Storms are a global peril causing billions in losses, accounting for 40% of natural hazard insurance claims. Fifth top cause of loss for businesses, analysis shows.
US top loss location. Maritime industry highly-exposed. Asia losses to increase.
Katrina has improved catastrophe risk management. Impact of storm and demand surge, business continuity and insurance coverage key lessons learned.
Pre- and post-storm risk management can still be improved. Preparedness crucial to mitigate increasing losses in future.
PRESS RELEASE - Johannesburg, London, New York, Munich, Paris, Singapore, Rio de Janeiro. August 18, 2015.
4,000 lives lost during the 2005 hurricane season, 80% of the city of New Orleans flooded, US$125 billion in overall damages and 1.7 million insurance claims filed: Hurricane Katrina, which struck the Gulf Coast of the US on August 29, 2005, remains the largest-ever windstorm loss. However, severe windstorm loss is not exclusive to North America. It is a global peril with more than 50 countries having suffered significant windstorm losses in recent years, insurance claims analysis shows. To mark the 10-year anniversary of Katrina, a new risk bulletin from Allianz Global Corporate & Specialty (AGCS) – Hurricane Katrina 10: Catastrophe Management And Global Windstorm Peril Review – analyzes windstorm risks and losses and examines the lessons learned from Katrina for future global windstorm loss mitigation, given increasing weather volatility.
“Katrina will always be remembered as an extraordinary natural disaster that foremost affected millions of individuals and businesses, but also left an indelible impact on the global insurance industry,” says Chris Fischer Hirs, CEO of AGCS. “Storms can have a devastating effect for businesses. Even without considering the influence of climate change the prospect of increasing losses is more likely in future due to continuing economic development in hazard-prone urban coastal areas around the world and in Asia in particular. Preparedness is a key issue to limit windstorm exposure and the lessons learned from major catastrophes such as Katrina can help businesses mitigate the impact of future events. AGCS is committed to working closely with clients and risk managers and sharing its insight to help ensure they are as prepared as possible.”
A decade on from Katrina, although businesses’ catastrophe risk management awareness has matured, there is still room for further improvement with a greater emphasis needed on reviewing pre-loss and post-loss risk management. Business continuity planning and indirect supply chain exposures are areas which would benefit from greater attention. If such procedures are not in place or reviewed, the magnitude of windstorm losses can increase significantly.
40% of natural hazard claims windstorm-related
Whether it is hurricanes in the US, typhoons in Asia or winter storms in Europe – strong winds can easily cause property and business interruption losses for companies, as an analysis of more than 11,000 AGCS major business insurance claims worldwide (> €100,000) indicates. Over 400 storm-related claims were filed during this period[1], meaning windstorm ranks fifth in the top 10 causes of loss for business according to value of claims. Windstorm losses account for approximately 40% of all natural hazard losses by number of claims and 26% by value, according to AGCS analysis.
The US is the top loss location, accounting for half (49%) of the global claims analyzed, followed by Europe (19%), Asia (6%) and Central America (3%). Losses across Asia are expected to rise exponentially in future with 80% of the top 10 exposed locations to coastal flooding from storm surge and wind damage expected to be in this region in the next 50 years. Growth of exposure is far outpacing take-up of insurance coverage resulting in a growing gap in natural catastrophe preparedness.
Marine sector impacted
Claims analysis shows the maritime industry is highly-exposed to such losses, accounting for 60% of windstorms claims analyzed by number compared with 30% for property. Destruction of high-value pleasure craft, commercial vessels and cargo can significantly increase the loss tab. “Claims can also be incurred due to water ingress into ships’ cargo holds damaging the cargo,” explains Captain Rahul Khanna, Global Head of Marine Risk Consulting, AGCS. “Storms can also damage or destroy ports or coastal infrastructure, including warehouses and stored cargo, cranes, quaysides, terminals, buoys and sheds.”
Lessons learned from Katrina – storm surge to demand surge
Katrina and other storms such as Sandy have helped to greatly improve catastrophe risk research and modeling. Katrina showed the impact of storm surge can often be more damaging than high wind speeds and that the physical size of the hurricane can affect the surge itself. Storm surge has been a contributing factor in half of the top 10 costliest storm losses in US history, with these five storms having collectively caused almost $125bn in insured losses.
The flooding caused by Katrina also showed the state of the levee systems in the US to be substandard and in need of repairs estimated to be $100bn, according to the National Committee on Levee Safety. There are many levee systems throughout the US that would reveal similar deficiencies if subjected to the same level of scrutiny as those in New Orleans.
Katrina also outlined the need for better wind damage protection. Most of the wind damage caused by Katrina occurred to the building envelope, comprising roof covering, walls and windows. “If the building codes had been strictly followed, wind damage would have been greatly reduced,” says Andrew Higgins, Technical Manager, Americas, Allianz Risk Consulting. “Poor workmanship and a lack of knowledge were the primary culprits.” After Katrina, Allianz developed enhanced roof surveys, placing greater scrutiny on condition and age of roofs.
Importance of business continuity in the aftermath of a catastrophe, knowing exactly what is covered by the insurance policy ahead of a windstorm event and the unexpected impact of demand surge are the other key lessons learned. Katrina showed demand surge for materials in order to rebuild after a catastrophe not only leads to rising prices and supply shortages but can also have peripheral loss consequences, such as were seen post-Katrina with the use of sub-standard batches of Chinese drywall.
“Today, the Gulf Coast is better prepared to withstand the effects of a hurricane due to better education, improved construction guidelines and increased third party inspection,” says Higgins.
Mitigating the impact of increasing losses from windstorm events
While scientists cannot provide a conclusive answer to the question of how climate change impacts storms, most agree severity of windstorms will change in future. Based on Allianz experience the severity of losses from weather events including windstorms is already increasing. The average amount paid for extreme weather events including windstorms by insurers between 1980 and 1989 totaled $15bn a year. Between 2010 and 2013 this rose to an average of $70bn a year.
Adequate preparedness before a storm arrives is key in order to mitigate potential losses, particularly in areas such as construction sites which are extremely susceptible. There are four crucial areas of windstorm loss mitigation:
Pre-windstorm planning including development of a comprehensive emergency plan and testing it. Inspect roofs and the building envelope; anchor large equipment and prepare for possible flooding.
During a windstorm response personnel should monitor for leaks, fire and damage.
After a windstorm the site should be secured to prevent unauthorized entry.
An immediate damage assessment should be conducted if safe to do so.
Business continuity management is crucial as just-in-time production, lean inventories and global supply chains can easily multiply negative effects.
Property damage and business interruption are usually covered by insurance policies but often there is loss of market share, suppliers, clients and staff.
Businesses should develop and test business continuity plans and communication cascades. Have insurance policies at a safe accessible location.