Disaster Preparedness: In Search of a Better Business Model

June 24, 2015

Disaster preparedness in the United States is built on a paradoxical business model. The majority of authority and responsibility for disaster mitigation, preparedness, response and recovery resides in government. This is supported through funding that primarily starts at the Federal level, and cascades down to the local level through a relatively few funding streams. However the majority of the U.S. economy and critical infrastructure most at risk from a disaster resides in the private sector. Further, the U.S. economy is optimized for free-market competition.

In order to be competitive, companies need to be efficient with just-in-time inventory systems and must develop proprietary tools and processes to stay ahead of the competition. This works well for maintaining a world class economy, but in a disaster when excess inventories are needed and a group of competitors must come together as an “Emergency Support Function,” the transition is more traumatic than among government institutions whose long-term survival is not determined by the rules of the market.

Some efforts have been made to bridge the gap between government and private systems through the occasional integration of private industry groups and corporate interests into planning at federal, state and local levels. The discussions have taken place in this realm have had limited impact on effective planning that provides meaningful guidance during and after a major disaster. In many instances, private sector entities (Walmart after a number of large-scale events, power companies in the aftermath of Hurricanes Katrina and Sandy, and so on) have provided essential relief, but this is generally driven by corporate initiative rather than through a coordinated and integrated response. Much more could be accomplished through proactive collaboration at every state of disaster planning, response and recovery.

The private sector also brings perspectives and expertise on how the world works outside of government institutions. Private businesses, and particularly the insurance industry, can provide much needed insight and leadership into disaster preparedness in several critical areas needing development. This includes measuring risk, evaluating investments, incentivizing change, improving organizational structure, and information management.

1. Measuring risk

Several oversight reports have criticized the lack of objective measurement of government preparedness programs. In principle, risk is measured by a multiplier of the likelihood of a disaster and its potential impact. In practice these calculations are highly subjective and tend to be based more in argument rather than an objective process. The insurance and reinsurance industries are critical partners in improving this. Existing methodologies for measuring risk and costing that into insurance premiums provides an important foundation for developing a more robust method of measuring disaster risk. Developing a better measure of risk is a prerequisite to educated investment in disaster preparedness within and outside of government.

2. Evaluating investments

Net Present Value, Internal Rate of Return, integration of risk premiums and other tools adopted by organizations to evaluate proposed activities bring an important objectivity to investment decision making. This valuation of cost and potential benefit within a finite set of resources has not reached this same level of maturity among the emergency preparedness community. Due to this, investments are often made based on political priorities, or partial logical arguments that do not appropriately maximize impact in competition with other equally noble initiatives. Preparedness decision making has improved in its basis on threats and intelligence in recent years, but adaptation of these private sector methodologies for public benefit would offer an additional tool-kit for prioritizing the investment tax dollars and quantifying its value over time.

3. Incentivizing change

With a better understanding of the return on investment that preparedness can provide, the private sector is better positioned to understand how to incentivize change outside of the current avenues of regulation and targeted government grants. Insurance premiums could be altered on the presence/absence of effective disaster risk reduction programs (examples of this already exist in targeted programs). To create a corporate culture of preparedness, individual departments and employees could be recognized for their own efforts that promote resilience to disasters. Additionally, a better understanding of the value of preparedness could be integrated into how companies are valued among investors and the capital markets.

4. Organizational structure

An important trend among the design of corporations in the last several decades is the movement away from strict hierarchies and a move towards more networked organizations, relying on collaboration rather than command and control. This more closely mirrors the structure of emergency management agencies that must unify the capabilities of different response partners (public and private) towards response objectives. Lessons learned from the development of business process by the private sector to manage these networks would add to the effectiveness and efficiency of their emergency management counterparts in government

5. Information management

The information management systems developed to support networked organizations would also be valuable to the emergency management community. Enterprise business intelligence systems for developing a common operating picture among business partners provide insight into similar measures of effectiveness in a disaster response, including inventory management, supply chain monitoring and other process measures that correlate with effective operations. While much progress has been made in improving communication among emergency management response partners, the level of information sharing and dashboard development with drill-down capabilities in the private sector, has yet to be realized among emergency managers.

For its part, government can be an important partner in creating market conditions and incentives that are conducive to preparedness and for sharing risk in scenarios where an adequate business case for private sector management is not possible. Examples like the Federal Emergency Management Agency’s National Flood Insurance Program and U.S. Department of Agriculture’s Crop Insurance Program provides starting points for understanding these public/private risk management relationships. Government sponsored incentives for preparedness can also be made more robust. With a better understanding of return-on-investment, incentives can be designed around tax credits for preparedness programs that reduce future costs of response. The growth of social impact bonds and impact investing also creates interesting possibilities for government sponsored investment vehicles that provide market rate returns, with the cost offset by the savings from mitigated damage and improved response to future disasters.

Government has a necessary role in providing leadership in disaster preparedness. However, regulation and grant funding are not a sufficient business model for preparedness. An increasing involvement in disaster preparedness from the private sector will ensure that all of the resources of our nation are brought to support our preparedness, response and recovery from disasters, and that the ingenuity that has led to our success as a nation is integrated fully into what keeps us standing after the unpredictable and inevitable challenges that all disasters present.