Catastrophe Preparedness: Ready For The Worst?

When the ice fell from the sky in 1998, resulting in a flurry of insurance claims in Ontario and Quebec bigger than anything the Canadian insurance industry had ever seen before, Canadian insurers arguably awoke to a new era of mega-catastrophes and their implied consequences — namely, processing thousands upon thousands of claims within a very short period. Some argue the magnitude of the 1998 Ice Storm, which ultimately tallied just under 800,000 claims, served as a wake-up call for the insurance industry in terms of contingency planning. In particular, it highlighted how mega-catastrophes severely strain the resources of a company’s claims department. Perhaps the most obvious strain is on the available pool of claims handlers and adjusters who must process a vast quantity of claims all at once. Are there enough people to handle the avalanche of work required by mega-catastrophes? In the short term, it appears, the answer is yes. But in an industry in which succession and staffing issues are coming to the fore, the long-term answer to the staffing issues appears less clear.

Bailing While Sailing

The trick in contingency planning for mega-catastrophes, as industry sources will tell you, is in preparing to find the right number of people to handle claims resulting from a nightmare scenario in addition to keeping constant the number of people required to handle an everyday claims load. On any given day, for example, an insurance company may be operating at 10% of its overall claims capacity. But if during a catastrophe the claims intake doubles in a matter of days, the company needs to be prepared for the additional intake when there is already a lot of work coming through the door.

“I think the obvious challenge people have with disasters is having enough of the right people, at the right time, with the right skills, and the right tools to do the best job for the insurance companies,” Wayne Beck, the vice president of consulting services at CGI, says.

Is the industry prepared? For now, at least, insurance companies and adjusters appear comfortable with the amount of human capital now available in the Canadian industry.

“Speaking from ING’s perspective, the relationship and the agreement that we have in place with our chosen vendor, they have always provided us with the appropriate amount of resources,” ING Canada vice president of claims Larry Lythgoe says.

Major independent adjusters, such as Cunningham Lindsey Canada Ltd. and Crawford Canada, say they, too, have implemented plans to ensure they have enough people available in the event of a catastrophe.

Cunningham Lindsey Canada Ltd., for example, has identified catastrophe adjusters across the country (whether in-house or not) who are able to work solidly on a crisis situation for four weeks, without affecting the day-to-day business.

“Certainly the shift we made, and this was hammered home with Hurricane Juan in Halifax a few years ago, is that we have to keep the local people doing the local business — the regular-line business, the day-to-day stuff — and bring cat teams in from across the country,” says Rob Seal, president and CEO of Cunningham Lindsey Canada. He said his company affiliates itself with smaller CIAA member firms to make sure it is not taxing regular line adjusters, and business can go on as usual.

Crawford & Company has a network of catastrophe-specific adjusters throughout North America who receive on-going training. The first line of defense is an internal network of Canadian property adjusters. The staff have various levels of catastrophe experience dating back to the Ice Storm at least, and are regularly called upon to assist in the Caribbean. The company has recognized the need for training and has stepped up programs at Crawford University to ensure adjusters continue to become more proficient with property scoping and estimating.

The problem, of course — which has been sounded by the incoming president of the CIAA, Fred Plant, among others — is keeping enough trained adjusters in the pipeline for handling catastrophes five or 10 years down the road. In this respect, the succession concerns expressed elsewhere in Canada’s insurance industry (and other industries for that matter) is also a threat to the future of the adjusting profession. An increasing number of claims professionals are due to retire at the same time catastrophes are getting bigger and thus the need for more trained professionals is becoming acute. Seal says all adjusting firms are competing to recruit from an ever-shrinking pool.

David Cernak, president of PCA Adjusters, says he believes the dwindling stock of individuals with claims handling expertise is a growing problem for the industry.

“It appears that over the past couple of years, we have been seeing more and more senior claims people looking at retiring at an earlier age,” Cernak says. “If this is true, then the problem we have with attracting younger talent is magnified significantly; [it’s] something that should be focused on sooner rather than later.” Cernak says.

Recruiting efforts in the past may have been hampered in part by the lack of public knowledge about the opportunities that exist within the industry, Seal notes.

“Maybe it’s not as sexy as some industries right now,” he says of the adjusting profession, adding that the industry needs to be more aggressive about promoting itself. “The industry has to get together and do that. . . .As an industry as a whole, I don’t think that we’ve done a very good job of getting together and selling our industry, whether it be adjusting or underwriting or any of those types of things.”

Cernak agrees with the need for more aggressive recruiting into the industry. “If we are to continue with having a strong workforce of good knowledgeable claims people in this industry of ours, I think we’ll need to provide some new and creative incentives to attract the younger people in to the claims field and maintain these incentives to keep them,” he says.

Carol Messervey, chair of the national catastrophe committee for the Canadian Independent Adjusters’ Association (CIAA), frames the issue in terms of the need for insurers and independent adjusters to work together in the short term to avoid staffing gaps. “We’d like to see some new blood coming [into the industry], but it’s not all that easy,” Messervey says. “If the insurance companies don’t continue to support us in the good and the bad times, the firms can’t continue to maintain the full staff that they’d like to if a catastrophe arises. So, I think at this time, yes, we have the bodies, if you will, to bring people in [to handle a catastrophe]. Will we be able to in five to 10 years? I don’t know, that’s anyone’s guess really.”

Seal adds “the problem we have [now] is that, without support throughout the year from various insurance companies — or volume support I guess we’d call it — it’s hard to keep adjusters on the shelf. You can’t sit around waiting for the cat to happen, and [then] have these people not doing anything for eight or nine or 10 months of the year [while] waiting for the next cat to happen.”

Seal says this is a universal problem for independent adjusters across the country. “For us, it’s been educating the insurers [by telling them]: ‘If you want those teams, then you need to give us support throughout the year.”

People Supporting People

Additional adjusters will not be the only resource required during times of crisis. Claims departments will need other additional personnel to handle a catastrophe as well, including staff to help administer and process the claims. Also, arrangements need to be made to ensure suppliers are available when they are needed the most.

“How you deal with a catastrophic event and what you need in place depends a lot on the type of business that you write,” Linda Paccanaro, vice president of claims at Kingsway General Insurance, observes. There are, however, a few common elements that must be in place no matter what type of business you run, she adds. First and foremost, a company’s catastrophe plan must take into account the additional staff and resources required to handle the claims. When a catastrophe hits, for example, the first thing the company can expect is for its existing communications infrastructure to be taxed. Fax machines, e-mail servers, phone lines and staff workloads will be flooded. Without a proper plan in place, communications might be so swamped as to be blocked altogether. A back-up plan to handle the communications between the insurers, customers, adjusters and suppliers is absolutely essential.

“The very first thing you think about in catastrophe planning is: ‘How do people [customers] get in [to report claims to the company]?'” Paccanaro says. “How can they report to you? How do you find out who’s had the loss? And how do you manage that?”

Some insurers line up more administrative people to make sure the proverbial communications bottleneck stays open. Some companies, for example, have set up call centres. In such cases, in the event of a catastrophe, phone lines are re-routed to a call centre that has been established to handle the influx of calls. This ensures the claims associated with the catastrophe are segregated from the day-to-day claims. A team is often assigned to capture aggregate loss data so that decisions can be made about where to allocate available resources.

“You need to have arrangements [in place] to take care of the [claims] overflow, or to enable you to take care of the overflow, whether that’s an outsource arrangement (or) whether it’s changes in your processes,” Paccanaro says. “Sometimes [companies will] go into what we call an ‘up-front adjusting mode,’ [in which] one person takes all the information and another person processes, so there are different ways of managing that.” But every plan has some way to control the flow of the claims volume.

As mentioned above, it’s imperative to have organized in advance where the claims adjusters will come from.

Some insurance companies, such as The Economical Insurance Group, have an after-hours service provider. In the event of a catastrophe, independent adjusters will handle any after-hours claims that result from the cat — except in cases where internal staff members may have more experience with a particular cat or the company would prefer to use the independent adjuster’s resources in a different fashion.

When a catastrophe hits, The Economical maps out where the cat occurred, what territory it hit and then determines how many postal codes have been affected. On this basis, it makes a preliminary projection as to how many claims the company might have. In turn, the company will be able to determine the resources it will need.

“There’s no perfect science here,” Rocco Neglia, the vice president of claims at The Economical, says. “You might have 100 policies in force in one area. You might escape with no claims, or you may have all 100 of them.”

He said The Economical uses internal resources to handle catastrophes, in addition to independent adjusters and contractors. If the catastrophe is large enough, it will also parachute in second-layer independent adjusters and contractors. “During those types of occurrences, everybody is going to be stretched to the maximum,” Neglia says. “That’s the nature of the beast, I suppose.”

The Economical has a national agreement with one particular independent adjusting company. In exchange for giving the independent a certain proportion of its business, the adjusting firm agrees to provide The Economical with comparable or commensurate resources.

ING Canada revitalized its catastrophe plan roughly two years ago. At that time, the company made sure there were catastrophe coordinators in every one of its offices across the country. This group of co-ordinators meets and attends common sessions to ensure they are all working from the same manual, in an effort to simplify things when a catastrophic event takes place.

“In the insurance world, claims is the sort of moment of truth,” Lythgoe says. “I think that gets heightened in a catastrophic situation. (There is) a higher level of emotion or intensity and so to be really well prepared at that time I think is really key. I believe that the plans that we’ve put in place allow us to do that.”

The company’s plan begins with using internal personnel to handle the claims; subsequently, ING Canada will call independent adjusters as required. (ING Canada has an agreement with an independent adjusting firm.) When the insurance company goes beyond its internal resources to use independent adjusters, it is to ensure there is always someone covering a desk in the office in order to maintain appropriate service, Lythgoe says.

It is important to keep in mind ING Canada’s marketshare when contemplating the use of internal resources to handle a huge catastrophe, sources warn. Smaller companies attempting to deal with a catastrophe on their own, without looking to independent adjusters for relief, might find out the hard way in the middle of an event that they don’t have the staff necessary to handle all the claims, says Brent Hackett, assistant vice president catastrophe services and operations of Crawford & Company (Canada).

“Most insurers have a cat plan (that) includes an internal roster of staff,” Hackett notes. Such plans include “property adjusters from across the country who have volunteered to travel if and when the need arises.” But what often happens, Hackett adds, is that the company’s internal staff may be on vacation or simply have too much work on their desk, therefore affecting capacity to attend to a catastrophe site outside their home region. “Alternatively, what happens to the work left behind when someone goes off to cover a catastrophe?” Hackett asks.

Sometimes it might seem cost-effective to hire non-claims staff for adjusting or cat service. To do so, Seal notes, runs the risk that a company might find itself paying for claims that aren’t covered, or not pay for claims that are in fact covered. This might result in bad press for the company, and often the industry as a whole. Such a situation can also create issues with regards to indemnity.

Messervey encourages companies to use independent adjusters that follow the principles contained in the CIAA’s code of ethics. “(We) work hard to maintain the integrity and the professionalism and the educational level all the way across Canada,” she says. “When you hire a member from CIAA, that’s what you’re getting.”

Supplier Availability

Not only are additional adjusters needed to handle the claims, but arranging for clean-up crews in advance is an important part of quickly clearing up and fixing any damage caused by the catastrophe. Some insurance companies will have a network of preferred suppliers that they can call upon in the event of a catastrophe.

“Contractor capacity is one area that impacts the industry,” Lythgoe says. “There is a limited number of contractors that do this kind of work. And when you have a GTA rainstorm like we had in 2005 [a storm that caused roughly Cdn$400,000 in insured damages], the capacity gets filled up pretty quickly.”

One thing is certain, sources say: If you are searching for people in the middle of a catastrophic event, good luck. By then, the damage to the company’s operations has already been done. Ensuring you have a formalized agreement with groups of suppliers that are dedicated to helping your company in the event of a catastrophe can help you move in quickly and minimize damage, sources say.

Resources can quickly run short during a catastrophic event. At that point, the economic laws of supply and demand kick in: the shorter the supply of contractors, the more compensation contractors can demand from insurers. Suddenly, an insurer that has not planned in advance can find its costs increasing exponentially while customers wait for their property to be repaired. “It can be a service nightmare and a publicity nightmare,” Paccanaro warns. “It can happen if you get a really heavy hit and you don’t have the right processes or you don’t have the right resources.”

The same goes for hotel accommodations and car rentals. There are only so many hotels and cars available to outsource in a given area. This number shrinks substantially if local residents need to evacuate from their home or if their cars are damaged during a catastrophic event. Insurers would be well-advised, sources say, to arrange contingency plans with hotels, motels, car rental companies and so forth to ensure their staff has a place to stay during the crisis period.

It would also be wise to make sure contract wordings with suppliers are clear, recommends Glenn McGillivray, the managing director of the Institute for Catastrophic Loss Reduction (ICLR). Taking the time in advance to make sure everyone understands what will be covered and what will not be covered can help to solve a number of problems right from the get-go, he notes. It will help ensure claims staff and adjusters are not wasting their time and efforts on policy interpretations when they are placed in the pressure-cooker situation of processing a huge number of claims at once.

Use Available Technology

When used properly, technology can be used to fill in gaps created by a shortage of people. “I think that in order for insurance companies and third-party adjusting firms to be successful, they need to find a way to get more leverage from a shrinking number of claims adjusters over a broader geographical area,” Beck says. Using technology is one means to do that, he adds.

“Firms that tend to provide service [during large-scale] disasters need to find, obtain and acquire tools that are more mobile from an access perspective, and from an execution perspective,” Beck says. “In other words, it’s got to be Web-based, it’s got to be 24/7, it’s got to be mobile from portable phones, laptop, tablets — all that kind of good stuff — and they need to find a way to get more leverage from the experts again by leveraging technology.”

Always Be Prepared?

The operative word in all of this is ‘preparation.’ Many of the logistical dilemmas in mobilizing all of the people and infrastructure required to handle a catastrophe can be overcome with forethought — and a dedicated catastrophe plan. “You have some companies that are really well-prepared and others that are just flying by the seat of their pants — and … everything in between,” McGillivray says.

All companies should have business continuity plans, which are required by the federal regulator in the case of insurers. However, a business continuity plan only looks at what happens if the company gets hit and how to keep the business running. A catastrophe plan, on the other hand, looks at how to deal with the client if a catastrophe impacts a large portion of the business.

The most important factor, however, is will your plan work during a major event?

“Crawford & Company has a national catastrophe plan, we have a business continuity plan — as do most underwriters,” Hackett says. “It’s a matter of implementing the plan successfully. We are constantly tweaking our plan to improve quality and customer service.”

A catastrophe plan requires extensive preparation, relationships with other business in the industry and a sure-fire way to set the plan in motion when necessary. Perhaps its most valuable function, however, is to marshal all of the human capital required to process claims resulting from a major catastrophe.