A number of major hurricanes since 2005 including Katrina, Rita and Wilma have had a profound impact on the risk management and insurance industry. Of these, Katrina was the most costly natural catastrophe with over £80bn in economic losses and almost £40bn of insured losses. These events brought about significant change in the management of disasters globally. We are arguably better equipped to deal with the impacts of natural
catastrophe as a result, but does that necessarily mean we are better prepared?
There is a lot to be said for learning the hard way. It is usually considered to be a most effective means of getting a message across. But when it comes to managing the impact of major storms on businesses and the economy, it would appear that lesson has not consistently been driven home.
We already knew that businesses implementing research-proven loss reduction recommendations can minimise losses (by up to a considerable 85%) in some cases but it is a complex and ongoing task that not all vulnerable businesses are undertaking. And as the gap between insured and total losses from natural
catastrophes widens, the cost of the impact of floods, earthquakes, hurricanes and droughts is growing.
New technologies and ongoing research will only improve preparedness, and the use of storm tracking data and other available technologies will play an increasing role in aiding risk assessment and response. Among these, drones, thermographic imaging and live streaming are able to cast previously unobtainable data that can more precisely than ever map risks and vulnerabilities.
Outside of the more high-profile disaster-prone areas, volatility and the unpredictable nature of the weather
continue to damage profitability.
Preparedness is crucial to mitigating losses, particularly in high-risk locations or vulnerable properties, but, according to UK Met Office research published in October 2015, a third of supply chains use no weather data at all. Indirect supply chain exposures make a case for establishing alternate relationships to avoid a reliance on one single supplier, for instance.
The same Met Office report revealed that almost half of retailers and suppliers rank the weather among the key risk factors external to their business. Despite this, a third do not use any weather data within their supply chain and about a fifth rely solely on free weather data services.
While natural catastrophe risks are unavoidable the impacts can be minimised, but a disparity between the identification and prioritisation of risk continues to distract from progress. FM Global’s own research taken among financial executives suggests that while almost all companies with operations exposed to natural catastrophes are aware of the risks, fewer than a fifth of them were worried about the negative impact on the bottom line.
That same body of work reveals that half of organisations with exposures in hurricane prone regions are not well-prepared for the eventuality — which all suggests that learning the hard way may continue to be a feature for some organisations with natural catastrophe exposures, and will certainly contribute to greater costs related to recovery.