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Preparing for a flock of black swans

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Lessons learned from contingency planning against multiple risks

Large-scale weather events such as windstorms, floods and droughts are becoming more frequent and less predictable, requiring more standardized but also agile responses which can be adapted to each event. However, at the same time, we are also seeing growing social risk in the form of protests, strikes and violence which are affecting businesses. An obvious example is last year’s gilet jaunes protests and the more recent pension strikes in France. These changes, and their repercussions, require new approaches and adaptation on the part of our profession. The question now becomes: "How to prepare for the unpredictable?”

Claims professionals tend to analyze past occurrences and review case histories to determine precedents and prepare themselves for the future. However, as the black swan theory points out, there is a fallibility of ‘known information’ and analysis of losses. We can never know what is unknown and therefore we must develop tools to help us prepare for the unexpected.

The challenge

In November 2019 a very large fire broke out in a Parisian hotel in an area of the city popular with tourists. A designated team of experts went to the scene immediately and undertook standard first emergency procedures. The expert in charge of evaluating the operating loss plunged into the figures and started estimating the possible losses according to several different scenarios. Satisfied with his work, he submitted his initial report to the insurer and proposed the provision for financial loss, knowing that the hotel should remain closed for six months, until the end of April 2020.

Then the unpredictable happened. A pension reform strike against changes to France’s pension system proposed by President Emmanuel Macron began on 5thDecember 2019 and lasted until the end of January 2020. The media reported 25%-30% drop in activity in the capital as result of the protests

The expert in charge of the operating loss had to revise his estimates in order to include the impact of this external and unexpected turn of events in assessing the evaluation of the loss. In reality though, in the absence of the loss, the hotel would have seen its activity vary as a result of the protests and it is therefore advisable not to take into account the impact of this factor in the overall costing. 

An interim report reviewing the provision is then sent to the insurer. The insurer did not have time to take into account this new information before a new virus COVID-19 was detected in China, and the loss adjuster had to review the report again. 

An assessment now must incorporate the effect of the drop in tourist numbers, particularly Chinese tourists (who represent only 2.5% of foreign tourists in general, but 7% of international tourism receipts in France which equals to approximately 4 billion euros).

Only three months have passed since the initial fire and already a third version of the report needs to be produced. There are still three months left before the hotel reopens and it begs the question: what will be the next event that may cause a review of the assessment?

Lessons learned and moving forward

Major and complex losses are becoming an increasing concern for all lines of business as we face existing and emerging risks, and there is no way to predict the next disaster or crisis. Furthermore, the financial aspect of claims is always more difficult to understand because of the complex financial arrangements of companies. With the unprecedented and unusual events that France has experienced recently, it is important to bring financial expertise to help with the analysis and refine financial strategy of losses.

Sedgwick colleagues around the world have learned from past experiences of assessing loss and managing complex situations. The importance of preparedness and aligning the right resources ahead of time makes response and mitigation less stressful during difficult times. This includes:

  • Working alongside the insured to find solutions for the continuation or resumption of business as usual.
  • Using our experts’ experience in the field to better manage the crisis.
  • Finding the best solution: every problem has at least one solution; if there is no solution it may be that there is no problem.

There are also ways for clients to better protect their businesses too. For example, to speed up any adjusting should an event occur, policyholders can keep their documents in the cloud or saved to a USB stick, so our experts can access them quickly. Documents such as pledge statement, property lease, most recent profit and loss statement, and balance sheet (preferably for the last three years) are crucial in the insurance claims process. 

The year may bring many emerging risks and the only constant is the necessity to evolve and adapt. Whatever size company you operate, Sedgwick colleagues are well-equipped to provide the right guidance, tools and support to help your business and operations bounce back when faced with difficult challenges. As a business, you need to find ways to stay agile and responsive; choosing the right experts that can help navigate through any standard and unusual situations which may affect your business interruption claim, will make a big difference.

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