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Disaster plans crucial to weathering crisis

Risk managers, others offer catastrophe management lessons learned the hard way

Disaster plans crucial to weathering crisis

It's hurricane season in the United States, and so far the tempests have been kind. But, as the extraordinary array of natural catastrophes in recent years has indicated, Mother Nature is merely providing a reprieve.

Learning from past disasters helped the Miami-Dade County Public Schools cope well with future hurricanes, according to the district's risk and benefits officer, Scott Clark. “When Hurricane Andrew struck in August 1992, we suffered a $95 million loss from the ground up,” said Mr. Clark, who also is the president of the New York-based Risk & Insurance Management Society Inc. “What we learned there we have carried forward, and have not endured any really significant property losses since.”

Under Mr. Clark's watch are some 360 schools, comprising more than 1,500 buildings that collectively represent $8.2 billion in property risk. The key lesson Mr. Clark learned was to remove any and all equipment from the roofs of schools and other facilities. Heating, ventilation and air conditioning units, among other machinery, had broken free of their moorings during Hurricane Andrew and punctured the roofs. Once the envelope of a building is opened, the real damage begins, Mr. Clark said.

“We've removed all the stuff off the roofs and now have it stored on ground in cement bunkers,” he said. “In schools that have flat roofs, we've built an 18-inch high parapet along the perimeter at top to reduce the possibility of debris hitting the roof. This way the parapet, and not the roof, suffers damage.”

Also learning from past losses is Andy Salipante, loss-prevention manager at Chesterfield Services Inc., a third-party administrator in Uniontown, Ohio, that has been representing the Salvation Army since 1947. “Our losses from Hurricane Katrina guided the funding of a hurricane-impact survey of all major buildings in excess of $10 million each,” Mr. Salipante said. “This, in turn, allowed us to do things we should have done in the past, such as removing or tying down equipment on roofs, replacing the flashing, installing 140-mph (wind-resistant) windows, and creating an emergency response plan that directs people to tie down interior furnishings. We're much better prepared when the next one hits.”

Messrs. Clark and Salipante are two of several risk managers who learned hard lessons from previous natural disasters. In interviews with other risk managers and loss prevention experts at risk consultancies, law firms, insurance brokers and insurers, the best of all best practices for minimizing natural catastrophe and related human losses is this: Assess their impact well beforehand.

“Constructing scenarios of what can happen is essential, yet many organizations fail to do so,” said Howard Kunreuther, professor of decision sciences and co-director of the Wharton Risk Management and Decision Processes Center at The Wharton School, University of Pennsylvania in Philadelphia.

Others agree. “All companies in disaster-prone areas need to undertake failure mode and effects analyses, where a bunch of people in the organization get together and imagine worst-case scenarios, and how the business will sustain itself during such events,” said Robert Wolf, staff partner-risk management at the Society of Actuaries in Schaumburg, Ill. “The goal is to quantify potential costs to prioritize mitigation strategies.”

“It's all about preparation,” said Gerry Alonso, senior vp-claims at Providence, R.I.-based property insurer Factory Mutual Insurance Co., which does business as FM Global. “You want to protect buildings from potential damage, from boarding up windows to securing all equipment, and have pre-existing arrangements with contractors so your buildings are first in line to be repaired.”

A key step in preparing for a natural disaster is grasping when it will strike. Quality Distribution Inc., a Tampa, Fla.-based trucking company, maintains close communications with hurricane trackers. “We have three separate people here who stay in close touch with the National Hurricane Center, which also is located in Tampa,” said Mike McDonald, vp of enterprise risk management. “These people also follow storms on our computers, and they reach out to employees when (storms) threaten via a 1-800 informational hot line, so everyone—and especially our drivers—knows what's coming.”

Business disruptions caused by a disaster are not confined to a company's own facilities, due to the complex, global links in many manufacturers' supply chains. One link fails and the entire chain can unravel.

“The last 18 months have shown that disasters occurring elsewhere can still affect U.S. companies direly,” said Mr. Alonso. “You need to know the laws, culture, language and customs of the countries you draw supplies from, and have back-up plans in place to mitigate the damage quickly.”

Gary Lynch, global leader of risk intelligence and supply chain strategies at insurance broker Marsh Inc. in New York, advises organizations to prepare a supply chain resiliency plan “that is transparent throughout the various links,” he said. “You need visibility into each link to understand the economic impact when something breaks. Then you can take the appropriate response.”

As recent events have shown, a single natural disaster can set in motion other catastrophes. “Four of the five costliest earthquakes occurred in the last 13 months, and the one in Japan unleashed a tsunami and other perils, creating a domino effect,” said Mr. Wolf. “Companies with operations or supply partners in affected areas are not immune to the consequences, even though these events may be thousands of miles away.”

As Mr. Kunreuther states in “At War with the Weather: Managing Large-Scale Risks in a New Era of Catastrophes,” a recently published book he co-authored with Erwann O. Michel-Kerjan, the tragedy in Japan “is viewed by experts as an almost impossible combination of successive catastrophes....The series of disasters...has spurred thinking among business leaders and policy analysts about what steps need to be taken to prevent catastrophes that could have global impacts but are currently not on key decision-makers' radar screens.”

While planning is the first step in gauging possible loss scenarios, acting on this information is next.

“About 85% of property damage in a hurricane comes from wind-driven water, so the idea is to protect equipment from water damage by ensuring that all building openings, like windows, are hurricane wind-resistant, and having the roof inspected annually,” said Arnie Goldin, property specialist in insurer Chubb Group of Insurance Cos.' Tampa, Fla., office. “You want to make sure the cladding—the protective shield of a building—is as puncture-proof as possible.”

Mr. Goldin further recommends developing emergency-preparedness plans that put certain employees in charge of particular responsibilities, such as shutting off utilities, covering equipment with plastic sheathing, making contact with contractors, and distributing flash drives to colleagues to capture data in case the communications and data network fails.

Labor Finders International Inc., a West Palm Beach, Fla.-based temporary staffing firm, stores all its data at a remote hot site far from company headquarters, despite operating in a building engineered to withstand a 150-mph windstorm. “We're highly centralized here, so we also have a backup electrical system to keep us functioning if power is lost,” said Wayne Salen, director of risk management.

One last piece of advice comes from law firm Reed Smith L.L.P.: Make sure the insurance to transfer disaster risks has air-tight coverage terms, conditions and financial limits.

“In the wake of Katrina, many companies learned to their chagrin that the policy language was inferior to address the losses at hand,” said Gary Thompson, a partner in the firm's Washington-based insurance recovery group. “The best way to ensure this doesn't occur to you is to have a legal expert review the insurance policy. You need to think through to the end game when you're well in front of it. “

Companies must remain vigilant.

As Mr. Alonso puts it, “The No. 1 killer of businesses is complacency. A major hurricane hasn't hit the Northeast in more than 20 years, but that doesn't mean one won't strike tomorrow.”