By Dave Schmidt and Bob Frady
Abstract: OX2 Solutions united Oxxford Information Technology’s commercial banking risk insights with HazardHub’s “wetness” index to better understand the commercial impact of Harvey on Houston. This analysis revealed that a large percentage of Houston businesses are at risk of bankruptcy, or of simply going out of business, especially those in FEMA’s 100-year flood plain where recovery is going to require an extended period of time. Consequently, insurers and lenders should be taking into account these convergent risks when writing policies and loans. Absent that foresight, the impact of a natural disaster such as Harvey is sure to magnify the size of the storm surge affecting financial supply chains and the economy.
By identifying all the businesses in Harris County, TX (Houston area), based on location, and mapping those locations against FEMA’s floodplain maps as well as taking into account other elevation criteria, we are able to quantify the impact of flooding and storm surge from Hurricane Harvey. By looking at business revenue at the affected locations as well as the affected businesses debt and bankruptcy risk, the effects of Harvey become clearer. We also identified home-based businesses to illustrate the extensive exposure of that segment of commercial enterprises.
The above table shows the number of businesses expected to be “wet” in Harris County. The 84,562 businesses identified account for 23 percent of the approximately 375,890 active businesses in Houston as of the end of July 2017.
Of those affected, 55 percent are at a high risk of bankruptcy, while 35 percent have a moderate bankruptcy risk profile. Only 10 percent of Harris County businesses were deemed to be at a low risk of bankruptcy prior to Harvey.
The businesses in Harris County generate roughly $107 billion annually. As you can see from the above chart, 40 percent of those sales ($42.9 billion) are associated with businesses with a high bankruptcy risk. Likewise, 49 percent of the commercial revenue generated within Harris County is associated with businesses in the moderate bankruptcy risk category. The good news is that the larger proportion of sales are attributable to businesses in the 500-year flood plain, which may be able to recover quicker than those in the 100-year flood plain.
From a debt perspective, the picture is equally bleak. Total debt on the books for businesses that are “wet” and at a high risk of bankruptcy is $16.9 billion. For businesses with a moderate bankruptcy risk the figure jumps to $19.9 billion. The immediate problem is short-term debt, which for the most part is made up of accounts payable and to a lessor extent, though still very critical, the current portion of long-term debt.
The trick for many businesses recovering from Harvey will be to maintain payment on the current portions of their long-term debt without being cut-off by their suppliers. The suppliers in turn need to make progress collecting their receivables, or face problems of their own with their financers, especially when the collateral is those same pastdue receivables that end up being excluded as suitable collateral.
Lastly, we looked at the exposure related to home-based businesses, which account for 61 percent of the affected businesses, but just 12 percent of the affected sales. The bigger problem is that 71percent of the affected home businesses are in the high bankruptcy risk category. Often underinsured and without access to the financial resources of larger businesses, this group of small business owners are likely to be severely impacted due to lack of resources, especially when business revenue is required to meet the mortgage payment.
The Challenges for Insurers and Lenders
Insurers and lenders whose commercial portfolios are exposed to the areas impacted by hurricanes Harvey and Irma need to be proactive in terms of the subsequent recovery. The first step is prioritization. Identifying and ranking the businesses that have been impacted by the storm enables prioritization of your remediation efforts.
For insurers and those businesses affected, efficient and fair claims processing is the key. Reliable data regarding contents and inventory and the effects of business interruption provide an equitable framework. Likewise, the lessons learned will impact future underwriting and pricing.
One of the under-measured factors from businesses in Harvey’s destruction zone involves business interruption. Business interruption insurance (also known as business income insurance) is a type of insurance that covers the loss of income that a business suffers after a disaster. The income loss covered may be due to a disaster-related closing of the business facility or due to the rebuilding process after a disaster. For example, approximately 36 percent of all commercial insurance claims with Hurricane Katrina were business interruption claims. With the unprecedented flooding from Harvey – much of which has still not dried out – that number may rise sharply.
The adequacy of insurance also affects the lending community. For lenders, the ultimate question after a disaster is, who is viable and who is not. An important success factor is the amount of time it takes the business to return to normal operations. Once viability is determined, remediation efforts can be evaluated. Furthermore, the lessons learned from these disasters then need to be incorporated into the underwriting process.
The need to do this is apparent. In areas affected by a major hurricane, bankruptcy rates increase roughly 50 percent. In addition, most small businesses won’t bother going through the bankruptcy courts and will simply cease operations.
Banking risk existed before Harvey’s deluge on Houston, but the potential wetness of Harris County in particular necessitates a wet+bankruptcy risk multiplier that plays out unequally depending on industry, FEMA zone, insurance coverage, and potential impacts. In conclusion, small business insights that include reliable financial estimates and risk indicators, coupled with greater details involving proximity risks are the keys to facilitating the recovery process as well as enabling better preparation for future catastrophic events.
About OX2 Solutions Corporation and Oxxford Information Technology: Since its founding in 1980, Oxxford Information Technology has specialized in providing intelligence on private companies to the financial service industry. It is widely recognized as an industry leader in the use of advanced information technology and analytical techniques. Utilizing Oxxford’s data resources, OX2 unearths “practical and actionable solutions” addressing client challenges. Dave Schmidt is the COO of OX2 Solutions and can be reached at firstname.lastname@example.org. For more information, go to www.ox2solutions.com
About HazardHub: Air. Fire. Water. Earth. HazardHub is the only third-generation provider of property-level hazard risk databases spanning the most dangerous perils in the continental United States. HazardHub translates huge amounts of geospatial digital data into easy to understand answers, providing easy to comprehend risk scorecards that are used to make real world decisions. Our team of scientists provide comprehensive, and innovative, national coverage for risks that destroy and damage property. Bob Frady is the CEO of HazardHub and can be reached at email@example.com. For more information, go to www.hazardhub.com.
 Bob Lawless, Nevada Law Journal, Volume 6, page 7, 2005 – the study focused on hurricanes from 1980–2004 and therefore did not include super storm Katrina