Managing Disasters

Totally ready or just terrorism ready?

Is the nation’s terrorism-centric focus hurting its efforts to plan for other disasters? Dr. James L. Valverde Jr., director of economics and risk management for the Insurance Information Institute, posed that question at the recent Chartered Property Casualty Underwriters Society Golden Gate Chapter All Industry Day in San Francisco. Valverde, who gave the keynote address, “Managing Natural Catastrophes in a Post-9/11 World,” said, “adopting an all hazards mindset is central to where we need to go at all levels of government.”

Hurricanes Katrina, Rita and Wilma proved that point, he said. According to Insurance Information Institute statistics, the hurricanes produced a record 2.773 million claims. Katrina was the deadliest hurricane to strike the United States since 1928. Eight of the 11 most expensive disasters in U.S. history have occurred within the past four years. “At best, 70 percent of [Katrina] claims have been dealt with in a substantial way,” Valverde noted.

“There has been a huge increase in the insured value of global cat losses in recent years,” he said. “2005 will be the worst year ever for insured cat losses by far. It was twice as bad as 2004.” According to Valverde, 2005 had $55.3 billion in insured catastrophe losses, compared with 2004’s $27.5 billion.

“Katrina has impacted the industry in many ways,” Valverde added. As of October 2005, 59 companies had announced pre-tax loss estimates as a result of Katrina. Loss totals range from $22.1 billion to $24.4 billion. And at least 20 companies have been put on watch for possible downgrades by rating agencies.

Future vulnerabilities

What’s concerning, Valverde said, is that “the next hurricane season is almost upon us and we’re still dealing with the last one.”

Looking at the 2006 hurricane season, he said across the entire United States coast, there is an 81 percent probability that a category 3, 4 or 5 hurricane will make landfall. “The number of manmade and natural disasters is increasing. It has been on an uptick for more than 20 years,” he said.

Thus, the nation needs to look at what it means to manage catastrophes, Valverde said. After 9/11, the Department of Homeland Security was created to address some of the risk concerns. “It was a fusion of numerous federal agencies with seemingly disparate agendas and had the objective of coordinating and centralizing the leadership of the nation’s homeland security activities under a single, cabinet-level department,” Valverde said. It involved 22 separate agencies and approximately 180,000 employees. “Where in the country can you talk about a corporate merger of this magnitude that this department is trying to do?” Valverde asked. The creation of DHS was an unprecedented attempt by the nation to protect itself.

But where is the accountability?

Katrina was the first real test of the system, and everyone says it failed miserably, Valverde said. However, “there is an essential tension between our desire to prevent terrorist acts weighed against the mitigation of consequences arising from acts of terrorism and other extreme events. How do you allocate resources in a system as complex as this one?”

DHS developed an Emergency Preparedness and Response mission, Valverde said, but in the process, FEMA (Federal Emergency Management Agency) was “marginalized in the larger context of homeland security,” he said.

“The agency is no longer cabinet-level, but rather it is a small cog within the organizational and bureaucratic behemoth that is DHS,” he said. “FEMA’s mission to help states prepare for all hazards- from terrorism to natural disasters -has become lost within DHS’s myopic focus on terrorism.”

Importance of all hazards

As the DHS and governments assign risk to potential future disasters, Valverde suggested taking a look at the likelihood that certain events will occur. The Homeland Security Council has developed 15 all-hazard scenarios for use in national, federal, state and local homeland security preparedness activities. Yet he believed the focus is somewhat misguided-all but three deal with nuclear, biological, radiological, explosive or chemical attacks.

Keeping probability factors in mind, Valverde said it would be wiser for the nation to adopt an “all hazards” mindset; a “fully integrated national emergency response system that is adaptable enough to deal with any terrorist attack, no matter how unlikely or catastrophic-as well as all manner of natural disasters.”

The challenges, he suggested, are in identifying the types of emergencies for which the nation should be prepared and the requirements for responding effectively; assessing current capabilities against those requirements; developing and implementing effective, coordinated plans among multiple first-responder disciplines and jurisdictions; and defining the roles and responsibilities of federal, state and local governments, and private entities.

Perhaps one of the most important lessons learned post-Katrina, Valverde said, is that planning can affect property casualty insurers. Insurers should perhaps consider an additional “externality”-the mismanaged government response and recovery efforts in affected regions-when preparing for disasters. “Mismanagement will affect losses,” Valverde emphasized.