Sept. 11 Disaster Planning Wake-Up Call.

• Author: Heffes, Ellen M.
• Position: Risk Management

A catastrophe, by definition, is an unplanned, unexpected event. In the United States, we're somewhat prepared for dealing with certain catastrophic events: hurricanes, airplane crashes, riots and even volcanic eruptions. Corporations and communities mitigate the financial risks of such unexpected natural and accidental events with insurance and reinsurance. Yet, it's apparent that no one was prepared for the consequences of the Sept. 11 terrorist attack and its ripple-down effects on every corner of life in the U.S. It's resulting in a wake-up call for heightened awareness of corporate risk and risk management.

"The extent of this tragedy will always be defined by the human tragedy, but it's a financial tragedy as well," says Hemant Shah, co-founder and president of RMS (Risk Management Solutions Inc.), a Newark, Calif.-based firm that provides natural hazard risk management products and services, primarily to the insurance and reinsurance industries. Immediately following Sept. 11, RMS was deluged with calls from clients and others seeking tools for understanding balance sheet risks related to terrorism.

Unlike earthquakes or hurricanes, terrorism is hard to quantify, since it has an element of randomness to it, explains Shah. "So, rather than focus specifically on terrorism as a class of risk, the broader view might be political risk." Political risk relates not just to terrorism, but to governmental instability, disruption in trade, riots and other direct or indirect results from political instability.

In general, the components of operational risk assessment include: location and site selection, insurance coverage and other financial hedges, ensuring operational redundancy and contingency planning.

Shah says that while most natural disasters cause accumulations of small to moderate property losses over large areas, the World Trade Center attack caused mass business interruption, with the loss concentrated in one fairly small, yet intense area. By definition, it's a "direct" business interruption when facilities have been either damaged or destroyed, and it's very costly. Indirect or "contingent" business interruption can have consequences throughout an entire business, with even greater costs. "Companies today are networked, operate on a 'just-in-time' manufacturing basis and are tightly wound in terms of efficiency. If something goes wrong, or a piece of a network is out, things can unravel very quickly -- causing indirect...