A new Oxford executive research briefing has suggested that the impact of catastrophes on share-holder value is influenced by good quality risk management rather than the existence of catastrophe insurance.
This raises interesting issues for companies and the providers of risk management services. While catastrophe insurance will make good the economic loss it does not guarantee the return of shareholder confidence.
Firms affected by catastrophes fall into two distinct groups - recoverers and non-recoverers. The initial loss of shareholder value is approximately five per cent among recoverers and 11 per cent among non-recoverers. By the 50th trading day, shareholder value for the recoverers was actually 5 per cent higher than before the catastrophe.
The non-recoverers suffered a cumulative drop of almost 15 per cent up to one year after the catastrophe.
So, why do some companies experience an overall increase in shareholder value following a catastrophe and others not recover at all?
One possible explanation from the research findings is that there are two elements to the catastrophic impact. The first is the immediate estimate of the associated economic loss while the second hinges on management's ability to deal with the aftermath.
According to the report, effective management of the consequences of catastrophes would appear to be more significant factor than whether catastrophe insurance hedges the economic impact of the catastrophe.
The combined effect of the two sets of factors could therefore be either positive of negative: Positive where the benefits of what is revealed about management outweigh the net financial loss of the catastrophe; unfavourable if the revelation effects are negative, since this will amplify the negative impact of the financial loss.
The message is clear: catastrophe insurance cover offers no protection against the shareholder value effects of catastrophes. This suggest that a company's insurance strategy should not be considered in isolation or viewed as a substitute for high quality risk management and contingency planning systems and procedures.
This research further suggests that there may be considerable demand from the corporate sector in future for the unbundling of traditional insurance products. This would allow firms to disentangle their decision to purchase risk management services and claims handling.
Mr Colum Diamond is development director of Sedgwick Dineen Insurance Brokers and Risk Consultants.
