10 Years Later: Lessons From Hurricane Katrina
Businesses learned a great deal from the impact of Hurricane Katrina, but underwriters are concerned that institutional memories are fading and there may be “unintended complacency” about exposures to future catastrophic events.
It was Katrina that showed the impact of storm surge can often be more damaging than high wind speeds and that the physical size of the hurricane can affect the surge itself, according to Allianz Global Corporate & Specialty (AGCS).
There has been a steep rise in the cost of claims for extreme weather events — from an average of $15 billion a year between 1980 and 1989, to an average of $70 billion a year between 2010 and 2013, according to AGCS.
Windstorm losses account for approximately 40 percent of all natural hazard losses by number of claims and 26 percent by value, it said.
However, growth of exposure is far outpacing take-up of insurance coverage resulting in a growing gap in natural catastrophe preparedness, according to AGCS.
Jayanta Guin, executive vice president, researching and modeling at catastrophe modeling firm AIR Worldwide in Boston, said the damaging effects of storm surge convinced AIR of the need for a more detailed, hydrodynamic model as opposed to the simpler parametric approach that had been used.
Today, both AIR’s U.S. hurricane model and its recently introduced U.S. inland flood model use a physical modeling approach to capture flood risk.
“For both models, particular engineering attention has been paid to the current-day vulnerability of the levee system in and around New Orleans,” Guin said. “While that system has clearly been strengthened since Katrina, we maintain a healthy dose of skepticism about the levee systems’ longer-term upkeep.”
Katrina, which struck New Orleans on Aug. 29, 2005, also revealed new insights into the vulnerability of commercial structures, such as the large number of casinos built on barges along the Mississippi coast, he said. Now, there is greater recognition of the wide array of buildings that companies are insuring. As a result, underwriters’ view of the vulnerability of commercial assets has increased.
Video: National Geographic provides a day-by-day account of Hurricane Katrina’s wrath, from its birth in the Atlantic Ocean to its catastrophic effects: flooded streets, flattened homes, and horrific loss of life.
Lou Drapeau, director of risk management at the University of Kentucky in Lexington and vice-chairman of Disaster Recovery Institute International, said that before Katrina, most organizations did not have someone in charge of business continuity, but now many do.
Moreover, he said, Katrina “got a lot of people’s attention” on the need to coordinate risk management, emergency preparedness and emergency response, business continuity and disaster recovery.
“Those functions can’t exist in their own towers — they really have to work together,” Drapeau said. “Katrina really caused those four separate areas of an organization to work more closely than they have in the past.”
One of the lessons learned from Katrina is that the complexity — and losses — associated with hurricanes in highly developed areas with significant infrastructure are far greater than imagined, said Andy Castaldi, head of catastrophe perils Americas at Swiss Re in Armonk, N.Y.
Over time, carriers learned how to better estimate potential losses, but there are still “quite a bit of surprises,” Castaldi said, such as the damage due to storm surge from Katrina.
Thus, it’s important that manufacturers and other businesses be prepared not only to cover losses from property damage, but also from business interruption.
“People tend to forget how devastating events can be, and I’m not sure many companies have done enough to protect themselves financially with business interruption plans if they have extensive downtimes,” he said.
Losses escalate quickly due to the increased automation in manufacturing, Castaldi said. Thirty years ago, employees could come the next day after a hurricane, clean up and start working, but today, plants have robotics and other electronics, which are more susceptible to hurricane damage and more costly.
“It might take months for these highly specialized electronics to get repaired as there may be a long waiting list, which can cause bigger problems and bigger losses than ever before,” he said.
Monica Ningen, head of property underwriting U.S. and Canada for Swiss Re, said that the question commercial property owners often asked before Katrina was, “Can we afford to take steps to mitigate against these sort of events?” But the question after Katrina, is, “Can we afford not to?”
Ningen is concerned that many organizations are starting to forget about the disaster plans that were conceived after the hurricane.
“New risk managers are coming in and their organizations are forgetting the importance of response time and response in general,” she said. “Public and private entities need to figure out how to work together to find disaster preparation and mitigation solutions.”
Resiliency of an area after a catastrophic event can be measured in three ways: whether people have work, whether their home is habitable and whether children can go to school, Castaldi said.
“Corporations have to think beyond their four walls and make sure their workforce has adequate housing and schools that are properly protected,” he said. “There is such a thing as unintended complacency — the further time away from an earlier catastrophic event, the more people don’t prepare for another one.”
Cheryl Harper, president of RIMS’ South Louisiana chapter, lived through Hurricane Katrina — her house flooded and her employer had 8 feet of water in its offices.
Harper is operations manager for Catholic Mutual Group in New Orleans, the Louisiana office of the Roman Catholic Church’s self-insurance fund, which provides insurance and risk management services for the Archdiocese of New Orleans and two smaller Louisiana dioceses.
After Katrina, the organization set up temporary offices in Baton Rouge and didn’t return its operations to New Orleans until January of 2006.
Businesses must have a solid business continuity plan in place that is updated annually, including emergency contact numbers for all employees, she said. Fortunately, with hurricanes there are advance warnings, so if an event is forecast, Harper makes sure she reconfirms that information before any storm hits.
“It’s important to be able to reach your team by several different methods, as after Katrina we had no cell service, but we could text,” she said.
“You need to invest a little more money on the front end for a secure roof, which will help prevent substantial damage when the next storm does come.” — Cheryl Harper, operations manager, Catholic Mutual Group
Since the organization’s servers were damaged due to flooding during Katrina, the Catholic Mutual Group now has a back-up server in northern Louisiana that it can access remotely. If Harper and her team need to evacuate in the future, she plans to take the minimal amount of operational equipment to make sure she can access the remote server and provide services from any location.
Moreover, the organization published a hurricane manual, which includes emergency contact information as well as guidance on property protection, claim reporting, remediation, reconstruction, and templates for contractor bidding and other forms. Before any storm hits, her company puts remediation companies on standby.
Another crucial lesson learned after Katrina was to strongly encourage parishes and other members to install standing seam metal roofs in new buildings or replace outdated roofs with them, as those roofs typically hold up better during hurricanes, she said.
This is particularly important now that named storm deductibles are anywhere from 2 percent to 5 percent of the insured value of the building. Replacing with this type of roof can be very costly, but it will save the building from interior water damage and extensive remediation from typical roof damage in a storm.
“You need to invest a little more money on the front end for a secure roof, which will help prevent substantial damage when the next storm does come,” Harper said.
In addition to roofs, AGCS recommended examining and shoring up all “building envelopes,” including walls and windows, and making sure gutters and other drainage systems are clear of debris or vegetation, so water can properly run off during a storm event.
“These steps allow us to better support clients in determining potential repairs or maintenance needs,” said Thomas Varney, the company’s ARC regional manager for North America in Chicago.
Businesses should also make sure to adhere to four primary areas of windstorm loss mitigation, according to AGCS’ report “Hurricane Katrina 10: Catastrophe Management and Global Windstorm Peril Review,” released August 18:
- Pre-windstorm planning includes the development of a comprehensive, well-tested emergency plan, site and equipment inspections, and preparations for possible flooding.
- During a windstorm, response personnel should monitor for leaks, fire and damage.
- After a windstorm, the site should be secured to prevent unauthorized entry. An immediate damage assessment should be conducted if safe to do so.
- Business continuity management is crucial as just-in-time production, lean inventories and global supply chains can easily multiply negative effects. Property damage and business interruption are usually covered by insurance policies, but often there is loss of market share, suppliers, clients and staff. Businesses should develop and test business continuity plans and communication cascades.
The Unknowns of the Tianjin Disaster
I was in Tianjin last week as the explosion happened. I wasn’t alone.
There were 15 million of us in town, and in reality the explosion happened about 30 km from where I was staying, so there was no immediate danger, although rumors of a major chemical leakage made my family think twice about leaving town.
This wasn’t an over-reaction, as I remember the impact of the Chernobyl nuclear disaster in 1986 blowing from Russia as far as Southeast England, where I live. Back then, we were warned to stay indoors, and local livestock in the open were judged to be contaminated and not fit for human consumption.
The Tianjin incident may not have been unprecedented – think Buncefield in the U.K., which was the largest European explosion since WWII – but it was shocking nevertheless, and will have worldwide implications on the topic of risk.
It will be months, probably years, before we know the full story.
The first explosion was substantial, but the largely volunteer fire service soaked a cocktail of highly volatile (and perhaps unregistered) chemicals with water, leading to a much larger secondary event, which proved to be devastating.
Video: BBC broadcast this video, taken by stunned eyewitnesses, of the two massive explosions in Tianjin City. The second explosion was equal to 21 tons of TNT.
It will be months, probably years, before we know the full story. In a country known for discretion, it is critical that investigators candidly share their findings, even if the truth might hurt. Even so, we must equally respect that discretion
In the hours following the incident, Tianjin City was in a state of shock. The waiter in my hotel told me how his brother ferried the injured to hospital, before it was decided that the site was too dangerous for him to be there. The government then requisitioned his car and carried on the good work.
Local international chain hotels provided temporary accommodation. At a time of enmity between the Japanese and Chinese where painful wounds remain, and with events recognizing 70 years after the end of WWII, there were messages of support on social media from Japan.
How different was the Tianjin explosion from Hiroshima, with densely packed homes close to the explosion site? If you were a victim, would you have noticed the difference?
We haven’t spoken about insurance, but I just wanted to share the context of a man-made disaster.
As an insurance professional, old habits die hard. I wondered about the Day One reserve, how quickly the reinsurance would kick in, how to calculate and mitigate the loss. One incident – or two? Was the fire fighting water, which created the second explosion, an inevitable consequence of the original incident, or a new and intervening factor?
One for the lawyers, I think, bearing in mind the very substantial amounts involved.
For underwriters, do you need to sit in a dark room and think of your worst nightmare, and then work backwards into reality? Is imagination a greater attribute than actuarial science? Who could have predicted the Twin Towers?
My world and work nowadays is analytically orientated – but isn’t the “real business” of insurance about claims like this in Tienjin?
Could underwriters ever have foreseen the risk? Would the most advanced of analytical and cognitive intelligence have helped?
Could insurers ever have foreseen the heroic work of volunteers who perhaps made matters worse? But in respect to their distressed families, let’s not prejudge the finding of any investigations.
How can even the most advanced analytics give insight into the “unknown unknowns”?
A Global Perspective
As any traveler knows, the world is full of uncertainty and dangerous places, where the challenges of simply trying to run a profitable business far from home are complicated by even greater risks, such as political violence, civil unrest, credit risk, corruption, expropriation of private assets by the government, and more.
Anyone doubting this need only take a look at current events. Some 70 percent of the world’s nations currently have serious corruption problems throughout their governmental and civil service framework. Nearly 40 percent of all nations are experiencing some form of significant civil unrest. Signs of economic distress are everywhere, from falling oil prices to Eurozone debt crises to economic slowdown in China.
Despite such geopolitical risks, the world still needs its businesses to continue running amid dangers that range from warfare and terrorism to punishing economic conditions caused by international sanctions, to simple graft and hostility toward foreigners.
For global and multinational companies, keeping an eye on their political risk profile is as important as handling worker safety, environmental impact, products liability, or any other insurable risk. Thankfully, political risk exposures are insurable as well, and Starr Companies is there to provide its clients with robust political risk insurance coverage, a suite of unique support services that truly is second to none, and the ability to educate clients on how to manage their political risk.
Political risk hazards generally fall into one of the following categories:
Breach of Contract and Non-Honoring of Financial Obligations
These related hazards involve the failure of a local actor to uphold their contractual or financial obligations to a foreign investor, and the inability or unwillingness of local authorities to intercede on the foreign investor’s behalf. This is perhaps the most common form of political risk hazard, as it is a major problem in any environment where there is substantial economic instability and/or corruption.
Confiscation of Property
Also known as “expropriation,” “ownership risk” and “nationalization,” this is when a government seizes property or assets without compensating the owners for them. An overt example of expropriation would be a revolutionary government seizing an office building or a factory belonging to a foreign-owned corporation. An example of creeping expropriation would be a series of successive events by a government to gradually deprive an investor of their property rights.
This is when the local laws change in such a way as to constrict foreign investors’ economic activity in some way. It could range from creeping expropriation to changing taxation or labor laws that might simply make it far less profitable or far less efficient for a foreign entity to operate in a local jurisdiction.
Inconvertability of Currency
Also known as “transfer risk,” this is when a government takes action to prevent the conversion of local currency to another form of currency, making it difficult or impossible for foreign investors to transfer their profits elsewhere. This tends to happen in countries undergoing some kind of political crisis, like when Zaire—now the Democratic Republic of Congo—declared a new national currency in 1980.
Property or income losses stemming from violence committed for political purposes, including, but not limited to declared and undeclared warfare, hostile actions taken by foreign or international forces, civil war, revolution, insurrection and civil strife (politically motivated terrorism or sabotage).
Kidnap and Ransom
Political violence might also manifest itself as a kidnap, ransom and extortion hazard, but that is typically covered by a separate, specialized policy.
To protect against these risks, insurers can provide comprehensive and custom-tailored political risk solutions, which at a client’s request can be broadened to cover investment contract repudiation, currency inconvertibility and political violence. Such policies typically last for periods of 5 to 10 years. Protected assets for this coverage include fixed assets (e.g., a factory, farm, warehouse or office), mobile assets (e.g., harvested natural resources, raw or manufactured inventory or mobile equipment), leased assets (e.g., aircraft, watercraft or construction vehicles) and investment interests in assets abroad (e.g., money dedicated to funding a foreign project, held in a host country bank and subject to expropriation).
Kidnap & ransom coverage protects company personnel and family by providing financial reimbursement for such an event. Depending on the insurer, some K&R programs also provide independent expert consultancy before and after a potential act of kidnapping, ransom or extortion.
Great insurance coverage isn’t enough to adequately protect against political risk, however. Businesses need extra support to stay on top of their exposures, and to know what the latest geopolitical developments are.
Starr Companies, for example, does this through Global Risk Intelligence, a specialized team of political risk experts with long-standing backgrounds in national intelligence and international affairs. GRI delivers to Starr clients a unique risk advisory service that spans the gamut of commercial property & casualty exposures. GRI also produces two assets that are extremely helpful. The first is the Executive Intelligence Brief, a world-class monthly analysis of ongoing geopolitical developments (especially in emerging markets) available exclusively to a carefully selected readership of top executives. The second is the Global Risk Matrix, a quarterly ranking of the overall political security risk of every country on the planet.
The world’s geopolitical landscape is changing at a remarkable pace, with new risks and uncertainties arising in even the unlikeliest of places. And yet, as business becomes ever more globalized, insurers can provide their clients with tailored coverage to absorb the losses that stem from political turmoil. By finding the right insurer, with the financial strength to cover their risks as well as the analytical acumen to help turn risk into opportunity, businesses can create partners in prosperity anywhere in the world.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Starr Companies. The editorial staff of Risk & Insurance had no role in its preparation.