Insurers turn to loss control as property claims spiral

With the rise in claims costs having exceeded the growth of premiums for the last five years, it should come as no surprise that last year saw the Canadian property and casualty insurance industry incur a negative development on prior year claims, says Susan Vella, senior vice president of personal insurance at Chubb Insurance Co. of Canada. This was the industry’s first “negative development” in many years, notes Vella, who spoke at the recently held “2002 Property Claims Summit” hosted by Marshall & Swift/Boeckh – Canada.

While the losses over recent years have been widespread across all lines of business – with auto having attracted the most attention – an area which is seeing a startling increase in claims costs is personal property, Vella observes. The property market in Canada is at least 20 points under-priced, she notes. The true extent of this under-pricing is even greater when taking into account “cat loads”, claims trending and the need for reserve strengthening, she adds. “Even at the current pace of rate increases [being applied across the industry], we cannot expect to make up for a decade of neglect with a short burst of price increases. The current rate increases will help close the inadequacy gap. But for the next two years the bulk of the rate increases will go toward the new price of reinsurance and for the rate inadequacy of the past.”

The loss causes most prevalent in property now stem from water, Vella says. “2001 marked the first time in Chubb’s history that we paid out more in water damage claims than in fire.” Whilst showing a startling increase in losses, water damage claims are arising from the following categories: freezing, sewer backup, leaky roofs, water ingress and mold. In response, Chubb has applied obvious corrective actions such as rate increases, but is also looking at policy language to eliminate “jackpot losses” and offer clients significantly higher deductibles – as much as $50,000. The insurer is also looking at risk modeling and other statistical loss analysis techniques to weed out high recurring loss business. “To achieve an underwriting profit, companies are going to have to properly value what they are insuring. They [insurers] are going to have to insist that the client share more in the losses through deductibles and co-insurance clauses, and they are going to have to have a solid understanding of the coverage they are providing and the loss costs associated with that coverage.”

Jonathan Kost, from Marshall & Swift, points out that loss control depends on two critical factors: front-line claims handling skills, and data analysis. Having a strong front-line on the claims handling side is critical, he observes, although the true effectiveness of this to the bottom-line depends on data collection and analysis. “Only through data collection can you determine best practices, and what’s happening out there, and how it is impacting on your bottom-line.” Kost notes that “analytics” application in the U.S. has cut about five percentage points of the combined ratio of some insurance companies. Canadian insurers could expect the same, he adds.