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A recent question on the game show Jeopardy asked, "In 2006, what state's population increased by more than 1 million people?" The answer: Texas. The reason: Hurricane Katrina.

After Hurricane Katrina, the population of New Orleans decreased by half--for nearly two years. Although there has been a small, but noticeable, increase in people returning to the area, the city's economic and customer base remains at a much lower level than before the storm, leaving officials and business owners wondering when--or if--former residents will return. This experience raises important questions: If larger metropolitan areas endure more severe catastrophes, what will be the recovery time for residents? What will businesses do to survive?

Insurers and risk managers recognize the extensive exposures they face in the Northeast, Florida and California. Modelers and other industry resources report that insured losses from events in those areas could run in excess of $100 billion. But no reliable method is known for measuring the actual economic impact of such disasters over time. The accepted formula today is to simply double the insured loss. That practice may very well understate economic losses following extreme events, which the United States has not really experienced to date.

In the insurance world, the standard focus is on the claims that result from disasters. Generally, once claims are adjudicated and paid, the industry moves on to address the next catastrophe. Outside the affected area, there is much less interest on actual, societal recovery time. Case in point: On Aug. 23, 2007, the Weather Channel reported that many families and businesses have not yet fully recovered from the impact of Hurricane Andrew in 1992.

Another notable factor is the threat of multiple events of catastrophic proportion. Facing sequential events is not new to insurers. For example, in 1989, insurers faced Hurricane Hugo and then the Loma Prieta earthquake. In 1992, the industry faced Hurricane Andrew in Florida and Louisiana and, shortly thereafter, Iniki in Hawaii. In 1994, there was the Northridge earthquake and six major winter storms in the Northeast. In 2004, Florida was struck by four hurricanes in approximately six weeks. In 2005, three of the costliest hurricanes in U.S. history struck the mainland, causing nearly $60 billion of insured losses.

From both insurance and comprehensive risk management perspectives, what could be the consequences of the concurrent incidences of a hurricane in a major eastern population center and an earthquake in a West Coast city? Not only could such events cost the insurance industry more than $100 billion, but they could also produce more than 10 million claims--in addition to the daily influx of fire, theft, auto and other claims. The challenge facing insurers is how to muster and disburse resources, while still providing suitable service. What happens in the interim to those who fall near the end of service queues among millions of claimants?

What's clear is that it will take a long time to connect insurers with policyholders and move the claims process forward. In the interim, it's essential to plan for "survival" and continuity--to live, work and operate businesses. Under these conditions, insurers and risk managers, as well as firms and families, must think deeply about measures to preserve and safeguard resources against a catastrophic event.

Let's examine just some of the challenges in the aftermath of Katrina and how they might translate into even bigger problems:

- Local governments were unable to restore services and provide protection to people. Small towns that lost fire or police departments and related vehicles had to find replacements before being reimbursed by the federal government under the Federal Emergency Management Agency. Mass evacuations left the towns with little or no revenue to replace critical municipal services. Businesses also suffered. These are typical ripple effects--among many--in the aftermath of a catastrophe.

- Demand surge and the increasing cost of supplies were common problems. People and businesses paid significantly more for scarcer materials and labor. And in many cases, they waited longer because of persistent strains on resources.

- Many people moved away permanently. They chose to forgo returning to New Orleans and found jobs and homes elsewhere. A drain in population, manpower and buying power on another metropolitan area can significantly debilitate renewal efforts.

- Damage to bridges, such as the one over Lake Pontchartrain in New Orleans, resulted in long-distance detours. Recall the impact of roadway disruptions in the wake of the San Francisco earthquake of 1989, or imagine the repercussions of a single bridge collapse in New York City.

- Without the ability to transport food into the affected areas, hording, theft and other social disruptions resulted in New Orleans. These disruptions could be even worse in a major metropolitan area.

- Many local governments were not equipped to handle the rebuilding process in the aftermath of a large catastrophic event and couldn't dispense services quickly enough. After Katrina, the process of getting permits or building plans approved was taking so long that contractors were hiring high-school students to stand in line for them--sometimes for days. This is the kind of service bottleneck that could occur on an even larger scale elsewhere.

- There were serious infrastructure issues to consider in New Orleans, such as repairing or replacing sewage or water plants, electric facilities, and underground piping or wiring. A megacatastrophe in an East Coast city could short out electrical cables and flood subways, halting most forms of transportation. Tunnels, roadways and airports would be flooded. Commerce would certainly be affected without the ability to conduct regular business--on regional, national and global levels.

- Much of New Orleans' workforce suffered the loss of their homes. Employers had to schedule days off so employees could deal with insurance adjusters or retrieve their property. This left many companies with half their human resources at any given time. In the event of a megacatastrophe elsewhere, the ability of businesses to organize their workforce and operate with some semblance of normalcy could be significantly hampered, causing many other downstream difficulties.

- After Katrina, and indeed after Sept. 11, 2001, in New York City, downed businesses relocated employees throughout the region. However, the impact of workforce decentralization is potentially crippling as companies must adopt new ways to communicate and share mission-critical information.

Even now as New Orleans is recovering, people are resuming their lives, but are they able to quickly and productively contribute to society? Buildings and businesses can eventually recover, but the psychological effects on people often take much longer to heal.

New Orleans is a prime example of a major urban area affected by a large disaster that--two years later--is still in a protracted revival process. Public officials have said that replacing infrastructure damages alone could take up to 15 years.

Catastrophe-driven workforce relocations, as well as facilities and infrastructure changes, may require fresh reviews of insurance programs to ensure adequate property/casualty, benefits and workers' compensation coverages.

In the past, insurance companies and risk managers would evaluate personal lines, commercial lines, automobile and workers' compensation in separate, vertical silos. Now the industry is realizing that one catastrophic event can affect all those coverage areas simultaneously. This accumulation of risk requires a new way of thinking about--and managing--risk.

Another concern for insurers and risk managers is the globalization of business and of insurance companies themselves. The implications of insuring multiple business locations with thousands of employees--and preparing for potentially major or concurrent business interruptions--require a more holistic approach.

Historically, insurers primarily focused on whether they could pay for a catastrophe and if they had enough adjusters to manage the resulting claims. Today, exposures include more direct and consequential physical, economic and societal ripple effects. When a megacatastrophe strikes, the challenge for insurers and risk managers will become much wider in scope.

The lessons from recent events provide us with models to refine our response strategies and capabilities.

GARY KERNEY is assistant vice president of ISO's Property Claim Services division.

December 1, 2007

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