Natural Disasters: A Double-Edged Sword for Construction

Natural disasters caused roughly $35 billion in insured losses (22% above the 10 year average) and $72 billion in global economic losses in the first half of 2022, according to Swiss Re. "The effects of climate change are evident in increasingly extreme weather events such as the unprecedented floods in Australia and South Africa," Martin Bertogg, head of catastrophe perils at Swiss Re, said in a press release. "This confirms the trend we have observed over the last five years; that secondary perils are driving insured losses in every corner of the world."

Severe heat waves damaged infrastructure in Europe; floods destroyed businesses in Kentucky; and heavy rain battered South Korea. And the rest of this year's hurricane season is expected to be more active than normal despite a quiet start. The average Atlantic hurricane season peaks in August, September and October, with 95% of major hurricanes occurring after Aug. 1.

"Although it has been a relatively slow start to hurricane season, with no major storms developing in the Atlantic, this is not unusual and we therefore cannot afford to let our guard down," FEMA Administrator Deanne Criswell told CNN. "This is especially important as we enter peak hurricane season—the next Ida or Sandy could still be lying in wait."

As severe weather events become more common, the construction industry will play a pivotal role in disaster preparedness and recovery, said Brian Turmail, vice president of public affairs and strategic initiatives at Associated General Contractors of America. "There is a significant market opportunity for the construction industry for investments in resiliency. As more and more communities look to raise road levels, put in higher surf breaks, look for better ways to handle storm water drainage or look to make buildings more energy efficient; that means new construction opportunities for the industry."

Some disaster-proofing projects are federally funded and can take decades to complete. But private companies also can choose to prepare for natural disasters on their own, said Kurt Sorensen, CCE, CEW, CICP, credit and collections manager at Entergy (New Orleans). "We are starting to see more interest, at least in the utility space, in what they call resiliency of the grid. [Businesses] are trying to prepare by finding ways to harden transmission lines."

Companies also look to the construction industry after a disaster hits, which can create a profit opportunity if approached carefully, Sorensen added. "On the back end, natural disasters can promote more construction. But on the front end as a material supplier, your customer's clients may be wiped out and no longer exist. You're about to be bombarded with opportunities, but the risk profile will be elevated."

Sorensen recommends the following as a credit professional handling the fallout of a natural disaster:

• Call your customers immediately to make sure they are okay and continue to follow up.
• Stick with your established customers.
• Avoid the temptation of working with new customers that are looking to profit off the disaster.
• Check with your insurer to see if you can capture bad-debt write-offs that are storm related.
• Make sure all your liens are filed properly.
• Have regular conversations about risk management.
• Create a detailed disaster plan for credit management.

If you're going to work with new customers, you need to gather as much information as possible, said Tim Stine, controller at Stine Lumber LLC (DeRidder, LA). "We are set up to accept credit cards or open a cash account to help new customers if needed. During a disaster, sometimes our own offices are running on generators and we can't always check credit agencies on new customers, so we do everything we can to protect ourself and help customers at the same time."

-Annacaroline Caruso, editorial associate