In recent years, the intensity of storms and the length of droughts that exacerbate wildfires have coincided with increasingly variable weather patterns generally attributed to long-term climate change. For example, Hurricane Helene originated last September in the Gulf of Mexico and eventually wreaked havoc as far north as Appalachia, and a few months later, wildfires ravaged neighborhoods deep inside Los Angeles County during the region’s typically wetter months. Whether it is the amount of rainfall, size of hail, frequency of tornadoes or locations of wildfires, the increasing unpredictability of catastrophic events means companies must go beyond traditional insurance approaches to proactively strengthen their properties’ resilience against the unexpected.
“Before ever talking about insurance, companies need to talk about their operational resilience and how they are proactively addressing it,” said Mark Millard, who leads BDO’s insurance risk advisory group. “If you are proactive with your resilience efforts, you will approach insurance differently, and it will be in a more economic manner.”
Florida's Tampa General Hospital took such proactive measures in 2019 when it installed an AquaFence flood wall around the facility's perimeter that can be quickly erected as storms approach, allowing the facility to withstand storm surges of up to 15 feet. In addition, the site’s water source and energy plant is located 33 feet above sea level to withstand flooding from a category 5 hurricane. As a result, the area’s only Level 1 trauma center was able to function throughout Hurricane Helene.
Business needs vary widely, and so do appropriate risk mitigation measures. An organization's key stakeholders, including representatives from operations and facilities, should discuss possible hazard scenarios and ways to minimize damage and downtime, Millard advised. Developing and enacting such a plan is critical to maximize the organization’s resilience as well as its leverage when negotiating P&C coverage. Insurers are currently flush with capital and some P&C premiums are even decreasing, Millard said, and that leverage can help companies make the most of current market conditions.
“The best plans assume—for a minute—that insurance is not there. It should be a backstop when everything else in the plan did not work, requiring the entity to rely on this risk-transfer product,” he said. “Risk managers should be proactively thinking about what the storyboard of resilience looks like.”
Telling the Risk Story
The resilience storyboard should document the plan’s executed and tested components, conveying to the insurance company that “we understand what the losses could be, and these are the preventive measures we have taken,” Millard said.
To insure property, insurers will look at a commercial client’s schedule of values, breaking down every billable task to recover from losses, as well as the reasonableness of the company’s business interruption calculations. On a year-over-year basis, they will consider whether those costs have been adjusted for inflation and the impact of potential supply chain disruptions. Insurers will send their own engineers, Millard said, but they will have a more favorable view of clients who present their own engineering and loss control findings and activities, model the impact of potential catastrophic events, and incorporate that information when choosing new construction sites and in the construction itself.
“Another critically important step is building a relationship with underwriters, meeting throughout the year with the underwriting community and developing trust,” he added.
Given the increasing intensity of catastrophic events, preparing plans to mitigate them is an ongoing exercise driven in part by ever-improving technology. Gerald Glombicki, a senior director in Fitch Rating’s insurance group, noted that insurers are constantly seeking to improve their models to understand why one commercial structure survived a hazard while a similar one across the street did not. They are also taking extra steps to verify the details. “Before, insurers may have required data [verifying elements of the property] in the form of an attestation by the insurance agent or customer,” Glombicki said. “Now, if it is above a certain dollar amount, they may send representatives to verify it or they can get satellite imagery of the actual property.”
Insurers may also request that risk managers download applications that allow them to walk through their company’s facilities to perform virtual inspections. “It is easy to do, and the insurer does not have to send a physical inspection person out,” said Michael Reilly, a managing director with Accenture’s insurance practice, adding that the technology started with residential insurers and “a couple of commercial carriers are now playing around with it.”
Property Protection Steps
In turn, such advances require companies to analyze their property risk in increasing detail. Ian Giammanco, senior director for standards and data analytics and a lead research meteorologist at the Insurance Institute for Business and Home Safety (IIBHS), said that a company must scrutinize the buildings in its portfolio to ensure hazard mitigation measures are appropriate. For example, to protect against wind, including hurricanes and tornadoes, companies that own long-span buildings can install wind-reinforced roller door systems to reduce the chance of doors failing to close and damaging the rest of the structure and its contents.
Giammanco said that there is far less research about risk mitigation for wildfires than for wind, especially considering that the recent and rapid expansion of the wildland-urban interface exposes more and more human structures to wildfire risk. However, the research into wildfire resilience is accelerating quickly, he said, focusing on systems that reduce the likelihood of buildings igniting.
A key step is ensuring a building’s roof is noncombustible. Commercial structures are often built with noncombustible materials, but rating services such as FM Approvals, UL Standards & Engagement and the IIBHS can provide additional assurance. “If you have combustible roof material, that will be the weakest link in the chain of ignition,” Giammanco said.
It is also essential to ensure embers are unable to get into buildings through vents or other openings. To prevent flames from jumping from one structure to another, buildings should be properly spaced and have no fuel between them. “The most critical part is a five-foot area that surrounds the building and making sure there are no combustible materials there,” he said.
In addition, wind flow around most buildings leads to the accumulation of embers that can ignite combustible materials close to the structure, creating flames potentially hot enough to ignite even hardened exterior surface materials. “There is a lot more variance in commercial construction, so insurers look at all these components in very minute detail,” Giammanco said, noting that the building code under which a building was constructed will also be taken into account.
Choosing the Right Broker
Every company should also ensure its broker and insurers understand its business, especially for highly specific industries. “A generic carrier might charge more or not understand the right way to structure the coverage, so it is important that your broker is introducing you to carriers that understand your industry,” Reilly said. Companies can also lower premiums by retaining more risk through higher deductibles or by reshaping their businesses to include more leases, shifting the risk to another party.
According to Loretta Worters, a spokesperson for the Insurance Information Institute, tailoring mitigation strategies based on the specific weather patterns and vulnerabilities in the area can also help reduce premiums or at least minimize increases. It is also important to collaborate with local emergency management agencies and community organizations to coordinate response efforts, and regularly train employees on emergency response procedures and safety protocols.
For wind and flood risk, Worters said risk managers can save on insurance costs with changes like reinforcing roofs, windows and doors; installing flood barriers around building entrances in low-lying areas; and improving drainage systems. Companies should also elevate equipment to protect it; invest in surge protectors to safeguard electronics; and develop detailed emergency response plans, including a detailed evacuation plan and procedures for securing critical data.
The Impact of Changing Weather Patterns
Emerging weather patterns point to more extreme and shifting hazards ahead. One of the biggest challenges today is an increase in volatile fire-weather conditions, such as longer droughts. Changing weather patterns have also moved some of the most intense tornado activity from the Great Plains to the Southeast, toward denser and more vulnerable populations.
Giammanco said another major challenge is understanding the impact of hailstorms, since there has been less study of them compared to other weather hazards, and there are multiple factors that go into producing hail. Companies located in the eastern United States may want to consider hail as a more likely potential hazard as they fortify their properties’ resilience and negotiate premiums with insurers. “We think today we will actually see more damaging hail events, but their frequency may lessen a bit,” he said. “The Upper Midwest all the way to the Northeast and New England may see an uptick in hail frequency, but back to the West and Southern Plains may see a decrease.”
While past hazard patterns are not fully predictive of future ones, risk managers should use any readily available information to analyze and understand the current risks factors for where their company’s facilities are located. In specific areas like the Florida coast, catastrophe risks are likely to continue, further increasing costs there. As a longer-term response to those increases, companies may want to consider moving facilities to more sustainable regions. “That is an extreme step to take, but if I am running a manufacturer that could be located anywhere in the country and I am currently in a coastal area, I may want to rethink the location,” Reilly said.