Businesses advised to strengthen loss controls as nat cat risks rise

California officials brace for post-fire floods

Businesses advised to strengthen loss controls as nat cat risks rise

Property

By Nicole Panteloucos

Despite progress in containing wildfires across the Palisades, Los Angeles remains on high alert due to continuing strong winds. Adding to the challenges, California officials are now preparing for post-fire risks, such as flooding and landslides.

As reported by The Weather Network, wildfires significantly alter the environment. They destroy trees and vegetation that anchor the soil, and when these roots are removed, the loosened soil becomes more prone to being washed away during heavy rains.

Intense fires can also change soil composition, creating a wax-like layer that repels water. This reduced absorbency can increase the likelihood of rainwater pooling on the surface, heightening the risk of flooding.

Building a flood response plan

According to Jonathan Naranjo (pictured), national real estate practice leader, SVP, at Newfront Insurance, to effectively mitigate flood risk, businesses and homeowners should prioritize collaboration and planning. Working closely with broker partners, as well as loss control and risk engineering teams from both the brokerage and carrier sides, is essential to building resilience.

"Having a documented Flood Emergency Response Plan (FERP) is essential to ensure that every stakeholder, whether within an organization or a household, knows exactly what to do and how to prepare in the event of a hurricane or severe windstorm," said Naranjo.

Key components of a FERP can include identifying flood-prone areas and vulnerabilities in your business or home, clearly defining roles and responsibilities for team members during a flood emergency, and outlining strategies to secure or relocate critical equipment, inventory, and documents.

In addition to response planning, brokers can recommend actions for clients to help protect their businesses and homes from the elements, such as:

  • Reinforce structures: Strengthen foundations, roofs, and walls to ensure they can withstand high winds, floods, or earthquakes.
  • Install flood barriers: Use floodgates to prevent flooding, particularly in flood-prone areas. Naranjo specifically advised against using sandbags, noting, “Research shows sandbags are ineffective. For instance, it would take 30 sandbags - or more - to block a common entryway, compared to one AquaFence.”
  • Upgrade windows and doors: Install impact-resistant windows and doors to protect against strong winds and flying debris.
  • Clear gutters and roofs: Regularly clean gutters and remove debris to prevent water backup and reduce flood risk.
  • Create firebreaks: In wildfire-prone areas, clear vegetation and establish defensible space around the property to minimize fire risk.

Risk engineering and rising water damage deductibles

Not only do these measures help reduce damage risk to clients' homes and businesses, but they can also lead to lower insurance premiums. As Naranjo predicted, with the increasing severity of nat cat events, insurers will increasingly expect policyholders to implement risk engineering recommendations after on-site visits. “If critical items aren’t addressed, it could lead to significant rate hikes or even non-renewals,” Naranjo warned.

Naranjo also shared that clients would continue to face heightened scrutiny around water damage deductibles this year. “Water damage deductibles are under intense scrutiny right now,” he confirmed. “Even for clean, profitable risks without any history of losses, insurers are looking to increase water damage deductibles from $25,000 to as high as $100,000. This is because the frequency of water-related claims is expected to rise. It’s no longer a question of ‘if’, but ‘when’ a water event will occur.”

Making better underwriting decisions

Brokers must highlight the importance of clients implementing necessary loss control measures, particularly as insurers increasingly use advanced technologies and AI to map weather patterns and assess property risks. This shift may prompt insurers to be more selective in insuring homeowners and businesses in high flood and wildfire risk areas, as they make more informed underwriting decisions.

According to Marty Smuin, CEO of Arturo: “When underwriting properties with deferred maintenance or those located in areas prone to flooding, hurricanes, or severe storms, the risk assessment can make or break a company. It's crucial to evaluate these risks carefully.”

He explained that the insurance industry is moving towards automation to reduce errors. “It’s not about eliminating human involvement, but rather minimizing mistakes. A human can’t analyze an image in milliseconds and extract 150-200 data points, which is where AI and computer vision come in. These technologies automate the process, but someone still has to make the final underwriting decision.”

Smuin emphasized the importance of insurers taking precautions and partnering with the right technology providers to ensure reliable, high-quality data. “You need data you can rely on because if your models are flawed, your decisions will be, too,” he cautioned.

This focus on accurate data is particularly crucial as Naranjo pointed out that highly protected risks, or "desirable risks"—such as newer property developments with reinforced steel, concrete structures, and fully sprinklered buildings—will continue to perform well. These properties meet all life safety standards and up-to-date building ordinance codes. "Properties with this type of portfolio are expected to remain strong, with potentially modest, single-digit rate increases," he explained.

Related Stories

Keep up with the latest news and events

Join our mailing list, it’s free!