The Impact and Aftermath of Hurricanes Katrina and Rita

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On October 5, 2005, Marsh, the risk and insurance subsidiary of MMC, hosted a panel of experts who discussed dealing with the aftermath of Hurricanes Katrina and Rita. The panel was moderated by Timothy J. Mahoney, chairman of North American Client Development for Marsh, and included the following MMC colleagues:

• Robert O’Brien, a senior vice president with Marsh’s National Property Claims practice and leader of Marsh’s Catastrophe Response practice for North America.
  
  
• Robert Howe, a managing director and the practice leader of Marsh’s North American Property practice.
  
  
• Gary Guzy, a senior vice president and the national environmental business development leader with Marsh’s Environmental practice. He was formerly the general counsel for the U.S. Environmental Protection Agency [EPA].
  
  
• Gary S. Lynch, a managing director and the national practice leader for Marsh’s Operational Risk Management and Business Continuity practice.
  
  
• Todd Johnson, a vice president of operations for Ontrack Data Recovery, a wholly owned subsidiary of Kroll Inc.
  
  

The following excerpts are taken from a white paper based on the panel discussion.

Timothy J. Mahoney (TJM): Weeks after battering the Gulf Coast, Hurricanes Katrina and Rita continue to have a ripple effect on the insurance marketplace and on businesses and industries throughout the United States. Our panel of experts will discuss how the insurance markets are responding to the hurricanes, the impact on the environment, supply-chain issues, business continuity, and data recovery.

TJM: Bob, you’ve been very busy lately, working with many of our clients. What types of issues are you dealing with?

RWO: In addition to the severity of the damage, Katrina, in particular, has created some unique issues with which businesses have had to contend. For example, the area affected by the storm is so vast. Another issue is that many areas – particularly New Orleans – were virtually inaccessible for so long.

The inaccessibility has an obvious effect on the ability to restore physical assets, but it also creates significant difficulties in restoring business operations. And the infrastructure damage has created problems in moving supplies into the affected areas.

TJM: How are insurers responding to some of these claims?

RWO: Insurers and adjusting firms have mobilized to respond to clients’ claims. As areas have become more accessible, insurers have been conducting ongoing inspections of damaged properties and are beginning the assessment and adjustment process. Due to the large geographic area affected, most firms have established multiple catastrophe locations. Also, restoration firms and salvage companies have been engaged throughout the affected areas.

TJM: For companies dealing with these claims, what is the process?

In addition, clients may need to file a notice of intent to claim for debris removal, pollution and contamination cleanup, and so on. Each policy will have its own provisions, so it’s important to meet with your claims consultant to ensure that you meet any deadlines.

It’s also important to obtain agreement and buy-in from all the parties to a comprehensive loss-management plan. This kind of plan should ensure that all the appropriate decision makers are engaged in the process.

TJM: How have our clients fared through the recent renewals effective October 1? And can you share with us some key early indicators that you’re seeing from the property insurance market?

RFH: October 1 was certainly a challenging renewal time for many of our clients and for our professionals here at Marsh as well. I describe the results as being extremely mixed. As you mentioned, pricing was declining pre-Katrina. Thus, there are many cases where we had early quotations that property insurance markets honored; and we were able to reduce cost for clients.

Following Katrina, many insurers delayed quoting business until late in the month. This gave them a bit more time to understand the losses. Renewals generally ranged from flat to a moderate increase. Larger increases typically took place only where significant catastrophe exposures, adverse loss experience, or difficult risk factors forced insurers to take a harder line on the business.

TJM: What other insurance market factors or drivers do you and your team have your eyes on right now?

RFH: First, we have some real concerns over what happens in pricing for catastrophe coverage and in limits through the balance of the year and into 2006. Insurers have been using computer modeling to mitigate losses to their portfolios and to monitor their overall risk accumulations. In the case of Katrina, the verdict is that the modeling wasn’t as accurate as it could have been. This left many insurers overexposed, and we expect sharp refinement in the use of modeling. This will certainly have an effect on limiting supply – not just for wind, but also, perhaps, for other natural perils – as we move forward.

Second, the reinsurance marketplace was hit hard by Katrina. This was an extremely vertical event, which, in some cases, went right through our insurers’ risk and catastrophe treaty reinsurance protections. Many insurers had to pay for costly treaty reinstatements and are expecting lower limits and higher pricing for their treaty renewals, many of which come up in December and January. We expect insurers to attempt to pass these costs along to insureds.

The degree to which the supply of catastrophe treaty reinsurance coverage is constrained may determine how pricing goes for many companies in 2006.

TJM: As we’ve all seen on the news, Katrina and Rita have created significant environmental challenges for the areas they affected. Gary, what’s the story?

GSG: The impact has been enormous. The EPA estimates that there are over 100 million cubic yards of debris. According to the Coast Guard, some seven million gallons of oil were released and are being cleaned up. Floodwaters inundated an area that contains more than 50 Superfund sites on the EPA’s National Priorities List, the worst of our nation’s hazardous waste sites. In many areas, sediments left over from floodwaters have high levels of petroleum products, heavy metals, pesticides, and bacteria that will likely have to be cleaned up. And the moisture itself has caused extensive mold growth in buildings, which often can’t be seen, but also needs to be cleaned up.

TJM: As a practical matter, what should businesses be thinking about?

GSG: Our basic message is to plan carefully and not make matters worse. Businesses will want to be certain to:

• Do an initial environmental assessment so they’ll know what issues they face;
  
  
• Avoid inadvertent and dangerous mixing of waste;
  
  
• Avoid new regulatory violations by inadvertently storing or disposing of wastes in violation of the regulations or by not reporting on spills or storage;
  
  
• Screen contractors and disposers conducting cleanups very carefully so that those cleanups or disposals don’t become a problem later on; and
  
  
• Make certain that they have appropriate indemnity and insurance protections because of the strong possibility of third-party litigation from neighboring property owners or even of government enforcement actions.
  
  

TJM: Shifting gears a little bit, what about the overall environmental insurance-market conditions?

GSG: We do perceive several signals pointing to a hardening of the insurance markets in terms of the price and the scope of coverages – particularly due to some of the reinsurance drivers that Bob Howe referenced. Any hardening will perhaps not be as extreme as in other coverage areas due to the specialized nature of environmental impairment liability coverage.

TJM: Gary, the impact from the hurricanes extends far beyond the geographic area. What are some of the supply chain disruptions that you’re seeing?

GSL: From retail establishments being down to power outages to transportation and shipping issues – all of which we have witnessed in the Gulf region – the disruptions have not only affected the surrounding area, but also have had a national and a global impact. The ripple effect shouldn’t be underestimated. What we’re seeing from Katrina and Rita is how precarious the supply chain is and how imperative it is for businesses to have proper response protocols and procedures in place.

TJM: You’re working with companies dealing with this right now. What are you seeing?

GSL: A lot of companies had plans in place for when a disruption would occur, but two of the things that were underestimated are:

• The severity and the impact that this disruption would have on the business; and
  
  
• The domino effect.

There are a couple of key points that companies need to think through when they’re looking at a business continuity plan – specifically, when their on-site operations are not functioning:

• First, they need to make sure that the plan addresses what their critical business functions are, who their critical employees are, and where they can establish remote central operations quickly.
  
  
• Second, the alternative site and the remote central operations center need to be adequately equipped with proper desks, phones, and so on; and they need to be staffed with only critical personnel.
  
  

TJM: Let’s talk about outsourcing for a moment. A lot of companies have outsourcing arrangements in place. What are the key lessons learned from the hurricanes?

GSL: We saw companies affected that weren’t necessarily physically located in the Gulf states, but that utilized outsource providers located in that area. What these companies failed to do, through some of their due diligence processes, was to look at what types of backup and contingency plans those outsource providers had in place to ensure continued service if a disruption were to occur to the outsource provider’s business. Failure to do so can lead to a domino effect in which your business is disrupted significantly because the outsource provider lacks its own business continuity and contingency plans.

TJM: Todd, looking at some of the flooding, is it even possible to rescue the data from damaged computer hard drives, or is everything on backup servers?

TRJ: Tim, it is definitely possible to recover data from storm-damaged storage media. But it’s not always an easy process. Rain and seawater generally harm the data in two ways:

• First, by causing electrical damage to the drives, which can make them inaccessible to the users; and
  
  
• Second, by leaking through the protective seals on the drives, allowing dirt and other contaminants to get inside the storage area.
  
  

Although extreme cases like hurricanes might cause damage that makes it look like data are unrecoverable, a data recovery company can often extract the data using specialized tools and techniques.

While many companies do back up their critical data, there are a couple of problems that occur:

• First, the last backup might not be current enough to be useful.
  
  
• The other issue is failure of backups. If people don’t test their backups regularly to validate them, they could be in for an unpleasant surprise when they finally restore the backup data.
  
  

TJM: So what should you do if you’ve found your computer submerged?

TRJ: We tell our clients, first and foremost, not to try to power up physically damaged devices and not to try to clean any hard drive or server that’s been damaged. Also, don’t use software utility programs to try to fix a system that’s physically damaged, as these can often make the problem worse.

TJM: What should companies look for when evaluating a data recovery provider?

TRJ: Before engaging a data recovery provider:

• Check the company’s R&D background to make certain it has a good track record and the latest technology;
  
  
• Be certain that the data-recovery provider has the resources in place to handle a large volume of work in the event a catastrophe occurs;
  
  
• Check the company’s security procedures, protocols, and certifications;
  
  
• Finally, be certain you know what you’re getting with your data recovery services.
  
  

This content was edited for Viewpoint. If you would like to receive the full white paper, “The Impact and Aftermath of Hurricanes Katrina and Rita,” or if you would like to register to listen to future panel discussions, please send your request to .