This issue of CFO Insights discusses the importance of putting capital asset management plans into place that can be called into action if disaster strikes. In addition, we will outline why basing those plans on solid capital and risk management principles can help equip companies with preparedness and flexibility in the unfortunate event of a natural disaster.
Hurricanes Harvey, Irma, and Maria and other recent natural disasters have brought the ever-present possibility of unexpected catastrophes to the headlines. Across industries, organizations of every size are asking how to prepare for and manage the risks when unexpected acts of nature occur.
Consider these recent statistics. Extreme weather and natural catastrophes reached $306 billion in total damage in 2017, with 16 events causing more than $1 billion in damage each. Most of that damage—$265 billion—came from hurricanes.1 Moreover, the Intergovernmental Panel on Climate Change, a United Nations-sponsored group that assesses climate change research, predicts that financial losses due to hurricanes could increase by more than 70 percent by 2100.2
That uptick likely reflects increased expenses resulting from market fluctuations, materials shortages, and labor scarcity, as well as the cost to rebuild. Yet companies rarely factor the event-driven risk of a natural disaster into their budgets for new capital construction or existing capital assets—or even into their revenue projections.
In anticipation of a possible natural disaster, adherence to capital and risk management principles can reduce the potential for loss. Below are some considerations when preparing for the unexpected:
Assessing the extent to which insurance coverage exists may be challenging and require the assistance of an entity’s legal counsel. In determining the accounting for insurance recoveries, an entity should first perform an assessment similar to the following:
CFO Insights, a bi-weekly thought leadership series, provides an easily digestible and regular stream of perspectives on the challenges you are confronted with.
Deloitte CFO Insights are developed with the guidance of Dr. Ajit Kambil, global research director, CFO Program, Deloitte LLP; and Lori Calabro, senior manager, CFO Education & Events, Deloitte LLP.
For more information on the financial reporting implications of disasters read this edition of the Financial Reporting Alert, which covers asset impairments; income statement classification of losses; insurance issues; environmental remediation, liabilities, clean-up and operating losses; stock compensation performance conditions and modifications; derivative and hedging considerations; employee benefits issues; assistance received from outside entities (e.g., Red Cross), disclosures; regulatory relief issues as well as other considerations.
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1 “Extreme hurricanes and wildfires made 2017 the most costly US disaster year on record,” The Washington Post, January 8, 2018. https://www.washingtonpost.com/news/energy-environment/wp/2018/01/08/hurricanes-wildfires-made-2017-the-most-costly-u-s-disaster-year-on-record/?noredirect=on&utm_term=.bc9f2c45e1c5
2 “Warming seas could lead to 70 percent increase in hurricane-related financial loss,” University of Vermont, October 12, 2017. https://phys.org/news/2017-10-seas-percent-hurricane-related-financial-loss.html