Cutting CAT Costs

CATs provide exemplary tools for reflection. The Edmonton floods, for example, provide integral information that can be analyzed to create an efficient flood response and prevention plan.

Within 48 hours of the Edmonton floods, local restoration contractors took on as much work as they could handle. Unfortunately, a significant demand for restoration services, specifically water extraction, remained. Many insurers responded by calling contractors from the surrounding region, but these preferred professionals had also been hit by heavy rains and were unable to facilitate the insurers requests. As a result, the insurers were forced to seek aid from areas such as Ontario and, while the out-of-area contractors were generally willing, they were concerned with costs associated to: deploying crews; how much work would be required when they arrived; the terms of engagement; and, how long would they be on site.

Many insurers were ill prepared to answer these questions and this meant that several days of negotiations were required to iron out the details of mobilization. As a result, about a week had passed by the time the off site contractors finally arrived in Edmonton. This delay has a direct affect on the insurers and reinsurers bottom line. The question is, with prior planning, could such delays be averted?

THE HIDDEN COSTS OF CATS

Restoration contractors view a CAT as unusual business and contractors responding to a CAT will first call their bank manager to determine if they can afford the additional expenses associated to CAT response. Crews from hundreds, even thousands of kilometers away from the CAT site must incur travel costs – someone must pay for their travel time, accommodations, food and daily living expenses. Contractors cannot afford to absorb these additional costs.

Most insurers recognize the extreme additional costs incurred by the contractor and are willing to reimburse them.

Insurers must have these costs broken down on a per job basis but without knowing precisely how many jobs there will be and how much time they will take, insurers must wait for the CAT response to be complete before they can tally the total cost. At this point insurers will begin to issue invoices with a pro-rata charge. Invoices subsequently are often not issued a full business quarter if the on site work extends six to eight weeks. Such a delay is exactly the reason why many contractors politely refuse CAT response offers.

AN INDUSTRY SOLUTION

A CAT response methodology that will meet the needs of both insurers and contractors is based on a fee structure that takes overhead costs, anticipated volume and a per claim mobilization cost into account.

New CAT response methodology addresses issues such as CAT response roles, response parameters, additional costs per claim, allocation of these costs, communication to insureds and the media, as well as a host of issues relating to cash flow and job management.

Currently in place is a five-step methodology that logically walks decision makers through each step thereby clarifying communications, speeding up response times and defining the on-going roles and responsibilities of CAT committee members. This methodology facilitates a well-defined plan and response process that offers a way to charge for CAT response as well as provide numerous additional benefits, such as:

* Improved loss mitigation

* Improved communication for all stakeholders

* Efficiency, so that more claims can be mitigated in the same time frame

* Ease of accounting

* No ‘surprise’ billing

* Avoidance of frustration surrounding the procurement of labour and supplies

* Improved service to the insurers customers

* Better management of customer expectations

* The ability to reduce reinspection costs by clearly defining the work scope and pricing prior to work beginning

BENEFITS TO THE BOTTOM LINE

One of the major concerns during a CAT is the propensity for manpower and equipment prices to fluctuate with demand. With a pre-negotiated CAT plan, equipment is made available at regular pre-determined rates rather than rates determined by circumstance. This has a positive effect on the bottom line. In addition, response time is improved because there is no need to negotiate terms and conditions with numerous vendors. This means that the contractors are: on site sooner; more focused; and, able to begin mitigation immediately. The right plan may mean that more claims can be taken care of in the same amount of time, thereby saving the insurer countless costs that are normally associated with delays.

In addition, insurers are able to deliver on the promise that they have made to their insureds and at the same time they are helping to build strong consumer bonds while receiving positive press. All of this ultimately helps improve retention.

With a CAT plan in place, insurers can pre-sell their ability to take care of their customers even during trying times. Brokers are more apt to recommend an insurer whom they know can take care of their clients regardless of loss circumstances.

Because criticism is often directed at insurers, an insurer with a marketable CAT plan will be able to demonstrate the true value that it brings to its customers.

CAT METHODOLOGY

The methodology is offered in a chart format (see chart 1) and can be modified to include company specific procedures and standards that can be incorporated into the insurers overall CAT response plan. Its primary purpose is to improve communication between the many stakeholders involved in the CAT response including: head office staff; field adjusters; brokers; independent adjusters; and, contractors. The insurer implements the methodology internally, but uses it as the basis for communication between each of these stakeholders.

Stage 1 – Activation

The insurer determines a CAT situation exists. Based on the information at hand, this step allows claims managers to determine if the CAT task force should be mobilized and what the expected lead-time to mobilize the CAT Task force and other resources (emergency services) will be. This initial assessment stage may involve the immediate mobilization of resources prior to a complete on-the-ground assessment.

CAT activation authorizes the initial mobilization, any mobilization expenses and sets a meeting time and place.

Stage 2 – Mobilization

Once an initial assessment is complete the CAT task force is mobilized to the affected area where it can perform a detailed assessment of the situation. Alternatively, this may be done using regional representatives that communicate with task force members. If the task force needs to travel to the site, mobilization authorization will be required to okay associated travel costs.

The assessment and mobilization process should include brokers, as they will be receiving information from their clients and can help in the overall assessment of the situation. All stakeholder communication should be ongoing in order to maintain an accurate picture of the situation.

Stage 3 – Assessment

In this stage, a detailed assessment is performed. The documents used provide a complete checklist of everything that should be considered in a CAT response. By developing these forms and checklists in advance of the CAT, the task force can quickly determine the requirements and easily communicate them to the service providers. Included in the check list are:

* The number of insureds in the affected area

* The likely number affected

* The coverage being offered (i.e. anything beyond what the policy would usually respond to?)

* The communications plan

* The response strategy (e.g. by sector)

The service providers on the task force initiate their response based upon the service profile. The assessment phase takes normal claims volume into account, as this work will continue regardless of the CAT.

Stage 4 – CAT Response

In this stage, the contractors have begun their work based upon the instructions developed in Stage 3, and the CAT task force begins to meet regularly throughout the recovery period to evaluate the response and make adjustments to the CAT service profile, where necessary. The instructions delivered on the various forms developed in stage three continue to guide all parties during stage four.

Stage 5 – Post Response Evaluation

At the conclusion of the CAT, the task force meets to assess the response to the specific situation and to review the steps taken to respond to the CAT. They examine the results achieved and identify changes that would improve the results.

All findings are documented and the response methodology is modified to include any additional actions to be taken in future CAT occurrences.

All five steps are meant to capitalize on the resources offered by the insurer and the restoration contractors, as well as other stakeholders. A formal response plan that includes both insurers and contractors will focus on damage mitigation and on achieving a timely, coordinated response. This will offer the insurers the ability to save significant sums of money. By implementing such a plan, insurers will not be exposed to delays that could lead to costly consequential damages. The plan requires considerable dialogue and cooperation, which cannot be initiated at the onset of a CAT.