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Katrina’s Lessons in Windstorm Risk Management

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Hurricane Katrina, which pummeled the Gulf Coast of the United States 10 years ago on Aug. 29, has proven to be the deadliest and costliest disaster on record. The 2005 Atlantic hurricane season was the most active in recorded history with more than 30 tropical and subtropical storms, including 15 hurricanes.

According to the study, Hurricane Katrina 10: Catastrophe Management and Global Windstorm Peril Review by Allianz Global Corporate & Specialty, it was predicted that hurricanes would become more frequent and intense after 2005, however, “In reality, the exact opposite has occurred,” Andrew Higgins, technical manager, Americas at Allianz Risk Consulting explained in the report. Instead, there has been a reduction in Atlantic hurricane activity during the last 10 years, with 2013 seeing the fewest Atlantic basin hurricanes since 1983. “These results illustrate the fact that we do not fully understand the complex climate variables that affect hurricane activity,” he said.

Because Katrina’s impact was so devastating and widespread, many changes have since been made. New Orleans has built a new system of levees, for example. Flooding caused by Katrina revealed the state of the levee systems in the U.S. to be substandard and in need of repairs estimated at $100 billion,the National Committee on Levee Safety found. “There are many levee systems throughout the U.S. that would reveal similar deficiencies if subjected to the same level of scrutiny as those in New Orleans,” according to the study.

“Katrina will always be remembered as an extraordinary natural disaster that affected millions of individuals and businesses and left an indelible impact on the global insurance industry,” Hugh Burgess, head of corporate lines at AGCS, said in a statement. “Even without considering the influence of climate change, the prospect of increasing losses due to storms is more of a result of continued economic development in hazard-prone developed coastal areas. Preparedness limits windstorm exposure and Katrina has taught us many lessons on this front.”

Top lessons from Hurricane Katrina:

1. Storm surge impact and risk modeling

“Storm surge modeling prior to Katrina essentially assumed that the height of the storm surge was a function of the maximum sustained winds,” Higgins said. “Katrina clearly showed that there are other factors that affect storm surge height… We have learned that in addition to wind speed, the physical size of the hurricane can affect the storm surge. Camille’s hurricane-force winds extended 60 miles from the storm center, while Katrina’s extended 120 miles. The larger size of Katrina was a major factor in pushing more water onto the shore.”

2. Flooding threat

The flooding caused by Katrina showed that the conditions of the levee systems in the U.S. are very poor. “The 2013 Report Card for America’s infrastructure developed by the American Society of Civil Engineers rates the levees in the U.S. as a D-,” Higgins said.

3. Wind damage prevention

Substantial wind damage occurred to structures that experienced hurricane force winds from Katrina, despite the fact that the recorded wind speeds were less than the wind design speeds. So what happened? “Most of the wind damage occurred to the building envelope,” Higgins explained. “That includes the roof covering, walls and windows. If the building codes had been strictly followed, the wind damage would have been greatly reduced. Poor workmanship and a lack of knowledge were the primary culprits.” He added, “Today, the Gulf Coast is in a better position to withstand the effects of a hurricane due to better education, improved construction guidelines and increased third party inspection.”

4. The importance of business continuity

After widespread catastrophes businesses typically relocate, meaning the client base can diminish until recovery progresses. The key to recovery is to establish a plan in advance that identifies clear priorities for attention to crucial operations, so the business can get back up-and-running as quickly as possible.

5. Insurance coverage issues

While insurance claims settlement levels from Katrina were high, it’s imperative to know what’s protected ahead of time. Many insureds were surprised to find out they were not covered for storm surge losses, the main coverage issue resulting from the storm. Whether damage was caused by wind or water became a key focus of post-Katrina litigation.

6.  Unexpected impact of demand surge

Demand surge is a post-catastrophe complication which can have not only catastrophe-related consequences in terms of rising prices due to a shortage of available goods, but other loss consequences as well. For example, a shortage of American-made drywall because of the demands of rebuilding led to a significant increase in imports of defective drywall manufactured in China. This resulted in a number of environmental issues and eventual litigation, particularly in the storm-affected states of Florida and Louisiana.

Allianz concluded that businesses need to start early to prepare for the worst-case scenario. “Businesses need to be sure to have tested business continuity plans and especially communications cascades in place and have insurance policies at a safe location,” advised Andreas Shell, Head of short-tail claims at AGCS. “Creating a separate booking account to which businesses can record hurricane-related damages to easily identify the loss incurred can also help.”

Terry Campbell, regional claims head, Americas at AGCS noted that every company should take these steps to ensure the claims settlement process runs as smoothly as possible after a windstorm event: “Follow the protocol outlined in the catastrophe response plan. If there isn’t one in place, one should be immediately developed for that event. Ensure there is adequate staff to respond and that there is ongoing communication to include scheduled meetings to discuss progress as well as issues, problems etc. These can be done as frequently as necessary,” he said.

Ken Feinberg on the “Two Types of Risk”

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Ken Feinberg, the "claims czar," says there are two types of risk that challenge leadership.

Ken Feinberg just might have the most difficult job out there. He has worked as mediator/administrator in the wake of tragedies and natural disasters such as 9/11, the shootings at Virginia Tech, Hurricane Katrina and the Holocaust slave labor litigation. He is currently serving as the administrator for the $20 billion BP oil spill claims fund.

It is Feinberg’s job to sit with victim’s families and to sift through claims from each disaster in order to figure out how much their personal and financial loss is worth. It is a job few envy.

But through his years of experience with mediation and dispute resolution, he has learned that there are two types of risk that challenge leadership:

  1. Risk as defined by the assignment that you’ve undertaken
  2. External risk — or in other words, the external pressures on you or the stress level factored into how you perform

“You have to define risk with each situation [you’re presented],” he said. “When I pay a fisherman, I find a payment that ends their concern, but what is the likely risk that the Gulf is safe? Have I factored into that reward a good understanding of future risk to fishing in the Gulf? Inherent is the notion of a substantive definition of risk.”

In relating that knowledge to his recent tasks as administrator of the 9/11 victim’s compensation fund and the BP oil spill claims fund, he noted:

“When administering the 9/11 fund, it turned out that my evaluation of risk was poorly done — I underestimated the support of the victim’s families and the public in general. I evaluated correctly with the BP case — I’m a human pinata.”

More so than knowing and incorporating the two types of risk that challenge leadership, those in charge should also incorporate certain characteristics. The following are those Feinberg truly believes in and which he has incorporated during his challenging assignments:

  • Convey a sense of certainty
  • Be transparent — “The more sunlight I let into the room, the easier it is,” he said.
  • Consistency — no bias or favoritism
  • Flexibility — keep an open mind
  • Use sound judgement — “Give the people impacted by your decisions a say.”
  • Delegate to good people — “Staff is the key.”

Feinberg’s job is not easy, but it has taught him a lifetime worth of lessons regarding leadership, risk and fairness.

Check back over the next several days for more posts relating to the amazing speakers I was fortunate enough to hear at the Wharton Leadership Conference, including Jane Golden, executive director of the City of Philadelphia Mural Arts Program; James Quigley, author of As One; and senior partner at Deloitte; and Colonel Jack Jacobs, NBC analyst and recipient of the Medal of Honor.

Rebuilding Japan May Cost More Than $300 Billion

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According to the office of Prime Minister Naoto Kan, the cost of Japan’s rebuilding efforts following the earthquake may exceed $300 billion, which would easily make it the world’s most expensive natural disaster on record. (Hurricane Katrina, with an estimated $125 billion, inflicted the previous-record amount of damage.) There is often a big difference between early estimates and final tolls — particularly estimates coming from those who are directly affected — but the World Bank is also expecting the costs to come in around $250 billion.

Rebuilding after the 9.0-magnitude quake and tsunami, which ravaged the northeastern coast of the main Japanese island of Honshu, will cost up to $309 billion, Mr. Kan’s office said Wednesday. The World Bank, citing private estimates, said on Monday that the figure could reach $250 billion.

More on the insured loss estimates from the Japanese earthquake can be seen here.

Top Ten Disasters of the Past Decade

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Zurich has unveiled its list of the “Top Ten Megadisasters” of the past decade. The usual suspects pretty much (listed chronologically — not by their “overall business impact,” which is the basis for the list).

1. 9/11 – 2001
2. SARS – 2003
3. 2003 U.S. / Canada power outage – 2003
4. 2004 Indian Ocean earthquake and tsunami – 2004
5. Hurricanes Katrina, Rita and Wilma – 2005
6. Financial crisis – 2008
7. China earthquake – 2008
8. H1N1 pandemic – 2009
9. Iceland volcano – 2010
10. Floods in Europe and Pakistan – 2010

I have to admit, I would have probably completely forgotten the 2003 blackout if I was playing Family Feud and had to come up with all 10 — and I even wrote a cover story for Risk Management magazine about it.

Obviously, catastrophes that weren’t included like the Haiti earthquake, Cyclone Nargis and Bam earthquake were horrific tragedies, but the insurance penetration in those areas is so minimal that the ghastly human tolls did not have a large affect on the industry.

Let’s all dearly hope that the next decade is tamer.

katrina ninth ward

Ninth Ward. New Orleans. Post-Katrina.