Risk managers and insurers should have “robust strategies” in place

Aon is warning risk managers and insurers to be prepared after leading forecasters said this year would be an active one for Atlantic hurricanes and tropical storms.

Risk managers and insurance companies should consistently employ robust enterprise risk management strategies and business continuity programmes, a press release from the company said.

The National Oceanic and Atmospheric Administration's updated forecast on 22 May calls for 12 to 16 named storms between June 1 and November 30. Other major forecasting organisations also believe conditions are ripe for an active storm season.

"While predictions of hurricane activity are important, insurance and reinsurance buyers must remember that any storm can cause massive destruction, whether that storm occurs in a season of above-normal activity or below-normal activity," said Steven Drews, lead meteorologist and associate vice president of Impact Forecasting LLC, a unit of Aon Re Global. "Hurricane Andrew in 1992 and hurricanes Dean and Felix in 2007 each caused massive destruction - during periods of relatively light activity."

The low severity of property catastrophe losses since 2006 – resulting in part from the relatively small number of land-falling hurricanes and tropical storms in the last two years - is one driver of what Aon Re Global expects will be favourable pricing for traditional property catastrophe reinsurance programmes for insurers' mid-year renewals.

A recent Aon Re Global study of insurance company stock price reaction to 2005 hurricanes Katrina, Rita and Wilma found that insurance company stock prices were more sensitive to a single large loss (i.e. Hurricane Katrina alone) than to an aggregation of loss events (i.e. Katrina, Rita and Wilma combined). The Aon Re study underscored the view that insurance companies can best drive shareholder value by consistently managing the enterprise risks facing their businesses. Ceding risks through the reinsurance markets is one method of doing so.

Managing enterprise risks should also be a strategic priority for those risk managers and finance professionals responsible for risk management. A second study released in late 2007 by Aon Global Risk Consulting found that only one in ten of the companies surveyed had developed a fully integrated enterprise risk management strategy.

"We advise our clients to focus on how best to protect their people, property and data, as well as the ability to communicate," Tobin said. "Also, we urge clients to procure generators, temporary employee housing and restoration services before or early in the hurricane season, as such services are often difficult to get after a storm hits."

Mitigating business interruption is key to preparing for tropical storm and hurricane risks and preventing a company or organisation from losing revenue, Tobin added.

"Organisations may become complacent in their loss-mitigation planning if they haven't experienced a property loss in some time," said Arnold Mascali, president of Aon Horison and Aon Global Rapid Response. "Such complacency can leave them vulnerable to significant losses if catastrophes

strike their facilities while they're not adequately prepared."