What is my 2021 tropical cyclone risk exposure?

Forecasting how cyclone damage and associated flood risks can hit your bottom-line and outlook

On the 29th of September, 2020, the Bureau of Meteorology announced a La Niña had been established in the tropical Pacific. In Australia, La Niña typically increases the chance of above average rainfall, and heightens the risk of widespread flooding and cyclone events. The last La Niña season was during 2010 – 2012, which included the devastating 2011 Queensland floods (resulting in over AUD $2bn in insured losses).

As a La Niña summer in the Pacific has been declared, it’s crucial to consider how exposed your business is and identify any preventative measures you can put in place to mitigate risks. Significant risks to consider, include:

• Property damage and business interruption
• Power interruption
• Prevention of access and supplier interruption
• People risks

Is your business exposed to damage from wind, such as those associated with tropical cyclones? 

Understanding which of your assets and business operations are exposed can be a complex exercise. Download Marsh's La Niña Briefing Paper here.

Conducting a natural hazard exposure analysis can help to identify which assets are exposed to specific natural perils and where to prioritise further analysis. 

Catastrophe modelling can help inform how exposed and resilient your business is to cyclone risk through loss quantification (relevant to property damage and business interruption). The loss modellng can be used to review the effectiveness of your insurance program and the adequacy of policy limits, as well as support risk mitigation including business continuity planning. 

The output from a comprehensive catastrophe loss modelling exercise can help your business structure an efficient risk transfer program based on your risk tolerance, including your ability to withstand insured losses from a major tropical cyclone disaster.

Insured losses: Are your insurance policies exposed? 

After Cyclone Debbie, some affected businesses were surprised to learn that despite having property coverage, they weren’t covered for flood risk and/or resultant flood damage. Nearly every tropical cyclone serves up a reminder of the importance of reviewing a property policy and understanding the scope of coverage before a loss happens. 

A common property insurance policy will typically exclude cover for flood risks, unless specific arrangements have been made to include this cover. On the other hand, storm is a risk which is typically covered. For example, a standard policy wording commonly used in Australia excludes physical loss, destruction or damage occasioned by or happening through ‘Flood’, where ‘Flood’ is taken to mean ‘the inundation of normally dry land by water overflowing from the normal confines of any natural watercourse or lake (whether or not altered or modified), reservoir, canal or dam.’ 

However, it’s not always clear whether the damage has been caused by ‘storm’ as opposed to ‘flood’. This is an issue. Where there is a flood exclusion, it is a general principle of insurance that if there are two equally competing causes of a loss, one covered (in this case storm) and one expressly excluded (in this case flood), then the whole loss is excluded.

Building resilience 

Risk engineering looks at the design and construction of physical assets for the purpose of better protecting those properties and the people who occupy them. Risk engineering experts can assess, quantify and prioritise property-related exposures and any associated risk mitigation. Such assessments can help show the return on investment for various mitigation strategies, therefore maximising resource and capital allocations. Using appropriate risk engineering, selecting facility locations with risks in mind and identifying and addressing vulnerabilities in existing locations all play a role in ensuring the best possible protection for your assets. 

Disasters like Cyclone Debbie are defining moments. A well-developed, integrated and exercised business continuity management framework including emergency management, crisis management and business continuity planning, developed with input from across the business, provides an overall framework to prepare for, respond to and recover from a catastrophe.

Get on the front foot with risk mitigation

Businesses can prepare for tropical cyclone risks by: 

• Actively monitoring and following the advice provided by emergency services in a timely manner 
• Locating the business continuity plan if it exists and conducting a review to ensure it is still current
• Ensuring arrangements are in place to contact staff, suppliers and customers, including ensuring ready access to telephone, email and home address details 
• Securing critical records and files including accounts, customer lists, inventories, insurance details 
• Activating plans to isolate or protect assets and equipment to minimise damage or loss 
• Securing property and assets to prevent potential theft and looting 
• Advising critical suppliers and customers of likely outage, impacts and alternative servicing arrangements 
• Testing arrangements to divert telephony and other critical services 
• Be timely with decision making and be prepared to be out of the business premises for multiple days 
• Reviewing and updating business continuity and crisis management plans. 

Keep up to date with the tropical cyclone outlook for your area, here.

Climate change is likely to see an increase in cyclone activity in the future 

Already the increasing severity of natural disasters is having an impact on insurance costs and coverage. Insurers are reacting by raising premiums and imposing stricter coverage terms. The property insurance market continued to harden in each quarter throughout 2020. In the Pacific region, pricing increased 23% in the first quarter, climbing to 28% in the second quarter, and 31% in the third quarter. Further catastrophic events like cyclones will only continue to drive these increases.

The cost of doing nothing

The time and effort involved in recovery after a cyclone event is influenced in large part by the actions that organisations take before an event occurs. This work can and should start today by: 

• Understanding your cyclone risk exposures 
• Undertaking a business interruption review 
• Creating and reviewing a cyclone emergency management plan
• Updating business continuity plans to cover the management and logistical processes for continuing or resuming and recovering interrupted critical business functions 
• Understanding the specific wording in your insurance policies and whether any extensions or exclusions will apply
• Investing in risk mitigation strategies to help reduce the severity of potential flood or cyclone loss events. 

Marsh have a team of property risk consultants who can help you determine the flood and cylone exposures of your assets and support you in the design and implementation of risk mitigation and organisational resilience strategies that you can put in place to protect your business.

Need help now? Contact us here.

Marsh's full La Niña Briefing Paper is available for download now. 

1. Bureau of Meteorology, 2020, ‘Climate Driver Update’. http://www.bom.gov.au/climate/enso/

The information contained in this publication provides only a general overview of subjects covered, is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Insureds should consult their insurance and legal advisors regarding specific coverage issues. All insurance coverage is subject to the terms, conditions, and exclusions of the applicable individual policies. Marsh cannot provide any assurance that insurance can be obtained for any particular client or for any particular risk. Statements concerning legal matters should be understood to be general observations based solely on our experience as insurance brokers and risk consultants and should not be relied upon as legal advice, which we are not authorized to provide. All such matters should be reviewed with your own qualified legal advisors. Copyright 2020 Marsh Pty Ltd All rights reserved.  LCPA: 20/610