May 2012

Fear vs. Prevention

Two years ago a leading article with a major head line in the USA Today stated “Fierce Hurricane Season Predicted.” The article went on to say that an “extremely active” hurricane season was to occur in 2010 with 14 – 23 named storms to hit the Atlantic Ocean, Caribbean Sea and Gulf of Mexico. Of those named storms eight to 14 should become hurricanes, including three to seven “major” hurricanes with wind speeds above 111 mph, this was the highest prediction that forecasters had ever made. The forecasters had been making these predictions since 1998. The predictive forecasts are made by the National Oceanic and Atmospheric Administration, which is part of the Federal government and two scientists from Colorado State University. The forecasters take into consideration factors that include El Nino and warm Atlantic Ocean water off the coast of Africa. Now are these predictions accurate and what purpose do they serve?

“When the hurricane season ended in 2010 there was a small article that stated not a single hurricane made landfall in the USA and that there was only a 2 – 3% chance of that happening. Early indications suggest odds are an active season will occur in 2011.” This was stated by the scientists and meteorologists from Colorado State University.

There are three Earthquake and Windstorm Models that are used in the Property Insurance Industry and they are EQE (ABS Product), AIR (ISO Product) and RMS. All three serve a purpose of modeling insurance carrier portfolios to determine the level of risk the carrier is taking on for insurance and reinsurance purposes. The models are also used by the rating agencies to determine the relative risk a carrier is taking on in a geographic area where there is a significant risk of an earthquake, hurricane or possibly a flood. The models involve gathering data called Primary and Secondary factors, which are used to develop the modeling results. However in most cases that data is not accurate and not submitted by qualified engineers who understand the factors and the details involving the construction features.

As an industry, are we steering away from prevention – where Risk Management and the Brokerage firms are using their financial resources to gather data for modeling purposes – instead of using it for preventative purposes? Why have a Property Loss Prevention Engineer visit a site to Primary and Secondary factors for a model? Shouldn’t we also be inspecting the site to determine whether there are any deficiencies? By inspecting the site, if that hurricane struck or the earthquake occurred, the facility would have been protected to the most conservative standard.

FM Global has a Test Center where they have a “Shake Table” in which an engineer can simulate an earthquake. They also have a natural hazards lab that is capable of simulating windstorm damage. FM Global provides some of most conservative windstorm and earthquake protection guidelines in our industry. Risk Logic is an enthusiastic advocate of ensuring that facilities meet the FM Global standards for these natural perils. To have a “qualified” engineer visit a site in a natural catastrophe prone area, and provide a detailed assessment with qualified recommendations backed by FM Global standards, is critical in the protection of a building.

In December 13, 2011 a very small article was posted that the two top U.S. hurricane forecasters from Colorado State University abandoned the practice of building seasonal forecasts because it simply doesn’t work. Both scientists looked back on their past 20 years of forecasts and determined that they had no real predictive value. Colorado State University has been known for decades for their forecasts detailing how many named storms and hurricanes can be expected each hurricane season. Their exact quote was, “We are discontinuing our early December quantitative hurricane forecast for the next year… Our Early December Atlantic basin seasonal hurricane forecasts of the last 20 years have not shown real-time forecast skill even though the hindcast studies on which they are based had considerable skill.”

Modeling natural catastrophe risks definitely serves a person in our industry. However the shift from modeling only, and not having a qualified engineer provide a thorough analysis for risk prevention, is a mistake.

Successful Risk Management programs stress a proactive, preventative philosophy. At times the message may need to be reactive, but to model only and not be active in property loss prevention is a mistake that will adversely affect your company.

At Risk Logic we have qualified Professional Engineers with over 20 years experience who can provide a detailed windstorm or earthquake property risk prevention analysis.