September 1, 2014 by Ted Gregory, Operations Manager, Property Claims Services, a unit of Verisk Analytics Inc.
The first eight months of 2014 were relatively quiet. Five months passed before the first PCS-designated catastrophe event struck Canada. By the end of June, only two designated events had occurred, amounting to nearly $100 million in insured losses. Activity increased in the second half of the year with two events designated in August accounting for another $553.4 million.
This follows the most active year in the history of the PCS Canada service, in which six designated events caused more than $3 billion in losses.
While it may be tempting to view this year as a welcome respite from the major events of 2013, insurers should instead remain vigilant. Frequency does not indicate severity. A major event could come at any time, and if it does, it could have a fundamental impact on the market overnight. Rather than slip into a false sense of security, insurers should continue to examine and revise their catastrophe plans, fine-tuning them to address an ever- changing marketplace.
A RECORD-SETTING YEAR?
Two PCS Canada-designated catastrophes occurred during the first half of 2014: the tornado that hit Angus, Ontario in June, and a wind and thunderstorm event in Manitoba and Saskatchewan. In addition, two events were designated as catastrophes in August.
If this year’s low levels of catastrophe activity continue, 2014 could set a new record in Canada. With losses at $652 million this year (with two more events designated and under review by PCS), it could become the quietest catastrophe year in the history of the PCS Canada service. Based on early indicators, it appears unlikely that the two August events designated by PCS will cause a significant change in the prevailing small catastrophe trend, and absent a tropical storm on the East Coast, major threats will become less likely as the year continues.
All four events designated by PCS this year are wind and thunderstorm events, which – in the absence of flooding – tend to result in lower losses than some other natural perils. These storms caused the most damage in personal lines claims, which account for 70% of the year’s losses, with auto claims accounting for 24% and commercial claims accounting for 6%.
The largest event of the year was the wind and thunderstorm event in Alberta, which is responsible for 71% of the reported 2014 catastrophe losses sustained by the Canadian p&c insurance industry. Ontario is the most catastrophe-prone province of 2014, having been included in two of the four events designated so far this year.
The situation was much different in 2013. Last year was the busiest catastrophe year on record with $3.2 billion in insured losses across six events. The two most significant events of the year resulted in a combined total of nearly $2.7 billion in losses.
The largest on record at PCS was the wind and thunderstorm event that struck Alberta in June of 2103, causing $1.7 billion in insured losses, due largely to the covered flooding that followed the event. In July, a similar event unfolded in Ontario, resulting in nearly $950 million in insured losses.
Those two events fundamentally changed the year, which otherwise would have had losses of only $500 million and would have been the quietest year on record by 38%.
Of course, 2013 was an anomaly. The year’s aggregate losses were nearly three times the average annual loss reported by PCS of $1.12 billion (2009 to 2012), with event frequency that was on par with the annual average of 7 (6.5) events. In fact, 2013 was the most severe year in the history of PCS Canada by a factor of three; the storm in Alberta alone would have made 2013 the worst year on record. Absent that significant event, 2013 would have been Canada’s second-lowest catastrophe claims year since 2010.
For now, at least, 2014 looks like it will fall well below the annual average. With that in mind, only a significant increase in small-event frequency or a major catastrophe event would be necessary to bring 2014 close to average.
Could an unexpected twist happen in 2014? History suggests that is unlikely. Superstorm Sandy, which made landfall in Ontario and Quebec in 2012, caused $100 million in reported insured losses. As the year moves forward, the risk of convective storm losses declines, reducing the likelihood of high-frequency, low-severity events. That said, it is important to keep the anomalies in mind. A major event – or a series of winter storms – could belie such predictions. The problem, of course, is uncertainty. Insurers need to be ready for the unknown.
Calm years should be as instructive as active ones. While the big losses make headlines and remind the insurance industry that major events can strike at any time, years with lower losses should serve as an opportunity to refocus on the tasks that can protect a company when conditions turn. They provide the chance to refine catastrophe plans, train adjusters and shore up relationships with the vendors that can be crucial to keeping customers happy and containing loss adjustment expense (LAE).
The first step is to examine the past. Review both industry-wide and company historical catastrophe claim data to identify the trends – and anomalies – that can mean the difference between a smooth operation and high losses and expenses. Refine plans based on both trends and specific experiences to equip adjusters to serve customers faster and more effectively. Affected customers will be able to move on with their lives and can create word-of-mouth recommendations that insurers rely on in a highly competitive, post-catastrophe market.
Training is always a concern. Small mistakes can have profound consequences when magnified by large numbers of adjusters seeing several customers a day. Training can also include plans for spot corrections and improvements during an event. Using industry-wide benchmark data, catastrophe coordinators can identify overpayment or underpayment trends that could either be unnecessarily costly or put the insurer at risk of alienating customers at a sensitive time.
Strengthening and formalizing vendor relationships can result in lower LAE when an event does occur. Defining agreements with salvage companies, tree removal services, and independent adjusters during quiet catastrophe years can lead to measurable savings when a catastrophe strikes, potentially shaving points off combined ratios and protecting earnings and shareholder value.
INVEST IN PREPAREDNESS
Even quiet years can threaten the metrics that ultimately lead to the creation of shareholder wealth. Smaller events, especially when frequency increases, can erode retentions and impair insurer balance sheets, resulting in unexpected losses. Investing in preparedness when losses are low can lead to increased efficiency, customer satisfaction, and financial performance when a major event occurs.