It may be true that appearances can be deceiving, but that's not where stories of disaster-induced inflation come from. Claims professionals have known about it for years, but it took Hurricane Andrew to bring it to the public's attention eight years ago. In the wake of the storm, everything got more expensive, and prices of some things went up a lot.
The media and some politicians were quick to lay the blame on unscrupulous businesses that took advantage of the situation to gouge customers who had no alternative. But there's a lot more to it than that.
Prices reflect costs, and costs go up after a catastrophe. Contractors have to pay overtime to employees who work 100 hours a week, and the overburdened distribution system means dealers have to pay more to compete with other areas for products that are in high demand.
They also have to pay premium rates to get the goods delivered. The upshot is that losses caused by a catastrophic event cost more than identical losses that are limited to a single property, and the price increase is certainly worth noticing.
It's at this point that a lot of knowledgeable individuals start to get worried. What has them upset is the failure of standard property insurance forms to address the spike in prices. If a hurricane blows away a building worth $1 million, they moan because if it costs 25 percent more to replace it because of post disaster inflation. The insured is out $250,000. The only way to avoid that is to insure the property for more than its worth.
None of this is, after all, a problem for a well-designed risk management program. They've got a point, but would you be ready to explain to the CFO why there's no problem?
The part of a well-designed risk management program that comes into play first is pre-event loss control--being ready for the loss before it occurs. When hurricane Andrew roared across South Florida, a lot of people thought it swept away everything in its path.
That's not true. Fully engineered structures were able to stand up to the brunt of the storm with only minimal and predictable damage. You didn't get the message from the news reports, but the really severe damage was mainly confined to homes and small commercial structures that weren't fully engineered and often weren't engineered at all.
A well-designed risk management program also eliminates problems with insurance coverage. Even if the loss does penetrate your retention, you shouldn't have a problem. In the worst-case scenario, the loss exceeds the full replacement cost of the property under normal circumstances.
Because they typically work for larger organizations whose properties are geographically spread, risk managers often find that they have adequate insurance in place despite temporary inflation after a disaster. They do it with blanket insurance, not smoke and mirrors.
It turns out that the best way to deal with the temporary price increases that come with a natural disaster is to get back to risk management basics. If you sweat the small stuff, the big stuff will take care of itself.
Editor?s note: Longtime Risk & Insurance® columnist JOSEPH F. MANGAN died Nov. 4, 2004. Over the years, he had built a loyal following of readers thanks to prescient and insightful commentary about a subject close to his heart: property insurance. We have reprinted here a column that appeared in the July 2000 issue of the magazine in his memory.
March 1, 2005
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