5 Critical Actions to Take Before the Next Natural Catastrophe
Insured losses from natural catastrophes in 2023 totaled $380 billion, well above century averages. Read how you can protect your business from these unplanned costs.
United States weather and climate-related disasters are increasing in intensity and economic impact. The government’s latest billion-dollar disaster report recorded 28 such events in 2023, well above 2020’s 22-event record.
Many experts believe these numbers will not only increase but may be driven by demographics as much as science. Recent reports show people and businesses are either moving to or staying in key locations, most likely to bear the brunt of these accelerating natural disasters.
“More people are choosing to live and work in catastrophe-exposed areas like coastal regions and dry, heavily forested areas where wildfires can occur,” says Andy Simmons, head of large property insurance at The Hartford. That means more homes and more businesses will be at risk for a wider range of events, often without adequate insurance coverage.”
According to Aon’s annual Weather, Climate and Catastrophe Insight report, U.S. and European damage from natural disasters in 2023 totaled $380 billion. That was a year the U.S. government documented as the hottest on record. The report also noted that the 2023 damage total was well above the $90 billion annual average so far for the 21st century.
By Aon’s calculation, only 31% of its 2023 loss total was covered by insurance. The widening distance between insured and uninsured risk, known as the protection gap, may mean that businesses aren’t fully prepared to deal with catastrophe and may be under-insuring their assets.
A Case Study for Unpredictable Weather
In this example, a manufacturing company was growing very fast and kept increasing the inventory in their warehouse. A storm came through and damaged most of the that inventory. Unfortunately, the limits they had originally selected for their policy were no longer enough to cover the larger amount of inventory now on-hand. With the limit exhausted, there was no coverage available to cover the remainder of their loss. The company had to absorb the cost of the ruined inventory.
To avoid this scenario, companies should regularly review their coverage to make sure it matches business changes. As businesses grow and evolve, so do their risks and needs. Regularly reassessing coverage can help prevent such costly oversights and ensure that the company is adequately protected against unforeseen events.
Companies who want to strengthen their resiliency against catastrophes should also consider these five actions:
1. Create and Test a Business Continuity Plan
Any catastrophe can cause lasting interruptions to critical infrastructure like water and power supply, telecommunications and roads. Establishing a business continuity plan (BCP) is a best practice for every company. Conduct a “what-if analysis” to see if your plan will be effective in a variety of different scenarios. Note that creating a regularly updated emergency plan should be part of this process. It’s also important to identify the right people to create, monitor and update your BCP. This is especially true for supply chain management.
“Knowing your key suppliers’ locations and operations can help to ensure continuity,” says Simmons. “You may not be in a CAT zone, but where are your suppliers?
Natural catastrophes are impacting broader geographic areas than they have in the past. Hailstorms, tornadoes and wildfires all appear to be expanding beyond historical boundaries. For this reason, even companies who have never experienced disruptions in the past due to severe weather should re-evaluate their exposure and consider diversifying their backup suppliers.
2. Ensure Your Policy Limits Match Your Risk Exposure
Closing a company’s potential protection gap means ensuring your policy limits match your risk. Accurate building valuations are necessary to set those limits, sub-limits and deductibles. An exact calculation of potential business interruption losses is essential. If the numbers are off, it will ultimately impact the coverage you can get.
“The industry continues to evolve in this area,” Simmons says. “Customers should ensure their broker and carrier are obtaining the right information to address the unique needs of the business.”
Reviewing language with a broker will also help risk managers understand where they might be left exposed. Key questions to ask may include:
Is storm surge covered in your flood policy or not?
Is contingent business interruption included in your property policy?
Is there a time element, and is that threshold appropriate?
Do you have coverage for debris removal?
3. Use Technology To Better Understand Risk Exposure
Advanced tools can help companies get a clearer picture of their property risks with greater efficiency and safety. For example, instead of getting up on the roof to inspect its quality, satellites and drones can take detailed aerial pictures.
“The more we understand your business property and the risks you may face based on your company structure and geography, the better guidance we can provide to help you protect what’s important,” says Simmons.
Such data can show if the roof is deteriorating and in need of repair, or if pooling of water suggests a drainage issue. This information can also highlight a need for preventive maintenance and serve as the basis for making more accurate valuations.
Companies can also pull in third-party data to build a clearer picture of their exposure. For example, trends mapped by the National Weather Service may reveal that a specific location is likely to experience heavier rain and wind, so that facility should be prioritized for capital expenditure investments.
4. Storm-Proof Your Property
Buildings don’t need to be razed and rebuilt to take advantage of structural or mechanical upgrades that may greatly improve their resiliency. Many fixes are relatively inexpensive and easy to implement. Anchors that keep roof-mounted equipment firmly in place amid high winds are one example. Hail guards are another.
“A properly engineered building performs much better,” Simmons says. “A few changes can go a long way in engineering out some of the catastrophe exposure.”
A federal analysis in 2022 rated most states the lowest possible rating on the quality of their building codes. This means that even newer structures that are compliant with local regulations may not be strong enough to withstand today’s weather-related catastrophes or climate extremes.
The Insurance Institute for Business and Home Safety (IBHS) rates hurricane-prone states on the strength of their building codes. States with poor ratings consistently see more severe property damage from similar events compared to states with more robust standards. Risk managers should check their state’s ranking to see if their building codes provide a good guideline for resilient construction or if they need to be improved.
5. Keep Your Emergency Plan Current
What happens in the hours right after an event can be the difference between staying open or closing indefinitely. As part of your business continuity planning, your organization should have a separate, comprehensive emergency response plan to help kick-start recovery. Keep employee contact information current so facility managers can update their staff on location safety and key recovery tasks.
Also, document established relationships and contacts with local, reputable contractors who can prioritize expected repairs and access materials quickly. Identify the providers of critical supplies, like backup generators for power and industrial fans to help prevent mold growth in case of flooding.
Another important element in any post-event plan is knowing your claims person by name. “Alerting your carrier of a loss as quickly as possible helps to get your claim rolling and may open up access to additional resources,” Simmons says.
Finally, connect with your agent at regular intervals to identify and address business changes that may require updates to your coverage or reveal new opportunities to mitigate risks before they occur.
Compliments of Hartford Insurance
Dan Zeiler
dan@zeiler.com
877-597-5900 x134