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Hurricane Harvey: An Insurtech Case Study

Storms of unprecedented power have lashed the U.S. and the Caribbean in recent years, leaving a trail of devastation estimated in the tens of billions of dollars. The U.S. alone has experienced 212 natural disasters since 1980 with the overall costs totaling $1.2 trillion, according to the National Oceanic and Atmospheric Association (NOAA).

As a venture investor interested in fintech, I get sight of quite a lot of innovative insurtech startups hoping to be the next big thing in insurance. Barely any of these businesses are focused on improving claims management. Why is that?

Perhaps claims are considered the least sexy aspect of the insurance industry, a necessary evil if you like. Good insurers understand the claims experience is one of the most important parts of insurance. Insurance, after all, is a promise to make good your losses in case of an accident.

Natural disasters are brutal. They leave people vulnerable and exposed, and a speedy resolution by the insurer is crucial to the customer experience, encourages customer retention and also saves the insurer time and money.

That’s an easy thing to say, but dynamically responding to claims after events of the magnitude of Hurricanes Harvey and Irma is no mean feat. It’s often impossible for people to access the areas for quite some time, by which point storm surges have subsided, and claims can be harder to assess.

One company addressing this challenge for insurers is Geospatial InsightVenturesOne recently announced a growth equity investment in the company, and I was with their team in the U.K. They had just delivered incredibly detailed visual intelligence on Hurricane Harvey to enable insurers and their corporate clients to understand the situation at ground level and respond swiftly to claims.

There are three main challenges that an insurer can address by adopting visual intelligence services after a natural disaster:

  1. The approximate total claim size likely as a result of the event.
  2. An accurate map of the area affected by the event, to prevent fraudulent claims.
  3. That the proximate cause of the claim is directly related to the event.

There is a lot of hype around the possibilities of advancing techs like machine learning, big data and drones, etc., but I see less in the way of tangible examples of how they can be combined to deliver benefits right now, so here is a real-life example.

Hurricane Harvey Case Study

On Aug. 25, 2017, category 4 Hurricane Harvey makes landfall near Rockport, Texas.

Harvey causes catastrophic flooding, with 50-plus inches of rainfall in some areas (a record from a tropical cyclone in the U.S.). Harvey covers over 20,000 square miles in 72 hours, displacing 30,000 people.

See also: Hurricane Harvey’s Lesson for Insurtechs

Situational Analysis

The first step was to make an initial assessment of the affected area and a rapid review of expected requirements by insurance clients. The densely populated residential and commercial area of greater Houston was set.

Big Data Collection, Processing and Analytics

Although Harvey made landfall on Friday, the weather event continued with torrential rainfall throughout the days that followed. By Wednesday, the 30th, it is estimated that a mind-boggling 24.5 trillion gallons of rainwater was dumped from the Gulf of Mexico across Houston and Southern Texas.

To get the most comprehensive understanding possible, a diverse variety of data sets were collated, including terrain data, satellite imagery, drone footage from social media scrapes and independent commissioned light aircraft with specialist high-resolution camera imagery.

The team used the data collected from aerial and social to calibrate the threshold used to generate the sentinel footprint. Geospatial Insight then use proprietary algorithms to cluster the areas detected as water into flooded areas.

To understand the likely impact of Harvey on homes and commercial buildings, the multiple data sets were combined to gain insight into flood extents. The color-coded image below shows different data sources.

The blue is derived from the National Oceanic and Atmosphere Association (NOAA) imagery and an aerial survey using a Midas oblique camera system.

The red is Sentinel 1 radar satellite that can penetrate cloud cover to identify areas of standing water.

The small pockets of yellow are derived from Geospatial Insight’s social media scraping tool to find photos and videos of the event, which can then be mapped to build the extents from video evidence. Typically, the team use their global network of licensed UAV operators that work to agreed SLA’s to map flood areas with drones, however, drones were banned over Houston during this time frame due to emergency services using the airspace for rescues, etc.

Footage like the example below were identified, then the flight path and flood extents expertly mapped.

Why was the flooding so severe?

You can clearly see the two large blue reservoirs on the west side of Houston, Addicks to the north of Interstate 10 and Barker to the south. They are designed to protect Houston from flooding, and both dams feed into the Buffalo Bayou. The reservoirs are surrounded by parks and residential areas, and by Monday evening water levels had already reached record levels, measuring 105 feet at Addicks (north) and 99 feet at Barker (south).

Local officials hoped to prevent a spill-over by slowly releasing water from both the Addicks and Barker dams on Tuesday and Wednesday. However, the storm surge was so great that the engineers had to release water through the dam gates much earlier than expected or risk it spilling over and causing further damage to homes. A warning was given to homes to evacuate in the early hours of Monday morning, but the decision was made to release the pressure late Sunday night, and many residents became stranded in the resulting swell.

Accelerating Claims with Visual Intelligence

To provide the intelligence required to rapidly address insurance claims, the Geospatial Insight team needed to first make sense of huge amounts of unstructured data. Not only the diverse image sources but also client information for insurance customers and corporate responsibility data like home addresses of employees to map the affected customers and staff.

This data was quickly mapped and the multiple image sources applied as layers to allow corporate clients to access and make sense of the information via Geospatial Insights’ dedicated customer portal.

The image above shows the client portal with claim location points identified in yellow.

High-resolution satellite images can be a good indicator, but they are a top-down view, so it is much harder to get an accurate perspective on the level of damage on a property. Images at an oblique angle were needed to help quantify this over a vast area, and thus Geospatial Insight commissioned a light aircraft equipped with a Midas 5 camera to map the most-affected region for high-resolution imagery.

See also: Preparing for the 2019 Hurricane Season  

The visualization below shows how this camera is able to capture oblique angles in four directions simultaneously (along with an overhead view).

Using this technique, huge areas could be imaged in high resolution and then mapped to provide oblique angled images in North, South, East and West orientations for accurate analysis of identified claim locations.

With this resolution and volume of data, the Geospatial Insight team could identify the evidence of flooding such as remaining water, sediment and waste outside houses even after the flooding drained away. Below is an example image showing home furnishings being disposed of. You can clearly see the raised swimming pools that remained clean and blue compared with those that were ruined by the storm surge.

Rebuilding Lives After Disaster

Sadly, it seems many residents of Houston were uninsured and face rebuilding their lives without any form of insurance payout. For those with cover, getting access to funds quickly will make all the difference.

By embracing the kind of technology used in Hurricane Harvey, insurers can make a meaningful difference in helping residents, businesses and communities get back on their feet as quickly as possible.

A Tough Lesson in Disaster Preparation

Yet another hurricane season has left a broad swath of America’s coast in recovery mode following a once-in-a-generation storm, and wildfires are devastating California. The disasters remind the rest of us how fortunate we are to be safe. They remind government agencies about the importance of preparedness. And they remind employers about the importance of risk managers.

Disaster response is part of the job description for risk managers, of course, but that doesn’t make it any easier to suddenly be the most important person at the company in the exact moment that the situation is at its least predictable and most frenetic. Lives are in danger, homes are being inundated or burned, entire communities are scrambling for safety — and you’re the person who is supposed to have answers and a plan.

The situation is one that insurance companies can understand. People may not fully appreciate their role when things are going well, but, when things go wrong, clients expect an immediate and efficient response. It may seem that the work of a risk manager or insurance company begins after a crisis, but those working in either field know that it’s the careful work of preparing that makes a successful response possible.

Some of the most effective risk managers are also realizing that tools and capabilities that allow for efficient insurance claims intake and processing can serve businesses and risk managers before a crisis. Consider Tropical Storm Harvey as it lined up on the U.S. Gulf Coast a year ago, making landfall near Corpus Christi on Aug. 25 and careening inland toward San Antonio before reversing back to the Gulf of Mexico and crashing into Houston, where it did even more damage.

Even the most dramatic satellite images or simulations were never going to prepare people on the ground for what was coming. That sort of work needs to be done on a personalized level, through systems that tell people about their specific risk levels, what to expect in their neighborhood, when to expect it and what to do about it. And then what to do if those initial warnings weren’t heeded.

See also: Natural Disasters and Risk Management  

It’s the sort of work that third-party administrators (TPAs) for insurance carriers were preparing for as Texas braced for the most damaging storm to strike the continental U.S. since 2005. As risk managers for companies in the U.S. Gulf Coast reviewed their widely distributed workforce and facilities in the storm’s path, they, too, realized that they would soon be managing overwhelmed phone lines and routing calls to keep thousands of employees informed and as safe as possible through the storm.

The very same processes that an insurance company or its TPA uses to manage the wave of claims that follow a catastrophe are extremely well-suited to help the companies threatened by a disaster to be operationally resilient throughout. Just as importantly, a well-planned disaster response starts days before the crisis hits. In the social media age, it takes rigorous planning and agile systems to stay ahead of the myriad information channels employees are plugged into.

A disaster is overwhelming even for the biggest companies with well-resourced risk management teams. It can be a knock-out punch for smaller firms. About 25% of businesses don’t reopen after a disaster has passed, according to Insurance Information Institute estimates. More than a third of small businesses have no emergency plans for severe weather or natural disasters, according to a report from the U.S. Chamber of Commerce and Met Life in May.

With the power and frequency of storms and other natural disasters on the rise, companies are searching for solutions. A San Antonio-based construction and engineering company with dozens of offices and thousands of employees through Texas, Louisiana and the rest of the Gulf Coast saw the crisis coming. Its insurance needs would come soon enough, but, more immediately, it needed to communicate with its employees to keep them safe and informed about operations.

The company had never expected to have to equip so many employees for the magnitude of disruption that Harvey represented, and realized with only days to spare that its ability to survive the storm depended on being better prepared for it. The company needed a way to communicate with its employees in the storm’s dangerous and dynamic environment. Most importantly, this would help their employees and families survive the storm, but it would also put the company in a position to spring back faster and outcompete others who took longer to get back on their feet.

Taking advantage of today’s technological capabilities, it found a service already experienced in rapidly standing up the type of infrastructure the company needed – a hotline, trained operators, automated routing of issues – and reached out to an intake specialist on a Friday evening to build a crisis response system by Monday morning. Practically overnight, the company gave its human resources department a tool for employees to check in and get information about the company’s response and what their own next steps should be.

As the storm continued to batter the region, the company was able to swiftly respond to facility concerns, reorganize employees to where they were needed and direct employees to the resources they needed to start rebuilding their lives. In the worst-hit areas, the company made sure that employees were out of harm’s way and being given reliable updates, as opposed to relying on digital media and social sharing, which can become a default information source in the absence of a company system that can scale and configure fast. Those outside sources of information can quickly move into the vacuum left by a company’s inability to take and react to information and can become a new crisis in and of themselves, spawning rumors and unchallenged facts.

When the storm waters started to recede, this Gulf region firm was still strong. Because the risk management and human resources teams did not try to ride out the storm with legacy systems supporting their work, instead finding more sophisticated solutions, they maintained the trust of their workforce and the integrity of their business.

There are critical lessons that can be learned from this kind of quick intake system start and the attempt to build a resilient system:

  • A strong contact center team is key, but not sufficient. The technology is available to make sure that the human interactions at the center of disaster response are more accurate, efficient and effective.
  • Advanced dissemination and escalation engines are indispensable. Bad information spread over social media can exacerbate the crisis, and the only way to counter it is to make sure the right messages are reaching people faster.
  • Intake systems need to start fast and then keep up with a rush of information. You have to prepare for the unexpected. Companies can’t always know what’s coming their way, so they need systems that can set up overnight.
  • You have to be ready to adapt at a moment’s notice. Dynamic, rules-based intake scripts are not only essential at the outset, they allow for an intake process capable of adjusting to changing circumstances.

In a crisis, unexpected events are impossible to avoid, and a technology-driven system employing smart automation will take the unique business rules that every risk manager has and make their complexity manageable for intake specialists, minimizing disruptions.

See also: 5 Techniques for Managing a Disaster  

A consistent concern among risk managers is that no matter how well one forecasts threats, develops detailed plans and runs drills against them, the speed and scale with which crisis can hit seems to be increasing. Preparation can start to seem impossible, but it isn’t. It just calls for new tools.

With this year’s hurricanes and the harrowing fire season, risk managers are once again reviewing their ability to respond, and a close, detailed look at lessons learned from previous events like Harvey, and putting into place the countermeasures necessary to prevent unwanted surprises, can keep risk managers operating efficiently in the next crisis.

An Insurtech Reality Check

If you’ve got your eyes set on technology that won’t move the needle this year, it’s time to reevaluate what can provide bottom-line results in the short term. AI and machine learning will have their day in commercial insurance. But what are you doing today to drive tangible business results? Insurtech does not have to be a “pie in the sky” endeavor. It can be deployed right now.

Just a year ago, the insurtech conversation was all about innovation labs, blockchain, IOT, wearables and, of course, AI. Now, the dust has settled a bit, and the realization has set in that those bright, shiny objects may take years to make a real impact on re/insurers’ bottom lines. While they are still undoubtedly vital to innovation, long-term success and survival, it’s important to strike a balance between “pie in the sky” and practical. Last year’s devastating catastrophes served as a catalyst for more focus on short-term solutions that can improve bottom lines—now. Not years from now. This swing to here-and-now solutions was recently articulated in an article by Ilya Bodner, founder of insurtech startup Bold Penguin, where he notes:

“Insurtech is moving rapidly now into commercial lines where the attention and intent is focused on solutions that will deliver a strategic and immediate return on investment (ROI)….Insurers are moving away from bright, shiny, insurtech objects and toward service partners, emerging technologies and solution providers with a return on investment more immediate than promised for five years down the road.”

I second this sentiment. P&C risks are changing, as evidenced by 2017’s $144 billion in global insured losses and a commercial lines combined ratio of 104%. And, while a strong market made many insurers whole last year, that is not a guarantee going forward. The next hurricane, flood or wildfire won’t wait for you to innovate. Insurers must find ways to bring innovation to their bottom lines now. Don’t get me wrong, pie in the sky is good—and it is necessary. But insurers must strike a balance between their long games and short gains. You need both.

Caution: The hard truth

I don’t have to tell you that following last year’s back-to-back hurricanes there was an outcry about how the models got it wrong (of course, it didn’t help that some modelers put out early and grossly inaccurate estimates that incited market confusion and concern). Here’s the hard truth: Insurers also got it wrong. Got it wrong by using a single view of risk; by not taking advantage of innovations in data; by taking too long to operationalize data; by waiting for the perfect, utopian platform (in-house or commercial) to be built or delivered; by expecting legacy analytics software to deliver the scalability, reliability and insight required to act efficiently and effectively. No longer can insurers approach risk The. Same. Old. Way. Risk is changing. You must change with it. And the good news is, integrating insurtech in a way that helps you better assess and manage the evolving landscape of catastrophe risk doesn’t have to be time-consuming or costly, and it can produce immediate results.

Here are a few of the challenges that insurers face that insurtech can help them address, in the here and now:

  • Reality: Models provide a “framework for thinking; they don’t represent truth.” Evan Greenberg, chairman and CEO of Chubb, recently stated, “Given there have been three one-in-100-year floods in 18 months, how can Harvey represent a 1% chance of occurring, as the models suggested? Models provide an organized framework for thinking; they don’t represent truth.” Now, we all know models serve an important purpose, and our clients can derive insights from modeled data within our platform. But models must be taken with a dose of good old-fashioned human judgment. Models and the outputs are nuanced. It’s all about identifying the right models and model components that best represent your lines of business, geography and business practices. But it’s also about balancing resources and business value with this expensive exercise. You need to have an intelligent conversation about model nuances—and figure out the “so what” questions that models provoke but don’t answer.

See also: Can Insurtech Rescue Insurance?  

  • Reality: You can’t handle all the data. There’s a gap between the wealth of data now available and an insurer’s ability to quickly process, contextualize and derive insight from that data. Insurers are generally frustrated by a lack of process and an easy way to consume the frequent and sophisticated data that expert providers put out during events like Harvey, Irma, Maria, the Mexico City earthquake and the California wildfires. Beyond the sheer volume of data, insurance professionals are expected to make sense of it by using complex GIS tools. In reality, you have all this data but no actionable information because you can’t effectively make sense of it. Even insurers with dedicated data teams and in-house GIS specialists struggle to keep up. (SpatialKey tackles this problem by enabling expert data from disparate sources (e.g. NOAA, Impact Forecasting, JBA, KatRisk) and putting it into usable formats that insurers can instantly derive insight from and deploy throughout their organizations. We do the processing work, so our clients can focus on the analysis work.)
  • Reality: Your best data is your own, but you’re not benefiting from it. It’s one thing to be in possession of data, and quite another to be able to realize its full value. Data alone has little value. One of our clients, for example, needed a way to re-deploy its own data to its underwriters, so we helped the company integrate an underwriting solution that would put its data, along with expert third-party data, in the hands of its underwriters—all from a single access point that would consolidate disparate sources and drive enterprise consistency.
  • Reality: Your customers expect on-demand; you should, too. Your customers don’t want to wait for a quote or go through a lengthy process to submit a claim. Our society is instant everything, and while commercial insurance may not be held to the same real-time pressure as personal lines, it is moving in that direction. When you need the latest hurricane footprint, you need it now, not four hours from now. When an earthquake strikes Mexico City, you need to understand your potential business interruption costs today. When a volcano is erupting and no drones are allowed in the surrounding airspace, you need a geospatial analytics solution that can help you provide advanced outreach to insureds and do the financial calculations to understand actual exposure. Likewise, when your underwriters are trying to win business, you’d rather they spent their time evaluating the risk than searching for information.

Who knows what this hurricane or wildfire season will hold. The question is, are you prepared to handle it better than last year? What changes have you made to strengthen your resilience and that of your insureds? What has been learned and applied for meaningful results? It’s a misnomer that insurtech and disruption go hand in hand. Some insurtech solutions are built to complement—to drive efficiencies, cost savings and underwriting profitability—not necessarily replace existing processes or legacy systems. Data and analytics is an area where insurers, brokers and MGAs can still improve their bottom lines yet in 2018.

See also: To Be or Not to Be Insurtech  

Take down the pie and dig in

My intention is not to dilute the importance of up-and-coming insurtech technologies, like AI and machine learning. They will undoubtedly help insurers compete as risks become more complex. My point is that those longer-term technological investments must be tempered with an understanding of what technologies will help move the needle in the present. You can strike a balance between pie-in-the-sky insurtech and insurtech that works for you now.

4 Lessons From Harvey and Irma

As we prepare for what could be a very active hurricane season, we pause to reflect on what we learned from last year’s historic storms.

Even from the sky, it was heartbreaking to see the devastation from flooded neighborhoods, destroyed homes, submerged cars and people left homeless in Texas, Florida and beyond.
Together, Hurricane Harvey and Hurricane Irma cost billions and served as a stress test for the insurance industry.

Munich RE named the 2017 hurricane season as the costliest on record, resulting in $215 billion in losses. According to the reinsurance company, last year’s disasters totaled $330 billion in losses—just $135 billion of which was insured.

Hurricanes Harvey, Irma and Maria, as well as the California wildfires at the end of 2017, represented the bulk of last year’s storm damage. The National Oceanic and Atmospheric Administration (NOAA) lists 16 weather events that resulted in $1 billion or more each in losses. These catastrophes totaled $306.2 billion in damage, the NOAA reports, and eclipsed the prior cost record of $214.8 billion in 2005.

EagleView had a unique view into what the industry was facing. We mobilized a fleet of 120 fixed-wing aircraft to capture millions of high-resolution images of the affected areas as well as referencing satellite and drone imagery. From there, we applied machine learning to quickly analyze property data to help carriers begin triaging and processing claims.

See also: Hurricane Harvey’s Lesson for Insurtechs  

While no one welcomes disasters, the storms, fires and mudslides may have accelerated the insurance industry’s response to catastrophic events. An army of adjusters with clipboards and flashlights will no longer cut it. The industry must evolve.

Here are four lessons we learned firsthand during the 2017 hurricane season.

1. Take advantage of the calm before the storm.

As we saw in 2017, catastrophes can wreak financial havoc on an insurer’s books. Naturally, carriers want to mitigate those costly exposures to risk before they might occur.

At the time of quoting, machine learning can help assess risk. With comprehensive property data analytics, a carrier can eliminate “buying a claim” when binding the policy, thus ensuring the right rate for the right risk. During the renewal process, understanding any change to that risk can help a carrier try to minimize claim frequency and severity.

2. Make boots on the ground smarter with eyes in the sky.

Experienced, licensed adjusters bring a level of expertise that can be hard to replicate, especially following a natural disaster. But they can only cover so much territory, especially if they are hard to find.

That’s what happened in Florida when Irma hit. Insurers had to scramble to find adjusters. Yet many were, as the Wall Street Journal pointed out at the time, “1,000 miles away, working on claims made after Hurricane Harvey hit Texas.”

To ensure proper coverage, insurers can work with partners in advance to put the right tools in place before a storm. For EagleView, that sometimes meant staging our aircraft hundreds of miles away from the hurricane so that we could get in the air as soon as the FAA gave us the go-ahead.

Complementing the adjuster force with the right aerial imagery program will give insurers greater confidence that they’ll be able to answer their customers’ needs quickly and accurately. Some carriers saw as much as a 60% improvement in adjuster production when they applied aerial imagery and data analysis solutions.

3. Don’t fly blind.

Drones are important assets in property inspection, but they’re an imperfect solution by themselves. While the FAA’s Part 107 rule guiding small unmanned aircraft offers greater flexibility to fly in national airspace, certain restrictions can still prove cumbersome.

Namely, the drone must remain in the line of sight. During an inspection of a large property with multiple outbuildings, for instance, the pilot must move around the property to keep the drone in sight.

Time is another constraint when it comes to operating a drone. Without the appropriate waiver from the FAA, a pilot can only fly in daylight or twilight, which makes conducting thermal imaging to detect roof leaks challenging.

Because some small drone operators were unable to meet the demands of large carriers, some insurers abandoned their drone programs altogether. Others have minimized the number of drone assignments, hired and coordinated a collection of disparate drone pilots or simply conducted re-inspections themselves.

Not only is that inefficient, but it sets the carrier up for a bad customer experience. A better approach? Carriers should use a mix of satellites, fixed-wing planes, drones and field inspectors to run an effective inspection program. A variety of information sources—rather than a single inspection method—will deliver the most comprehensive claims data.

4. Maintain customer satisfaction with speed.

The good news, according to a JD Power report, is that “overall customer satisfaction among homeowners filing property insurance claims has reached a new all-time high, despite record-high property losses following a spate of hurricanes, earthquakes and fires in North America” in 2017. However, the report goes on to tell us that there’s wide variability in performance by region, noting that customer satisfaction in Texas and Florida—two of the areas hardest hit by hurricanes—show below-average results.

Speed in resolving issues is a critical factor in retaining high satisfaction levels. That means carriers need to ensure a partner has a large breadth of capture and processing resources.

See also: Getting to ‘Resilient’ After Harvey and Irma  

Carriers need to feel confident that their vendors can scale. In a catastrophic situation, technology partners must be able to meet the demands of their clients with drones, satellites, fixed-wing aircraft and field inspectors, and deploy those solutions immediately.

Applying these lessons to 2018

With the record-breaking disasters of 2017, could 2018 be similar? We haven’t yet figured out how to predict or prevent natural disasters like the ones we faced last year.

What we have learned from these experiences, however, will surely help the industry better deal with this year’s crop of storms. That should be good news for insurers and the people they serve.

IRS Guidance on Hurricane Recovery

Hurricanes Harvey and Irma have wreaked havoc on the lives of thousands of Americans, leaving many looking for ways to assist those in need and achieve favorable tax treatment. The IRS has maintained historical guidance, and it made recent announcements that provide guidance for those individuals and employers looking to assist victims.

Employers Can Offer Tax-Free Assistance to Staff 

An employer may provide assistance to employees affected by a presidentially declared disaster in a manner that is exempt from federal income and employment taxes. Providing assistance in cash or services is relatively straightforward and requires no substantiation from the employees, while still allowing the employer to deduct the payments. Because there are virtually no administration requirements, an employer can react very quickly to help alleviate its employees’ immediate needs.

The exclusion is provided by Internal Revenue Code (IRC) Section 139(a) and specifically exempts from gross income “Qualified Disaster Relief Payments” that are not compensated by insurance or otherwise. “Qualified Disaster Relief Payments” can be paid to, or for the benefit of, an individual to reimburse or pay reasonable and necessary expenses incurred:

  • As a result of a qualified disaster for family, living or funeral expenses;
  • For the repair or rehabilitation of a personal residence; or
  • For repair or replacement of the contents of a personal residence — to the extent that the need for such repair, rehabilitation or replacement is attributable to a qualified disaster.

Revenue Ruling 2003-12 shows how this provision is particularly helpful after a hurricane, stating, “Payments that employees receive under an employer’s program to pay or reimburse unreimbursed reasonable and necessary medical, temporary housing or transportation expenses they incur as a result of a flood are excluded from gross income.” In addition, the rule explains that the amounts excluded from gross income under Section 139 are not subject to typical reporting requirements.

See also: Harvey: First Big Test for Insurtech  

Increased Access to Retirement Plan Funds 

The IRS recently announced relaxed procedural and administrative rules that normally apply to retirement plan loans and hardship distributions, specifically for victims of Hurricane Harvey. Participants in 401(k) plans, 403(b) tax-sheltered annuities and 457(b) deferred-compensation plans sponsored by state and local governments may be eligible to take advantage of streamlined loan procedures and loosened hardship distribution rules designed to provide quicker access to their money. In addition, the six-month ban on 401(k) and 403(b) contributions that normally affects employees who take hardship distributions will not apply. While IRA participants are not allowed to borrow from the IRA, they may be eligible to make IRA withdrawals under liberalized procedures.

Not only does this broad-based relief apply to victims of hurricanes, it also applies to a person who lives outside the disaster area, takes out a retirement plan loan or hardship distribution and uses it to assist an immediate family member or other dependent who lived or worked in the disaster area.

Plans will be allowed to make loans or hardship distributions before the plan is formally amended to provide for such features. In addition, the plan can ignore the reasons that normally apply to hardship distributions, thus allowing them, for example, to be used for food and shelter. If a plan requires certain documentation before a distribution is made, the plan can relax this requirement. To qualify for this relief, hardship withdrawals must be made by January 31, 2018.

Before accessing retirement funds, it is important to remember that the relaxed procedures have not changed the tax treatment of loans and distributions. Retirement plan loan proceeds are tax-free if they are repaid over a period of five years or less and hardship distributions are generally taxable and subject to a 10-percent early-withdrawal tax unless one of several exceptions is satisfied.

Employee Donations of Leave

The IRS also recently issued Notice 2017-48, which indicates they will not assert that cash payments an employer makes to a charitable organization in exchange for vacation, sick or personal leave that its employees elect to forgo constitute gross income or wages of the employees if the payments are: (1) made to the charity for the relief of victims of Hurricane Harvey and Tropical Storm Harvey; and (2) paid to the charity before January 1, 2019. The employee does not take the money into income and therefore does not get a charitable deduction.

IRC 501(c)(3) status for disaster relief organizations

When considering natural disasters like Harvey or Irma, a company may want to donate to an existing charity, or they may want to form a new charity. If an employer forms a new charity, it should be sure the assistance is geared towards a class of persons broad enough to constitute a “charitable class.” In other words, assistance cannot simply be for a single family or an individual. Even if the group is smaller and limited to a particular group of employees or franchisees, the group could still qualify as a charitable class if the group is indefinite and open ended, such as one that includes victims of a current or future disaster. If a new organization applies to the IRS for 501(c)(3) status, it could be eligible for an expedited review of the application.

Existing organizations qualified under section 501(c)(3) could get involved in disaster relief activities that accomplish charitable purposes — even though those activities were not described in its exemption application, without first obtaining permission from the IRS. However, it should report new activities on its annual return.

Public charity or private foundation?

If the organization qualifies as a 501(c)(3) organization, a determination must be made as to whether the organization is a public charity or a private foundation. Employer-sponsored private foundations can make payments to employees for certain “qualified disasters” that the Secretary of the Treasury has specified. On the other hand, public charities can make payments under broader circumstances, like other disasters or employee emergency hardships. Classification as a public charity will depend on whether there is broad-based public support for the organization, as opposed to a few individuals or a company making the major contributions. In some cases, an organization can be classified as a public charity if it supports another public charity, such as a community foundation.

When companies form new organizations to help employees who encounter disasters, it may be possible to show broad public support if other employees make donations. Even though these employees are associated with the company, they still may be considered the general public when it comes to their individual donations, allowing the organization to qualify as a public charity.

See also: Hurricane Harvey: A Moment of Truth  

Employers cannot excessively control a public charity

In addition to the charitable class requirement, an employer cannot excessively control a public charity, nor can the organization impermissibly serve the related employer’s private interests. Recipients should be chosen based on an objective determination of need or distress and should be selected by a group independent of the employer so that any benefit to the employer is merely incidental.

If these requirements are met, the public charity’s payments — even if those payments are to employees and their family members — are considered payments for charitable purposes and, thus, are not considered taxable income.

For more information

This is just a short summary of what companies and organizations need to keep in mind the next time disaster strikes and they wish to extend a helping hand. Companies should review IRS Publication 3833 for more information.

Additional resources concerning other tax relief, specifically related to Hurricane Harvey and Hurricane Irma, can be found on the IRS disaster relief page. For information on government-wide relief efforts, visit www.USA.gov/hurricaneharvey or www.USA.gov/hurricane-irma.