Articles - Why generic natural catastrophe models leave firms exposed

By Ester Calavia Garsaball, Managing Director, Natural Catastrophe & Risk Financing, Climate Practice, WTW

How would any protection measures or operational redundancies drive or mitigate business interruption? What about the lead time to replace specialized equipment to get you fully operational again? Generic exposure mapping can’t answer these questions.

We’re seeing many businesses base their natural catastrophe and climate risk management decisions on distorted views of their loss profiles because they’re based on generic modeling.

To help protect your business from inefficient risk management and risk transfer, this article makes the case for shifting from exposure-led assessments to engineering-led vulnerability analyses. We also offer practical ideas on applying more tailored approaches to understanding your nat cat and climate risks.

Because when your analysis mirrors real vulnerabilities instead of generic assumptions, you can negotiate with insurers from a stronger position and secure coverage more closely aligned with how nat cat and climate risks would really hit your organization.

Off-the-shelf models support aggregated analysis across hundreds or thousands of locations. They were designed for insurance and reinsurance portfolios using high-level assumptions on similar assets behave in similar ways. That works if you have standard residential and commercial buildings, but not if you operate large or more complex facilities, such as a port, airport, power or solar plant or a linear asset such as a rail line. A single point on a map won't reflect the complexities.

A more accurate assessment breaks sites down into sub-assets or zones, then models more than one point across the footprint. A more detailed, bespoke approach means you can capture how impacts would hit differently across the site. This is particularly important for localized hazards such as flood.

Many off-the-shelf catastrophe models base business interruption calculations on property damage and don’t consider significant drivers of interruption, such as supply chain dependencies, utilities, backups you may or may not have on site or potential bottlenecks.

Let’s imagine you run a port in the US and your cranes are damaged by a storm or an earthquake. You would face significant interruption, both initially and as you wait for replacements to be shipped, possibly from China. Many standard exposure models wouldn’t reflect this specific business reality.

Tailored vulnerability focuses less on what an asset is worth and more on what you could lose if it were compromised. Instead of defaulting to ‘full value’ when you set limits (where every part of a complex facility is treated as one and the cover priced as such), you can set them around credible, realistic scenarios and based on the differences and redundancies across a facility.

Bear in mind, some country-specific design codes may underestimate certain hazards, particularly where they’re based primarily on historical observations and aren’t regularly updated to reflect evolving risk conditions. Comparing design criteria against multiple hazard datasets, including forward-looking climate projections where appropriate, can help inform decisions on climate-resilient design and ensure assets are better prepared for future conditions.

How can you check whether your nat cat modeling reflects your operational reality?

You should also consider loss prevention measures, such as wind tie-downs for cranes, pre-storm adjustment of solar panel tilt angles, and other operational actions that can reduce and severity of losses

Then, you’ll want to evaluate downtime drivers and recovery constraints, such as reliance on utilities, on-site backups and lead times for replacing specialized equipment. Your aim is to illuminate blind spots and understand the true vulnerabilities generic proxies can miss.

We recently ran an earthquake and tsunami engineering assessment for a port that considered its cranes, backups and the way the site earns revenue. This analysis led to a recommended property damage and business interruption limit of about $600 million, significantly lower than the $1 billion the business had previously bought.

In another vulnerability assessment for a port, our engineers recommended an additional $100 million limit after they assessed the soil conditions and that critical cranes lacked seismic retrofitting.

Because you dive deeper into the site-specific vulnerabilities and existing risk controls these assessments will also provide additional risk mitigation recommendations on how to manage residual risk to reduce your losses.

You can calibrate insurance-recognized catastrophe models using insight and loss estimates from the single site engineering assessments to derive a more precise and tailored portfolio model that’s specific to your business rather than a standard market view. This can help you both assess whether aggerate limits are appropriate and also support a defensible premium allocation across sites within a portfolio.

Whether a tailored assessment reveals previous over or underinsurance, having detailed evidence will improve your negotiations with insurers and lenders and ultimately support either confidence in your protection so you can sleep at night or cost savings. Bespoke analytical evidence can support capacity and pricing discussions because you can show how your losses would develop realistically.