Risk managers can greatly reduce the financial and operational consequences of catastrophic events by implementing comprehensive, well-tested disaster preparedness and response plans.
The potential business impact of large-scale disasters extends far beyond physical property damage. Whether natural or man-made, a catastrophic event can expose companies to liability stemming from life safety failures, drastically impair their ability to grow or even maintain market share, and permanently damage their brand and reputation, experts said during the Risk & Insurance Management Society Inc.'s annual meeting in Denver last month.
Additionally, large-scale disasters often have short- and long-term effects on companies' employees that can result in reduced productivity and key personnel losses if left unaddressed.
“Most companies have to respond to a disaster at some point, and what you do in preparation for those disasters is critical to your company's outcome,” said Steven Sachs, executive vice president at New York-based Willis North America Inc. “When a disaster does occur, your management team will remember what you do much longer than they will the 10% or 15% you might save them on insurance costs in a given year.”
Experts said comprehensive disaster planning begins with companies' identification of the events and scenarios that are most likely to affect them, based on companies' individual business models. That process should be informed both by internal engineering reports and loss histories, as well as analyses of physical, operational and financial exposures provided by brokers, insurers and other external service providers.
Beyond their company's own physical footprint, risk managers should assess the extent to which a catastrophic event may affect primary and secondary suppliers and recipients, including distributors, clients and customers.
Another important but often ignored element of a comprehensive disaster plan is a pre-established network of relationships with local authorities and service providers, including independent adjusters, forensic accountants, remediation companies, general and specialty construction contractors, and transportation companies.
Risk managers also should ensure that their company's disaster plan contemplates contingencies for long-term employee and tenant displacement, as well as provides access to critical resources and supplies that are likely to become scarce in the event of a large-scale disaster, such as generators, medical supplies, food and water.
“If you wait until the day of — or the day after — an event, you're already too late,” said Joseph Bermudez, a Denver-based shareholder at Wilson Elser Moskowitz Edelman & Dicker L.L.P.
Experts also said emergency communication channels between key internal crisis response personnel and employees at large, as well as external stakeholders such as clients, customers, insurance brokers and underwriters are critical to effectively mitigate operational and financial losses during and after a catastrophic event.
Comprehensive disaster planning should outline contingencies to address employees' needs in the aftermath of an event, said Jay Kirschbaum, St. Louis-based national human capital practice leader at Willis North America.
Companies must consider whether they will need to provide employees and their families with alternative access to their health care benefits, particularly in cases where provider networks have been compromised. Ideally, Mr. Kirschbaum said, employers will have negotiated emergency out-of-network allowances or reimbursements with health insurers ahead of time.
Risk managers, human resource professionals and benefit administrators should also work together to address intermediate and long-term leave issues, including the potential applicability of employees' benefits under the Family and Medical Leave Act.
Additionally, companies should identify in advance employees enlisted in the military who are likely to be called away during and after a disaster — including reservists and National Guard members — and be aware of those workers' reinstatement rights, Mr. Kirschbaum said.
Companies should provide on-site trauma counseling and other social services in the aftermath of a disaster, and consider providing temporary housing for displaced employees and their families.
“I know a lot of risk managers are going to say that this is all great information, but it's still very hard to carve out the time to actually sit down and do this,” said John Cadarrette Jr., managing director of the Chicago-based consultant Claro Group L.L.C. “Trust me, if you do this sort of detailed planning in advance, it will save you a lot of aggravation later down the line.”