The Lasting Lessons of Hurricane Katrina
How this catastrophic event continues to enable the global insurance industry to become even better.
On Aug. 28, 2005, the National Weather Service’s National Hurricane Center issued a warning at 7 a.m. CDT that Hurricane Katrina, a “potentially catastrophic Category 5 hurricane,” was headed for the northern Gulf Coast. In the days that followed, the storm became the largest insured loss event in history, claiming more than 1,800 lives and generating more than 1.7 million insurance claims worth more than $41 billion (adjusted for today, those claims totaled more than $48 billion). Total economic damage from Katrina ultimately exceeded $100 billion.
The arrival of Katrina triggered the evacuation of more than one million people across Louisiana, Mississippi, and Alabama. However, many stayed, either because they were unable to leave or because they decided to take their chances. The biggest population center in Katrina’s path was the city of New Orleans, which was particularly vulnerable because its average elevation is below sea level. The U.S. Geological Survey determined that major breaches in New Orleans’ network of levees caused flooding in more than 75 percent of the city. In a report issued after the storm, the U.S. Army Corps of Engineers, which had built the flood defenses, admitted engineering failures and using outdated information during construction. Litigation was filed against the Corps of Engineers by almost 500,000 residents and businesses in New Orleans. A federal judge ruled that, despite faulty engineering, the Corps had immunity under federal law.
While the insurance industry paid out more than $41 billion in Katrina claims, according to the Insurance Information Institute, many residents whose property was damaged lacked insurance, particularly for flood. The story of Katrina did not end when the storm weakened and moved away from the Gulf. Instead, a new chapter would be written about the responsiveness of the global insurance industry and how lessons from Katrina are enabling the industry today to help individuals, businesses, and communities rebuild after catastrophes.
The Industry’s Response
The immediate aftermath of a major hurricane is chaotic both for policyholders filing insurance claims and the claims professionals who are trying to quickly get to the affected areas. Katrina presented unprecedented challenges for catastrophe claims professionals; gaining access to the worst-hit areas was nearly impossible in the first few days. Despite all of these challenges, however, experienced catastrophe claims teams were able to get to the serious work of resolving losses and enabling insurers to process damage claims.
The damage from Katrina “was absolutely devastating,” says Bud Trice, vice president of catastrophe services for Crawford and Company. “We set up a command post in Mobile, Ala., because you could not find anything past the Alabama line. There was literally nowhere to find food, fuel, or a place to sleep,” he recalls. “Usually, [claims professionals] want to get to the worst damage first. We just couldn’t do it.”
Teams of claims professionals commuted several hours each way from Mobile into the affected areas. Lack of fuel was partly due to wide-area power outages.
“We could not get gasoline because even if you have full fuel tanks, you need electricity to pump it out of the ground,” says Trice. “When you don’t have fuel, time seems to take forever. On the other hand, the days after Katrina were a whirlwind experience.”
The devastation that Katrina caused was widespread and shocking, even for experienced catastrophe claims professionals, Trice says. For example, New Orleans had severe flooding even though it was not directly hit by Katrina. Areas east of New Orleans through Mississippi and into Alabama suffered the brunt of the damage from wind and storm surge, he notes. “Point Clear, Ala., was 150 miles from where Katrina made landfall. Some properties there had wind damage and four feet of water inside them,” he says.
“I’ve been working on catastrophe claims for 38 years,” Trice continues. “When Hurricane Hugo hit Charleston, S.C., in 1989, it was the worst I had ever seen. Then in 1992, Hurricane Andrew made Hugo look like a Category 2 storm. Katrina had the same effect; it made Andrew look small. Then when you pile Hurricanes Rita and Wilma on top of Katrina in the same year, things just got crazy,” he says.
One of the things that enabled Trice’s catastrophe teams to handle claims soon after Katrina hit was a satellite communications truck. Access to New Orleans and the worst-hit areas remained difficult, but the satellite truck allowed claims professionals to download assignments and upload reports.
“That was a success story,” says Trice. “We found a vacant office, rented it, pulled up the truck, and raised the dish. We had phone and Internet access before we had power in the building.”
Deploying the Katrina Model
The “KRW” experience of having Katrina, Rita, and Wilma all strike within months of each other in 2005 provided important lessons for the industry. Many companies considered the following elements in forming a “Katrina model” for handling simultaneous major catastrophes:
- Resources. How many claims professionals can be deployed?
- Logistics. How best to get claims professionals into the impact zone?
- Sequence of storms. How to effectively handle big events that all occur within a short time?
- Resolving claims. What are the most efficient ways to process a large volume of reported losses?
- Coverage issues. Katrina prompted a debate in the insurance industry regarding coverage for wind versus water, and many losses due to storm surge or flooding were excluded from property policies.
“We had to look carefully at the claims we saw in Katrina,” says Trice. “There is a boat on top of a house? Boats don’t fly, so that was caused by water. Then there is the bare slab—was that caused by wind or water? Water may not have washed the house away, but it washed the evidence away.”
Part of Crawford’s Katrina model involved creating a special team that combined the resources of its catastrophe services group with claims professionals from the company’s global technical services unit, which handles large and complex losses that exceed $1 million. “It worked like a charm and enabled us to get the right kinds of claims into the right hands,” Trice says.
Richard Lafayette, senior vice president and chief technical officer of Crawford’s Global Technical Services, agreed on the necessity and effectiveness of the team approach.
“Katrina was the most complicated event I ever worked, including Andrew,” he says. “The logistics made it nearly impossible to get work done. It took three-to-five hours just to drive to New Orleans, inspect losses, and drive back to where the hotels were located. At times, it was overwhelming. The Katrina model worked extremely well, and it’s a big part of our plan for handling similar events in the future.”