Today’s global economy has created a wealth of high-value industrial facilities, an increasingly high proportion of which are located in regions at risk to earthquakes or hurricanes. The RMS® Industrial Facilities Model incorporates the unique physical and operational characteristics of industrial facilities in estimating facility vulnerability, and calculating the estimated financial risk from building, contents, and business interruption losses for a comprehensive set of facility types worldwide. Industrial Facilities S tat e - o f -t h e - A rt I n d u s t r i a l Fac i l i t i e s M o d e l The RMS Industrial Facilities Model combines the latest global research on industrial facility performance with extensive RMS experience in analyzing and investigating industrial losses from earthquakes and hurricanes, and consultations with major worldwide industrial insurers, resulting in a model that is consistent with the levels of data and the types of issues encountered by industrial underwriters. The model is calibrated against insured loss data from industrial underwriters as well as engineering damage data from recent events. This detailed and exhaustive review provides insight into the vulnerability of critical components of industrial facilities, and the high percentage of value associated with contents (machinery, equipment, and stock), a feature unique to industrial facilities. The model includes a comprehensive set of industrial facility types and a full range of construction classes based on the predominant structure types found in each country. C o m p o n e n t - B a s e d Vu l n e r a b i l i t y D e v e l o p m e n t An industrial facility consists of many integrated components and processes. Successful operation of a system or facility depends on the performance of its critical components. RMS employs a systems-reliability approach to develop vulnerability functions for each facility type and peril. In this approach, separate vulnerability functions are developed for buildings and contents for every critical component present at each industrial 20% facility occupancy. The component- Buildings weighted according to their relative Chemical Processing Equipment values to arrive at overall building and contents vulnerability functions Damage Ratio level vulnerability functions are then Mechanical Equipment Pumps 10% Tanks Pipelines Substation Power Generators for each facility type. Within a country, region-specific vulnerabilities are Overall Chemical Processing Facility 0% Wind Speed / Earthquake Intensity also developed to take into account local construction practices and code requirements. Component-based vulnerability development for structures within a chemical processing facility B u s i n e s s I n t e r r u p t i o n b y F a c i l i t y Ty p e In the Industrial Facilities Model, business interruption estimates consider the impact of building, machinery, and equipment damage, as well as expected modes of component failure. Business interruption downtime values are calibrated using data on operational disruption following past earthquakes and hurricanes, including paid business interruption claims. The industrial model differentiates occupancies—one business occupancy may interruption experience loss less potential physical between damage the than various another at a given wind speed or ground shaking intensity, or estimates of business interruption impacts may differ due to the nature of industrial operations, equipment housed at the facility, or impact of off-site lifelines on the facility. R e l at i v e Da m ag e a n d L o s s Pot e n t i a l The model provides representation of a detailed the relative 1.25 for both earthquake and hurricane perils, as well as the ability to specify construction class information and site-specific characteristics. This allows for improved estimates of loss Ratio to General Industrial vulnerabilities of different occupancies 1.00 Fossil Fuel 0.75 Pulp and Paper Outdoor Chemical Processing Food & Beverage 0.50 Pharmaceutical Electronics 0.25 ATC 38 - General Industrial potential, resulting in more effective underwriting. 0.00 50 In addition, the model can be 100 250 500 1000 AAL Return Period used to refine overall portfolio loss estimates. For example, loss estimates Relative earthquake risk by occupancy type for heavy industrial occupancies are typically lower than those obtained using general commercial lines vulnerability functions. Similarly, transmission and distribution loss estimates are typically higher for hurricane, reflecting the greater susceptibility of these facilities to wind damage. E a rt h qu a k e a n d H u r r i c a n e I m pac t s on I n du s t r i a l Fac i l i t i e s Ear thquake Damage to Heavy Manufacturing Facilities Due to their high relative value, the vulnerability of contents is key to assessing loss potential for industrial facilities. This maintenance building collapsed, causing significant damage to railway cars housed at the facility, which represented a majority of the total loss. Hurricane Damage to Light Industrial Manufacturing Facilities Hurricane winds may cause relatively minor structural damage, but result in significant contents damage due to water entering the facility. This built-up roof experienced membrane lifting and peeling. Water through the roof openings damaged the facility contents, and operations were shut down for approximately two weeks. Source: FEMA C o m p r e h e n s i v e R e s e a r c h f o r Vu l n e r a b i l i t y D e v e l o p m e n t RMS conducted detailed research of critical components and their performance in earthquakes and hurricanes for each facility type. The resulting vulnerability functions differentiate damageability for both structures and contents based on facility type and predominant construction class. An example of the development process for the refinery facility type is shown below. Study Facility Process and Critical Components Detailed investigation of refinery processes and loss experience confirm the critical components that contribute most to capital loss, production loss, fire risk, and hazardous substance release Q u a n t i f y R e l a t i v e Va l u e s o f A l l F a c i l i t y C o m p o n e n t s Site-specific investigations, literature review, and underwriter input are used to quantify relative values of structures and contents associated with each refinery component Study Perfor mance and Claims Data for Each Component Based on a study of over 30 earthquake and hurricane event reports and a review of industrial claims data, specific failure modes for critical components and resulting Mode 1 loss estimates are calculated for structures, contents, and Mode 2 business interruption C r e a t e F a c i l i t y Vu l n e r a b i l i t y F u n c t i o n s B a s e d o n R e l a t i v e Va l u e s o f Components Refinery structure and contents vulnerability curves and business interruption estimates are developed for Class 1 Class 2 Class 3 Class 4 Default (unknown) Structure Windspeed/Earthquake Intensity Damage Ratio default (unknown) construction class and for other predominant classes in each geographic region Contents Model Specs P e r i l s C ov e r e d a n d G e o g r a p h i c S c op e  Earthquake: Andorra, Argentina, Australia, Austria, Belgium, Belize, Bolivia, Brazil, Canada, the Caribbean, Chile, China, Colombia, Costa Rica, Ecuador, El Salvador, France, Germany, Greece, Guam, Guatemala, Honduras, Indonesia, Ireland, Italy, Japan, Liechtenstein, Luxembourg, Mexico, Monaco, the Netherlands, New Zealand, Nicaragua, Panama, Peru, Portugal, Spain, Switzerland, Taiwan, Turkey, the U.K, the U.S., Venezuela  Hurricane: Australia, Austria, Belgium, the Caribbean, Denmark, France, Germany, Guam, Ireland, Japan, Luxembourg, Netherlands, Norway, Sweden, Switzerland, the U.K., the U.S. F a c i l i t y Ty p e s C o v e r e d  Heavy industrial: mining, cement mills, steel mills, pulp and paper, glass plant, general  Chemical processing: primarily outdoor, primarily indoor  Light industrial: electronics, pharmaceutical, biomedical, semiconductor, general assembly, general manufacturing, technological risk  Petrochemical: oil refineries, pipelines, pipeline below ground, tank farms  Electric power generation: fossil fuel plants (various sizes), hydroelectric plants, co-generation plants (various sizes)  Electric power: transmission and distribution lines, substations, nuclear power plants, wind farms  Natural gas facilities  Food and beverage  Data processing/telecommunications  Communications  Ports and harbor facilities  Dams, reservoirs only, water/sewage treatment plants, mechanical C on s t ru c t i on C l a s s e s Choice of construction classes is dependent on the predominant structure types in each country (e.g., unknown, light metal, unreinforced masonry wall, reinforced concrete, nonductile concrete, reinforced masonry, steel frame, tilt-up, for facilities in the U.S.) S e c o n d a ry M o d i f i e r s  Earthquake: construction quality, equipment anchoring and bracing, structural upgrade/retrofit, business interruption (BI) preparedness and BI redundancy  Hurricane: construction quality, outdoor equipment anchorage and protection, contents vulnerability to water damage S p e c i a l Fe at u r e s  Component-based vulnerability functions  Separate vulnerability functions for structure and contents (machinery, equipment, and stock) for each facility type and construction class  Region-specific vulnerabilities to account for differing construction practices and code requirements  Calibration and validation based on event reconnaissance, site-specific risk evaluations, and industrial facilities claims data Risk Management Solutions, Inc. < 7015 Gateway Blvd., Newark, CA 94560, USA < http://www.rms.com ©2009 Risk Management Solutions, Inc. 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