The%Interna/onal%Federa/on%of% Adjus/ng%Associa/ons ... · •Incalculable damage to corporate reputations (and market capitalisation) Why is this research relevant to the ... •$1bn

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!12th!October!2011!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!John%Hurrell,!CEO,!Airmic!

The%Interna/onal%Federa/on%of%Adjus/ng%Associa/ons%!

Catastrophe%Claims%Adjus/ng%a%Global%Challenge%

‘Roads to Ruin’

A research project undertaken by Cass Business School for Airmic, Sponsored by Crawford and Lockton –

June 2011

The%Presenta/on%•  Scope of the project

•  Why is this research relevant to the insurance industry

• Key findings

• 4 Case studies

• Wider implications – the ‘Risk Glass Ceiling’

Scope%of%the%Project%(1)%•  18 individual case studies of catastrophic corporate failures 2000 – 2007

• In depth review of underlying causes and the longer term consequences

• Identification of key points of failure

Scope%of%the%Project%(2)%•  Case studies included 2 fires / explosions, 5 product failures / recalls, and 2 accidents involving loss of life

• Companies studied included AIG, BP, Total, Cadbury Schweppes, Coca Cola, Firestore, Land of Leather, Maclaren and Railtrack

• Aggregate pre-crisis value of the companies involved was $6 trillion!

Consequences%of%the%Failures%•  7 bankruptcies (3 subsequently rescued by Governments)

• 11 departures of Chairman / CEOs

• 4 prison sentences

• 16 fines, penalties and regulatory interventions

• Incalculable damage to corporate reputations (and market capitalisation)

Why is this research relevant to the insurance industry?

• 8 of these cases directly related to insurable risk • All 18 cases pointed to failures in the risk management processes / oversight • In no case did the insurance industry play a significant part in

• Risk prevention or • The recovery process / crisis management - A missed opportunity!

Key%Findings%(1)%What were the underlying causes of failure?

•  Board risk blindness

• Corporate culture driven by executive incentives

• Poor communication

• Complexity of risks

• The Risk ‘Glass Ceiling’

Key%Findings%(2)%How well were the crises managed? • Generally Poor, even where there had been prior incidents

• Slow realisation of the magnitude of the reputational consequences

• Poorly developed / out of date contingency plans

• Poor stakeholder communications

• Failure to engage effectively with the insurance industry

Case%Studies%BP Texas City Refinery 2005 vs. Buncefield (2005) • Both caused by major explosions • BP’s explosion resulted in 15 fatalities but fatalities at Buncefield were zero due to the timing of the explosion (early Sunday morning) • BP implemented a well developed crisis management plan and suffered no short term share price or reputational damage • Short term emergency responses and crisis management generally handled well at Buncefield but failures in continuity plans quickly emerged

Longer%Term%Implica/ons%BP - • A series of reports prepared after the loss (Mogford Report 12/2005 and Baker Report 1/2007) pointed to critical failures in

• Safety as a priority • Short term bottom line focus • Organisational deficiencies

•  BP faced losses of • $1.6 bn in compensation to the victims • $1bn for rebuilding costs • $100 ml in fines and penalties

• Very signification erosion of BP’s reputational capital which would haunt them 5 years later after the Deepwater Horizon explosion

Longer%Term%Consequences%Buncefield (Hertfordshire Oil Storage Ltd – HOSL) • A Major Incident Investigation Board report in December 2008 pointed to failures in HOSL’s board oversight of risk • Estimated total losses exceeded £1bn • Severe disruption to fuel supplies (e.g. At Heathrow) • H&S prosecutions • A legal dispute over responsibility for loss between HOSL shareholders • Some terrific examples of very effective BCP Plans (e.g. Steria UK – who recovered their business in less than 24 hours following total destruction of their head office)

Key%Lessons%Key Lessons from BP Texas & Buncefield

1.  Boards must take active responsibility for risk oversight

2.  Boards / Management must learn the lessons of the past

3.  Risk maps, crisis and contingency / BCP plans must evolve with changes and increasing complexity

4.  Better communications needed on large complex sites

5.  The insurance industry has a vital role to play in risk assessment and advice and business recovery

Product%Recall%Cadbury Schweppes 2006 Land of Leather 2007 Maclaren 2009 Coca Cola 2004 Firestone 2000

Common Factors (exception Coca Cola) •  Slow recognition of the significance of the problem •  Failure to learn from previous experience •  Lack of transparency initially •  Confused and contradictory public statements •  Piecemeal response •  Failure to recognise media / social media impact

Product%Recall%Product Recall - Lessons Learned

•  A strong brand is resilient in the longer term subject to no recurrence of the same problems

•  Need for immediate, transparent and significant response

•  Need to involve insurers early and closely to agree... •  Admissions of liability •  Rectification measures

Wider%Implica/ons%The risk ‘Glass Ceiling’ 1.  The case studies show that risk and insurance is not

a boardroom issue until things go wrong and then it is often too late

2.  The insurance industry has unrivalled expertise in managing corporate crises but does not leverage the marketing opportunities which derive from this experience

3.  Risk managers need help to put insurance onto board agendas

4.  Corporates do not appreciate the value / critical importance of advice from the insurance industry during the crisis

Concluding%Message%

•  Banks have relinquished their critical role in helping corporates recover from potentially fatal crises

•  There is a vacuum for the insurance industry to fill

•  Loss adjusters are in the front line and have the experience to play a more decisive role in corporate recovery

•  The insurance industry needs to find a way to be able to monetise this opportunity