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Sep 2018

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Role of risk engineering in managing natural disasters

Source: Asia Insurance Review | Sep 2018

Losses from natural disasters are not only growing but their volatility is also increasing. In 2017, the worldwide economic losses of $330bn from natural disasters were significantly greater than those experienced in the previous extreme years of 2005 and 2008. Marsh Risk Consulting’s Alfred de Guzman provides some insights.
 
 
The growth in number and scale of natural disasters comes only a few years after the record year of 2011, where loss figures reached $350bn, primarily because of the Tohoku earthquake in Japan and floods in Thailand.  
 
Losses from natural catastrophes 1980-2017
 
The Asian region continues to be among the most exposed and vulnerable to natural disasters.  According to the Lloyd’s City Risk Index, natural catastrophe and climate related risks account for 42.2% of the GDP@Risk in the Asia Pacific region. 
 
The greatest threats come from tropical windstorm ($59.14bn) or typhoon, followed by flood ($15.95bn), and earthquake ($15.14bn). The top 10 cities with the highest GDP@Risk in the Asia Pacific region are all from Asia. They include Taipei, Manila, two cities from Japan (Tokyo and Osaka), Seoul, and five other cities from China (Hangzhou, Ningbo, Shanghai, Xiamen and Suzhou).
 
Top 10 cities in Asia Pac  & catastrophe treats in Asia Pac
 
While the above trends might seem alarming, the impacts of natural disasters can be managed.  
 
Many best-in-class companies are actively managing their natural hazard risk with internal and external resources as well as optimising their risk transfer structures to contain costs. For companies that are willing to invest on resources needed to build resiliency against natural disasters in their business operations, this can be an important competitive advantage.
 
 
 
Knowing the hazards
The first step is to know the natural hazards that can impact your critical facilities. Now, more than ever, risk engineers have access to tools that allow them readily to determine the natural hazards that can affect a particular location or site. For example, within the insurance industry, Munich Re’s NATHAN (Natural Hazards Assessment Network) Risk Suite and Swiss Re’s CatNet are proven tools for evaluating the risks of natural hazards, including typhoons and earthquakes, for individual or entire risk portfolios worldwide.  
 
With these tools, risk engineers are able to view an online natural hazard atlas, which makes the risk profiles of the region visible. They can be viewed in maps and are complemented by a geographical database with detailed information on natural hazards. 
 
When locally available information (such as hazard maps, historical records, government sponsored natural hazard studies, etc,) is correctly utilised to supplement the above tools, it makes it possible to get a professional overview and assessment of risk exposure, quickly and easily.  
 
Understanding your risk exposures
Companies may know the natural hazards that can affect their critical facilities, but may still find it difficult to determine the true extent of their exposure or to gauge the potential impact of such events on their operations. Experienced risk engineers can work closely with companies to identify vulnerabilities within these facilities. They can leverage the extensive knowledge that the insurance industry has gained from historical losses throughout the world and put the lessons learned from natural disasters into good use. The insurance industry has been at the forefront of developing loss control standards for typhoon, flood, and earthquake.
 
For large portfolios, risk engineers can use natural catastrophe models to understand and manage typhoon and earthquake exposures better. The risk engineers will collect the location information needed to run these models and work closely with their analytics team to validate the data quality.  
 
These models simulate the physical characteristics of natural hazards and project their effects on property and potential downtime. These sophisticated computer models can quantify the financial loss exposure for the portfolio, and also determine which sites contribute most to the risk. This gives a more accurate perspective of the risk profile across the portfolio and helps provide data to support risk management decisions.
 
Identifying opportunities for improvement
The natural catastrophe models provide the likelihood and magnitude of typhoon or earthquake losses. Taking into account the risk tolerance and risk appetite of the company, the results of the risk modelling can be employed to assist in developing more cost effective risk transfer solutions that will best meet business needs.  It can also help to validate whether the current insurance limits are adequate based on the potential loss exposure.
 
Beyond risk modelling, experienced risk engineers are also able to provide economically viable engineering solutions to mitigate potential losses from natural disasters.  
 
For example, modern buildings are built to more robust standards in terms of wind loads and they seldom suffer structural damage from typhoons. Most of the losses during typhoons occur because metal roofs and wall cladding are inadequately secured to resist the anticipated wind uplift pressures, or from flying debris hitting windows or skylights. Once the building envelope is breached, extensive water damage is expected to the contents inside. Risk engineers are able to review how metal roofs are secured to the building structure and provide advice that will allow the roof to remain intact during severe typhoons. The cost of retrofit can be as little as a few hundred dollars invested on some well-placed fasteners.
 
Non-structural damage
Similarly, modern buildings are also designed to resist considerable shaking before structural damage occurs. For this reason, non-structural damage accounts for a large portion of the insured losses from earthquakes. These are typically due to unbraced liquid-filled piping that broke, inadequately bolted production and utility equipment, inadequately secured false ceiling and raised floor, suspended objects that fall down, gas pipes that rupture, storage racks that are not bolted down.  After a walkthrough of the facility and review of drawings, risk engineers are able to identify these deficiencies and provide risk mitigation recommendations on how to best address them.
 
Emergency response plans also play a key role in mitigating the potential loss. It can mean the difference between a minor or catastrophic loss. For example, in flood prone areas, it is very important to indicate the exact triggers in the emergency response plans as to when the emergency teams are alerted, when installation of flood barriers should commence, or when the transfer of production equipment to elevated areas of the plant needs to start. Facility managers and risk engineers can work together to outline the procedures that need to be implemented before, during, and after natural disasters.  
 
Having clear, actionable plans in place before disaster strikes can help organisations minimise damage to people and property, and recover as quickly as possible. For example, the Thailand flood of 2011 showed the importance of being able to gather support documentation for physical damage and time element claims, oftentimes prior to being able to gain access to damaged or affected locations. A 
 
Mr Alfred de Guzman is senior vice president with Marsh Risk Consulting.
 
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