Counting the Claims

Last year was an exceptionally busy year for claims and that’s not going to change much in 2006, according to claims managers contributing to this month’s cover feature.

Asked to predict the top claims trends for 2006, claims managers answered in a variety of ways. Their concerns focus on everything from an increasing number of sexual abuse claims to creating technological solutions that would allow consumers to track the entire claims process through the use of the Internet.

Within this broad range of topic areas, a few issues stood out among the rest:

* Increased catastrophe claims due to the acute Canadian storm activity throughout 2005.

* Warnings of how US court decisions and areas of litigation – particularly in the area of class actions – may impact the Canadian insurance industry.

* A ‘wait-and-see’ approach to Canadian auto legislation.

Claims managers note their companies were very busy in 2005 because of severe rainfall in Calgary, Montreal and Toronto. In fact, after near-record rainfalls swamped Toronto in August 2005, one company reported receiving one-quarter of its annual number of claims during a single weekend. That kind of storm frequency is not abating, claims managers note. They discuss the need to both lobby politicians for improved infrastructure and to create and maintain well-devised plans for dealing with increased catastrophic claims in their own companies.

Despite reduced auto claims over the past few years, claims are predicted to increase over 2006 and claims managers seem to be waiting for the other shoe to drop when it comes to how the courts will interpret recent auto legislation. Of particular interest to claims managers is how courts will interpret the definitions of minor injuries as well as whether the injury caps and thresholds will survive court challenges. If thresholds are eroded and litigation costs for insurers increase accordingly, what will insurers do when they set premiums? What will they be able to do if the governments intervene to keep premiums low?

Year 2006 may also reveal the extent to which US class action lawsuits are becoming a Canadian litigation phenomenon, claims managers say. Tobacco and pharmaceutical class actions in the US highlight the vast claims exposure that exists in Canada when such a large number of potential claimants can be brought together, the claims mangers caution. Already Canada has seen a rapid increase in class actions at a level that one manager describes as “disturbing.”

At this point, we turn it over to the claims managers to identify what they regard as the Top trends of 2006.

Irene Bianchi

Vice President, Claims Royal & SunAlliance

Last year, claims teams at Royal & SunAlliance and other insurers were incredibly active across the country. Between storms, legislative activity and a rise in class action suits, 2005 was incredibly busy. I believe this trend of large, devastating storms will continue through 2006 and beyond.

The Calgary rainstorms and the August 19 Toronto storm were significant events that tested the strength, commitment and responsiveness of claims teams. The Toronto storm caused $400 million in damage – the industry’s second-costliest catastrophic event – ranking behind the 1998 Quebec and Ottawa ice storms.

Following the Toronto storm, we saw 25% of our annual intake of claims come in over a single weekend. Thanks to the quick thinking and action planning on the part of our property teams, we saw exceptional results and were able to get policyholders’ lives back to normal in record time. We learned it is essential to have a comprehensive catastrophe plan in place. The plan works best when it is detailed, comprehensive and well-communicated.

Our professional claims teams were able to give tremendous support and assistance to our valued policyholders during the storms. Our challenge continues to be to provide reliable, excellent service everyday – something we take very seriously at Royal & SunAlliance. Our commitment is to deliver consistently on our promise to assist people in getting their lives back together again after a loss.

We also need to be aware of other challenges that face us as an industry – particularly class action lawsuits. We are seeing an increase in frequency that is quite disturbing. Defending against these suits is expensive, but imperative. As a responsible insurance carrier, I believe we must defend these cases for the benefit of our policyholders and all insurance consumers. We are seeing a rapid increase in this style of litigation and we need to defend against it: the financial and societal ramifications are huge.

All of us will be wary of the auto legislation changes that have occurred in Alberta, Ontario, and in the Maritime provinces in recent years. As we pass through the ‘honeymoon period’ and start to see court challenges to the legislation, as well as definitions of threshold, all of our claims operations will be under pressure to be clairvoyant and understand what is happening so that we can react appropriately.

As we go through 2006 the challenges we have identified will stretch our thinking but that is what makes our roles in claims worthwhile.

Wayne Eaton

Vice President, Claims and Liability Management Swiss Reinsurance Company Canada

Now that every province in the country has achieved an admirable level of rate stability on the auto front, the same level of stability should remain on the claims side. As long as the general public remains in fear of higher premiums brought about by chargeable accidents, we are unlikely to see an increase in frequency. This is key, because the rising cost of medical services continues to add to the cost of administering the more serious bodily injury claims.

Casualty claims will experience a greater level of volatility and will continue to drive trends seen over the past few years. In particular, sexual abuse claims attract a considerable amount of sympathy, especially for victims whose traumatic experience has resulted in diminished earning capability. Increased damage awards will continue the upward trend.

The effects of US judgments will also continue to influence claim settlements north of the 49th parallel. As much as we may try to resist, globalization is rapidly spreading adverse claims trends around the world. Tobacco litigation, for example, once a US phenomenon, has not only spread to Canada but to many other regions including the UK, France, Italy and Spain.

Other trendy product liability claims that typically originate in the United States need to be closely monitored. Insurers – especially those with clients that have sizeable US sales – need not be reminded of the claims exposures that can materialize. Pharmaceuticals are only one example of the many products that have been exposed to multi-million-dollar and multi-billion-dollar settlements. All of these risks face added exposure to class actions, which can rapidly attract the attention of thousands of potential plaintiffs in the United States and elsewhere.

I would be remiss if I did not suggest that catastrophe claims are likely to keep many property adjusters active at least at some point during 2006. Forecasters are already suggesting that the 2006 hurricane season is likely to be 60% more active than normal. While this may not directly impact Canadian insurers, let’s not forget the level of localized storm activity that we have experienced over the past couple of years. Although the effects of global warming have thus far been difficult to predict, storm activity should be a factor on everyone’s radar screen.

Robert Fuller

Vice President, Claims Echelon General Insurance Company

The necessity of deciding how much technology will lead to best claims practices is a role occupying an ever-increasing amount of a claims manager’s day. It is becoming apparent that ignoring this
situation could lead to an inefficient and unproductive work environment. Perhaps most importantly, it may also lead to a less satisfied customer (insured) and/or distributor (broker or agent).

People demand quick, simple and interactive service in all aspects of their busy lives. Are we meeting their expectations when they have to deal with today’s claims departments? Or are our claims departments lagging behind, because our adjusters are spending much of their day “chasing paper” and coordinating manual processes that should really be automated?

More resources should be devoted to creating options for customers. Given today’s technology, for example, there is no reason why customers and brokers can’t visually follow their claims continuously by means of the Internet, should they choose to do so. They should be able to input and interact with us in the adjustment of their loss.

Canadian claims managers should work together with our technology suppliers to establish broader industry links with our business partners – for example, adjusting firms, appraisers, rental agencies, accountants, lawyers, doctors, and regulators – to allow more disclosure and openness of process to the customer through technology. I have met with computer company representatives recently who are trying to establish a foothold on these types of initiatives. I sense they are meeting with some resistance from the majority of insurers. Are we too cautious because of such important issues as restrictions under PIPEDA and Provincial Evidence Act doctrines? Are there solutions to these caveats? I believe so. Working in unison to develop them will be beneficial to all.

As we embrace new technological advancements, internal efficiencies will become self-evident. I recently visited with a US insurer and viewed a new computer system they have implemented, completing a full paperless initiative. Their productivity greatly increased. They are ready to commence the next phase of their strategic plan, which is to move all of the insurer’s employees to home-based offices. They intend to sell their building and lease a much smaller office space. The primary purpose of the new space is to house weekly or monthly department meetings as the need arose. The advantages of Voice Over Internet Protocol (VOIP) allows for this initiative. The resultant cost savings and employee satisfaction levels are anticipated to be very beneficial to the company. I look forward to following their progress.

The new frontier of claims management will complement opportunities created by the electronic advances. All the while, insurers will maintain a “human touch” at a time when the insured seeks superior customer service and an empathetic ear.

Ronee German

Vice President, Claims Chubb Insurance Company of Canada

The word defining the claims experience in 2005 is catastrophe, regardless of whether your perspective is Canadian, North American or even global. Chubb Insurance Company of Canada (Chubb) was affected by multiple incidents of severe rainfall in Calgary, Montral and Toronto. Sewer backup was the most prevalent cause of loss. Automobile results were also affected: in addition to the significant rise in the number of claims, the cost per claim was also higher. Automobile losses were often due to electrical system damage. The recent increase in home improvement expenditures – including such things as the installation of home theatres – means more costly damage. Costs associated with adjusting and settling claims are also affected. The threat of mould, for example, requires more sophisticated equipment and remediation techniques – which translate into higher costs.

Chubb’s adjusters and vendors are acutely aware of the importance of upholding Chubb’s reputation for superb customer service. Chubb’s Masterpiece homeowner’s policy provides comprehensive coverage, meaning that Chubb expends significant resources adjusting claims. In view of the trend towards increasing, weather-related claims volumes, these factors combine to put unique pressures on Chubb’s staff and service providers; in our view, they require us to work harder and smarter. We have successfully met these challenges, as illustrated by the fact that despite the difficulties inherent in dealing with unprecedented catastrophe loss activity – and perhaps because of them – Chubb’s customer satisfaction rating remains very high.

For 2006, Chubb intends to build on the momentum of our success by focusing on our long-term strategy to sustain claims service efficiency and excellence. Specifically, Chubb intends to:

* Establish a strategic focus on risk reduction in concert with our broker partners and service providers.

* Continue to develop and strengthen our relationships with vendors who are committed to providing outstanding service over the long term.

* Enhance our cost-containing expertise.

* Continue to reinforce our service excellence philosophy.

* Foster an entrepreneurial spirit of creativity and flexibility in the pursuit of these goals.

Nora Hohman

Vice President, Claims The Dominion of Canada General Insurance Company

Whatever happened to the odd quiet month in the claims department? Much has been said about the challenge of managing the 2005 storms. I expect most would agree that these types of events will challenge us again in 2006.

For those of us at The Dominion, the phrase ‘Do the right thing’ guides us daily. In the context of the 2005 storms, this means having a mature catastrophe plan that supports the delivery of outstanding service and consistent claim handling. This includes the same application of policy wording both the day before and the day after the storm. Some insurers seem tempted to apply wordings differently, possibly to gain short-term favor with policyholders or settle claims faster. Such inconsistency in the industry does little to restore consumer confidence.

Doing the right thing means using our collective strength as an industry to find ways to better protect Canadians from the impact of weather events. Our president, George Cooke, recently sat on a council of Canadian business leaders who are looking at the impact of climate change and what we should do. He raised the need to commit to upgrading infrastructures to better support growing communities and mitigate weather related losses.

Doing the right thing serves us well in dealing with other challenges. It is at the core of the partnerships we forge with our brokers and claims vendors. We align ourselves with those having similar values of honesty, integrity and a true desire to do the best for the consumer. It also means protecting policyholders from those who would cheat the system. We will continue our efforts to stop abuse, be it in the form of an outrageous tow or storage bill, or the rogue shop trying to hold vehicles hostage. It is time-consuming, tedious and distracting, but it is the right thing to do.

Doing the right thing also guides us in the management of product reforms. We will continue to apply the words as they were intended. Simply accepting any perceived erosion of thresholds or injury caps, or any other legislated changes will only lead to further product instability.

There are many challenges facing us in 2006. Those of us in claims have a tremendous opportunity to help our industry regain consumer confidence and encourage a more stable marketplace. At The Dominion we will do our share by continuing to ‘Do the right thing.’

Larry Lythgoe

Vice President, Claims ING Insurance Company of Canada

Over the last four years, a number of reforms to the automobile product have been introduced in at least four provinces. Further changes are being implemented in Ontario effective March 1, 2006. The good news is that consumers have seen reduced rates; to date, these changes have resulted in improvement to both frequency and industry
results in the provinces in which they’ve been implemented. The bad news is that there have been Charter challenges to these reforms in three out of the four provinces. In addition, over the coming months, insurers will start to see statements of claims for traditional litigation, challenging the threshold under Bill 198 in Ontario and the cap in New Brunswick. Accordingly 2006 could prove to be a very interesting and challenging year.

In Ontario, the elimination of DACs will take effect on March 1. Given tighter timelines and the expanded “unfair and deceptive acts and practices” provision, one challenge facing insurers will be to ensure that they have the proper systems and processes in place. In particular, “assessment vendor” management will become extremely important, as insurer examinations will become the main defence against allegations of improper benefit termination and resultant claims for bad faith. In addition, adjusters must have the knowledge and expertise to properly vet the medical information and treatment plans to allow them to make the appropriate decisions required by the new regulations.

In 2006, Ontario’s insurance industry will have a better sense of the volume of challenges with respect to the Bill 198 threshold. It will likely be 2007, however, before any decisions are handed down indicating the extent to which the judiciary will uphold the intent of the regulations to tighten the threshold (consistent with the Ontario Court of Appeal’s original OMPP trilogy decisions).

In New Brunswick, in addition to the Charter challenge, the limitation period has expired for the first claims to have fallen under the impact of the reforms. The industry will start to see the volume of litigation claiming to exceed the cap with respect to general damages. As in Ontario, decisions on these cases will probably not be received until 2007. Obviously the way in which the judiciary rule on the challenges to both the cap and Charter will determine the success of New Brunswick’s reforms. It will be interesting to see how these files progress through the system.

While it appears that some great progress has been made on the automobile product, the sustainability of this progress will depend on the outcome of closely-watched legal developments this year and next.

Linda Paccanaro

Vice President, Claims Kingsway General Insurance Company

Looking back is often the key to anticipating the future. Claims frequency for automobile losses continued to decline in 2005. The trend – driven by improved safety systems in vehicles, safety programs and improved vehicle technology – is likely to continue. The current high prices of fuel support reduced mileage by drivers. Initiatives to promote car-pooling in major Canadian cities and to augment use of public transportation will further support reduced, single-operator usage. Frequency figures for 2006 will pattern those of the prior year.

Severity, however, is a different story altogether. General inflation has driven higher purchase and replacement costs for some classes of automobiles and subsequently increased repair costs. These factors will continue into the upcoming year; severity is likely to increase at the same rate as 2005.

Casualty losses are the greatest challenge for claim departments. These have been steadily increasing. Reinsurers are closely monitoring the trend and increased reinsurance costs are evident for certain layers or types of insurance. Contributing factors to the pattern include rising medical costs and increased court awards. The pattern is not restricted to any specific province.

In the past decade, there have been significant increases for some categories of injury losses. Categories most affected appear to be brain injury, fatalities and spinal fractures. For head injury and spinals, the cost of claims has doubled in recent years, mostly the result of court awards based on future care and future medical costs. No exception to the trend, 2005 saw some significant awards that broke prior ceilings.

Plaintiff demands for settlements of these losses are often accompanied by extensive documentary on projected future losses. In Ontario, a plethora of experts has arisen promoting services for the significantly injured. These services are often expensive and tend to rapidly reduce available accident benefit limits, which subsequently increases tort exposures for the excess. In addition, policyholders are seeking higher limits, thereby making more funds available for payout on serious losses.

These ongoing claim trends will threaten profitability in 2006, as governments push for reduced rate increases and some markets soften while reinsurer markets harden. Companies that are successful in managing the impact of the trends will continue to see successful outcomes. Success depends on ensuring rate adequacy and understanding the long-tailed nature of the losses. Claims expertise will be critical for managing losses and ensuring that costs are contained wherever possible. Technology is likely to play a much larger role in 2006. Companies with databases that readily allow them to identify trends and react with ratemaking and claim-management strategies will see greater success than those that don’t.

In conclusion, frequency should continue to decrease marginally, while claims costs for medical components and tort settlements continue to increase. The fittest companies will recognize that underwriting profitability is demanded as investment returns remain low.

Greg Somerville,

Executive Vice President, Claims and Reinsurance Aviva Canada Inc.

What’s ahead for claims in 2006? We’ll be watching closely to see the impact of the significant regulatory reforms in auto insurance that are now taking effect in the Maritimes, Ontario and Alberta. The inevitable court challenges will create some noise in the marketplace, but the most significant impact will be to see how well the new definitions of minor injury and the interpretation of the injury threshold will stand up to judicial review.

In addition, we continue to experience double-digit increases on the liability-casualty, loss-cost trends, driven by items like class action activity, social inflation on court awards and novel heads of damage claims. This requires continued prudence in underwriting risk management and the development of programs to proactively manage the costs flowing from these exposures.

On the operations side, we have just gone through an unprecedented drop in claims frequency, but our trend lines indicate that frequency rates are rising again. Now that the reforms are taking effect, many customers have seen rate reductions for the past couple of renewal periods and I suspect that any reluctance they might have felt to file claims previously will have been reduced. And I don’t think that’s necessarily a bad thing.

In recent years, the customer-pay portion of auto claims has doubled from what it was. This is due to a number of factors, but it comes about partly because of customers’ fears that their future access to insurance might be negatively affected by a claim. We can’t afford to let those fears continue. The insurance industry will not secure a good image if customers feel they’re being sold a protection product that they can’t really use without penalty.

That is why our company, and the industry as a whole, has to become more proactive in pushing for solutions to claims issues by listening to the needs of our customers. We have to do all we can to ensure that we help them deal with the consequences of their claim from a customer-centric point of view. An accident that results in a personal claim is a significant interruption in a customer’s life and it’s our responsibility to return them to a pre-loss condition as soon as possible.

Finally, I think it’s prudent for us all to remember that while we work hard to be customer-centric and do all we can for those who have legitimate claims, we must also continue to effectively manage the cost side o
f our business to ensure we don’t pass on unnecessary costs to the 92% of our customers who do not make claims.