Magazine article Risk Management

Confronting a Growing Concern: The Risk of Undervaluation

Magazine article Risk Management

Confronting a Growing Concern: The Risk of Undervaluation

Article excerpt

The HPR (Highly Protected Risk) market is based on the premise that taking precautionary engineering measures could limit the size and frequency of losses. For a century since this product's inception, this assumption has held up, according to Gail P. Norstrom, president and CEO of Industrial Risk Insurers (1RI) in Hartford, Connecticut, who says that loss prevention has lived up to its billing. In recent years, however, the business environment that HPR protects has changed dramatically. Undereported property and business interruption values have become the center of a growing crisis that is costing millions of dollars and threatens to change the face of global property insurance coverage. The problem has the industry buzzing and was a hot topic among her peers at the past RIMS Annual Conference, according to Ms. Norstrom. Because of this crisis, risk managers will face restrictions in coverage, increased deductibles and higher rates as insurers rely more on reinsurance.

"Risk managers can expect more questions from HPR insurers about the values of their insured properties . . . not because we want to get more dollars in premium, but because we want to be able to accurately determine our loss exposures. If a property valuation is 10 percent off, that can add up to hundreds of millions of dollars for large risks," says Jim Black, executive vice president and COO at Protection Mutual.

The gap between reported values and losses has been widening dramatically and increasing in frequency. It is no longer acceptable, for insurance purposes, to simply assume that a valuation is accurate. This is due, in part, to changes in business practices and corporate restructuring that is creating new and unanticipated exposures. "These increased exposures have often eluded risk managers and insurers until the losses actually occurred," says Ms. Norstrom.

Changing Industrial Landscape

Significant new processes in business include the use of just-in-time inventorying, which schedules deliveries to arrive just before supplies are used. This inventory method builds up just enough material to meet short-term needs, which increases an organization's business interruption potential.

The business interruption exposure similarly increases as companies rely on a smaller group of suppliers or customers. …

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