Canadian Underwriter

Preparedness essential to reduce windstorm losses, lesson learned from Katrina: AGCS

August 18, 2015   by Canadian Underwriter

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Preparedness is crucial to mitigate increasing windstorm-related losses in future, notes Allianz Global Corporate & Specialty (AGCS), which Tuesday issued a risk bulletin to mark the 10th anniversary of Hurricane Katrina, the largest-ever windstorm loss.

Katrina struck the Gulf Coast in southeastern Louisiana as a Category 3 hurricane with sustained winds of 200 km/h on Aug. 29, 2005, flooding 80% of New Orleans. Ultimately, the event caused as much as US$125 billion in overall damages and more than US$60 billion in insured losses.

Over the course of the 2005 hurricane season – the most active Atlantic hurricane season in recorded history, with 15 hurricanes, including Wilma and Rita – about 4,000 lives were lost, reports AGCS, Allianz Group’s dedicated carrier for corporate and specialty insurance business. [click image below to enlarge]

The top 10 costliest hurricanes caused US$185 billion in insured losses

For Katrina, most of the wind damage occurred to the building envelope, comprising of roof covering, walls and windows, notes an AGCS press release.

New Orleans alone suffered direct property damage of US$30 billion, with 1.7 million insurance claims filed, states the Catastrophe Management and Global Windstorm Peril Review, which analyzes windstorm risks and losses, as well as examines the business lessons learned from Katrina for future global windstorm loss mitigation, given increasing weather volatility.

In all, more than US$40 billion was in privately insured property losses (1.2 million claims for personal property, 156,000 for commercial businesses and 346,000 for damaged vehicles). Claims payments to businesses accounted for approximately half of the US$40 billion, an unusually large share.

“However, it’s imperative to know what’s protected ahead of time. Many insureds were surprised to find out they were not covered for storm surge losses, the main coverage issue resulting from the storm,” the bulletin states. “Whether damage was caused by wind or water became a key focus of post-Katrina litigation. Many of the subsequent lawsuits took years to be resolved.”

Katrina was the costliest storm in U.S. by insured loss followed by Ike, Andrew, Ivan and Wilma. [click image below to enlarge]

Storms account for 40% of natural hazard losses by number of claims and 26% by value, and represent the fifth top cause of loss for businesses, AGCS says

Storms are a global peril causing billions in losses, accounting for 40% of natural hazard losses by number of claims and 26% by value, and representing the fifth top cause of loss for businesses, AGCS notes in the statement.

Regardless of location, strong winds can easily cause property and business interruption losses for companies, suggests an analysis of 11,000-plus AGCS major business insurance claims worldwide from 2009 to 2013.

“Over 400 storm-related claims were filed during this period,” notes AGCS. Of the global business claims analyzed, the United States accounts for 49%, Europe for 19%, Asia for 6% and Central America for 3%.

“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 bulletin notes. “For example, Haiyan is the costliest tropical storm event in Asia by overall losses (US$10.5 billion) in the past 35 years. However, only approximately $700m of this was insured.”

The maritime industry accounts for 60% of windstorms claims analyzed by number compared with 30% for property. “Storms can also damage or destroy ports or coastal infrastructure, including warehouses and stored cargo, cranes, quaysides, terminals and sheds,” Captain Andrew Kinsey, AGCS’s senior marine risk consultant, adds in the company statement. [click image below to enlarge]

The maritime industry accounts for 60% of windstorms claims analyzed by number compared with 30% for property

All that said, lessons have been learned from Katrina. These include improved catastrophe risk management related to the impact storm and demand surge, business continuity and insurance coverage, AGCS reports.

“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 Thomas Varney, regional manager, North America, Allianz Risk Consulting.

Storms like Katrina and Sandy have further helped improve catastrophe risk research and modelling. “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,” notes the AGCS statement.

“Storm surge has been a contributing factor in half of the top 10 costliest storm losses in U.S. history, with these five storms having collectively caused almost $125 billion in insured losses,” the statement adds.

Of course, additional improvements in pre- and post-storm management are needed. “Preparedness is crucial to mitigating increasing storm losses, particularly in highly susceptible areas such as construction sites,” notes the bulletin. “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,” the bulletin adds.

“Even without considering the influence of climate change, the prospect of increasing losses due to storms is more of a result of continued economic development in hazard-prone developed coastal areas,” Hugh Burgess, head of corporate lines of AGCS, says in the statement. “Preparedness limits windstorm exposure and Katrina has taught us many lessons on this front,” Burgess says.

Allianz’s analysis shows 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 totalled US$15 billion annually, increasing to an average of US$70 billion a year between 2010 and 2013.

AGCS advises four primary areas of windstorm loss mitigation are as follows:

• pre-windstorm planning includes the development of a comprehensive, well-tested emergency plan, site and equipment inspections and preparations for possible flooding;

• during a windstorm, response personnel should monitor for leaks, fire and damage;

• after a win
dstorm, the site should be secured to prevent unauthorized entry and an immediate damage assessment done if safe to do so; and

• business continuity management is crucial as just-in-time production, lean inventories and global supply chains can easily multiply negative effects.