Businesses often underestimate the "full magnitude" of a potential loss resulting from events outside the "normal range of probability", says a Marsh executive director.

Scott Leney told the RMIA annual conference Victoria bushfire costs were a chilling reminder of risk management shortcomings when extreme events occurred.

He said it was clear some risk managers remained "victims of the same old modelling techniques and risk assessment approaches".

It is very common for us to do little with low-probability, high-severity events and I think the main reason is today's world spins on an economic axis."

Leney said limited resources were not going to be directed away from achieving short-term, pressing objectives unless there was a reasonable chance of a risk event occurring.

Recent catastrophes, including the Deepwater Horizon oil spill showed companies needed layers of protection that went beyond what insurance programs and other traditional forms of risk financing offered, he said.

To recover from extreme losses, businesses needed brand equity in ample supply to sustain a hit to the brand; retained risk capital and banking facilities to buffer and finance recoveries; and flexible assets and contingency plans to assist with business continuity.

He used the 2010 8.8 magnitude Chilean and 7.1 magnitude NZ earthquakes to show more needed to be done to prepare for and mitigate the impact of major losses. There was a general absence of contingency planning, particularly for large events where the effects were felt broadly by businesses and the community.

"Notwithstanding the more successful Christchurch example, there is quite often a lack of pre-event supply chain risk management that can let businesses down, leaving them exposed," Leney said.

First published in Risk Report, Issue 340, Thursday 25 November 2010