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Hurricane Risk Management: Key Considerations Before and After Storms Strike

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On Sunday, August 29, Hurricane Ida made landfall in Louisiana as a Category 4 storm with winds of 150 miles per hour, making it one of the most powerful storms to ever hit the United States. Striking on the same date that Hurricane Katrina devastated the region 16 years ago, Ida caused significant wind damage, storm surge and flooding in Louisiana and Mississippi and has left 1 million homes and businesses without power, including the entire city of New Orleans. Ida has now weakened to a tropical storm and will continue to cut through the south before making its way across much of the East Coast, bringing significant risks of wind, rain and inland flooding throughout this week.

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The storm marks another overactive hurricane season officially underway in the United States, prompting business leaders and property owners to ensure they are adequately prepared from an insurance and risk management perspective.

Some key recommendations to consider before and after any hurricane include:

Preventative Measures

First, establish a plan that includes clearly defined roles and responsibilities for preventative measures to protect your building, employees or tenants in the event of a hurricane. This plan should include everything from the identified incident response team and the established internal and external communication protocols to the selected offsite workspace and disaster recovery plan.

It is also critical to have a predetermined contact list for key service vendors, suppliers and contractors—and to build relationships with those individuals in advance. When a storm of any magnitude hits, multiple businesses will likely be affected, so establishing a vendor rapport beforehand allows you to pre-negotiate rates and availability guarantees, helping to save time and money after a disaster.

From a property perspective, ensure that your buildings and structures are adequately protected to mitigate potential damage. Precautionary steps like boarding up buildings, covering windows and landscaping, and fastening anything that could blow away or fall may seem like small considerations, but can significantly reduce damage and losses.

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Additionally, back up important paperwork and IT services to avoid losing valuable assets. Severe weather often causes power outages and other service disruptions that may last longer than anticipated, and key files like property records and facility plans should be safely stored and easily accessible in the event of a hurricane.

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Not only is this important for overall business operations, but it is also easier to adjust claims when you can show that you recently backed up files.

Read the Fine Print

When it comes to your insurance policies, it is critical to verify that your coverage includes appropriate, up-to-date limits and deductibles.

This includes determining if you have adequate insurance based on your location and its respective risk for floods or windstorms. In addition, you should review your policy’s sublimits, which set coverage limits for certain scenarios, so you know what to expect if damage occurs. For example, windstorm, flood and named storms all have different limits based on the typical severity of the type of storm.

Do not wait until the hurricane is coming to evaluate or modify coverage, as this is like trying to insure a burning building, and insurance carriers will be bombarded with requests. Perform these evaluations and changes proactively so you can remain calm knowing the appropriate coverage is in place for any potential threat.

If a hurricane does hit close to home, business owners can typically tap into business interruption insurance and extra expense limits for any losses that occur due to suspended operations resulting from the storm. This also applies to property owners who may need to move tenants to a different location while the property is being fixed—a process that could take several months depending on the severity of the hurricane and the associated damage—and are therefore not incurring rent.

Now What?

If a hurricane impacts your business, implement your disaster recovery plan. Then, as soon as it is deemed safe to re-enter the property, document all damage in detail with written descriptions, as well as photos and/or videos. At this time, take a full inventory of damaged materials, as this will be important throughout the claims process, and save any pieces that could help with restoration down the line. Most claims require you to immediately notify the carrier of damage and provide the documented “proof of loss” within a specific time frame. Before doing so, reach out to your insurance broker who can help guide you through this process.

Another best practice is addressing any damage in a timely manner to avoid any issues that could worsen with time or additional weather events. Taking immediate action, such as covering an exposed roof, securing doors and windows, removing water, and drying out any affected areas, can lessen the potential impact of further deterioration and keep those in the vicinity safe from harm. For more dangerous and technical issues, like getting the electric system back up and running, consult a qualified professional.

While hurricanes can certainly be daunting, there are ways to prepare in advance to make sure you are not caught off guard or without a plan. Be sure to assess your risk and execute the appropriate steps to protect your business, property and employees. Most importantly, lean on your insurance broker and other qualified vendors with any questions or concerns.

Texas Cold Crisis: Insurance Options for Severe Weather Disruption

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On February 15, a massive and unseasonal storm with frigid temperatures spiked the demand for power and outpaced the supply, severing power to 26 million Texans. Unpredictable weather patterns present risks for business owners, but also create an opportunity to improve their risk mitigation strategies to address future uncertainties. 

Power outages are not caused by storms alone. Heat waves, hurricanes and wildfires can also create power outages—and outages are more common than business leaders may think. S&C’s 2018 Commercial and Industrial Power Reliability Report found that one in four businesses experience at least one power outage per month. The Department of Energy estimates that these outages cost companies $150 million per year. Although companies may face spoilage-related losses, data centers often experience the most severe consequences. When a data center goes down, it can impact a business’s most vital proprietary assets. According to a Ponemon Institute study, the cost of an unplanned data center outage is $5,600 per minute with an average recovery time of 119 minutes resulting in a loss over $690,000.

The cost for businesses goes beyond damage. Litigation tends to run rampant, and with the recent Texas power outages, businesses are already facing lawsuits. The family of an 11-year-old boy who died of hypothermia is suing energy company Entergy and grid operator Electric Reliability Company of Texas. Multiple wrongful death lawsuits are predicted from incidents including carbon monoxide poisonings, house fires and shelter closings.

A range of insurance options can help businesses protect themselves from complex, evolving and completely unpredictable risks such as natural disasters and climate change.

Property insurance protects the building and physical assets like equipment, supplies, inventory, fixtures and computers. However, property insurance may not provide all the coverage needed. Exclusions like floods, sink holes, earthquakes, terror incidents, and chemical, nuclear, biological and environmental events are likely not covered. An unexpected policy exclusion can be devastating and result in a claim being denied, leaving business owners and leaders feeling helpless and infuriated.

Business interruption insurance is helpful but may not be enough. Typically, when damage obstructs business operations, it is covered by property insurance, and business interruption insurance covers losses from interruption. However, a natural disaster can create a perfect storm, so to speak. For example, if an establishment is forced to close due to lack of power, there can be a denial of claims. Business owners may be able to have property repaired, but cannot recoup the lost revenue through insurance.

Another option for businesses is to choose captive insurance and own their own insurance company. This establishes a more robust approach to risk management, and enables the business or business owner to own a profitable second business. This can help lower commercial insurance costs, build up assets and loss reserves, enhance critically needed cash flow and liquidity, and help prevent losses from hollowing out the total business entity. Importantly, successful captive insurance companies are filled with liquid assets that back the reserves for potential future losses, owned by the business or business owner. Liquid assets are often more desirable than durable assets that depreciate and may be difficult to sell. Finally, a captive insurance company is a regulated entity.

A captive primarily insures its parent company or related companies, so the parent company can purchase insurance from its wholly owned captive. Such purchases may replace all, or a portion, of its commercial insurance. Additionally, risks that are unable to be insured, are cost prohibitive, or are underinsured in the commercial insurance market can be placed in the captive insurance company. The captive can also insure gaps in third-party commercial insurance policies.

Benefits of Captives in Natural Disasters

While businesses with claims for property insurance or business interruption coverage are denied, a business with a captive insurance company would not face exclusions that leave them vulnerable. Since a captive insurance policy can be written to be broad and robust, it has more triggers than third-party commercial insurance, sos an event may covered where business interruption might not provide coverage.

Captive insurance also serves as a valuable financial strategy. When captives build up loss reserves, backed by corresponding assets, those assets are available for dealing with a catastrophic event. When a business has to restart or relocate their operations, assets are readily available to help it navigate the challenges and pursue big changes. The business owner can use the asset buildup in successfully managed captive insurance companies to help grow the business by funding acquisitions, growth strategies and enhanced risk mitigation strategies via a dividend from the captive insurance company to the business owner.

Before another crisis strikes, businesses should review insurance policies, determine whether current policies offer adequate coverage, and determine if a captive will help them face the next worst-case scenario.

Lloyd’s Finds Extreme Weather Can Be Accurately Modeled Independently

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In a new report based on research from UK national weather service the Met Office, Lloyd’s has found that extreme weather events may be modeled independently. While extreme weather can be related to events within a region, these perils are not significant correlated with perils in other regions of the world.

The study’s key findings include:

  • Met Office research found that the majority of perils are not significantly correlated, but identified nine noteworthy peril-to-peril teleconnections, most of which are negatively correlated
  • Lloyds’ modeling finds that these correlations were not substantial enough to warrant changes to the amount of capital it holds to cover extreme weather claims
  • Even when there is some correlation between weather patterns, it does not necessarily follow that there will be large insurance losses. Extreme weather events may still occur simultaneously even if there is no link between them
  • An assumption of independence for capital-holding purposes is therefore appropriate for the key risks the Lloyd’s market currently insures
  • The methodology released in the report enables scenario modeling across global portfolios for appropriate region-perils

“This important finding supports the broader argument that the global reinsurance industry’s practice of pooling risks in multiple regions is capital efficient and that modeling appropriate region perils as independent is reasonable,” the report concluded.

According to Trevor Maynard, head of exposure management and reinsurance at Lloyd’s, “This challenges the increasingly held view among some regulators around the world that capital for local risks should be held in their own jurisdictions. Lloyd’s believes this approach reduces the capital efficiency of the (re)insurance market by ignoring the diversification benefits provided by writing different risks in different locations and, in so doing, needlessly increases costs, to the ultimate detriment of policyholders. Insisting on the fragmentation of capital is not in the best interests of policyholders.”

Check out the map below for further insight from the Met Office about large-scale weather perils that do demonstrate statistically significant correlation:

lloyd's extreme weather perils

Houston Faces ‘Largest Flooding Event Since Tropical Storm Allison’

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Historic flooding has left the Houston metropolitan area inundated once again this week, killing at least seven people, flooding 1,000 homes and causing more than $5 billion in estimated damages in Harris County alone. Gov. Greg Abbott declared a state of disaster for nine counties in and around the Houston area. The widespread nature of the disaster prompted the city of Houston to call this the largest flood event since Tropical Storm Allison, which devastated southeast Texas in 2001, causing $9 billion in damage and $1.1 billion in insured losses.

According to Harris County Judge Ed Emmett, about 240 billion gallons of rain fell on the Houston area this week. That’s the equivalent of 363,400 Olympic-size swimming pools, CNN reported. After 10 inches of rainfall fell in six hours Sunday night into Monday, powerful, slow-moving thunderstorms had paralyzed the region Monday, but storms continued through Wednesday.

Having some of the hardest rainfall overnight helped a bit to mitigate the dangers this week. While this made it difficult to predict, it allowed people to better make choices about going out, as opposed to last year’s floods around Memorial Day, Emmett told the Houston Chronicle. Nevertheless, emergency crews made more than 1,200 high-water rescues, many residents had to evacuate to shelters, and for those who were able to shelter in place, 123,000 homes had no power at the height of the flooding. Officials have also expressed concern about two local dams that have been rated “extremely high risk and are at about 80% capacity, but they are not in immediate danger of failing.

As I wrote in Risk Management last year, the city’s rapid urbanization and approach to land development have made it extremely vulnerable to flooding perils because there is little land surface that can absorb water in foul weather. Rivers, bayous and other receptacles for runoff are easily overwhelmed and take a considerable amount of time to return to normal levels, making the heavy, concentrated, sustained rainfall seen this week even more dangerous in such an urbanized setting. Last May, record rainfall and severe thunderstorms caused tremendous damage across Texas and Oklahoma, killing 32 people and flooding more than 5,000 homes in the metro regions of Houston, Austin and Dallas.

With this latest storm, Houston again offers a powerful reminder about the natural catastrophe perils compounded by urbanization and the need to prepare, both in the form of routine disaster preparation and urban planning. From the August issue of Risk Management:

The city has invested hundreds of millions of dollars to battle the effects of urbanization. On Buffalo Bayou alone, for example, flood control efforts totaling half a billion dollars in the past decade have included bridge replacements, the addition of detention ponds for runoff, and creation of green spaces that serve as parks in normal weather while offering more land surface that can absorb water in foul weather.

But the investments are not enough. “Houston may be doing things to try to improve…but there’s a long history of pre-existing stuff that is still there,” Walter Peacock, an urban planning professor at Texas A&M and director of the school’s Hazard Reduction and Recovery Center, told Time. “Think about every time you put in a road or a mall and you add concrete—you’ve lost the ability of rain to get into the soil and you’ve lost that permeability. It’s now impermeable, and therefore you get more runoff.”