The Details Matter: A Case Study
Accurate risk assessment of large industrial facilities is highly sensitive to the information model users enter about facility composition. It is also important to account for critical mitigation efforts, like the anchoring of components.
Stakeholders, like commercial underwriters, can obtain facility-specific information by inspecting the sites and noting the components and purpose of the facility. They can then translate this information into the most appropriate occupancy code in AIR’s 400-series. Note that these codes reflect differences in vulnerability by region. For example, energy facilities along the U.S. Gulf Coast typically exhibit mitigation efforts, like raised control panels, more consistently than those in other parts of the United States. AIR’s 400-series damage functions capture this variation.
To demonstrate the utility of the 400-series, the following example shows the differences in loss that can result from coding such exposure with the 300-series instead.
A power plant located in the United States produces electricity by burning fossil fuels, such as coal or oil. It is less than five miles from several active faults, and thus at risk from hazards including earthquake-induced ground shaking, liquefaction, and tsunami. Some components, like conveyor systems, piping, and flares, would be relatively vulnerable to moderate earthquake-induced ground shaking, while others, like open frame structures and turbines, are not.
If the 300-series were used instead, the best matched occupancy code would be electric (code 361), which would be appropriate for a small electrical station. In this modeling scenario, the thermo-electric facility’s total insured value—including the many structures and the diverse components—would be treated as buildings and/or contents instead of as uniquely vulnerable assets.
AIR examined the impact on the modeled average annual loss (AAL) of using the 300-series versus the 400-series. Results show that the average annual loss for the site (with a USD 230 million replacement value) decreases by nearly 37% when using the 477 code (Table 1). The 100-year return period loss decreases by 44%. Note that using the 400 series does not always result in lower loss values, but rather a more accurate estimation of the risk.
Table 1. Key metrics from a 300-series versus 400-series exposure mapping comparison. For this particular example, the average annual loss decreases by nearly 37% when using 477 (thermo-electric) versus 361 (electric), and the 100-year return period loss decreases by 44%. (Source: AIR)
|AIR Occupancy Code
||Average Annual Loss
|1% Exceedance Probability Loss (USD)
There are significant advantages to using the 400-series from a risk management and mitigation standpoint. Commercial underwriters can take full advantage of the detailed risk information they collect when inspecting the facilities they underwrite. They can be sure the information they have meticulously gathered is assigned the facility code that best represents the relevant component-level vulnerabilities. The process of translating the information about a facility’s constituent components to a particular facility code also helps commercial underwriters better visualize and understand their exposure data.
Portfolio managers can also benefit from using the 400-series. These executives are tasked with pursuing business objectives while balancing risk and return, decision-making that requires them to be highly informed. They must closely evaluate how the diverse set of facility types they manage fits in with their entire portfolio. The increased accuracy achieved with the 400-series can help them better understand when potential losses to a single risk warrant pursuit of mitigation options—either through insurance purchase or physical improvements to critical components. By enhancing portfolio managers’ risk views through comprehensive results, AIR’s 400-series ensures that they are in the best position to make fiscally responsible risk management decisions. Brokers, meanwhile, can use results from the 400-series analysis to enhance their roles as trusted advisors.
Informed decisions are an integral component of any sound risk management program, and the 400-series provides a more accurate and objective assessment of vulnerability for stakeholders throughout the risk management chain. AIR recommends that companies with portfolios of high-value industrial facilities investigate their key loss-driving risks and use the 400-series to assess potential damage and loss. AIR’s detailed modeling capability for these facilities is currently available for the United States, Japan, India, the Caribbean, and Australia and will soon be available for additional models.
Before the introduction of AIR’s 400-series, commercial insurers that wanted to assess the potential damage and loss to large industrial facilities were not able to derive the maximum benefit from catastrophe models. Critical information about the default breakdown of components was nowhere to be found, and as a result, there was high uncertainty in the estimates of damage and loss to complex, high-value industrial complexes.
Since 2009, however, that has changed. AIR’s industry-leading efforts to increase accuracy of catastrophe loss assessments have extended to the commercial space. Users can leverage AIR’s detailed modeling software to represent large and complex industrial facilities and to achieve more accurate loss estimates, which in turn help make better risk transfer decisions.
1At that time, this capability was just available for the AIR Model for U.S. Earthquake.
2 These damage functions are available in the hurricane and earthquake models for the U.S., the earthquake and typhoon models for Japan, the earthquake and tropical cyclone models for Australia, and the tropical cyclone models for the Caribbean and India.