The 2020 Mid-Year Economic Update_long

What’s Your Plan B?

CBS News Disaster Links
Lee Eagan’s Speech at the ISA Annual Meeting
Oliver H. Van Horn Co. Katrina Slideshow

‘Wake-Up Call’
Without question, the busy 2005 hurricane season served as a wake-up call to many businesses.

The Insurance Information Institute estimated $56.6 billion in insured losses and three million claims related to catastrophic events in 2005. (A catastrophe is defined as an event in a particular territory that causes $25 million or more in insured property losses and affects a significant number of property and casualty policyholders and insurers.)

About $52.7 billion of losses was due to the record-breaking hurricane season.

The Gulf Coast accounted for more than 80 percent of those claims and almost half the dollar loss.

Some companies are taking heed. A survey commissioned by Emerson found that since the 2005 hurricane season, more than 60 percent of large U.S. businesses have audited their backup power needs and three-quarters have budgeted funds to prepare for and maintain operations during natural disasters.

Still, the survey found that more than one-fifth of respondents have not budgeted to prepare for and maintain operations during natural disasters. The survey questioned businesses with $50 million in revenue or more.

More businesses are prepared for power losses than for handling threats of disruption from other sources. Almost 40 percent of large businesses estimated that one day of downtime would cost at least $500,000 in revenue. About 15 percent surveyed forecast one-day losses of
$2 million or more.

Records Preservation

Vital records include financial and insurance information, engineering plans and drawings, product lists and specifications, employee, customer and supplier database, formulas and trade secrets, and personnel files. To protect and access vital records, consider these approaches:

  • Label vital records
  • Back up computer systems
  • Make copies of records
  • Store tapes and disks in insulated containers
  • Store data off-site where it will likely not be damaged by an event affecting your facility
  • Increase security of computer facilities
  • Arrange for evacuation of records to back-up facilities
  • Back up systems handled by service bureaus
  • Arrange for back-up power

Source: FEMA Emergency Management Guide for Business and Industry

Questions to Ask Your Insurance Company

Ask your insurance agent to go through each major category of coverage, including business interruption; flood, hail and windstorm limits; and consignment and off-site inventory requirements. One distributor recommends setting an annual half-day meeting with your insurance agent to review your policy.

  1. How will my property be valued?
  2. Does my policy cover the cost of required upgrades to code?
  3. How much insurance am I required to carry to avoid becoming a co-insurer?
  4. What perils or causes of loss does my policy cover?
  5. What are my deductibles?
  6. What does my policy require me to do in the event of a loss?
  7. What types of records and documentation will my insurance company want to see? Are records in a safe place where they can be obtained after an emergency?
  8. To what extent am I covered for loss due to interruption of power? Is coverage provided for both on- and off-premises power interruption?
  9. Am I covered for lost income in the event of business interruption because of a loss? Do I have enough coverage? For how long is coverage provided? How long is my coverage for lost income if my business is closed by order of a civil authority?
  10. To what extent am I covered for reduced income due to customers’ not all immediately coming back once the business reopens?
  11. How will my emergency management program affect my rates?

Source: FEMA Emergency Management Guide for Business and Industry

Katrina and other hurricanes dealt many distributors along the Gulf Coast a tough blow in 2005 that will take years of rebuilding effort. Distributors in the region continue to fight declining revenues, a leaking pool of customers, and a shortage of employees. Take it from someone who lived in New Orleans just nine months ago: A disaster can hit you or your business; it’s best to be prepared. As distributors shared with MDM, it’s more than managing with less of everything. Dealing with the details now can make a big difference in recovery later.

Lingering Effects
New Orleans and other areas devastated by the 2005 hurricane season are struggling to get back on their feet. Businesses still face big obstacles, including skyrocketing insurance rates and finding employees. The pool of available employees has been shrinking every month since November.

That’s been the biggest headache for Richard Cahn, president and CEO of Dixie Mill Supply Inc., an industrial distributor in New Orleans. He lost five employees who were displaced after losing their homes. Another five lost their homes, but continue to work for Dixie Mill. But recruiting and retaining employees has been difficult.

Many places, including fast-food restaurants, are paying much higher hourly rates. Many temporary jobs are offering even higher wages. “The days of $8-$10 an hour people are history,” says Lee Eagan, president and CEO of Oliver H. Van Horn Co., New Orleans.

What’s more, because supply is so low, the cost of housing is prohibitively high. Workers can’t find affordable housing near their job sites. Medical care is in short supply in the city. Just two hospitals remain open. Water service is low – it’s estimated that 80 percent of the water system has been compromised.

In addition to labor issues, many distributors along the Gulf Coast have struggled just to stay afloat. “If you have major accounts in New Orleans, you are severely affected,” Cahn says. A majority of Dixie Mill’s customers are not based in New Orleans.

Insurance is a major hurdle for businesses in the hurricane zone. Insurance companies are not writing new business and have raised rates and lowered limits. Many policies now exclude wind and hail.

Eagan says his insurance provider has offered the Oliver H. Van Horn Co. just 34 percent of pre-Katrina coverage with a premium of 8.6 times the company’s previous rate.

Learning from Disaster
Developing business continuity plans, along with protecting revenue flow and crucial data, may lower your insurance rates as well as provide some peace of mind.

Cahn says his company was forced to “improvise” last year when Katrina hit. The city was shut down for months after Katrina, so the company could not operate out of its headquarters. Dixie Mill was forced to open a temporary office in Cotton Port, LA, about three hours north of New Orleans.

Employees had to sneak back into New Orleans to rescue computers and key documents so the company could continue operations. Lucky for Dixie Mill, its facilities were in the one area of the city that did not sustain flood damage. (About 80 percent of the city did flood.)

Cahn says his business is better prepared this year. Recently, he sat down with employees to lay out a disaster plan. The company considered four scenarios: a forced evacuation for a short period of time, for two weeks, for two months, and forever.

Cahn discussed each situation, and what the company would need to do for the business to survive. Even a few days out of work can mean a substantial loss in revenues for any distributor. He also prepared the company for the worst. “When we evacuate, we need to be ready for any of those scenarios,” no matter how unlikely, he says.

Dixie Mill has already rented the same Cotton Port facility it used last year after Katrina. He says the summer rental is costing some money. But in case of an evacuation, the company will be back up and running more quickly, which ultimately will protect Dixie Mill from sales losses.

Direct Hit
Oliver H. Van Horn Co. was hit directly. The offices were flooded and destroyed, and since then the company has been moving from temporary office to temporary office.

Oliver Van Horn’s inventory levels have returned to about 80 percent of pre-Katrina levels. Fifty percent of its Gulf Coast customers are gone. Revenues have dropped substantially compared with last year’s numbers, Eagan says. Since last year, Eagan’s company has looked more closely at its disaster plan.

One change it made: It now has a redundant computer server in another location. The company had sent its database to a service provider in Pennsylvania last year a couple of days before Katrina hit. It also backed up its servers and Eagan took the tape with him when he evacuated.

During a speech at the Industrial Supply Association annual meeting in San Antonio in May, Eagan urged distributors to contact their elected representatives about legislation that would provide comprehensive Category 5 hurricane protection including structural and non structural flood control; wetlands restoration; and levees.

Key Points
Distributors emphasized the following when creating a business continuity plan:

  • Incorporate key suppliers into your disaster plan to ensure business continuity. Discuss scenarios to establish how your top three suppliers can support any capabilities you might lose in an emergency.
  • Communication. Take down the email addresses, phone numbers (including spouses’ or other family members’), and other contact information for all employees and suppliers. Create a reference manual for recovery. In addition to keeping that information both on- and off-site, put this information in your cell phone or other mobile device.
  • Plan on the possibility that cell phones don’t always work. Like hurricane victims in the weeks afterwards, you may be forced to communicate by text message. Train your people to do this so it is not the first time under pressure!
  • Decide which records are critical to the survival of the business. Duplicate and separate important papers, such as titles and insurance policies.
  • Contact your bank. Will they reproduce data for you?
  • Dixie Mill has preserved a sample of each type of form it uses on a daily basis, including invoices and purchase orders. The company has also sent a box of the forms to an out-of-state office.
  • Know the numbers of the suppliers of your local suppliers, if possible, in case you need to order new forms, for example, or other items important to your business.
  • Know the numbers (personal and business) and e-mail addresses of your insurance agents and lawyers (as well as their assistants), Internet and phone service providers, etc.
  • Create a disaster recovery coordinator role. You or someone you designate has to think through the scenarios of worst case and create plans for who does what when. The plans may not be perfect, but it is always easier to adjust than to start thinking through the right decisions under pressure. Let the memory of Katrina be a positive in helping you and other distributors position to be stronger if or when the worst might happen.

Rebuilding After Katrina, by Lindsay Young
Disaster Planning Toolkit for Small and Mid-Sized Businesses
Hurricane Insurance Information Center

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