Changing weather patterns create new risks for businesses
It’s rare to get through a week without some type of weather-related event threatening or impacting millions of people across the nation. Climatic disasters — ranging from hurricanes and floods to droughts and wildfires — appear to be on the rise.
Last year, the U.S. experienced 14 separate billion-dollar disasters, according to the National Oceanographic and Atmospheric Administration (NOAA). It was the fourth-highest yearly total number of such events, following 2011, 2016 and 2017. This year — as of early April — there had been two events (flooding and a severe storm) in the U.S., each with losses of more than $1 billion.
In the future, look for “more extreme events and conditions such as higher tides,” says Kristiane Huber, resilience fellow at the Center for Climate and Energy Solutions in Arlington. “The 2018 National Climate Assessment lays out the impacts we’ve already observed and can expect in the coming decades.”
Global temperature has increased by about 1.8 degrees Fahrenheit since the beginning of the 20th century, and “we expect another 2 degrees of warming by 2050,” Huber says. “The past four years — 2015, 2016, 2017 and 2018 — were the four hottest years in modern history.”
Changes affecting the weather give businesses “a whole new area of risk to explore and plan for,” says Andrea S. Brazil, executive vice president of the risk management and consulting group at Towne Insurance in Virginia Beach. “They need to consider the impact of increased flooding or windstorm damage, supply-chain delays from vendors and, for some agricultural customers, changes to their growing season and crops.”
A ‘safety culture’
Changing climate conditions require business leaders to be fully engaged in protecting their assets, risk management experts say. “It’s forcing businesses to create and cultivate a safety culture,” says Nancy Ahrens, risk adviser for Scott Insurance in Richmond. “Climate falls into that fabric of safety. It has to be an all-the-time, every-time mindset. Everyone in the company has to be fully engaged.”
Businesses should spend time putting together business continuity plans that include how to prepare “for an approaching storm or flood, how to react in the short term to damage and to ensure some measure of continued operations, and, lastly, how to maintain their customer service in the long term,” says Brazil.
Businesses often don’t put enough attention on planning for weather-related disasters. Companies that don’t think about a plan “until a weather watch or even a warning is issued have much lower chances of survival,” says Rob Stiles, senior vice president, risk services, at Marsh & McLennan Agency in Richmond.
“The key components of a business continuity plan need to be in place well before a natural disaster strikes to ensure that a company is prepared, can respond and, more importantly, can recover to normal business operations with minimal downtime,” he says.
Exposure to risk
Businesses also need to take weather into consideration when they are considering acquisitions or expansions in their operational footprint. “You want to do your due diligence as it relates to the potential for catastrophic weather events,” says David Schaefer, president and CEO of Leesburg-based AHT. “When you are considering expanding, merging or opening a new location, review the exposure to catastrophic risk, particularly if there will be significant assets potentially in harm’s way.”
Hampton Roads is among the areas in the state most susceptible to hurricanes, flooding and high winds because of its coastal location. Nonetheless, families and businesses continue to build in flood-prone areas. “Nobody wants to stifle the economy, so more and more coastal development continues,” says Ahrens. “People love coastal property, so we have to proactively manage the risks inherent in these areas.”
Businesses located in coastal areas may have higher deductibles on their property insurance policies because of their exposure to high winds, hurricanes and flooding. “In Virginia Beach, for example, some insurance companies may want higher deductibles on wind and the flood coverage placed through the federal government. They may put a percentage deductible of 5% on the value of the building,” says Roy Bucher Jr., chairman of Lunsford, a Trustpoint Company, in Roanoke.
A company with a $1 million building and a 5% wind deductible, for instance, would be responsible for the “first $50,000,” Bucher says, noting some insurance companies apply the higher wind deductible to areas east of Interstate 95. “Some don’t want to write property coverage at all, and some add the higher deductible. These are things that risk managers have to deal with when you are in this area.”
Coastal Virginia also is vulnerable to sea-level rise. “The whole Chesapeake Bay area is a result of an ancient meteor strike 35 million years ago that made a crater that filled with water,” says Schaefer. “The land around that strike is still subsiding, and the ocean is now rising. As a result, high-water events caused by ocean rise and extreme weather are exacerbated. In addition, as we continue to build in these areas, more insured property is at risk for water inundation.”
The rising global sea level complicates the situation. Global average sea level has risen by 7 to 8 inches since 1900, according to the 2018 National Climate Assessment. That level is likely to rise by a half a foot to more than 1 foot by 2050 and by 1 to 4 feet by 2100, the report says.
Flooding is a significant issue for any business, whether it’s located in coastal areas or farther inland. Flooding is happening today in areas that were “historically dry, safe areas and not considered flood prone,” says Ahrens. “We are seeing more wild swings of increased rainfalls. Small rivers and swamps simply can’t handle the increased levels of rain.”
Cities such as Houston and New Orleans have seen devastating downpours — 6 inches of rain in 4 hours in Houston and 4 inches in 90 minutes in New Orleans. “The risk of these types of downpours are not foreign to Virginia, so businesses need to know where they have property exposures,” says Ahrens.
Businesses in coastal areas along the East Coast are paying more for property insurance today than in the past. “If they have no losses, it’s a minimum 10% increase,” says Alan Renkin of Marsh & McLennan Agency in Richmond. “If they have loss issues, it could be up to a 100% increase.”
The insurance industry also is asking businesses to bear more of the risk for extreme weather through higher deductibles and co-insurance. “There is a significant difference in building on the sand at the water’s edge than two miles inland,” says Schaefer.
“The cost of insurance is beginning to impact the decision on where to build because of the additional expense in high-risk areas,” he says. “We are seeing this across the board but particularly in areas prone to catastrophic risk. Property insurance is going up for these areas with little prospect that it will ever go back down, at least in our lifetime.”