Corporate risk managers looking to protect their property—and by extension, their organizations' overall financial stability—should consider viewing their facility risks from an engineering perspective, according to one catastrophe-risk expert.
“Many times people look at risks from a 10,000-feet level,” explains Akshay Gupta, director of AIR Worldwide's Catastrophe Risk Engineering practice.
Instead, he suggests, risk managers should take an on-the-ground approach, asking questions such as: When was the facility built? How has it been maintained? What kind of repairs and retrofits have been done?
“That's the level at which risk needs to be looked at, and that's where engineering comes in,” Gupta says.
“Facilities are so unique,” he adds, that even if two power plants are “sitting right next to one another, but they are operated differently by different companies, the risks associated with them are going to be very different.”
Engineering services can help risk managers better assess the vulnerability of their own assets and structures, which can be very complex, Gupta notes.
And while savvy risk managers are likely cognizant of the possible catastrophe perils threatening their facilities and operations, what they may lack, Gupta notes, is a deeper understanding of how varying levels of physical loss at their facilities could affect their operations.
An engineering-based, site-specific evaluation of a facility can offer powerful insight on both the likelihood and the extent of business-interruption loss for their operations.
In addition to an engineering-based look at their own facilities, risk managers should also consider a quantitative assessment of their supply-chain's exposure to catastrophe perils.
Pointing to an incident-filled 2011, Gupta says that it is fundamental for larger organizations to understand their supply chain “in a much more transparent manner as opposed to what had been done before.”
While most companies have looked at their supply chains from an operational and logistics standpoint, “nobody has really looked at it from a catastrophe-risk standpoint,” he says. “What happens when flooding takes place in Thailand, a tsunami in Japan or a volcano in Chile? That will be one of the key areas people will be focusing on this year.”
ALLOCATION ISSUE
Allocation of risk is also going to be a top risk-management focus on the property side in 2012, Gupta says.
“Either because of your own price pressures or because of limited market capacity, you can only get [coverage] to a certain level. So how do you best allocate that?” Gupta asks.
An engineering-based approach will help with those answers, he says.
“There really needs to be clarity with what the risk really is,” he says. “If you have clarity on how a risk is computed and defined, what the assumptions and uncertainties are, everybody—the corporate risk manager, broker and underwriter—is in a much better position with that risk.”
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