Hurricane zones: No need to become a sitting duck

Oct 18, 2005

The devastation in New Orleans caused by Hurricane Katrina graphically illustrates how destructive extreme weather can be.

For risk management professionals, the fearsome power of hurricanes is such that they present a unique set of challenges.

Oliver Schofield, a director at the global property practice at Aon, the consultant and insurance broker, says: "You can risk manage your way out of all sorts of problems. But when a hurricane is about to strike your building you have a major problem. This is outside management control."

While many businesses in New Orleans will have had risk management strategies in place, the failure of the flood defences protecting the city – an area they could not control – left them physically exposed.

Oil installations in the Gulf of Mexico were evacuated as the hurricane approached, saving lives, but physical assets, such as the rigs themselves, proved much harder to protect from damage.

Nevertheless, Rick Cudworth, head of disaster recovery and business continuity at KPMG, the consultants, says running a business inside a hurricanes zone does not necessarily leave you a sitting duck.

He says the key is to plan for when – not if – your business is hit by a hurricane.
Corporations should aim to have alternative facilities available to them in the event of disruption to their main operations.

"Big business has long recognised hurricanes as a major threat to their operations. This way, at the first sign of a hurricane, they can shift control of their businesses elsewhere," Mr Cudworth says.

A well thought-out strategy to deal with evacuation is also advised.
Mr Schofield contrasts the way New Orleans appeared to be caught unaware by Hurricane Katrina and the planning and risk management that was put in place in Houston as Hurricane Rita approached.

"Texas had the advantage of seeing how devastating Katrina was in New Orleans. It gave the authorities a chance to get organised," he says.

"Without a doubt the fact that we saw fleets of buses carrying people from Houston shows the risk management was much more effective."

Mr Cudworth also says the problems in New Orleans illustrate the need for different organisations to work together.

He calls this the "next generation of business continuity".

"You need to understand how your risk management strategy works with the civil authorities, regulators, your supply chain and with other companies. Major disasters rarely affect just one company," he says.

Proper implementation is also key to a risk management strategy, as is embedding the principles through the business.

The New Orleans authorities may have ordered the evacuation of the city as Katrina approached, but they failed to provide transport for those without their own and allowed thousands to stay behind in their homes.

"If you are going to have a risk management strategy then it has to be enforced," Mr Schofield says.

"Planning and testing are essential parts of risk management," Mr Cudworth says.
Although the current hurricane season still has several weeks to run, total insured losses this year look set to top the record total of $42bn in 2004.

Reinsurer Munich Re has estimated total insured losses from hurricanes Katrina and Rita could be $40bn. Other estimates are $60bn. This seems certain to have a impact on insurance premiums. Indeed one Lloyd's insurer, Atrium, has warned that the cost of insuring offshore facilities in the Gulf of Mexico against potential hurricane damage could rise by as much as 400 per cent.

As scientists debate whether the increased number of hurricanes over the past two years is an exception or the beginning of a trend, exacerbated by global warming, risk managers too are having to ask whether hurricanes are becoming more frequent.

Last year Florida was hit by an unprecedented four hurricanes in quick succession. Japan too has experienced its highest number of typhoons, the names for a tropical cyclone that forms in the Pacific, for decades.

A recent study in Science magazine argues that increasing sea temperatures had led to a rise in the most ferocious types of hurricanes.
Whether this is related to global warming is a moot point. However, even the US Pentagon says that climate change should be "elevated beyond a scientific debate to a national security concern".

Julian Heming, tropical prediction scientist at the UK's Met Office, says there is "certainly evidence of an increase in the most ferocious types of hurricanes. But that has to be set in the context that tropical storm activity is highly irregular."
In the face of what could then be an increasing threat, robust risk management can help reduce insurance premiums.

Moreover, investors are more likely to look favourably on an executive board with a proper risk management strategy if something does go wrong.

Mr Schofield says: "Natural disasters have risen up the corporate agenda. There is an understanding among corporate buyers that hurricanes are getting more fierce and happening more often. Hurricanes, global warming and climate change are all things that risk managers are more aware off. The challenge for the risk management community is not to ignore the changing risk management profile. We must adapt our models accordingly".