one another to sustain daily life and commerce locally, regionally, nationally, and worldwide. An enterprise-level failure can easily spread to the surrounding community and beyond. A regional or international catastrophe will almost certainly affect the consumer behavior and supply chain components on which an organization is dependent.

Over the last decade, major man-made and natural disasters have forced insurers and risk managers to reexamine the effectiveness of catastrophe risk management strategies. In 2005, Hurricane Katrina taught us hard lessons about the far-reaching impact of local events. Disruptions in regional and national transportation cut off the supply of essential goods and services. Oil rigs in the Gulf of Mexico were debilitated, driving up gasoline prices across the United States and affecting overall consumer behavior.

Those conditions strained global supply chain components and increased volatilities in energy pricing and commodities on international markets. But even events that affect a relatively narrow geographic area may degrade the effectiveness of insurance as a risk management mechanism as losses from multiple lines of business add up to enormous aggregate losses.

Rapid change in today's international business environment is contributing to increased risks across all operational functions. It's never been more important to consider the broader impact of external events — such as Hurricane Irene's recent path up the East Coast of the United States — on an organization as well as the community in which it operates.

During future events, businesses will have two major challenges: They must be prepared to mitigate loss and resolve related business issues, and they should consider helping the community. When a business can rebound from a catastrophic event quickly, employees have a greater incentive to stay within the community for the rebuilding process.

To assure the continuance of business for both individuals and commercial enterprises in the aftermath of a disaster, a catastrophe risk management plan and emergency preparedness strategy have to encompass far more than traditional property insurance. A robust and reliable response to extreme events must be not only planned but rehearsed and ready for implementation at a moment's notice. Catastrophe preparedness requires procedures that are regularly reviewed, tested, and updated to keep pace with organizational and community developments.

It's impossible to predict exactly when and where a catastrophe will occur, but modeling technology can provide valuable insights into risk exposure and multifaceted scenarios — particularly those involving supply chains, which rely heavily on interdependencies and contingent relationships. Supply chain risk management can be defined as the system of managing risks posed by people, technology, activities, information, and resources involved in transforming raw materials or disparate ingredients into a finished product or service and moving that product or service from supplier to end customer.

To manage risk associated with the dynamic changes taking place both inside and outside the enterprise, a comprehensive supply chain risk management plan would focus on assets as part of a process rather than traditional "numetrics." In cooperation with senior management, risk managers would embed risk management practices into all mission-critical points along the operational network. By teaching such techniques to key personnel, risk managers would facilitate appropriate decision making throughout the organization — thereby protecting not only its economic viability but also the interests of the surrounding community.

Extreme-event modeling can also help industry and community leadership develop detailed, flexible, and coordinated plans to speed recovery and rebuilding. Insurers, businesses, officials, and citizens all play integral roles in the aftermath of a catastrophe, and a holistic risk management and business continuity plan must include communitywide communication from initial prioritization to stabilization to recovery.

Risk managers should coordinate with government authorities and establish predetermined agreements and protocols. By developing a comprehensive outline of the emergency chain of command, they can increase decision-making effectiveness when a crisis occurs. Joining forces with government authorities, charities, and other organizations supporting recovery efforts helps businesses protect not only their enterprises but lives, property, and local economic viability as well.

Advanced risk management efforts involving both enterprise and community are beneficial to the common good. The insurance industry already possesses the mitigation and extreme-event planning expertise crucial to creating a comprehensive program. Now more than ever, we must use those techniques to address a wide variety of traditional and nontraditional risks.

Frank J. Coyne is chairman and chief executive officer of Verisk Analytics.