Masters of Disasters

Given that catastrophe claims are threatening to become a more common reality, insurers need to establish in advance an efficient, effective system for processing a large number of claims during a very short period of time, ING Canada’s property claims director Ted Doyle told the 39th annual joint conference of CICMA/CIAA.

Speaking to an audience of about 200 people, Doyle related ING Canada’s claims experience in September 2003, when Hurricane Juan hit Nova Scotia and P.E.I., causing an estimated CDN$100-150 million in damages. ING’s local offices received 3,500 claims related to the event, Doyle recalled.

He urged insurers to prepare their departments in advance for handling such a large number of claims.

“A cat is a marathon, it’s not a sprint,” Doyle said. “In the old days, we’d simply ask the local claims office to ask the adjusters to work a few hours longer, roll up their sleeves, and really pitch in to help their local community. That simply wasn’t going to do it [anymore].

“Claims departments are staffed for the normal, predictable, regular volume of claims…and normal claims have a way of continuing absolutely unabated. We realized in Halifax, Nova Scotia, that if we were going to have 3,500 additional claims reported, we better somehow make that more than a sundry duty… We realized we had to do something different.”

Doyle recommended dedicating an emergency response team to cat claims. This team, he added, should be separate from the insurer’s regular claims team. He also recommended segregating the resolution of cat claims from daily business operations. “If you simply intermix your cat claims with your normal claims, you bog everything down and you compromise the quality of everything,” he said.

An insurer should also consider alternative ways to “triage” cat claims. Doyle said the sheer bulk of cat claims might require a reconsideration of traditional ways to report and process claims.

For example, he noted, ING Canada’s Qubec office received 100,000 claims as a result of the 1998 ice storm that hit eastern Ontario and Qubec. “Reporting of claims is a challenge because that normal volume of claims continues to be reported,” Doyle said. “And whether you use fax, you e-mail, carrier pigeon, telephone – however you happen to have claims reported – you probably find you have capacity to handle the normal volume of claims. So we realized we’d better have some kind of alternative way for policyholders to report claims.”

He noted during the 1998 Ice Storm, the Qubec office “actually got to the point where they were running newspaper Proofs of Loss, which were documents that people could use to report a claim and document their damages. That was an extreme example of how to respond to 100,000 claims.”

Processing cat claims also presents a challenge. For example, Doyle said extra clerical help is required simply to input such a large number of claims. “It doesn’t help you if you have 1,00 extra claims and you can’t input them into your claims system,” he said.

Insurers must also prepare to adjust their resources – including a guide for hiring independent cat adjusters. He said insurers would be wise to create some kind of formula in advance for determining how many cat adjusters might be required. After the August 2005 Ontario storm, for example, ING used a formula that took into account the number of claims received within a certain period, the number of weeks in which the claims were expected to be resolved, and the productivity of individual adjusters. Based on these assessments, the insurer knew how many independent adjusters might be required.

Insurers must also take into account that cat adjusters’ productivity will likely decline as they deal with an increasing number of claims. “We try and operate on a two-week cycle,” Doyle said. “Cat adjusters can probably work in the field for about 12 out of 14 days and then it’s time to rotate, because you’re just going to burn people out if you keep working week after week after week on cat claims.

“It didn’t take us very long to realize that if we counted on the adjusters we had in B.C., and count the adjusters we had in Atlantic Canada, and then if we started flying our staff around, we could effectively compromise our service right across the country because of a localized, regional event. So as a large insurer, we recognized we were very dependent on independent adjusters. They’re an indispensable key vendor in our response.”

Key in the process is training independent, out-of-town adjusters so that they are consistent in applying policy wording to the damages they are assessing. “Ultimately the policyholder shouldn’t have their claim and how it’s adjusted vary because the adjuster happens to be from out of town,” Doyle said.

Insurers also need to prepare to work with contractors in advance to rationalize the restoration process. “I made the statement early on that 86% of our southern Ontario [2005 storm] cat claims were settled as of the end of December,” Doyle said. “That was when the cheques were cut. I can’t in all honesty tell you that 86% of our policyholders have had all of their restoration work done.

“Since we were dealing with a [moderate] Class 2 event that didn’t keep policyholders out of their houses, we had some time to work with. How would you like to handle, though, 1,000 claims in which all of those people were out of their houses?

“…Ultimately, it’s only a matter of time until we have a [major] Class 3 event. The challenge will be to enhance the local contracting complement by bringing in trained and qualified contractors from out of town.”

Craig Walker, the national president of CIAA, agreed the time to prepare for major cat losses is before the cat claims start arriving. “The moral of the story from CIAA is: Be prepared, have a plan in place and hopefully when an event occurred, one phone call triggers the plan,” he said.

Walker noted a better response was required when Hurricane Katrina, a Category 5 storm, swept through Louisiana and destroyed he levee system of the City of New Orleans and submerged parts of the city. “Public perception here was that the City of New Orleans and the state of Louisiana were simply under-prepared and ill-prepared for the events that befell them,” Walker said, adding the CIAA has the ability to draw on its membership to deliver adjusters to these kinds of events. “That does not do anybody any good, although the situation that they had to deal truly was a mess.”

Walker observed the CIAA developed a rotating claims office after a 1979 Mississauga train derailment. Retained by the CP Rail, the CIAA’s office coordinated and handled 50,000 claims totaling CDN$10 million between November 1979 and April 1980.

Preparing for timely responses and budgeting more money to shore up critical infrastructure is crucial going forward, since cat events are becoming more destructive as time passes, Paul Kovacs, the executive director of the ICLR said.

Kovacs presented slides showing increasing loss trends from 1975 to 2005 and beyond. The slides showed global insured and uninsured damage losses totaling US$2 billion in 1975 and US$80 billion in 2005.

“A colleague of mine who is with the Aviva head office over in Perth, he did one of the fun things that economists and others do sometimes with these numbers,” Kovacs said. “He drew a trend line and by the year 2065, the world is gone…. He published that before Katrina. We’re going the wrong way fast.”

Kovacs said damage losses are escalating because:

* Events are more extreme

* More people and property are living in risky areas than even 30 years ago.

* Aging municipal infrastructures are losing the battles for government funding to schools and hospitals.

“Using some Canadian data, [for] most of the basic infrastructure, like storm sewers in Canada, you can measure the age in decades, not years,” Kovacs said. “Some of the basic systems in downtown Toro nto and Montral are more than 100 years old. They were designed at a very different time in a very different period.”

He noted Canadian governments have made announcements totaling billions of dollars of investment in infrastructure, but there is still a shortfall of CDN$60 billion.