Case Study – Detailed Engineering Analysis

Company Description: Large shopping mall

Number of Locations: 1 location

Distribution of Locations: San Francisco

Scenario: High profile shopping facility in San Francisco valued at $200M. Visitors number in the tens of thousands on any given day. Client had concerns about insurance adequacy with respect to business interruption and with the structure's potential for collapse.

Analysis Objective: Evaluate the structure's ability to withstand a major earthquake and quantify losses due to structural and contents damage and business interruption. Identify best risk mitigation strategy with emphasis on property insurance.

Modeling helps identify building components vulnerable to earthquakes.

Analysis and Findings: Evaluated mall vulnerability under simulated seismic conditions using a three-dimensional computer structural model. The structure was found to be sound for frequent, less severe events, but relatively vulnerable to large events (magnitude 7.0 or greater) on the San Andreas and Hayward Faults. The probability of exceeding (PE) various levels of monetary loss in the next 10 years was estimated. The analysis showed that a total loss ($200M) has about a 0.4% chance of occurring in the next 10 years and that a loss exceeding 50% of building replacement value has a 0.7% chance of occurring in that period. In the latter case, business interruption was expected to exceed 6 months. The same analysis was performed for partial retrofit and comprehensive retrofit solutions. 

 

Derived Benefit: On the basis of the analysis results, the most appropriate risk mitigation strategy for the owner was a combination of a $3M partial retrofit of the building and insurance coverage for only 50% of the full replacement value of the building, with a 10% deductible. Before AIR’s analysis was performed, the owner was buying insurance to cover the full replacement of the building. This new strategy resulted in an $800,000/year reduction in insurance premium, enough to cover the retrofit cost in just 4 years. The internal rate of return of the risk mitigation investment was 12%. The owner selected this strategy, confident that a total loss was extremely unlikely and that the proposed partial retrofit was the best long-term investment. 

Case Study – Terrorism Security Analysis

Company Description: Large finance company 

Number of Locations: 1 location

Distribution of Locations: New York City

Scenario: Like most companies in New York City, after 9/11 their property and workers’ compensation costs skyrocketed. The company made a significant investment to improve on-site security, but their insurer did not acknowledge these measures. 

Analysis Objective: To quantify the likelihood and loss potential of a successful terrorist event impacting a property given various levels of on-site security

Analysis and Findings: The analysis focused on the likelihood of attack and loss potential under standard levels and increased levels of security, taking into consideration that the tighter security would result in a decreased likelihood that the secure site would be the subject of a direct attack. A company specializing in security for high risk and high profile facilities performed the perimeter security evaluation and provided their findings to the catastrophe loss modeling company. The model analysis found that the security improvements decreased the likelihood that the facility would be the subject of a direct attack, reducing loss potential by more than 30%. 

Derived Benefit: The client shared the analysis with their underwriter and received premium reductions totaling $400,000. Included in the analysis were insights for additional security measures that would further reduce loss potential.

Case Study – Risk Manager of Large Real Estate Firm Licenses CATStation^®

Company Description: Large real estate investment trust

Number of Locations: 1000 Industrial and office properties

Distribution of Locations: Nationwide

Scenario: This company’s focus is on the construction, acquisition, selling, and management of real estate. Their distribution of locations exposed them to the various natural and manmade perils within the U.S., but the risk manager had to rely on rules of thumb to make insurance purchasing decisions. Furthermore, the ongoing acquisition activity required frequent PML analyses and quarterly account reconciliation with underwriters. The reconciliation process entailed sending purchase and sale activity to the underwriter, who then billed or credited for the quarter according to his interpretation of the increase or reduction of risk. 

Sample loss report produced by CATStation

Analysis Objective: The risk manager wanted to gain a better understanding of his company’s catastrophic loss potential to more appropriately align his company’s insurance coverage with actual exposure. The risk manager also wanted to take greater control of the PML and account reconciliation processes. 

Sample hazard and deterministic loss analysis reports produced by CATStation

Analysis and Findings: AIR assisted the risk manager in cleaning and importing the portfolio data, including COPE (construction, occupancy, protection, exposures) values and insurance terms. Once imported, the risk manager was able to run the model and quantify his portfolio’s potential loss due to earthquake, hurricane, severe thunderstorm and terrorism. Model output also enabled him to see the implications of various insurance coverage and deductible scenarios. With this information he was able to identify the most cost effective approach. In particular, the company had sufficient insurance coverage for the 100-year seismic event (1% likelihood of occurring in a given year) but would need to double coverage if they wanted limits substantial enough to cover the 250-year event (.4% likelihood). For wind, the company had far more coverage than necessary, and could offset the cost of additional earthquake coverage by reducing their wind  limits.

Derived Benefit: By bringing modeling in house, this risk manager was able to save in multiple areas. First, by adjusting insurance coverage to reflect loss exposure, and by leveraging model output in the negotiation process, this company realized a net savings of $300,000 in premium reduction, while at the same time improving their coverage. Secondly, they no longer outsourced every PML analysis, since CATStation served as a quick and reliable estimator of loss potential at specific locations. Third, the quarterly account reconciliation was no longer dictated by the underwriter. The risk manager could send documentation on purchase and sale activity with a model analysis report on that activity’s marginal impact on loss potential.

Case Study – Large Property Portfolio Analysis

Company Description: Large real estate company

Number of Locations: 600+ Industrial and office properties

Distribution of Locations: Nationwide

Scenario: The risk manager of this company recognized that to keep insurance costs in line she needed to re-evaluate her entire program. She had never undertaken catastrophe modeling before, but recognized that savings might be possible if she could eliminate coverage she did not need. Like many real estate operations, this company’s portfolio had evolved over the years and looked far different than it had 5 years prior, yet its insurance program had hardly changed at all. 

Analysis Objective: Evaluate coverage needs, particularly pertaining to Florida wind exposure. Identify locations that are loss drivers.

Analysis and Findings: Hurricane, earthquake and severe thunderstorm (tornado, hail, straight-line wind) analyses were performed on behalf of this risk manager. The analysis revealed that this company was buying more wind coverage than actually needed - by a factor of five. The modeling also revealed that they were leaving themselves significantly exposed to earthquake risk. To comply with their organizational risk tolerance level they doubled their earthquake insurance coverage. The loss drivers were found to be older properties in the vicinity of the New Madrid Seismic Zone, located in the Mississippi River Valley, that were under covered. 

Derived Benefit: By tailoring their program more closely to their actual exposure, this company was able to reduce premiums by $500,000. These saving were realized despite the fact that they were buying into a hard market and purchasing additional earthquake coverage.