Canadian Underwriter

Expect the Unexpected

December 1, 2013   by Angela Stelmakowich, Editor

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December is upon us, as is the parade of sniffles, coughs and hacking that fill the air in workplaces, homes and everywhere else. This sort of thing is expected – it being December; this being Canada.

It is also expected certain risk management measures will need to be employed (hand hygiene, for example) to keep infection at bay.

But what if it were more than a tiresome cold – maybe requiring a day or two off work – that most would expect to run its course in a week or so? What if it were more… unexpected?

Expect the unexpected is likely the advice of Towers Watson, whose report, Extreme risks 2013, argues a robust risk management approach should not stop at a particular percentile and a holistic risk management framework should include very unlikely, but potentially high-impact, events.

“While interesting in its own right, we believe the consideration of extreme risks can be useful in helping to design more robust investment portfolios and more robust risk management processes,” Tim Hodgson, head of Towers Watson’s Thinking Ahead Group, notes in a statement.

The report ranks risks in three categories: financial, economic and “other,” the last greatly expanded in the 2013 report, released in late October, to include 30 risks.

Among the report’s top 30 high-impact events – very rare, but would have a high impact on global economic growth and asset returns – is a global pandemic.

Earlier this year, AIR Worldwide announced the release of a new pandemic flu model designed to capture the excess morbidity, mortality and insurance losses cause by pandemic influenza.

Almost a century after the 1918-1919 Spanish flu killed 50 million people, notes Pandemic Perspective, published in November by Aon Benfield, “pandemic risk remains the most important mortality exposure for the insurance industry and is placed above other forms of catastrophic event, including natural catastrophes, nuclear explosions and terrorism.”

Less dramatic, but still important, AIR Worldwide noted business interruption is among the areas where insurers and reinsurers may incur potentially significant losses. “Pandemics are low-frequency events with a potentially high level of severity and impact to insurers and reinsurers in the areas of life, health and disability,” said Nita Madhav, a senior scientist at AIR Worldwide.

“Other lines such as workers’ compensation, personal accident and business interruption may also incur significant losses, depending on policy specifics,” Madhav added.

The flu pandemic model includes more than 18,000 simulated events – ranging in severity from mild to severe – that can start and spread anywhere in the world and last from months to years.

The Public Health Agency of Canada notes it has been projected as much as 30% to 35% of the workforce may be absent as a result of the effects of pandemic influenza on individuals and families.

This past January, Zurich North America reported the influenza outbreak in the United States at the time was the most widespread outbreak of the virus since the H1N1 pandemic in 2009-2010.

The insurer released two risk bulletins, including one providing guidance on what a business should do in a flu outbreak. “Whether you are a global company or a local retail business, extended worker absenteeism due to an influenza outbreak could affect every part of your business.”

Among other things, the bulletin recommended identifying critical processes and functions that must continue for the business to remain viable; evaluating critical suppliers and customers, as well as developing a contingency plan for critical materials, parts or essential services; and identifying essential employees or expertise to find ways to protect critical employees through isolation, remote work or medical intervention.

January is just around the corner – and is expected to offer much of the same sniffling and hacking December did, unless, of course, it offers something unexpected.

Best to be prepared to manage whatever risk reveals itself, expected or not.

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