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With a disaster, "you have external issues that are hard to control, but there are management issues you can control" to keep an organization in operation, says Laurie A. Johnson, senior science advisor for Lexington Insurance Co.

Katrina, a Category 3 hurricane nearly twice as wide as Louisiana, blew onshore Aug. 29, 2005, whipping up record storm surges in Mississippi and breaching dozens of levees in New Orleans. Before blowing itself out, Katrina claimed more than 1,800 lives and caused $81 billion of damage, including commercial asset classes and industries with little catastrophic loss history. In the storm's aftermath, more than 400,000 jobs were lost.

Certainly, the potential for even greater loss in a future event is imaginable, he says, suggesting for example a hurricane that charges up the Atlantic seaboard and turns for New York.

Earlier catastrophes, such as the 1900 storm that swept through Galveston, Texas, killing an estimated 6,000 to 12,000 residents, the 1926 hurricane that tore through Miami, and the devastating 1995 earthquake in Kobe, Japan, illustrate that Katrina was not such an isolated powerful event, Power says.

If it occurred today, given modern land development, damage from the Galveston hurricane would rival Katrina losses, and the Miami storm would be nearly twice as destructive, notes a 2008 National Hazards Review report. Total economic damage in the Kobe quake exceeded $100 billion.

The events surrounding Katrina, especially in New Orleans, so many years after those earlier disasters should alarm risk managers. We witnessed the effects of:

-- Decades of inattention to the infrastructure.

-- Poorly conceived and executed evacuation plans.

-- Communication problems among first responders because interagency communication systems weren't integrated.

-- Utilities that were down for weeks.

-- Roads, including an interstate highway, that were impassable for extended periods.

-- A lack of clear and coordinated vision by civic leaders, which kept federal funding on the side and delayed rebuilding.

Those issues cannot be considered unique to New Orleans.

For example, the American Society of Civil Engineers last year graded the nation's infrastructure as poor and called for a five-year, $2.2 trillion restoration effort.

Those problems underscore the attention that businesses have to pay in their disaster preparedness and business continuity planning to employees' needs, their just-in-time manufacturing model and the claims-handling strength of their insurers.

The "kneejerk" reaction by risk managers wanting to mitigate confusion in a chaotic environment tends to be centralizing their organizations' response.

But the impressive response by first responders in New York after the 9/11 terrorist attacks, despite communication challenges there as well, demonstrated that "decentralization works," Power says.

He points out that because of the 1993 terrorist attack on New York's World Trade Center, Rudolph Giuliani became "very engaged" in conducting tabletop exercises on disaster response after he became mayor a few months later. In those exercises, paramedics, the fire department, the police and politicians participated.

"Everybody knew what their roles were" before a crisis, so they would not have to wait for direction during the crucial first hours after disaster struck, Power explains.

If the crisis is an impending storm, early site evacuation could be critical. But a university's Katrina experience illustrates that evacuation plans should be more robust than just ensuring an orderly exodus.

The school's plan anticipated the logistics and costs of relocating students and faculty temporarily. But it did not contemplate that the school would have to arrange for extended relocations. Besides that, school officials had to figure out how to attract the students and faculty back once the campus was ready.

Hospitals face similar relocation expenses for patients.

Exacerbating the problem, if a school or hospital does not sustain physical damage, it would not be insured for those expenses under a traditional property insurance policy.

A Texas medical center addressed that problem by purchasing the Lexington property insurance endorsement providing relocation expense coverage in the absence of property damage, Power notes.

After a disaster has struck, a preparedness plan should map out how the organization can be self-sustaining for an extended period. Katrina's aftermath underscored that the once traditional 72-hour survival plan is no longer adequate, Johnson stresses. "The timeline is longer?maybe weeks or months."

At the outset, communication is critical. How would communication with key personnel work to assess not only who is okay but also who is available? The plan also should address which executive functions would have to be temporarily reassigned and to whom.

An organization that is trying to keep its doors open after a disaster will need its key personnel and other employees who are onsite as focused as possible, which can't be expected if they are worried about their families. Companies, often with the assistance of organizations such as the American Red Cross, are helping employees establish family disaster preparedness plans that include emergency contact provisions that anticipate jammed communications in an afflicted area.

Preparedness plans also should anticipate that an organization might have to take broad protective actions if employees are stranded onsite because of impassable roads or because residential neighborhoods were heavily damaged.

In Kobe, Japan, some companies set up onsite temporary housing for critical personnel following the city's 1995 earthquake, which displaced 300,000. While government housing was provided, it often was too far away for personnel to commute to work, given road conditions and the interruption in public transportation.

By contrast, Katrina displaced two million Gulf Coast residents.

On the operations side, a preparedness plan can help a company?especially with a just-in-time manufacturing model--stay in production.

Katrina handcuffed a substantial number of such manufacturers, and even more companies have adopted that model since then.

An act of terrorism that doesn't directly impact a company's supply sources can be a problem for manufacturers that rely on sources outside of the country. When U.S. borders were closed after the 9/11 attacks, many just-in-time manufacturers suffered serious supply interruptions, Power notes.

To mitigate supply interruptions, risk managers should ensure that their companies have options contracts in place or arrangements with alternative suppliers.

Of course, that level of planning "stretches the traditional ideas of risk management," says David Crowe, Senior Vice President and claims division executive at Lexington.

Crowe and Power also stress the importance of companies closely examining the support that can be expected from another business partner--their insurer--during a disaster.

"Companies should ask if their insurer has a plan on how it would respond in a disaster like Katrina or worse, and has it been tested?" Crowe asks.

Lexington has developed extensive response protocols which are tested throughout the year.

Crowe notes that Lexington's response during Katrina was based on the company's experience during the 2004 hurricane season, when three of the 10 most costly U.S. hurricanes slammed Florida.

Lexington's plan includes provisions for quickly ramping up claims staff and policyholder resources such as independent adjusters, restoration experts, certified architects and engineers?and ahead of a known impending disaster.

By contrast, many insurers that hurriedly entered the market since 2008, expecting a market-wide tightening of rates and a wave of policyholder movement, did not arrive with tested claims-handling infrastructures. Many remain untested, and others rely heavily on third parties to provide claims services that carriers traditionally control in house, Power says.

Risk managers essentially have to ask themselves what they need to plan to create a new business model after a disaster, "not just to get back to what they have currently," Johnson says.

The Hurricane Katrina experience can help risk managers answer that question.

As former Major League pitcher Vernon Law once observed: "Experience is a hard teacher, because she gives the test first, the lesson afterward."

(The above piece is part of our continuing Perspectives series designed to highlight key products and services to our readers. This paid-for Perspectives was written and edited by Risk & Insurance® in conjunction with our marketing partner. Additional Perspectives can be found on our Web site at www.riskandinsurance.com/.)

September 15, 2010

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