EconSouth (First Quarter 1999)

Preparing for a Natural Disaster:
A Business Perspective

Preplanning can help mitigate disaster damages, saving both lives
and considerable costs associated with these unplanned events.

t used to be that the words "natural disaster" evoked, in many Americans' minds, visions of earthquakes, fires or mudslides on the West Coast. But that perception has changed during the 1990s — and particularly during the past year — as numerous natural disasters wreaked havoc on the southeastern United States.

Consider these southeastern disasters: Hurricanes Andrew (1992), Opal (1995), Earl (1998) and Georges (1998), which caused significant damage to the Atlantic and Gulf Coast areas; the floods in south Georgia (1994); wildfires in northern Florida (1998); and severe tornadoes in Alabama, Georgia, Mississippi and Tennessee (1998 and 1999). While everyone has viewed or read in the media about the human toll and suffering associated with such disasters, there is another side to their destructive nature: the business perspective and how businesses prepare for and recover from a natural disaster.


Kim Fuller, spokesperson for FEMA's Project Impact

Being prepared: Contingency planning

When Mother Nature strikes, any business in her way may be affected — from mom-and-pop stores to multibillion-dollar corporations. But businesses can take precautions to ensure that they are better prepared for a potential disaster by implementing an emergency management process in advance (see Making the Case for Emergency Management).

According to the Federal Emergency Management Agency (FEMA), emergency management is the process of preparing for, mitigating, responding to and recovering from an emergency situation, be it a natural or manmade disaster, a loss of computer or communications systems or a hazardous materials incident.

Many organizations have emergency management or contingency plans in place. The Federal Reserve, for instance, has contingency plans for many disaster situations, including hurricanes.

The Fed put these plans into action when Hurricane Andrew, one of the strongest hurricanes ever to hit the United States, struck south Florida on Aug. 24, 1992. "In advance of the storm when we knew we might be hit, we began to implement our contingency plan," said Jay Curry, vice president of the Atlanta Fed's Miami branch. "First, we wanted to ensure that our employees were safe and taken care of. To do that, we opened our doors to our employees and their families, and many decided to stay at our branch building during the storm."

After the storm, nearly all local businesses required that customers use only cash. Miami branch personnel went to work to ensure that cash was delivered to local financial institutions so that the Miami area's economy would continue to function.

On the day after the hurricane struck, the Miami branch paid out five times more cash than during a normal day — an amount that is still the one-day cash payout record for the branch. Since many of the branch's employees were unable to make it to work because of the severe damage in the area, the branch manually paid out this record total with only eight employees, half the number that would normally process cash by machine.

While the branch lost electricity, a backup generator kept critical systems like lights and the security system running. Other branch functions, such as U.S. government securities, wire transfers, automated clearinghouse transactions and checks, were transferred to the Atlanta headquarters. These functional transfers are a crucial aspect of the Federal Reserve's contingency plans, which provide for critical services to be sent to another Federal Reserve location to ensure the continued function of the local area's, region's and nation's payment system.

"Our contingency plans were quite comprehensive, but as we reviewed our performance after the hurricane we were able to add in some procedures that would make things go more smoothly in the event of another disaster," said Curry. These procedures included improving methods of communications and stocking supplies. As in the past, the branch continues to routinely update its contingency plans to ensure that they remain current.

Preparing for impact

Being more versus less prepared for a disaster can clearly pay off, according to Kim Fuller, spokesperson for FEMA's Project Impact program, which partners with communities, citizens and businesses in emergency management preparedness. "We estimate that for every dollar we spend on prevention we save $2 on disaster recovery," said Fuller. "That is why preparedness is so important. We've seen that when you put in the time and money up front it can significantly save money for businesses and communities in the long run."

While no community or business can control when a natural disaster occurs, communities and businesses can control their level of preparedness, helping to ensure a timely resumption of public works and business activities after a disaster.

Preplanning can not only help to mitigate disaster damages but can also reduce moral hazard issues related to disasters. Moral hazard is the condition often associated with an insurance arrangement whereby the existence of insurance encourages risky behavior — like building on flood-prone land — and protects individuals and organizations from the consequences of this behavior. In the case of natural disasters, critics have levied this charge against public aid for rebuilding multiple times in areas that are continually susceptible to disasters such as floods. Another example is allowing uncontrolled construction and development in coastal areas that are prime targets for damage from tropical storms or hurricanes and then providing disaster relief for rebuilding. By requiring individuals and organizations to implement preparedness efforts, however, moral hazard can be reduced.

Preplanning and preparedness efforts recently made a big difference in Pascagoula, Miss., a Project Impact community, when Hurricane Georges roared through in late September 1998, packing winds of more than 105 mph. Pascagoula is a city of 27,000 located on the Gulf Coast in a low-lying area that is susceptible to hurricanes, tropical storms and flooding. Earlier in 1998 the community's businesses, citizens and governments began preparedness efforts, such as implementing a disaster vulnerability awareness campaign.

"Instead of one or two weeks, most businesses were back up and running within days after Hurricane Georges — preparedness saved time and money," said Jim Foster, Pascagoula's Project Impact coordinator. "We believe businesses opened back up faster because they were more prepared, as were the public works and utilities people. Up until just recently, people thought about preparing for a disaster when a storm was approaching. Now businesses and the community are preparing for disasters in advance. That makes a difference when a disaster occurs."

Businesses opening sooner rather than later means that disruptions are more limited not just for businesses but for the communities as well, Foster emphasized. "It's important to understand how different groups within the community are linked, especially during a time of crisis. For instance, if employees' homes aren't prepared for a disaster and are severely damaged, then the employees can't work. If they can't work, businesses can't operate, which is a drain on the individual businesses and the local economy. Governments' and public works agencies' preparedness is also important so that they can act quickly to clear damage and restore electricity or water services after a storm. All three groups are connected and must work cooperatively."

Making disaster preparedness a regulatory issue

Disaster recovery plans are now becoming a regulatory requirement for many industries. To be prepared, each business should determine the regulatory requirements of their individual industry regulator or association to help avoid fines, penalties or negative press associated with noncompliance.

Health care is one industry that within recent years has begun to require that hospitals and similar facilities have disaster recovery plans in place. The Joint Commission on Accreditation of Healthcare Organizations (JCAHO) sets standards for operating a health care organization and evaluates the industry to ensure that these standards are met. Beginning in 1997, JCAHO began to evaluate health care organizations' disaster recovery plans as they relate to computer systems that might be damaged in the event of a natural disaster or foul play. Documented and tested disaster recovery plans that address items such as theft, vandalism, loss of critical data, provision of emergency power, and file and flood recovery are now required.

Bouncing back from a disaster

Unfortunately, disasters are a fact of life, particularly in some susceptible areas, like coastal communities. But no area, regardless of its geographic location, is immune to disasters, and communities throughout the Southeast, such as Albany, Ga., Sylvan Springs, Ala., Clarksville, Tenn., or Dunwoody, Ga., to name a few, have proved this point during the 1990s.

While communities or businesses can't control when a natural disaster occurs, they can control their level of preparedness, helping to ensure a timely resumption of public works and business activities after a disaster.

Making the Case for Emergency Management

The Federal Emergency Management Association (FEMA) points out a number of reasons for businesses to implement an emergency management plan. In its Emergency Management Guide for Business and Industry, FEMA says that emergency management

  • helps companies fulfill their moral responsibility to protect employees, the community and the environment;
  • facilitates compliance with regulatory requirements of federal, state and local agencies;
  • enhances a company's ability to recover from financial losses, regulatory fines, loss of market share, damages to equipment or products, or business interruption;
  • reduces exposure to civil or criminal liability in the event of an incident;
  • enhances a company's image and credibility with employees, customers, suppliers and the community; and
  • may reduce insurance premiums.

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