Natural hazards are one of the top causes of loss for Middle Market businesses. Working with insurance providers can help mitigate these risks.
By John Mizzi, Head of Industry Practices, U.S. Middle Market, Zurich North America
Hurricanes. Wildfires. Floods. Tornadoes. Hailstorms.
These natural hazards cause billions of dollars in damage worldwide every year and, in some cases, deal a direct blow to regional economies. They can also have a huge impact on businesses, including midsize companies.
According to Zurich North America claims data, weather-related events represent the largest driver of property losses for middle market businesses. Hail, hurricanes, tornadoes, water and wind are the top five property loss drivers, accounting for more than 80% of total incurred losses.
Recent severe weather trends bear this out.
While most of the world was fixated on the growing pandemic crisis and the civil unrest in the United States last year, Mother Nature produced one of the busiest and costliest years for hurricanes and tropical storms ever. In fact, the 2020 Atlantic hurricane season was the most active and the fifth costliest Atlantic hurricane season on record. There were 30 named storms last year, 13 of which developed into hurricanes. Twelve of the named storms made landfall in the United States, breaking the record of nine set in 1916.
In the Western United States, record-breaking megafires burned more than 8.2 million acres of land, destroyed over 10,000 buildings and killed at least 37 people. At one point, smoke from fires raging in California created haze-filled skies all the way to New York City.
And in February 2021, Texas experienced an historic cold spell. The deep freeze caused widespread power outages, leaving more than 4.5 million homes and businesses without power for days. Damages from the blackouts are estimated at $195 billion, making it the costliest disaster in Texas history.
Even at the height of a global pandemic, the World Economic Forum’s Global Risks Report 2021 identified “extreme weather conditions” and “climate action failure” as the top two risks facing the world today.
Businesses are particularly vulnerable to severe weather events. In addition to the direct physical damage they can cause to buildings, they can also disrupt the supply chain for manufacturers and distributors and create travel hazards for customers, employees and business partners.
Let’s look at some of the biggest natural hazard risks and how businesses can mitigate them.
Hurricanes are among the most destructive
Hurricanes and tropical storms are among the most destructive natural hazards known to mankind.
In fact, seven of the top 10 costliest natural disasters in the United States were hurricanes. Three of the top five costliest natural disasters occurred in 2017: Hurricanes Harvey, Irma and Maria, which cost a combined $278 billion in property losses.
Business and property owners living in a region that is prone to destructive hurricanes should plan early to protect themselves, their employees, their property and their businesses from the risk of hurricanes and tropical storms. A hurricane emergency response plan should be reviewed and updated each year before hurricane season begins. The plan should address needed actions to be taken at the beginning of hurricane season and when a tropical storm or hurricane watch is issued; when the warnings for an impending storm are issued; any actions during the storm; and actions immediately after the passing of the storm.
Property owners should adopt standards to help protect against hurricane-strength winds. The Insurance Institute for Business & Home Safety (IBHS) has developed standards for new construction to reduce damage to commercial structures and help businesses reopen more quickly following a severe weather event. Information about the IBHS FORTIFIED Commercial™ standards are online.
Businesses near the coastline run the risk of being inundated by water from a hurricane-induced storm surge. When water enters a building, it can damage production equipment and machinery; emergency generators, fuel tanks and fuel pumps; fire pumps, including fuel tanks, power supplies and controllers; fire alarm panels and security offices; boilers and chillers; electrical equipment; telephone systems; kitchen equipment; and more.
A loss of power, which is often associated with windstorms, can also lead to a property loss. A reliable source of emergency power will be required to maintain essential electric loads and support any needed clean-up or restoration efforts. Typically, an emergency generator will be used to provide power during a utility outage. When located in a hurricane-prone region, businesses should consider the reliability of the emergency generator during high-wind and high-water events as well as the electrical loads during or after a hurricane.
Wildfires are destructive, deadly and unpredictable
Because of climate change, wildfires are occurring more frequently and burning for much longer than they used to. No longer do we talk about wildfire “season,” because these destructive firestorms now happen throughout the year and throughout the country, from California to the Northwest, and in Texas, Colorado, Florida and throughout the forested areas of the Midwest.
Despite the growing risk, business owners in areas prone to wildfires can take some steps to help mitigate their risk and protect their employees.
Any mitigation efforts should start with a clear and well-practiced plan. Business owners should work closely with local fire officials and implement physical improvements to prevent wildfires from reaching or igniting your properties.
Wildfires spread by following a continuous path of combustibles. Wind-borne embers also present a threat. So, the key to preventing a wildfire from reaching or igniting your property is removing combustibles on and around the property.
Business owners should make sure they have sufficient open space free of vegetation and other combustibles between buildings and any nearby forest. They should also consider investing in exterior building surfaces that are either noncombustible or considered resistant to ignition by embers. Windows and doors should be fully closed and sealed.
Finally, business owners should know that where there’s smoke, there’s soot. Wildfires can produce plumes of smoke that spread far in advance of the fire itself, causing damage to a building even if flames never reach it. Smoke and soot damage from wildfires has resulted in multi-million dollar losses, often by being sucked into a building when HVAC systems are operating or reactivated after a fire. To minimize the impact, install louvers that automatically close when they’re not being used and have a plan in place to shut down HVAC systems when necessary.
Tornadoes, Lightning and Hail are among the most common storms
Thunderstorms, lightning, hail and tornadoes all result from what are known as convective storms. Severe convective storms are among the most common and most damaging natural catastrophes in the United States, according to the Insurance Information Institute. “The result of warm, moist air rising from the earth, they manifest in various ways, depending on atmospheric conditions – from drenching thunderstorms with lightning, to tornadoes, hail, or destructive straight-line winds.”
The problem with convective storms is they often arise without much warning. Local weather prognosticators may provide warnings of severe thunderstorms in the next few hours, but that hardly gives business owners enough time to prepare. Hurricanes and wildfires, on the other hand, typically announce their pending arrival days in advance.
Tornadoes get all the headlines because of their destructive force. But hail may be the costliest of the convective storm perils. According to the National Severe Storms Laboratory, “Hail is a form of precipitation that occurs when updrafts in thunderstorms carry raindrops upward into extremely cold areas of the atmosphere, where they freeze into ice.”
Most hailstorms are relatively harmless. A simple handheld umbrella can keep small ice pellets at bay. But when widespread hailstorms with “golf ball-sized” or “softball-sized” chunks of ice start falling from the sky, nothing on the ground is safe. Auto dealers are particularly vulnerable, as hail can damage an entire fleet of new cars on the lot. But homes, office buildings, manufacturing plants and crops can also suffer from significant losses.
A change in climate
Climate change is making natural hazards worse.
The steady rise in global surface temperatures is having a significant impact on the number, frequency and duration of natural hazards. Oxfam estimates the number of climate-related disasters has tripled in the last 30 years, and that more than 20 million people are being forced from their homes by climate change each year.
Government, community and business leaders are working together to slow or stop global warming. But midsize companies still need to face the reality that severe weather is here to stay. The good news is that insurance providers can help mitigate the risks and be confident that blue skies are above.