The Gulf oil spill disaster has been a catalyst for companies to think about their exposure to catastrophic risk. How would you react if a disaster of that scale befell your company?
“Nassim Nicholas Taleb’s book ‘The Black Swan: the Impact of the Highly Improbable,’ states that we all waste a lot of time managing for the predictable risks, but the only ones that really matter are the ones we cannot, or at least do not, imagine,” says Bruce Jefferis, CEO of Aon Energy.
Smart Business spoke with Jefferis and Leo G. Walter III, executive vice president, Aon Risk Solutions East Central Inc., about the issues raised by the Gulf oil spill and about what companies can learn from this disaster.
What lessons can companies learn from the Gulf oil spill?
No firm should underestimate the worst-case situation. Often, when you talk about insurance planning, people assume they will have losses, and they look back at previous losses, but they don’t often look at the worst possible thing that could happen. How would your insurance and risk management programs function in that kind of environment? It seems like an obvious question. But too often, people say, ‘Well, that’s unlikely. So I’ll buy something centered around a more likely loss.’ Frankly, it’s not the ‘more likely’ losses that impact the firm. It’s the completely unpredictable events — like the Gulf spill.
Most companies have already got that message. It doesn’t mean they can completely protect themselves from that worst-case scenario, but at least they have considered it and looked at all of their options.
How can companies prepare for that worst-case situation?
Don’t wait for that event to happen before you look at all your policies. How will you respond to that kind of event?
Many people look at a policy only thinking about a single event, a single line of coverage. But in a really bad catastrophe, almost every policy you have gets involved in some fashion. Property, casualty, fiduciary liability, pollution — it can easily spill over into directors’ and officers’ — a really bad event can cross over into almost every policy you have, so you need to think about it from that standpoint. You need to see how they all work together and figure out if they are going to do what you want them to do.
Say you have a large property claim, but you didn’t buy enough limits. The firm goes into bankruptcy, and you then have a spin-off D&O claim, because someone claims the directors and officers weren’t properly protecting the company. So you have D&O issues, the company stock is tanked because of the bankruptcy and you have some fiduciary claims coming out of that. That can get quite expensive. When an event like this happens, you need to map out how it hits everything — how the policies react, where the issues are — and find out if there is a better way to do it.
