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During 2004 and 2005, eight Category 3 or higher hurricanes affected more than 60 Simon Property Group Inc.-owned assets with a combined value of more than $4 billion.
Despite the scope of its exposure to those storms, Simon Property reported less than $10 million in total insured property damage and business interruption losses for the hurricane seasons that included Katrina, Wilma, Rita, Charley, Frances, Jeanne and Ivan — seven of the 10 costliest storms in U.S. history.
Michael D. Horvath, Simon Property's senior vice president of risk management, said the reason Simon Property fared so well through those storms and many since is the added precautions with which the company's shopping malls and other buildings were constructed.
“I remember saying to an engineer from (Global Risk Consultants Corp.) after the 2004 and 2005 hurricane seasons that we'd been fortunate in that the storms hadn't done a lot of damage to our properties, and he said, "Mike, you were much more than fortunate. You were well-engineered,'” Mr. Horvath said.
Specifically, Mr. Horvath has insisted that all of the company's capital development projects be built to construction standards set by FM Global — standards well above and beyond most local building codes.
“It has a huge value for the company when the big storms come through in terms of minimizing direct losses,” Mr. Horvath said.
That value was highlighted by the company's more recent experience with Superstorm Sandy. Sixty-eight of Simon Property's physical assets were located within Sandy's strike path. However, Mr. Horvath estimates the company incurred less than $600,000 in gross property and time-element losses as a result of last year's storm. Given the $500,000 deductible on its primary property program, Mr. Horvath said it is likely that the company will recover no more than $200,000 in losses as a result of Sandy.
In addition to saving the company millions in potential property losses, Mr. Horvath's insistence on higher construction standards for Simon Property's capital projects also has paid dividends on the company's insurance renewals. During the 2012 renewal season, Mr. Horvath and his team met with underwriters from more than 30 insurers to illustrate a fundamental deficiency in the industry's use of Risk Management Solutions' Version 11 hurricane model to determine Simon Property's projected windstorm losses in a given year.
In short, the model did not give the company any additional credit for designing and constructing its buildings according to the more windstorm-resistant standards, he said.
“We showed them a post-hurricane picture of a roof that had been designed to FM standards that was abutted by a roof that was designed to local code,” Mr. Horvath said. “The local code roof was uplifted and partially rolled over, and the damage to the interior space was significant. The FM roof survived the storm intact, with barely a leak.”
The demonstration was successful, translating to an estimated $5.5 million in premium savings for Simon Property on its insurance coverage.
Safety management is not a phrase one readily associates with exploring new frontiers.