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Risk managers and insurance professionals are preparing to gather for the Risk & Insurance Management Society (RIMS) 2015 Annual Conference & Exhibition in New Orleans, 10 years after a catastrophic event that reshaped risk management – and the insurance industry.

Hurricane Katrina devastated the U.S. Gulf Coast in 2005, and some parts of New Orleans are still struggling to recover. It remains the costliest insured event to date. According to the Insurance Information Institute, Katrina cost insurers and reinsurers more than $41.1 billion in onshore losses. The total insured losses were about $60 billion, counting claims under the National Flood Insurance Program and insured offshore energy assets.

When RIMS last visited New Orleans, in 2007, much of the damage from Katrina still seemed fresh. The city and the region were reeling from the effects of the storm. That year, I drove from New Orleans to Mississippi with some friends who lost a home in Pass Christian, Miss., where Katrina’s eye came ashore. All that was left was a concrete slab. On other lots, all that remained were staircases that led to empty space. Nearby, in their former neighborhood, an upholstered chair was wedged in a tree, 20 feet off the ground – two years after the catastrophe. For me, that was a stark illustration of storm surge. It’s hard to imagine how anything survives the fury of a Category 5 hurricane.

Fortunately, a lot has changed. As insurance claims were paid and the federal government fortified New Orleans’ flood defenses, the city began its long march to recovery. Building codes were strengthened, and infrastructure has been improved. But the risk of another Katrina still weighs on the minds of people in Louisiana and Mississippi. They know another storm like Katrina will visit eventually. Will they be ready? It’s something that attendees of RIMS should think about, too.

The theme of RIMS ’15 is “New Innovations, New Encounters, New Knowledge.” That is fitting, because there is a lot that’s new about how organizations need to think about risk. Let’s look at some of the lessons from 2005 and what has changed for risk professionals in the decade since.

Here are several that come to mind:

Business interruption. Katrina opened a lot of eyes to the need for better disaster preparation and, for businesses, to the need for business interruption coverage. That heightened focus on business interruption risk would evolve further, into global supply chain management. It remains a hot topic for risk managers today.

  • It also pays to think about consequential damage after a disaster, such as excess humidity, that can complicate or lengthen business recovery efforts. One risk manager told me that his CFO asked, “Why are we ordering air conditioners for our building that was shut down by the hurricane?” Answered the forward-thinking risk manager: “If we don’t, mold will grow and that will need to be cleaned up before anyone can go back to work in the building.”
  • Demand surge. Catastrophe modeling companies learned quite a bit from Katrina and sister windstorms Rita and Wilma in 2005. One of the learnings was how “demand surge” plays out following a string of catastrophes. The concept is simple and has been studied in an economic context for decades -- scarcity of labor and building supplies creates demand and raises costs – but 2005 gave the insurance industry a master class in the effects of demand surge on claim costs. The lesson for risk managers is to line up recovery services in advance, to minimize disruptions and lock in prices.

We might be able to measure risk more accurately today than 10 years ago, but the wind still blows, the earth still shakes and human behaviors still cause liability.

  • Data quality. People weren’t talking much about Big Data in 2005, but back then Katrina exposed a problem in what data was available: inconsistent quality or incompleteness. That resulted in sometimes unpleasant surprises for insurers, such as an insured structure underwritten as masonry when it actually was wood frame. Today, everybody is aware we live in an era of Big Data, and analytics can help inform our decision-making. Along with better analytics came a clear understanding that data quality is paramount, even if it’s imperfect.
  • Risk ownership. “Who owns risk?” is a key question for every organization. In 2005, it typically resided with whoever was responsible for risk management and risk transfer. Today, it’s a board-level responsibility, mandated by legislation enacted after the global financial crisis. In the past 10 years, risk professionals have become accustomed to getting asked about risk management programs by senior management and outside directors. That is a good thing for the risk management profession, even if it now requires risk managers to have ready answers.
  • We’ve looked at some of what has changed in 10 years. What hasn’t changed?
  • People are still people. And that means organizations and individuals are going to continue to have short memories. They need reminding that exposures still exist and need to be mitigated, insured or avoided.
  • Periods of low loss activity tend to make folks complacent. After Katrina, Rita and Wilma, hurricane risk was top of mind for just about everybody. In 2006, no hurricanes made landfall in the United States. 2007 was a relatively light year for insured catastrophe losses, too, even though two Category 5 hurricanes made landfall in Mexico and Central America. Two years in a row of low losses pushed hurricane risk down in the list of worries. Getting people to think about  and take action before bad things happen can be challenging.
  • Risk is still risk. We might be able to measure risk more accurately today than 10 years ago, but the wind still blows, the earth still shakes and human behaviors still cause liability. Risk doesn’t manage itself. In 2015 and far beyond, organizations will still need good risk managers.
  • Strength in partnership. Another thing that hasn’t changed is that risk managers still need great partners, in their brokers, risk advisers and underwriters.  

Regis Coccia is an insurance journalist and content strategist. His columns on insurance and risk topics appear periodically on Fast Fast Forward.

The views expressed in this column are the opinions of the author and do not necessarily reflect the opinions of XL Group.

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