Loss mitigation by learning from losses
Ten years on, Hurricane Katrina remains one of the costliest losses ever sustained by the insurance industry. Looking back on an event of this magnitude always raises the question of what lessons can be learned for similar scenarios in the future: Which measures to limit the extent of the loss were successful? And what part does the insurance industry play in all this?
In the aftermath of Katrina, building codes were improved in an attempt to take precautions against similar loss events, particularly in the US states with the greatest exposure to flooding. These efforts revealed the importance of ensuring close coordination of public and private prevention measures. But they also highlighted the difficulties that can arise when many different organisations with convergent responsibilities are involved. At the same time, the consistent enforcement of the new building codes and safety standards were frequently hampered by a lack of viable alternatives to building in certain areas and the scarcity of the financial resources of those involved.
Experience shows, that close cooperation between all public and private players was clearly an important factor in mitigating the overall loss, rather than simply shifting the loss burden. The insurance industry’s role in this development goes far beyond the transfer of financial risks.
On the whole, however, recent experience with hurricanes in the US has shown that a greater risk awareness of all parties concerned can help to limit the losses. For instance, there can be little doubt that the early warnings and large-scale evacuation measures helped to significantly reduce the losses from Hurricane Sandy in 2012. The cyclones Odisha and Hudhud in India are another prime example of the effect that timely and consistent precautionary measures can have: Odisha claimed 10,000 lives in 1999. In 2014, the hazard zone was evacuated quickly and over a large area before Hudhud struck. Thus, although the two cyclones were very similar in scale, Hudhud claimed only 84 lives. Examples demonstrating the efficacy and wisdom of loss prevention measures also abound in Europe. The Elbe floods in 2002 and 2013 both caused insured losses of around €2bn. However, the similarity in loss figures was caused by a significant increase in insurance density and value concentration in the region during the intervening period. The overall economic loss in 2013 was only about half as high as in 2002, dropping from over €11.5bn to less than €6bn. This reduction was mainly due to the expansion and improved maintenance of the dyke network. Apart from this, preventive measures by homeowners and firms, such as relocating heating systems to upper floors or sealing buildings more effectively, also helped. Here too, however, close cooperation between all public and private players was clearly an important factor in mitigating the overall loss, rather than simply shifting the loss burden. The insurance industry’s role in this development goes far beyond the transfer of financial risks. Timely information on the potential risks raises risk awareness and draws attention to the options available for prevention. At the same time, attractive premiums help to create incentives for preventing or at least limiting losses.