Preparing for and responding to megacatastrophes: the difficult road to recovery for New Orleans in the wake of Hurricane Katrina points to the importance of proper business continuity planning if companies are to continue

Risk & Insurance,  Dec, 2007  by Gary Kerney

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Summary

* The experience of New Orleans losing as much as half its population after Hurricane Katrina raises questions about recovery times should even larger cities get hit by similar catastrophes.

* The challenge facing insurers is how to muster and disburse resources in the wake of storms of even greater magnitudes than Hurricane Katrina.

* Catastrophe-driven workforce relocations may require fresh reviews of insurance programs to ensure adequate property/casualty, benefits and workers' compensation coverages.

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A recent question on the game show Jeopardy asked, "In 2006, what state's population increased by more than 1 million people?" The answer: Texas. The reason: Hurricane Katrina.

After Hurricane Katrina, the population of New Orleans decreased by half--for nearly two years. Although there has been a small, but noticeable, increase in people returning to the area, the city's economic and customer base remains at a much lower level than before the storm, leaving officials and business owners wondering when--or if--former residents will return. This experience raises important questions: If larger metropolitan areas endure more severe catastrophes, what will be the recovery, time for residents? What will businesses do to survive?

That's why it's imperative for government, businesses, insurers and risk managers to consider megacatastrophe recovery and continuity plans.

Insurers and risk managers recognize the extensive exposures they face in the Northeast, Florida and California. Modelers and other industry resources report that insured losses from events in those areas could run in excess of $l00 billion. But no reliable method is known for measuring the actual economic impact of such disasters over time. The accepted formula today is to simply double the insured loss. That practice may very. well understate economic losses following extreme events, which the United States has not really experienced to date.

In the insurance world, the standard focus is on the claims that result from disasters. Generally, once claims are adjudicated and paid, the industry moves on to address the next catastrophe. Outside the affected area, there is much less interest on actual, societal recovery time. Case in point: On Aug. 23, 2007, the Weather Channel reported that many families and businesses have not yet fully recovered from the impact of Hurricane Andrew in 1992.

Another notable factor is the threat of multiple events of catastrophic proportion. Facing sequential events is not new to insurers. For example, in 1989, insurers faced Hurricane Hugo and then the Loma Prieta earthquake. In 1992, the industry faced Hurricane Andrew in Florida and Louisiana and, shortly thereafter, Iniki in Hawaii. In 1994, there was the Northridge earthquake and six major winter storms in the Northeast. In 2004, Florida was struck by four hurricanes in approximately, six weeks. In 2005, three of the costliest hurricanes in U.S. history struck the mainland, causing nearly $60 billion of insured losses.

From both insurance and comprehensive risk management perspectives, what could be the consequences of the concurrent incidences of a hurricane in a major eastern population center and an earthquake in a West Coast city? Not only could such events cost the insurance industry more than $100 billion, but they could also produce more than 10 million claims--in addition to the daily influx of fire, theft, auto and other claims. The challenge facing insurers is how to muster and disburse resources, while still providing suitable service. What happens in the interim to those who fall near the end of service queues among millions of claimants?

What's clear is that it will take a long time to connect insurers with policyholders and move the claims process forward. In the interim, it's essential to plan for "survival" and continuity--to live, work and operate businesses. Under these conditions, insurers and risk managers, as well as firms and families, must think deeply about measures to preserve and safeguard resources against a catastrophic event.

Let's examine just some of the challenges in the aftermath of Katrina and how they might translate into even bigger problems:

* Local governments were unable to restore services and provide protection to people. Small towns that lost fire or police departments and related vehicles had to find replacements before being reimbursed by the federal government under the Federal Emergency Management Agency. Mass evacuations left the towns with little or no revenue to replace critical municipal services. Businesses also suffered. These are typical ripple effects--among many--in the aftermath of a catastrophe.

* Demand surge and the increasing cost of supplies were common problems. People and businesses paid significantly more for scarcer materials and labor. And in many cases, they waited longer because of persistent strains on resources.

* Many people moved away permanently. They chose to forgo returning to New Orleans and found jobs and homes elsewhere. A drain in population, manpower and buying power on another metropolitan area can significantly debilitate renewal efforts.