AIR Factors Business Interruption into Hurricane Model

June 7, 2007

AIR Worldwide Corp. updated its hurricane modeling software enabling enhanced methodology for estimating business interruption losses.

AIR’s newest U.S. Hurricane Model accounts for both building and business characteristics when estimating total business interruption downtime and includes indirect losses from sources other than physical damage to the insured building.

The release also includes enhancements to the model’s demand surge function, the vulnerability of residential contents and pool enclosures, and incorporates research by AIR meteorologists and climate scientists into the link between elevated sea-surface temperatures and U.S. landfall activity.

Dr. Jayanta Guin, senior vice president of research and modeling at AIR Worldwide said AIR’s research and development was inspired by business losses and interruptions in the aftermath of the 2004 and 2005 hurricane seasons.

The latest version of AIR software estimates indirect business interruption losses stemming from sources other than physical damage to the insured building (utility service interruption, actions taken by civil authorities, dependent building damage, and extended period coverage)
The new model also factors building characteristics such as size, contents, and complexity of the building system, and the potential for relocation or for continued operations while repairs are underway into the equation.

Analysis of claims data from recent hurricane seasons has also revealed that contents vulnerability for single family homes has decreased significantly in recent years. The updated model accounts for this trend.

The model has also been enhanced to account for the impact of hurricane winds on pool enclosures – structures that according to AIR’s latest research – show a higher vulnerability to wind damage than previously estimated.

AIR said the impact of demand surge – the increase in costs of materials, services, and labor due to increased demand following a catastrophic event – was fine-tuned and validated using high resolution construction cost time series data for the 2004 and 2005 hurricanes taken from XactAnalysis(tm), a reporting tool created by ISO subsidiary Xactware.

Research at AIR shows higher levels of demand surge for time element, including business interruption.

“Our ongoing analysis of billions of dollars of detailed claims data and our post-disaster survey findings provide valuable insight into the effects of hurricane force winds on insured properties,” Guin said.

In most cases, business interruption limits, which reflect part-year business income exposure, have been set equal to annual business interruption exposure, according to AIR.

“Modeled loss estimates are only as accurate as the exposure data input into the catastrophe model,” Guin said. “Insurers must continue to put an emphasis on improving the quality and completeness of their business interruption exposure data to improve the accuracy of the catastrophe risk information used by company management.”

Source: AIR Worldwide Corp.

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