Prepare for Increasing Catastrophic Risks After a Historic Year of Natural Disasters

MAY 7, 2024

There were 28 billion-dollar natural disasters in the U.S. in 2023, surpassing the previous record in 2020 and resulting in losses of at least $92.9 billion.¹ So far in 2024, we’ve already experienced several natural disasters with losses exceeding $1 billion each, and climate experts warn that we should view this escalated risk as the new normal.

According to a recent study by Rebuild by Design, all organizations face a high probability of being impacted by an extreme event, regardless of where they operate. The study shows that 90% of all counties in the U.S. experienced a weather disaster in the last decade. With today’s evolving weather risks, hail disasters are no longer limited to states considered “hail alley,” and tornado activity has been expanding eastward for several years. Recently, catastrophic flood events devastated inland areas of Kentucky, Missouri, southwest Virginia, and even the Las Vegas Strip — locations not usually susceptible to large-scale flood risk. Typical risk “seasons” are also extending. Wildfires have become a yearlong concern due to warming trends, drought patterns, and earlier snow melts in the west, while tropical depressions, tropical storms, and hurricanes are forming outside of the typical hurricane season of June 1 to November 30.

Three Actions to Take Now

Organizations should conduct regular risk assessments to identify potential vulnerabilities, make risk improvements where possible, and implement pre-emergency or business continuity plans for natural disasters.

1. Catastrophe risk modeling (CAT modeling): Insurance companies use tools to examine an insured’s exposures to natural disasters, develop loss estimates, and determine capacity and pricing. You can leverage those same modeling tools for major cost-driving events, such as hurricanes, floods, wildfires, severe weather, and earthquakes. CAT modeling takes a closer look and identifies which locations may be driving most of the estimated loss.
   
   It's crucial to gather specific information on those properties, including building design and resiliency measures, and run it through modeling again. This second look often generates a lower loss estimate, especially when you have undertaken proactive risk mitigation, such as installing storm shutters and other weatherproofing. Using this data, an effective insurance broker can negotiate with carriers, which can result in more favorable insurance pricing, terms and conditions.
   
   For example, USI reviewed the property program for a new client who had purchased $100 million in earthquake coverage. From a catastrophe risk analysis, USI identified five locations driving 80% of the loss estimate. USI ran the analysis again, inputting additional information related to the buildings’ earthquake designs, and was able to lower the loss estimate for these properties. The client was able to reduce the limit by $50 million, resulting in a $50,000 savings on their premium.
   
   
2. Targeted risk improvements: Depending on the natural catastrophe exposures present, you can minimize operational downtime and damage to your buildings by installing materials or systems designed to protect against these events. For instance, using hail-resistant roof coverings or decking could prevent a roof replacement following a hailstorm. Installing FEMA-certified flood panels can prevent water from entering buildings through openings and protect sensitive equipment like transformers or HVAC equipment. Having a regular preventive maintenance plan to clear brush away from buildings can reduce wildfire risk. Installing impact-resistant windows can reduce the likelihood of significant water damage often caused by hurricanes.
   
   It's crucial to use high-quality materials, especially those resistant to natural disasters, when retrofitting or building new structures. Utilizing robust, fire-resistant materials as opposed to typical framing materials can significantly reduce the vulnerability of a structure to wildfire. Such materials can ensure the structure’s longevity and reduce the need for frequent — and costly  — repairs or rebuilds.
   
   By making small investments in building resiliency, you can significantly minimize damage and prevent elongated periods of downtime after an extreme weather event. Some insurance carriers even offer a premium credit when these improvements are made to buildings exposed to potential catastrophic events. By using targeted risk control based on your natural catastrophe exposures, you can prevent and reduce loss, improve terms, and lower premiums.
   
   
3. Emergency response planning: By evaluating the potential risks and impacts of different types of catastrophes, you can develop a plan tailored to your particular needs. Specifically, an effective pre- and post-emergency response plan involves identifying the who, what, when, and how for each type of catastrophic event. Who specifically is responsible for what duty? When is the action required? How is that task completed? This process involves setting up a claims service team and a designated account adjuster who is familiar with your operations; partnering with an emergency response contractor (ERC) before a loss to receive a priority response following an event; arranging for critical operational components like generators, HVAC, refrigeration, or water; and developing an emergency response team and action plan.
   
   The plan should be specific to your operations and exposures, and should designate the specific individuals to carry out tasks before, during, and after a catastrophic event. The plans should be tested in live scenario training to see where improvements should be made or to account for “what-if” scenarios along the way. By developing, formalizing, and implementing pre- and post-emergency procedures, you can protect your assets and your people, minimize downtime, and become a more desirable risk to insurers, which can lower premiums and improve terms and conditions.