As business owners seek to build resilience to more extreme weather, they’re protecting their businesses against loss and disruption further down the line.
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US business owners are increasingly concerned about the impact of severe weather on their people, property and day-to-day operations. This concern is reflected in this year's Gallagher Business Owners survey, which found that natural disasters were a top concern for 91% of business owners. The survey also sheds light on the growing worry among business owners that they may not have adequate cover to pay for future losses.

It's not difficult to see why extreme weather is top of mind as the US continues to see widespread catastrophic events such as convective storms, hurricanes that cause damage and flooding, and wildfires. When these events are combined with urban sprawl and increased costs to construction labor and materials, the cost of disasters across the US is resulting in a more challenging insurance market. For the 84% of respondents who said they had made a business-related claimed on their insurance in the past year, the realities of dealing with property damage, safeguarding staff and navigating periods of business interruption are feeling ever present.

Severe convective storms have become a major driver of loss

During the first half of the year, total claims from natural peril events around the world were USD61 billion, with US severe convective storms (SCS) driving 61% of the loss (USD37 billion), according to Gallagher Re. Moreover, insured losses for SCS topped USD100 billion over the last 18 months, making it the costliest period on record.

And with hurricane season well underway, with forecasts for above-average storm activity, there's heightened potential for greater loss during the second half of the year.1

Historically, the insurance industry's average annual losses from natural catastrophes were driven by the "peak perils," such as windstorms, with reinsurance absorbing a sizable segment of the claims. But it's increasingly the case that secondary perils make up the bulk of the industry's total claims, with implications for carriers and commercial insurance buyers.

It means that a growing number of businesses, over a wider geographical area, are generally more exposed to weather losses now than in the past, making it harder for carriers to model and predict losses.

Carriers reassess their appetite for catastrophe risk

The cost of coverage is rising, and mid-market firms are seeing some of the highest increases. "Traditional catastrophe losses were viewed as hurricane and earthquake, so the likes of Florida and California have been addressing this for years. But now secondary-peril-driven catastrophes are impacting our clients in the Midwest, New Mexico, Colorado and Illinois," observes Martha Bane, leader of Gallagher's Property practice.

Insurance carriers are responding to the rising quantum of property damage claims by withdrawing capacity, particularly in catastrophe-prone states, increasing the cost of coverage and continuing to tighten policy terms. As a result, the cost and availability of coverage remain a pinch point for many clients, who are taking on substantial risk.

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Incorporating resiliency into the insurance decision-making process can help mitigate risks and costs down the road.
Martha Bane, managing director, Property practice

In return for coverage, carriers expect more detailed risk submissions and up-to-date valuations at renewal. Even after they've secured coverage, 80% of business owners are worried their property insurance won't cover a specific event or loss.

The issue of insurability is bigger than ever. There's concern that current market dynamics will become even more constrained as insurance carriers and reinsurers adjust to the "new normal" and steadily pull away from volatile, catastrophe-exposed business.

Insurance becomes the tail that wags the dog

For business owners looking for more certainty as they face the future, one option is to reduce their longer-term exposure to damage and disruption. "Insurance coverage and costs are now impacting business decisions on how clients operate and run their business," says Bane. "Higher insurance costs are eroding profit margins, leading them to explore alternative risk transfer solutions, in an effort to stabilize insurance costs.

"This is also causing business owners to also look at where they locate their business and how they construct their facilities," she continues. "Some clients are choosing to invest in areas where insurance costs are more affordable while offering the protection they need."

While it can appear difficult to justify additional expenditure on strengthening existing facilities and loss controls, such moves can pay off significantly longer term. Research suggests that every dollar spent on risk reduction and prevention saves up to $15 in post disaster recovery.2

Adhering to building codes goes a long way to improving resilience to natural disasters and protecting life, but going further can reduce both damage and long-term costs. For example, buildings in floodplains that are reinforced with up to five feet of freeboard, rather than the usual one foot, would save five dollars in future losses for every one dollar invested.

Counting the resilience dividend

Whether dollars are spent on relocating facilities to a less hazard-prone site, retrofitting a property's roof so it can better withstand a storm or building back better after a flood or storm claim, ultimately decisions made now could impact the severity of future losses and thus insurance costs to the business owner. As business owners seek to build resilience to more extreme weather, they're protecting their businesses against loss and disruption further down the line.

"These types of decisions are coming into the conversation more often with business owners, where the terms and conditions of their property insurance have changed, and they have to pay to replace their own roof because of higher deductibles, for instance," says Bane. "Incorporating resiliency into the insurance decision-making process can help mitigate risks and costs down the road."

Taking steps to reduce future losses will ultimately help businesses differentiate themselves in a challenging insurance market. Some carriers have offered premium discounts or lower deductibles to customers who have done things to mitigate risk. These offers reflect the underwriters' assessment that such investments ultimately improve the underlying risk, leading to a more favourable insurance outcome.

Concern Perils Client's response Carriers' response
Climate change Increased severe convective storm Understand assets vulnerabilities, e.g., replace old roofs and protect skylights from hail. Additional sources of power and redundant supplier. Carriers value proactive loss control and may give credit on the deductible.
Climate change Increased hurricane activity Understand assets vulnerabilities (e.g. replace old roofs, fortify assets with wind-resistant glass); create emergency response plans pre-and post-event with vendors. Carriers give more credence to insureds who commit to non-cosmetic cap ex budgets. Positive impact on rates.
Climate change Increased frequency and severity of coastal and non-coastal flooding Scrutinize flood zones before purchase or development; install flood gates. If the exposure is low for non-A&V, carriers are less likely to charge a high premium.
Climate change Winter freezes Teach tenants to prepare for severe winter weather (keep faucets dripping); procure emergency power before the event; immediately survey assets to determine extent of damage and potential for mold. Carriers factors these protocols into underwriting and may discount rate or deductible.
Wildfire Increased and prolonged wildfire season beyond typical regions (Colorado, Texas, Hawaii, etc.) Recognize vulnerabilities and install fire-resistant roofs and vegetation; water cannons; potential private firefighting services. Pre-arrange restoration companies for smoke damage mitigation. Carriers who normally avoid this exposure may be persuaded to provide capacity, thus increasing competition.
Earthquake Tectonic shock and earth movement If probable maximum loss (PML) exceeds 20%, retrofit assets to decrease risk of loss. For sink holes and subsidence, use geotech engineering to review soils and compaction in vulnerable areas. Retrofits can improve model output, and coverage needed may be less or at a lower rate.
Sources

1"Seasonal Hurricane Forecasting," Colorado State University, updated 9 Jul 2024.

2"Our Impact," UNDRR, accessed 1 Aug 2024.