Anatomy of a Cat Plan

The importance of a well-developed catastrophe response plan was never more evident to Canadian property and casualty insurers than in 2013. In the year of the flood, water devastated widespread areas in southern Alberta and wreaked havoc in and around the Greater Toronto Area (GTA), propelling insured losses from severe weather to record levels.

It has been reported that from 1983 to 2008, yearly natural catastrophe losses in Canada averaged about $400 million. Over the next four years, these losses hovered around the $1 billion mark annually, but then came 2013.

In early 2014, Insurance Bureau of Canada – citing figures from Property Claim Services (Canada), reported that insured losses from severe weather reached $3.2 billion in 2013. More than $2.6 billion of that estimated total related specifically to flooding in Alberta and the GTA.

In the United States, the Insurance Research Council notes that between 2004 and 2011, 39% of homeowners’ premium was spent on Cat claims.

Figures both north and south of the border tell a familiar tale. Organizations need to know how to respond to catastrophe events regardless of where and when they occur to ensure that the reputational risk associated with large-scale catastrophes is mitigated.

POST-MORTEM REVIEW INVALUABLE

One of the most critical and worthwhile exercises for an insurer to undertake is to complete a post-mortem following a major event and to use lessons learned from catastrophes to close gaps in existing catastrophe plans. These plans need to be reviewed and updated regularly, always remaining flexible enough to adapt to specific catastrophe circumstances.

J.D. Power’s 2015 U.S. Property Claims Satisfaction Survey, released this past March, illustrates the impact that an effective post-catastrophe claims review can have. By applying the lessons learned while handling Cat claims to non-Cat claims, and by putting renewed focus on their property insurance businesses, insurers have been able to increase property claims satisfaction to 851 (on a 1,000-point scale) in 2015, up from 840 in 2014, notes a company statement.

“The study shows the significant gains insurers have made in customer satisfaction by applying the lessons learned while handling prior catastrophic losses to all claim processes,” Jeremy Bowler, senior director of the insurance practice at J.D. Power, says in the statement.

When looking at the 2013 events in Canada, there were a number of challenges and lessons learned. Carriers were challenged by significant capacity utilization issues as a result of the sheer volume of claims generated by two significant events occurring so close together and, as such, had to rely heavily on external adjusters in both Canada and the U.S. to manage claims.

Adequate resources for a catastrophe event must be lined up beforehand (adjusters and contractors, among others).

Insurers with strong vendor partner agreements and relationships, as well as scale, have an advantage in terms of pinning down resources.

It is also important to have appropriate and timely liaison with the government post-event when uncovered losses are being funded by governments. In addition, companies need to be aware of policy coverage differences with their competitors and insurers need to ensure that their personnel have adequate media training.

LESSONS FROM AFAR

Canada’s p&c insurance industry, as a whole, can learn from catastrophes that occur in other parts of the world. One of this country’s largest catastrophe risks is on the west coast, where there is potential for a major earthquake event.

Consider what happened in Christchurch, New Zealand. In 2011, the city experienced a significant earthquake that caused widespread damage, with the impact aggravated by buildings and infrastructure already having been weakened by another quake in 2010. Significant liquefaction affected certain parts of Christchurch, producing around 400,000 tons of silt.

Liquefaction occurs when seismic waves cause wet soils to behave like a liquid, resulting in structural damage to buildings and creating significant barriers with reconstruction efforts because of the instability of the soil on which structures are built.

A number of lessons learned in New Zealand can benefit Canadian insurers. Surprises do happen. The loss experience from Christchurch reveals that liquefaction can become the dominant loss driver, and should there be a quake in Vancouver, the impact of liquefaction is potentially worse given the population density and property values on the west coast.

In Christchurch, the staffing for many insurers was too lean and training happened “on the job.” In an earthquake event, engineering consultants are a critical resource and the New Zealand event demonstrated that these resources were in short supply.

That experience also showed the length of time to repair quake-affected buildings structurally resulted in longer than expected business interruption and additional living expense claims.

ALL-PURPOSE PLANS

Whether the catastrophe event relates to flood, earthquake or some other cause, there are a number of best practices, if executed well, that should increase the opportunity for insurers to successfully manage a catastrophe event.

An insurer needs to make sure its business continuity plan (BCP) dovetails with its claims catastrophe plan. An internal catastrophe co-ordinator (or a small focused team) possessing necessary skills and experience should be appointed.

Team members will deal with varied technical, logistical and customer-related challenges, as well as daily and weekly debriefings to ensure relevant issues are addressed in real time to make certain the unique nuances presented by a catastrophe are being addressed effectively and in a timely manner.

Training of employees, both inside and outside of the company’s claims department, including temporary staff, is vital. Catastrophe-specific guidelines and scripts and loss scenarios depicted in the training material can be very effective in ensuring that claims staff handle claims consistently.

Insurers that execute well with a comprehensive claims-handling on-boarding program will stand out if Swiss Re claim reviews and benchmarking exercises completed over the last couple of years are any indication.

Companies should consider using non-claims personnel – such as underwriters, marketing people, agents, brokers and others with some knowledge or experience working with policy coverages – for emergency claims response. They can be a tremendous resource to a claim department and can help underpin the capacity shortfall that exists with many catastrophe events.

Other considerations include the following:

• vendor selection and management is key, both inside and outside of the area affected by the event;

• companies need to ensure they have an acute understanding of claims-handling capacity;

• reserving guidelines that are event-specific should be considered, ensuring that company management and actuaries are aware of reserving practices unique to the individual Cat event; and

• companies should prepare hard copy catastrophe binders or have memory sticks with a copy of their BCP, claim guidelines, policy wordings, vendor lists with contact information and any other expert-relevant information should infrastructures be impacted during an event.

Adjuster licensing is another consideration if the plan contemplates bringing in resources from outside of the province(s) where the event takes place.

Companies should be prepared to discuss with the regulatory authority responsible for licensing should the need arise to ensure dispensation is given to use unlicensed adjusting personnel, while catastrophe co-ordinators must consider their claim guidelines and how they should be altered to fit the event.

In addition, companies should consider building loss scope and estimating training for key catastrophe claims field staff to control building damage claims and to prevent building loss estimates from escalating; negotiating flat fees and implementing short-form reporting with external vendor partners to help mitigate adjusting expenses, reduce the shelf life of a claim and improve customer service with faster turnaround times; ensure that file reviews and re-inspections during and after an event are a staple of the process to make certain there is compliance with best practices; and carry out post-event customer surveys to measure how customers viewed their claims experience.

SECURING SUPPORT

In Canada, earthquake events present unique claims-response challenges not previously experienced by Canadians. Adjusters should be trained to recognize existing laws relative to the demolition of repairable structures, as well as have a comprehensive understanding of building codes and regulations.

Insurers, for their part, should consider securing retainers or agreements with engineers, architects, contractors and other related experts from jurisdictions that have experienced large-scale earthquakes that could help with responding to a Canadian quake event.

Catastrophe response in a hyper-linked world creates challenges and opportunities for insurers. With tech-savvy policyholders ready and able to take to social media when their claims expectations have not been managed or met, organizations are fast realizing the importance of social media in their catastrophe response plans.

It is critically important to actively monitor social media and push out information to help with demystifying concerns or issues being expressed on social media. Media enquiries create significant reputational risk and potential brand damage if not handled well.

As such, companies should ensure a single point of contact with media and embed media training with personnel who are involved in responding to the intense media coverage that often occurs in the days and weeks following an event.

Any catastrophe plan must be regarded as a living set of best practices that can be revisited and tweaked based on lessons learned from each event.

Effective catastrophe claims management with best-in-class people, processes and technology can mitigate claims leakage and strengthen an insurer’s reputation and brand. In addition, this approach allows a company to deliver on its promise to customers in a timely and well-executed way.