Denise Perlman is President of National Business Insurance at Marsh McLennan Agency, a Marsh McLennan company.
getty
In my last article, I gave a brief overview of the major risks impacting businesses. Today, I’ll dive deeper into the trend of catastrophic risk.
What Is Catastrophic Risk?
Catastrophic risk takes many forms. At Marsh McLennan Agency, we define catastrophic risk as “a single event, whether a natural catastrophe or something caused by human activities, that has a significant impact on any organization. An occurrence does not necessarily have to be local to generate severe losses.”
When it comes to catastrophic risk, the first thing many think of is extreme weather events. This is for good reason, as they can be unpredictable and devastating. An example of a major weather-related catastrophic event was Hurricane Maria. In 2017, the hurricane tore through the Caribbean, hitting Puerto Rico especially hard. What most will remember from this incident was the disruption to the supply chain, which severely hindered recovery efforts. The island’s ports and airports were shut down, and the infrastructure that powered the island was destroyed. This left the island without power.
While this was devastating for the people of Puerto Rico, the damage expanded beyond its borders. One of the only U.S. manufacturers of IV fluid produces products in Puerto Rico. Because of the hurricane, production halted, and the U.S. saw shortages of the fluid. The situation was a reminder of how broad the effects of a catastrophic event can be.
A similar, more recent example involves the shortage of chips used in products from smartphones to automobiles. This was primarily a result of the Covid-19 pandemic, as skyrocketing demand and dwindling supply led to a massive imbalance. It’s important to note that this shortage is still ongoing. CEO of Intel Pat Gelsinger explained that while things have improved, different challenges remain, “We believe the overall semiconductor shortage will now drift into 2024, from our earlier estimates in 2023, just because the shortages have now hit equipment and some of those factory ramps will be more challenged.”
Of course, this is only one of the issues that arose from Covid-19. These disruptions demonstrated how catastrophic pandemics—not just physical disasters—can upend global economies. The World Bank has outlined the challenges that follow biological disasters, such as reduced productivity, depletion of labor and weakened capital resources. In short, catastrophic risk can threaten the survival of organizations of all sizes.
What These Trends Mean For Businesses
Catastrophic risks are unique in that some are genuinely beyond the control of any organization. For instance, the next pandemic or epidemic will likely be tough to predict. The greater certainty, however, is that natural events will continue to cause devastation and disruption worldwide. They can be storms, floods, wildfires, earthquakes and other events. For example, the tragic wildfires that destroyed the historic Lahaina community in Hawaii escalated incredibly quickly making it difficult to prepare for.
Overall losses from natural disasters hit roughly $270 billion worldwide in 2022. Additionally, contingent business interruption losses climbed in recent years, according to an analysis by Allianz Global Corporate & Specialty. This includes a February 2021 deep freeze in Texas that damaged infrastructure and forced many businesses to shut down. This event alone led to as much as $155 billion in estimated economic losses.
With all of that said, not all catastrophic risks are naturally occurring. Human-caused losses such as oil spills, chemical releases and explosions have also had catastrophic impacts. If your organization has any potential exposures in these areas, addressing them before the unthinkable happens is important. Just the risk of fire in nonresidential structures accounts for dozens of fatalities and more than $2 billion in damage, based on annual averages from 2015-2019. These events can devastate businesses, and working to prevent them should be a top priority for any organization.
Your organization should also be aware of the indirect losses caused by catastrophic events. These issues, such as business interruptions and supply chain pressures, compound with direct losses and make the situation worse. The knock-on effect of reduced insurance capacity from a string of losses is also possible. The market can only afford to cover so much in losses and the broad effects of catastrophic events can push up against that amount. This can make receiving claim payouts after an event more difficult.
Is Your Business Prepared?
Ultimately, businesses should examine their property exposures, assess their risk preparedness and seek to improve their resiliency. Catastrophic risk is multifaceted, and therefore your business may need to consider various solutions relevant to your industry since no one size fits all.
No matter the industry, though, a great first step to take is ensuring you have some manner of plan in place should a catastrophic event occur. Be it proper coverage, a recovery plan and/or ways to increase your overall resiliency, it’s a crucial factor in doing business. Catastrophic events can have far-reaching effects. Being one step ahead of them could be critical to your organization’s success.
Next time, I’ll discuss the trend of inflation and what you can do to address it within your organization.
Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?