August 29, 2015 marks the 10-year anniversary of the largest-ever windstorm loss and the costliest disaster in the history of the global insurance industry. To mark the date, a new risk bulletin from Allianz Global Corporate & Specialty (AGCS), "Hurricane Katrina 10: Catastrophe Management and Global Windstorm Peril Review," published Aug. 18, analyzes windstorm risks and losses and examines the business lessons learned from Katrina for future global windstorm loss mitigation, given increasing weather volatility. Whether hurricanes in the U.S., typhoons in Asia or winter storms in Europe, the report's authors note, strong winds can easily cause property and business interruption losses for companies, as indicated by an analysis of more than 11,000 AGCS major business insurance claims greater than €100,000 worldwide from 2009 to 2013. More than 400 storm-related claims were filed during this period, showing that windstorm ranks fifth in the top 10 causes of loss for businesses according to the value of the 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 U.S. is the top loss location, accounting for half (49%) of the global claims analyzed, followed by Europe (19%), Asia (6%) and Central America (3%). The report finds that the growth of exposure is far outpacing take-up of insurance coverage, resulting in a growing gap in natural catastrophe preparedness. Storm surge has been a contributing factor in half of the top 10 costliest storm losses in U.S. history, with five storms—Katrina (2005), Sandy (2012), Ivan (2004), Rita (2005) and Irene (2011)—having collectively caused almost $125 billion in insured losses. Surge continues to be one of the most important components of the windstorm peril outside the U.S. as well. |

Severity of losses is increasing

Based on Allianz's analysis, the severity of losses from weather events, including windstorms, is increasing. The average amount paid for extreme weather events by insurers between 1980 and 1989 totaled $15 billion a year. Between 2010 and 2013, this rose to an average of $70 billion a year. A principal reason for the increased losses is the continuing economic development in hazard-prone areas, says the report. In the future, further population growth and expansion of industries, particularly in the developing world, will exacerbate the issue. Accumulation of risks is rising exponentially with the greater interconnectedness of the global economy, resulting in increasing business interruption, contingent business interruption and supply chain exposures. According to the report, the most important drivers of exposure growth are population growth, socio-economic growth and urbanization. Exposure rises most rapidly in developing countries, as development moves increasingly into areas of high and rising flood risk. Asian cities are now projected to account for 80% of the top 10 exposed locations in 2070. The growth of exposures is far outpacing take-up of insurance coverage, resulting in a growing gap in natural catastrophe — including windstorm — preparedness and response. The significance of the Asia projections for U.S. and multinational companies is the potential effect of supply chain disruption and exposures, explains Thomas Varney, AGCS's risk consulting manager for North America. "It's not just a company's internal exposures that should be of concern, but also the exposure of critical suppliers and vendors that supply raw materials." He points to the global impact of the recent floods in Thailand and the earthquake in Japan as disruptive natural catastrophes. "Companies, especially risk managers, need to understand how the network supply chain is set up," Varney says. "Put that into the context of how you operate your business." Varney notes that some U.S. and multinational companies can have an impact on developing country risk. Some have their own specifications and requirements that they want their facilities to be built to, which may be more stringent than local laws. It varies by company and location, he says, and it depends on whether you're buying an existing facility or building something new. |

Loss mitigation depends on adequate preparation

As you look at having a facility in a developing country, Varney explains, consider that a natural catastrophe could have a major impact on a country's fragile infrastructure. Your first step in mitigating risk, and losses, is to understand the types of exposures each facility faces in the specific location, then you can develop a plan to minimize downtime and protect the facility, as well as planning what to do afterward. Adequate preparedness before a storm arrives can mitigate potential losses, the report says, particularly in areas such as construction sites that are extremely susceptible. These are the four primary areas of windstorm loss mitigation: |

• Pre-windstorm planning includes the development of a comprehensive, well-tested emergency plan, site and equipment inspections, and preparations for possible flooding. Don't forget to protect computers, stock, key machinery and equipment subject to water damage. Backup all computer data and store in a safe location. Be prepared to shut down operations if necessary.
• During a windstorm, response personnel should monitor for leaks, fire and damage—onsite if possible.
• 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.

After the emergency is over and your business is up and running, Varney recommends that you review the effectiveness of the windstorm emergency plan and revise as needed. |

Practice, practice, practice

In Varney's view, the often-overlooked area—but the most important—is business continuity planning. He recommends that companies conduct a table-top exercise at least once a year. "List the kinds of events that may have an impact on your business," he advises, "and see how the company would respond, what kind of infrastructure is available. Build a plan that brings your business back to normal as quickly as possible." What steps do you need to take sooner rather than later? What improvements do you need to make before an incident occurs? In addition to natural catastrophes, consider a fire or a power outage that lasts for several days, Varney adds. For example, many companies, among them Toyota and Deere & Co., are dealing with business interruption caused by the major explosion at a hazardous chemical warehouse at the port of Tianjin, China. When you do the exercise, Varney recommends that you factor in the appropriate personnel. "Ask yourself, 'What happens if the person responsible for managing the company's response is on vacation or is in the affected area?' If there's only one person who is unavailable, that becomes a critical impact point," he explains. "You need back-up personnel available at all times. You also have to ensure that the team members have the training and authority to get the job done." |

What can agents do?

How does an agent, a broker or a carrier impress on clients that they need to take a long-term view, in terms of managing risk? In his practice, Varney advises companies to think about the ways the risk manager can be a bigger part of the procurement process and help the company build its knowledge base. Often, risk managers will raise issues that business managers might not be aware of when making such decisions as where to locate facilities or which suppliers to contract with. Carriers, agents and brokers need to have plans in place to help their clients and to manage their own businesses in case of a catastrophe or business interruption as well, Varney says. The report recommends creating a separate account, website or email address to which clients can record catastrophe-related damages to easily identify the loss incurred. For a copy of the report and planning checklists, click here. See also: |

• Top 8 emerging risks for today's supply chains
• Location, location, location: Higher property values increase potential catastrophic losses
• Catastrophe preparedness: Aligning policyholders and insurers' interests