INSIGHTS August 2015 10 Years After : Lessons in Preparedness, Response, and Resilience INSIGHTS August 2015

CONTENTS

2 Katrina Inflicts Large-Scale Destruction

3 Risk Management and Insurance After Katrina

8 Insurance Policy and Claims Issues

11 Risk Engineering

12 Business Continuity and Crisis Management

15 Conclusion INSIGHTS August 2015

INTRODUCTION

The last week of August 2015 marks the 10th anniversary of Hurricane Katrina, the costliest storm ever to make US landfall. The fallout from Katrina led to significant changes within the insurance and risk management industry. This paper and related Marsh web content look at what Katrina meant at the time and how its lessons can be used to protect your operations, your bottom line, your people, and your future. And while Katrina’s anniversary lays a groundwork for discussion, similar issues are raised and risk management approaches re-evaluated after nearly every major catastrophe, from Hurricane Andrew in 1992 to Katrina in 2005 to Superstorm Sandy in 2012.

Changes over the past 10 years in property insurance, claims, analytics, risk engineering, and crisis management were all influenced by Hurricanes Katrina and Ike, Superstorm Sandy, and other events, in the US and globally. The lessons learned are cumulative, a reminder that the risk and insurance industry is constantly evolving as new challenges emerge. Individual insureds can hopefully use such lessons as they prepare to respond to catastrophes and increase their organization’s resilience.

10 Years After Hurricane Katrina: Lessons in Preparedness, Response, and Resilience 1 INSIGHTS August 2015

KATRINA INFLICTS LARGE-SCALE “The scale of DESTRUCTION destruction just In the early morning hours of August 28, 2005, the hadn’t been National Hurricane Center issued a bulletin with an contemplated. ominous warning: KATRINA…NOW A POTENTIALLY CATASTROPHIC CATEGORY FIVE HURRICANE… People were hit HEADED FOR THE NORTHERN GULF COAST… both professionally

What followed was a storm that A combination of storm surge and and personally.” wreaked havoc on an astonishing weak levee construction led to scale, with long-lasting effects for flooding that inundated the city. STEVE PETTUS the Gulf region. As events played Managing Partner of Dickie out over more than a week on live Storm surge was a particular Brennan and Company television, Americans were shocked peril for low-lying areas, and New by the images of fellow citizens Orleans’ average elevation of six feet trapped for days on rooftops, and below sea level made it particularly sweltering in seemingly lawless vulnerable. During Katrina, the shelters. The response seemed city’s network of levees experienced haphazard, and many wondered if three major breaches, flooding more New Orleans would ever rebuild, than 75% of the city, according to the never mind be the same. US Geological Survey. Notably, the levees on the 17th Street and London Katrina’s arrival in the Gulf activated Avenue canals failed below their evacuation plans in Louisiana, designed thresholds. The US Army Mississippi, and Alabama, and Corps of Engineers acknowledged initiated an exodus of more than the engineering failures in a later 1.5 million people. Many remained report that described how New in harm’s way as Katrina knocked Orleans’ flood defenses at the time out power for about 2.5 million of Katrina had been constructed in people, and took out more than a disjointed fashion and using poor 3 million phone lines. quality data.

Katrina’s toll of human anguish After Katrina, nearly half a and physical destruction was million residents and businesses unprecedented in the US, and in New Orleans filed damage remains the single largest insured claims against the Corps of loss event in world history, Engineers in US District Court. causing more than $41 billion in The nearly eight years of litigation insured property damage, with ended in 2013 when the federal total economic damage topping judge overseeing it ruled that the $100 billion. New Orleans was the Corps of Engineers had immunity largest city in the storm’s path, despite flawed engineering in and was where the majority of the constructing the levees. estimated 1,833 deaths occurred.

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THE IMPORTANCE OF RISK MANAGEMENT AND HIGH-QUALITY DATA In the 10 years since Hurricane INSURANCE AFTER KATRINA Katrina, CAT models have become key components of property insurance underwriting, and play Katrina’s size caused a lot of people on the Gulf Coast to do an important role in obtaining the something they rarely did for storms: evacuate. Steve Pettus most effective coverage. And to run effectively, the models depend on is a managing partner of Dickie Brennan and Company, high-quality data. a revered quartet of New Orleans restaurants. He recalled CAT models are sensitive to uncertainty driven by poor or watching with a partner — insurance binder in hand — as missing data, which can increase the scenes of destruction were broadcast on television. both the base loss projection and the uncertainty associated with Beyond the immediate concern for people’s safety came the modeled loss events. This can worries about the business. “His question was: ‘Are we result in higher loss estimates, which can increase premium and reduce covered? Are we covered?’” Pettus said. “And I said, ‘Well, capacity for an individual risk. I think we are. I just hope everyone else agrees we are.’” If you can improve the data quality in your CAT models, you may be able to produce better quantification Pettus and his partner, of course, risk with catastrophe exposure is and qualification of the risk being were not alone with their questions. run through one or more models to considered by underwriters, which Katrina’s nature as a loss event consider potential loss scenarios. can result in significant premium comprising both wind and water For an insured, understanding CAT savings. A thorough review of CAT damage exposed ambiguities in exposures is a key to negotiating data quality can: insurance policies, many of which led with insurers. to claim disputes and litigation. And while computer catastrophe models Before Katrina, the modeling of Reduce loss estimates were in use at the time, they proved catastrophe exposures was typically due to inaccuracies in to be greatly out of line with actual done on aggregate portfolios for the original data. losses, putting pressure on insurers. reinsurance purchasing. Modeling Katrina thus became a turning point was a “nice to have” item, and was Increase model for the insurance industry on many not considered from a per-risk accuracy. fronts, including: CAT modeling, standpoint. Since Katrina, CAT Decrease model property policy wording, claims modeling has generally been used uncertainty. handling, and crisis management. on a per-risk basis. Better inform Katrina led to a sharp rise in the underwriters. CAT MODELING focus on data quality that has since become a driver of risk modeling. Katrina brought about a major Initial loss estimates from Katrina It appears that the steady drumbeat change in thinking about missed the mark by a longshot in from insurers and brokers about catastrophe modeling, while at the part because the data loaded into the importance of data quality is same time changes in technology the models was inadequate, having an impact. In a survey of and analytics allowed for advances incomplete, inaccurate, or miscoded. risk professionals during a recent in methodologies. CAT modeling Part of the reason for the mismatch Marsh webcast, 77% of respondents and analytics, once the domain of in modeled and unmodeled said they were confident their reinsurance buyers, have since been insurance losses in Katrina was that company provides high-quality widely adopted in the insurance the CAT models at the time had data to underwriters about their industry. Today, virtually every overestimated the impact of pure property exposures.

10 Years After Hurricane Katrina: Lessons in Preparedness, Response, and Resilience 3 INSIGHTS August 2015

FIGURE 1 Map of Hurricane Katrina’s Path Source: National Oceanic and Atmospheric Administration (NOAA)

Hurricane Katrina (2005)

Tropical Depression Tropical Storm Category 1 Hurricane Category 2 Hurricane Category 3 Hurricane Category 4 Hurricane Category 5 Hurricane

Hurricane ("Superstorm") Sandy (2012)

Hurricane Ike (2008)

8/29 8/28 8/28 8/27 8/26 8/26 8/24 00:00 12:00 00:00 12:00 12:00 00:00 22:00

8/27 00:00

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Hurricane Katrina Timeline

August Tropical depression identified. 11

Hurricane Katrina (2005) 11-24 Katrina strengthened as it moved westward. Tropical Depression Tropical Storm Category 1 Hurricane Tropical Storm Katrina named over the central Bahamas 24 Category 2 Hurricane

Category 3 Hurricane Category 1 hurricane status attained before Category 4 Hurricane 25 making landfall on Florida’s southeastern coast Category 5 Hurricane with sustained winds of 80 mph.

Katrina’s wind field doubled in size. 27 Escalated to Category 5; at peak intensity Katrina Hurricane ("Superstorm") packed hurricane-force winds extending 90 miles Sandy (2012) 28 from its center, and tropical storm-force winds extending 200 miles with maximum sustained winds measured at 172 mph. Katrina’s eye came ashore near Buras, Louisiana Hurricane Ike (2008) as a Category 4 hurricane. 29

The loss record from Hurricane Katrina Sources: NOAA, Federal Emergency Management Agency

8/29 8/28 8/28 8/27 8/26 8/26 8/24 00:00 12:00 00:00 12:00 12:00 00:00 22:00

8/27 00:00 Lives lost: Property damage: Economic damage: New Orleans:

1,833 $41 billion* $108 billion 75% of city flooded

* Excluding losses under the National Flood Insurance Program (NFIP) and insured offshore energy assets.

10 Years After Hurricane Katrina: Lessons in Preparedness, Response, and Resilience 5 INSIGHTS August 2015

wind damage and underestimated than $13 billion in insured losses as catastrophes — Hurricane Ike in the damage from flooding and storm far north as Illinois, Indiana, Ohio, 2008, earthquakes in New Zealand surge. As a result, initial damage and Pennsylvania. For insurers, Ike and Japan in 2011, Sandy in 2012 — estimates identified only about one- demonstrated that windstorms can in part because no event since has fourth of the total damage. have a wide, severe impact after been as severe in terms of insured heading inland. losses. Capacity for catastrophe- Today, insurers make sure to have exposed risks shrank temporarily multiple perspectives on a particular For policyholders, Ike reinforced the following Katrina, until new capital loss potential, and insureds provide idea that hurricane preparedness entered the market. Since then, for more detailed information about should not be limited to coastal reasons largely unrelated to Katrina their properties — from location by locations. Engineering surveys done or other disasters, capital markets exact latitude and longitude to the after Ike showed that for properties have injected a large amount of number of stories of each building that complied with the latest financing into the insurance and to type of construction. Unique building codes, damage was minimal. reinsurance sectors, generally construction characteristics, like However, for other properties, the keeping capacity and competition flood defense systems and first- damage was greater than expected. high and prices generally stable floor building elevations, are now Engineering analyses showed that to declining. captured to more accurately depict roofs failed more catastrophically and differentiate specialized risks. due to the impacts of climate-driven early deterioration, and in some FINANCING Katrina also led CAT modeling cases poor construction quality. Sophisticated financial modeling companies to revise their models developed since Katrina has and update their assumptions. While From a modeling perspective, provided a clearer view of investors’ the models in use pre-Katrina had insurers were better prepared for potential returns, which historically looked at probable maximum losses the losses from Superstorm Sandy in were high following major loss (PMLs) and average annual losses, 2012 because they had stress-tested events. This has led to the formation it became apparent that AALs were their underwriting portfolios. But of new insurance and reinsurance understated. For example, some even Sandy led to further iterations entities to take advantage of market insurers that experienced Katrina in model development. For example, demand for capacity. losses and were forced to raise from a business interruption capital reported that their actual standpoint, many experts were Katrina also fostered a greater catastrophe loss from the storm was surprised at the length of time sophistication in financial modeling more than 10 times the amount that that pooled water remained in of insured risks. This took two forms: the companies had modeled. affected areas. one in terms of creditworthiness and the other in attracting new MODELING CHANGES PROPERTY INSURANCE forms of capital. CONTINUE TO FOLLOW Rating agencies: After Katrina, MAJOR EVENTS Typical for windstorms, most credit rating agencies began to look insured damage from Katrina was at how insurers and reinsurers Changes in windstorm modeling to property: Of its 1.7 million claims, used modeling in their capital also occurred after Hurricane Ike, 1.2 million (70%) were for property management strategies. After which struck Texas and Louisiana in losses, according to the Insurance Katrina, companies that failed September 2008. Ike was unusual in Information Institute. Katrina’s to demonstrate strong capital the longevity of its hurricane-force severity led to a short-lived spike management for catastrophe risks winds, which persisted inland far in insurance rates — nearly 20% faced downgrades of their credit longer than was then considered on average, across all industries and financial strength ratings. The possible for a , (See Figure 2). rating agencies’ emphasis on capital according to the National Oceanic management sharpened insurers’ and Atmospheric Administration Subsequent increases in property focus on accurate risk modeling. (NOAA). The storm cut a swath into rates in recent years were not the upper Midwest, causing more as sharp following other natural

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FIGURE 2 Average Property Rate Changes – All Industries, 10+ Year History Source: Marsh Global Analytics

Hurricane Hurricane New Zealand Earthquake / Hurricane Katrina Ike Japanese Earthquake and Tsunami Sandy 20%

15%

10%

5%

0%

-5%

-10%

-15% Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Jul-Sep 2008 Jul-Dec 2005 Jul-Dec 2006 Jul-Dec 2007 Jul-Dec 2009 Jan-Jun 2005 Jan-Jun 2006 Jan-Jun 2007 Jan-Jun 2008 Jan-Jun 2009 Oct-Dec 2008

More so than after any other natural disaster of the past 10 years, Hurricane Katrina was followed by a sharp spike in property insurance pricing. The large amount of alternative capital that has entered the market in recent years has helped to keep prices generally stable.

Non-traditional capital: Katrina also • Insurance-linked securities: has come close to the insured opened the door to non-traditional These vehicles include CAT losses from Katrina; helping forms of capital, including: bonds, which were seldom used CAT-exposed risks generate before Katrina but are now widely significant value for investors. • Sidecars: These special- issued. CAT bonds offer investors purpose vehicles provide fully potentially higher returns with That trend continues today, and collateralized reinsurance. defined indemnity triggers, global reinsurance capital stands Sidecars enable investors to making them an attractive at more than $400 billion, commit capital to specific sets alternative investment. according to Guy Carpenter, a of risks for shorter durations, Marsh & McLennan Company. with a predefined exit plan. • Alternative capital: As Following Katrina, many insurers institutional investors such and reinsurers set up sidecars as pension funds and private to provide additional sources of equity firms sought higher, underwriting capacity. Those uncorrelated returns, alternative sidecars have attracted billions of capital entered the insurance dollars in capital from hedge funds and reinsurance industry. Over and private equity investors. the past 10 years, no catastrophe

10 Years After Hurricane Katrina: Lessons in Preparedness, Response, and Resilience 7 INSIGHTS August 2015

KATRINA WIDE-AREA DAMAGE CASE STILL INSURANCE POLICY AND RESONATES CLAIMS ISSUES The case of Orient-Express Hotels Ltd (OEH) v Assicurazioni Generali SpA (2010) continues to cause disquiet After Katrina, many businesses were surprised to learn across the insurance industry. It is that, despite having windstorm coverage, they weren’t the ongoing element of uncertainty as to how insurers will view a loss covered for storm surge, as that was likely a flood peril given the legal precedent that keeps on their policy — and they had not purchased coverage the issue in debate. (see Figure 3). And yet, storm surge was responsible for The Windsor Court Hotel in New Orleans, owned by British firm most of the damage in New Orleans and surrounding OEH, was damaged by hurricanes areas. Many disputes over the exact cause of damage Rita and Katrina in 2005 and forced to close. New Orleans itself was wound up in court, and many policyholders won. But a subject to evacuation orders. OEH victory in court will not make up for the time and energy made a claim to insurers for the property damage and the business diverted from recovery. interruption (BI) losses.

The insurers stated that the BI Katrina claims disputes led insurers Underwriters since Katrina have loss must be “in consequence of to tighten their policy wordings, generally tightened their policy damage,” however, and claimed particularly around the flood peril. wordings on business interruption OEH suffered loss “in consequence The debate about flood coverage was and contingent business of the event.” Under its policy, which still occurring when Superstorm interruption. Many limit coverage included a “trends” clause (similar Sandy inundated Lower Manhattan to a single tier, such as a direct to an “experience of the business” in 2012. supplier or direct customer of the clause in the US), OEH could only policyholder. Some policyholders recover for any BI losses it would Nearly every major disaster serves were surprised to learn after have sustained “but for” the physical up a reminder of the importance Superstorm Sandy that their policies damage to the hotel. of reviewing a property policy and excluded flood damage if a service understanding the scope of coverage supplier was affected by that peril. The English High Court of Justice before a loss happens. For example, Flooding that caused power outages, ruled that OEH should be treated if a company has $100 million therefore, tended not to be covered. as though it were an “undamaged of flood coverage, what is the hotel in an otherwise damaged policy definition of “flood?” Is city,” and so because OEH would $100 million enough? have received fewer guests due to conditions in the city, OEH did Since Katrina and Sandy, the use of not receive any insurance recovery named-storm or windstorms with under the core coverage (some storm-surge clauses have become recovery was achieved under a more common, and coverage limits prevention of access clause). and how deductibles are applied have changed dramatically. There Some experts considered the is more clarity now on risk transfer outcome for OEH harsh, and the than before Katrina. decision has led to questions about the BI recovery an insured can expect in the event of a natural catastrophe event.

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Service interruption: Katrina FIGURE 3 Storm Surge Source: NOAA involved an extensive amount of service interruption, raising the question of what is the scope of coverage for such losses. A service interruption must be caused by a peril insured against or a peril not otherwise excluded and generally 17 ft deals with the service supplier, storm tide such as a utility. In the event of a service interruption loss, some 15 ft surge 2 ft normal insurers are likely to argue that if high tide there is no trigger — for example, property damage — then there Main sea level is not an accidental event. They could take a hard line and say a voluntary interruption is not a covered service interruption. And The National Oceanic and Atmospheric Administration defines storm surge as “an abnormal rise of as in any coverage, it’s important water generated by a storm, over and above the predicted astronomical tide.” Storm tide, on the other to understand the specifics of an hand, involves the amount the water level rises from the combined effect of storm surge and the normal (astronomical) tide. Much of the damage from Hurricane Katrina was caused by storm surge, a fact that individual policy. resulted in many thousands of insurance disputes because insureds were often not covered for storm surge. Understanding such coverage issues before a disaster can be critical for effective, rapid recovery. Civil authority, ingress/egress: According to NOAA, the storm surge from Katrina measured 25 to 28 feet. These are two extensions of coverage that come into play in almost every instance in which a government entity shuts down an area, and COMMON CLAIM ISSUES and the continuing expenses that prohibits access to a facility, whether the property generates when it’s due to flooding, windstorm, or some The ultimate test of an insurance not operational. For example, a other peril: policy is how it responds to a claim. continuing expense could be taxes Following are some of the potential on a property. A non-continuing 1. Civil and military authority, claims issues that were raised by expense could be heat, light, and which has led to some debate Katrina and other disasters. It’s power. Another issue that may cause over the years. For example, not an all-inclusive list, and each misunderstanding is the indemnity following both example has been the subject of period. BI is a good example of why and Superstorm Sandy, there extensive debate in insurance and it is important to have a thorough were discussions on the news legal circles: understanding of a policy before a by politicians telling people to loss occurs (see sidebar page 10). stay home. So the debate became: Business interruption: Business Was that considered a civil interruption is one of the most Deductibles: Another claim military authority claim under misunderstood coverages on an following most large losses involves a policy? “all-risk” property form, and one deductible applications, including that often brings difficulty in by occurrence and by location, 2. Ingress/egress, which involves settling a claim. Following Katrina and for separate deductibles for access to or the ability to leave and other events, many of the property damage and time element. a property. This typically arises difficulties arose around what is not Insureds need to know if there is a post-flood when an area is covered in a business interruption definition of an occurrence in the surrounded by floodwaters, and policy. It’s important to note that policy and whether the deductible the roads are not serviceable. BI policies do not replace revenues: is per location and is applicable to they are designed to replace the all buildings. profits that an insured has lost

10 Years After Hurricane Katrina: Lessons in Preparedness, Response, and Resilience 9 INSIGHTS August 2015

DRILL YOUR INSURANCE POLICY Wording, again, is very important. funding protocols, and partial For example, has the access to or payments. Planning helps ensure One of the recurring lessons learned egress from your property been that the empowered personnel from Hurricane Katrina and other “prevented” or “impaired?” It is are involved, including adjusters, disasters is the importance of critical to understand the exact forensic accountants, building understanding what your insurance terms and definitions. consultants, risk managers, financial policy says and how it will respond executives, and communications. to a claim. Named windstorm or flood: Clarity is critical in any definition. Wide area impact: One of the most And yet, in the past two years, fewer Following Katrina — and again difficult claims issues following than 25% of companies have tested with Sandy — there were many a major disaster involves the how their property policies would substantial disputes that involved extensive geographic area that may respond to a loss suffered during a the definition of windstorm versus be affected. Businesses that may major catastrophe, according to a flood. One of the things that an not have suffered any significant survey conducted during a recent insured should look at is whether damage themselves can still see Marsh webcast. the named windstorm definition their revenue plummet if a wide Nearly 150 risk professionals includes “storm surge,” which is swath around them is damaged, responded to the statement: “My basically wind-driven water. thus driving away their customer organization has run a drill or Does the flood definition exclude base. Such claims can be extremely exercise in order to understand how storm surge? complicated and discussing potential our property insurance policy would loss scenarios and appropriate policy respond to a major catastrophe.” Loss management plans: At its wordings with insurers and brokers core, loss management planning is ahead of time is advised. about keeping an insured funded. 24.8% When recovering from a major said they had run such a drill catastrophe, all parties need to CLAIMS FUNCTION within the last two years. work as allies. The insurers need to GAINS VISIBILITY understand the insured’s financial and operational goals, and vice versa. Another notable development in 11% said they had run a drill in the When looking at loss management the claims arena following Katrina last five years. plans and communication protocols, is that insurers’ claims departments there should be agreement generally have become more between parties as to the roles, visible. Commercial policyholders 36.6% responsibilities, and deliverables, are now typically encouraged said they had never conducted as well as who has the authority to to develop closer relationships such a drill. make decisions. with claims teams. This is part of catastrophe loss management During Katrina, Sandy, and other and is thus becoming more of a 27.6% disasters, when decisions had to be topic of discussion pre-loss, along said they were not sure if such made in areas such as reinstatement, with protocols on funding claims. a drill had ever been conducted. replacement, and mitigation, The end result has been a general A drill of this type would involve there often weren’t enough people improvement in insurers’ ability running through a scenario with your involved at a mid-management level to fund payments and to make insurer and other key stakeholders to make those decisions. In many partial payments following to understand what coverage would cases that slowed down the process, catastrophe losses. be triggered by a loss, the various and at times led to confrontation definitions that would come into play, around such issues as reconstruction what information would need to be alternatives, use of alternative collected before and after the event, suppliers, time element exposures, and more. The information gathered during such a drill can lead to improvements that may be critical to recovering promptly from a disaster.

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RISK ENGINEERING “If you don’t do

After Katrina forced thousands of businesses to shut things differently down and New Orleans’ failed flood protections came now than you did under scrutiny, risk engineering received a renewed before Katrina, focus. Property risk engineering looks at the design and construction of physical assets for the purpose of then you didn’t better protecting those properties and the people who go through it.” occupy them. STEVE PETTUS Katrina, Sandy, and other disasters Manufacturers and other businesses Managing Partner of Dickie challenge even the best-laid plans started paying closer attention Brennan and Company and prompt organizations to re- to their proximity to waterways evaluate them for gaps and ways to following Katrina. However, a improve on them. manufacturer must consider a number of items before simply For example, after Sandy flooded moving an existing or planned Lower Manhattan, many companies facility: What is the cost to move realized the importance of moving operations? Could an investment equipment, systems, and critical in risk reduction provide enough assets from sub-basements. protection to stay at a location? Likewise, Katrina increased How would higher labor, material, awareness of the risks associated and transportation costs of a move with their properties’ locations. factor in? That heightened awareness — particularly to flooding — prompted And while engineering involves many organizations to examine their physical structures, it ultimately protection for physical assets and helps protect the people that work their contingency plans. in them. Companies, particularly those with significant property In some cases, companies risk, should consider engaging made engineering changes that risk engineering and related experts strengthened structures to to assess, quantify, and prioritize withstand certain risks; more their property-related exposures. generally, site selection is more Such assessments can help show important now when choosing the return on investment for locations for operations. various mitigation strategies, thus maximizing resource and For example, when a client was capital allocations. planning a new facility, Marsh suggested that it build just two feet higher than originally drawn up. That moved the entire facility out of a flood zone, making a significant, positive difference in the client’s risk profile for the location.

10 Years After Hurricane Katrina: Lessons in Preparedness, Response, and Resilience 11 INSIGHTS August 2015

BUSINESS CONTINUITY AND CRISIS MANAGEMENT

There were many changes in both government and private industry planning for disasters following Katrina. For example, the National Response Framework now defines how all federal agencies will respond to emergencies. That plan was updated in March 2006 based on the collective experiences in responding to Hurricanes Katrina, Wilma, and Rita in 2005. The primary improvements were focused on communication/ coordination among government agencies.

Before those major disasters, procedures, putting in place and Among the crisis management and most businesses had developed testing emergency-response plans, business continuity planning steps risk-specific plans — for example, assessing the resilience of their to take ahead of time to prepare one for hurricane, one for flooding, supply chain, instituting data backup for an event and address potential or one for loss of power. Yet most and recovery protocols, evaluating coverage issues: organizations had not “cross- levels of insurance coverage, and walked” those plans or their creating post-loss claims accounting • Identify locations — your own, supporting teams to see how they and filing systems. your customers, and your would work together. Eventually, suppliers ­— that might be exposed the need to do so led to more to direct or indirect damage or focus on all-hazards planning and CREATING YOUR PLAN affected by power outages/surges cross-company collaboration. The and other service interruptions. emphasis is not so much about Plans should be flexible and scalable, responding to specific risks, but on able to be adjusted according to • Identify and/or update lists of making sure there is a broad, holistic the facts of a particular event. An service providers and remediation response structure in place, with important starting point for a crisis companies that can support your corporate level crisis management management plan is to think about recovery efforts efforts — for plans, emergency response plans, a worst case and how business example roofing, electrical, and business continuity plans, and continuity would be ensured. restoration contractors. Finding humanitarian support plans. Using probable maximum loss and the help needed to rebuild was maximum foreseeable loss data — one of the most difficult things for It’s not uncommon for companies that is, how bad could the impact be many businesses in Katrina’s wake. to update these plans after a to business — will result in a better devastating storm — regardless of response plan. • Determine the extent of your whether they sustained losses or how reliance on supplies and suppliers, severe the impacts. For example, No company wants to shut down including the extent to which two-thirds of businesses checked and unless they have to. Critical delays might affect your ability updated their disaster recovery plans decisions need to be made in to deliver products or services after Katrina, according to a Federal advance, and can be informed to market. Emergency Management Agency by tabletop exercises that help (FEMA) report. to test plans and simulate • Identify and review potential scenarios. Whether an elaborate alternative sourcing arrangements. Before disaster strikes, businesses exercise across the enterprise or need to consider undertaking such smaller, more basic drills, they • Ensure business continuity actions as developing business help companies to see how their strategies can be implemented — continuity and crisis management emergency response plans would for example, consider what needs plans, establishing internal perform as they walk through what to be done to continue to meet and external communications they would do. customer demands.

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• Decide what is required to protect 10 STEPS TO PREPARE A CATASTROPHE RESPONSE PLAN your building and other physical assets, such as moving equipment, taping windows, and tying down It doesn’t take a storm the size of Hurricane Katrina to cause significant damage to HVAC systems. your organization. Taking a sequential approach to crisis preparation and response planning can help your organization manage and recover from just about any disaster. • Assess crisis management procedures and tiered-response Following are 10 steps to keep in mind as you develop your CAT response plans. actions for when disruptions become more severe. Before a Loss

1. Identify your CAT-exposed locations.

PREPARING YOUR 2. Assess your supply chain for CAT exposures that could generate contingent time EMPLOYEES element losses.

The backbone of any company is its 3. Run CAT models for your identified exposures. people, and protecting them is a key 4. Assess the values exposed within your portfolio to loss from hurricane or storm crisis management consideration surge perils and analyze modeled loss estimates for physical damage as well as during an event like Katrina. direct and contingent time element losses to determine where mitigation efforts And yet, only about one-third can best be directed. of companies in a recent Marsh survey said they are ready to help 5. Assess the adequacy of your insurance in terms of limits, retentions, and coverage employees get back on their feet in terms and conditions. the wake of a major disaster. About 6. Develop or re-evaluate your CAT response team, claims management, and crisis 150 risk professionals responded response procedures to ensure they properly address your exposures. during a recent webcast to the statement: “My company has a plan 7. Review these plans in conjunction with your organization’s operational and in place that will help our employees financial goals. manage the personal impact of a major disaster while at the same After a Loss time rebuilding our business.” 8. Activate your CAT response, claims management, and/or crisis response plans.

• 35% said yes. 9. Monitor the progress and adjust activities as needed; establish communication protocols to ensure your organization’s recovery is proceeding in support of the • 32% said no. stated goals.

• 32% said they were not sure. 10. Conduct a post-event evaluation and improve plan where necessary.

It’s important to make sure that any plan is flexible enough to handle rapidly changing situations, and to meet your company’s unique circumstances.

10 Years After Hurricane Katrina: Lessons in Preparedness, Response, and Resilience 13 INSIGHTS August 2015

Following are four basic BE PREPARED TO DOCUMENT LOSSES humanitarian support planning steps to help your employees through a crisis — be it a hurricane, tornado, Forensic accountants and others involved in the claims process stress that proper earthquake, or other disaster. documentation is essential to the recovery process. Following a major disaster, areas of loss relate primarily to: • Help employees prepare personally. This includes • Assets and income. educating employees about • Property damage. personal preparedness, placing literature in break rooms, and • Loss of income. inviting local community planners • Extra expense. to talk about preparation. Damage to buildings, furniture, fixtures, inventory, technology, data and media, • Give employees time to prepare. technological infrastructure, and equipment are experienced frequently. When Organizations need to make sure operations are interrupted, companies will experience a loss of income, an increase employees understand their in expenses (“extra expense”) or a combination of both. personal responsibilities are in In documenting these losses, it will be useful to have access to the following financial order, which can help employees records immediately following an event: to stay focused while at work. • Fixed asset register and depreciation records. • Provide a means to check • Most recent physical inventory. in. Different communication methods may be needed so that • Purchase orders or estimates of all contracts for repair or replacement of employees can report that they’re damaged assets. safe and receive information. • Profit and loss statements for two years prior to the event for all affected locations. • Help people recover. For • Budgets and forecasts prepared before the loss to depict anticipated loss results. example, providing access to equipment to clear fallen trees or Following a loss, forensics experts recommend that a new general ledger account be help in filing personal insurance created to capture all expenditures incurred as a result of the loss. claims, and assistance in how to It’s also important to recognize that documentation for information that may be talk to their kids about the event — given verbally is important. For example, consider impacts to business operations. all these can make employees feel If conversations are held with customers or suppliers that may be material to claim taken care of and be better able to measurement, it is essential to document them. Likewise, as time passes, people’s help the business recover. memories fade, or people leave. Every piece of information or recollections of events should be gathered and recorded early on in the process. Companies that took such steps before, during, and after Katrina Another important consideration is to identify potential issues early on and address them reported high levels of employee with the entire claims team. These issues can include code upgrades required, changes good will and loyalty. that will be made to the pre-loss structure, or improvements to be made.

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CONCLUSION “The rebuilding

Katrina is long gone, but recovery is ongoing. Katrina and of New Orleans is other disasters provide strong reminders that catastrophe still going on, but risks can disrupt lives as well as derail business plans. The a lot of positive time and effort involved in recovery after a catastrophic event is influenced in large part by the actions that things have organizations take before an event occurs. Businesses can happened. The mitigate their risks and increase their resilience by focusing on four areas: city is better prepared for the 1. Protect your property. Disasters 3. Protect your people. Hurricane like Hurricane Katrina are Katrina has stayed in people’s next time.” defining moments for an memories in large part due to the organization. A well-developed scale of human suffering it caused. crisis management plan, Effective crisis management JAMES “BO” LABORDE crafted with input from across strategies can help safeguard your Marsh New Orleans Office Head the enterprise, provides an employees, their families, and the overall framework to prepare surrounding community. Make for, respond to, and recover sure that employees understand from a catastrophe. Using your overall disaster management appropriate risk engineering, plans, as well as the specifics of a selecting facility locations with given event. risks in mind, identifying and addressing vulnerabilities in 4. Protect your future. It’s not existing locations — all play a possible to predict the ultimate role in ensuring the best possible outcome when disaster hits your protection at your locations. business. Diligence in catastrophe management — including risk 2. Protect your profits. Changes in engineering, emergency planning CAT modeling following Katrina that involves regular exercises, helped inform the development of and data-driven risk finance — can risk financing. The output from an improve resilience and accelerate effective CAT model can help your recovery after an event. company structure an efficient risk transfer program based on its risk tolerance, including its ability to withstand losses from a major CAT event. Paired with a solid crisis management plan, a customized risk transfer program can help protect your bottom line.

10 Years After Hurricane Katrina: Lessons in Preparedness, Response, and Resilience 15 INSIGHTS August 2015

About Marsh Marsh is a global leader in insurance broking and risk management. We help clients succeed by defining, designing, and delivering innovative industry-specific solutions that help them effectively manage risk. Marsh’s approximately 27,000 colleagues work together to serve clients in more than 130 countries. Marsh is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy, and people. With 57,000 employees worldwide and annual revenue exceeding $13 billion, Marsh & McLennan Companies is also the parent company of Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; Mercer, a global leader in talent, health, retirement, and investment consulting; and Oliver Wyman, a global leader in management consulting. Follow Marsh on Twitter @MarshGlobal.

About this Report This report is based on the personal observations, insurance knowledge, and risk management experience of numerous Marsh experts. Contributors included Marsh’s US Property Practice, Marsh Risk Consulting, Marsh’s Claims Practice, and Marsh’s New Orleans Office. Special thanks to Steve Pettus, managing partner of Dickie Brennan and Company.

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