CORPORATE BUTTERFLY EFFECT: how to manage interdependencies and con?ngent business interrup?on

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2 CORPORATE BUTTERFLY EFFECT: how to manage interdependencies and con?ngent business interrup?on RIC004 Speakers: Cristiane Alves, Risk Manager, CSN Maurizio Castelli, Country Manager Italy, XL Group Coordinator: Maurizio Castelli, Country Manager Italy, XL Group

3 Learning Objectives At the end of this session, you will: Understand interdependencies and Contingent Business Interruption risks Understand latest issues facing multinationals in handling CBI risks Learn state of the art solutions in terms of insurance, risk engineering and claims management to address CBI.

4 INTRODUCTION RIC004 Maurizio Castelli, Country Manager Italy, XL Group

5 The Butterfly Effect The butterfly effect is a term used in the chaos theory to describe how small changes to a seemingly unrelated condition can affect complex systems. The term comes from the suggestion that the flapping of a butterfly's wings in South America could affect the weather in Texas, meaning that the tiniest influence on one part of a system can have a huge effect on another part. The concept of the butterfly effect is attributed to Edward Norton Lorenz, a mathematician and meteorologist, who was one of the first proponents of the chaos theory. Lorenz was running global climate models on his computer one day and, hoping to save himself some time, ran one model from the middle rather than the beginning. The two weather predictions, one based on the entire process, including initial conditions, and another based on a portion of the data, starting with the process already part way completed, diverged drastically; contrary to Lorenz s expectations, tiny, unpredictable variations caused the two models to differ. Page 5

6 Corporate Butterfly Effect A small change to a seemingly insignificant part of the supply chain can heavily affect the results of the company, i.e. Page 6

7 Corporate Butterfly Effect (cont d). i.e. in the global context, companies have to manage their supply chain risk on the different fronts of their suppliers (including utilities), their clients, and their internal interdependencies. Each of these fronts can be affected by several factors and any interruption caused by any of these factors in any point of the chain can result in a severe negative impact on the results of the company. 2011, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO 7

8 Corporate Butterfly Effect 2011, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO 8

9 CORPORATE BUTTERFLY EFFECT: The Risk Manager s perspective RIC004 Cristiane Alves, Risk Manager, CSN 2011, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO

10 CORPORATE BUTTERFLY EFFECT: how to manage interdependencies and con?ngent business interrup?on in order to obtain better results, companies have changed the way of running their business

11 CORPORATE BUTTERFLY EFFECT: how to manage interdependencies and con?ngent business interrup?on Companies have started a movement to look at the outside world, in other words, to develop the perception of other regions than their original ones.

12 CORPORATE BUTTERFLY EFFECT: how to manage interdependencies and con?ngent business interrup?on threats expousures risks

13 CORPORATE BUTTERFLY EFFECT: how to manage interdependencies and con?ngent business interrup?on What happens if those threats affect your suppliers or costumers?

14 CORPORATE BUTTERFLY EFFECT: how to manage interdependencies and con?ngent business interrup?on What happens if your main supplier or costumer of the company suffers from a business interruption? What happens if you concentrate your highest volume of sales in only one costumer?

15 CORPORATE BUTTERFLY EFFECT: how to manage interdependencies and con?ngent business interrup?on What is the meaning of that? It means that each company must understand its independence to assure the improvement of their results. It is also important to understand that every threat or exposures existing in our own operation can certainly be found in the operation of my suppliers and costumers.

16 CORPORATE BUTTERFLY EFFECT: how to manage interdependencies and con?ngent business interrup?on ompanies that roduce row a t e r i a l o r omponents to be ssembled in their nal product in the ame site / plant Companies that p r o d u c e t h e i r utilities, like energy generation or water supply in the same site where the operation occurs (reuse)

17 CORPORATE BUTTERFLY EFFECT: how to manage interdependencies and con?ngent business interrup?on Companies that have integrated business in order to maximize their result (railroad concession, row material production )

18 CORPORATE BUTTERFLY EFFECT: how to manage interdependencies and con?ngent business interrup?on Tire Industry

19 CORPORATE BUTTERFLY EFFECT: how to manage interdependencies and con?ngent business interrup?on Farm: latex -> rubber in company production Transportation to the plant (railroad concession). Suppliers: row material, utilities Breakdown machinery.

20 CORPORATE BUTTERFLY EFFECT: how to manage interdependencies and con?ngent business interrup?on

21 CORPORATE BUTTERFLY EFFECT: how to manage interdependencies and con?ngent business interrup?on The dependency level and its impact if a specific component or sub product cannot be used at the production of the final product; The number of production lines for the company to produce the same final product; The nominal capacity of each of these lines; The necessary capacity of each line to produce the amount that the company needs to achieve its goals; Available mitigation alternatives: stores, alternative suppliers, alternative way to operate, etc. The market situation in the moment of the interruption: which segment should be prioritized (retail or original equipment?) The aspects of the region/location where the main suppliers and costumers are located: political, economic, legal conditions, weather and logistics aspects. Supplier and costumer s Loss Prevention Plan Supplier and costumer s Business Impact Analysis Supplier and costumer s plan to response (BCP). Supplier and costumer s Crises Management Plan

22 CORPORATE BUTTERFLY EFFECT: how to manage interdependencies and con?ngent business interrup?on Thank you!!!!

23 CORPORATE BUTTERFLY EFFECT: The Insurance Support: Underwri?ng and claims management RIC004 Maurizio Castelli, Country Manager Italy, XL Group

24 Business Interruption A changing perspective The evolution of several parameters in the global landscape affects the perception of risks by insurance markets Risk accumulation control as a key driver in Property insurance underwriting. Risk accumulation affected by the business Interruption component as much or more than the direct property damages component. BI component results from loss of revenues on the affected unit but also from interdependencies and impact coming from suppliers and clients. The increasingly tight connection within the supply chain of an insured company led to a completely different perspective in calculating BI exposures his also leads to the need of a much deeper and clear analysis and understanding of the relationship with suppliers and clients, external and internal. 2011, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO 24

25 Business Interruption - CBI Wake up calls Sept /11 March 2011 Tohoku EQ and Tsunami Oct-Nov 2012 Sandy August 2005 Katrina August 2002 Central European floods July 2011 Thailand floods 2011, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO 25

26 Why BI exposure is increasing Contingent BI : business interruption damages incurred as a consequence of property damages suffered by direct suppliers or customers of the insured, leading to a shortening of supply or demand which results on an impact on its revenues. Contingent BI damages are increasing because of significant cost saving measures widely implemented: Just in Time (or even Just in Sequence ) inventory strategies Reduction of stock capacities Single source supplier agreement (and no second molds ) High level of specialization Sourcing from low cost countries Outsourcing production to third parties 2011, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO 26

27 Earthquake Japan 2011: main features EQ Tsunami Radiation Supply chain CBI 2011, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO 27

28 Earthquake Japan 2011 : coverage issues/lessons learnt EQ limit Flood limit Radiation exclusion Concurrent causation Upstream / downstream Full supply chain Tier one only/ Tier two Named supplier Deductible language Make up in other areas of the globe 2011, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO 28

29 Flood Thailand , XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO 29

30 Flood Thailand 2011: main features Area damage CBI Salvage 2011, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO 30

31 Flood Thailand , XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO 31

32 Flood Thailand 2011: coverage issues/lessons learnt Flood limit High Hazard Zone / Flood Zone A Concurrent causation Denial of access Upstream / downstream Full supply chain Tier one only/ Tier two Named supplier Deductible language Make up in other areas of the globe Suppliers and Customers located in the same Industrial region 2011, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO 32

33 Hurricane Sandy 2012: main features Saltwater Power outage Access Humidity 2011, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO 33

34 General lessons learned from claims management Implementation of supply chain teams Reduction of quality standards (temporary) Move away from single source supplier Learn more about high hazard zones of customer/supplier Normal mitigation like in all other BI claims helped - Business Continuity Plans - Move production to other areas - Overtime Review policy limits Full supply chain coverage/named supplier Risk Engineering support 2011, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO

35 Corporate butterfly effect Dependency on: Utilities Group Interdependencies Critical suppliers Outsourced productions Critical clients Disruption of logistic chain Infrastructures (access to facilities) 2011, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO 35

36 Corporate butterfly effect: the role of the insurer ü Support the client, along with the broker in: Risk Identification; making sure that dependencies and foreseeable scenarios have been considered and that time element has been factored in properly Risk assessment: calculate loss scenarios and the corresponding exposure level Risk Mapping: compare calculated exposures with the insured s risk appetite and identify suitable level for indemnity limits and deductibles Identify named CBI versus un-named CBI risks ü Based on above analysis understand the coverage needs and design a suitable coverage package ü Calculate account risk and portfolio impact (accumulation) to come to an assessment of overall exposure ü Define the adequate premium and T&C ü Implement and handle a suitable global program including all local legal and tax compliance needs ü Ensure proper handling of losses when these will happen 2011, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO 36

37 Corporate butterfly effect: the importance of data quality The more the submission is clear, complete and detailed, the more the insurer is able to offer a satisfactory solution in terms of premium level, deductibles, limits, wideness of coverage, wording. In particular, for Cat Nat exposures, Today we have the availability of very accurate tools (in terms of calculation of probability and magnitude of foreseeable events) to calculate the Nat-Cat exposure including accumulation. However results can vary significantly even following minimal variation in the address of the location being analyzed. If the information about the risk locations is not accurate, the insurer has to use worst case scenarios data in his assessment of the risk and this is not to the advantage of the insured. 2011, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO 37

38 Corporate butterfly effect: insurance coverage Ø «Traditional» Business Interruption coverage: Time element Loss of Profit Extra expenses Business Interruption Extra Expenses Interdependency Contingent Business Interruption Named CBI Unnamed CBI Denail of access Service Interruption Ø Enhanced coverage: Group Interdependency Ø Special CBI coverage subject to specific sub-limits: Named and Unnamed CBI Denial of Access Service Interruption Additional special coverages: Loss of rent Loss of licenses Loss of interest Penalties 2011, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO 38

39 Corporate butterfly effect: an integrated approach Risk Engineering: Property Damage Loss prevention Supply Chain Loss prevention Business Impact Analysis and BI Loss Prevention Crisis Management Business Continuity Plans Underwriting and insurance solutions Risk Assessment and design of effective insurance solution BI and CBI capacity and comprehensive coverage Global Insurance Programs capabilities and know-how Suitable platforms for effective handling of complex global programs Claims Handling Professional claims handling team available around the clock and around the globe (specific experience and know-how in cross-border claims handling) Specific experience in handling complex BI and CBI claim Close cooperation of claims people with Risk Engineering and Underwriting 2011, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO

40 Thank You!