2004 – A Year to Remember

December 21, 2004

Ask any man on the street for an example of a fast-paced, rapidly changing industry, and they will likely respond “computer engineering” or “bio medicine” or “telecommunications.” Ask them for an example of a slow-paced, stodgy industry and they’re just as likely to say “insurance claims” or “construction” or “home remodeling.” What little those people know.

As those of us who participate in the greater claims industry well know, over the last few years this industry has experienced a series of market dynamics that have been unprecedented in our time and whose pace shows no signs of letting up.

We participate in one of the few industries in America in which every day brings with it a foreboding sense of “what’s next.”

Whether it is a new merger, a new restoration technology, a new lawsuit, new legislation, a new catastrophe, a significant change in the financial markets, the entry of a new market player, a new claims processing technology, a new technical standard, or a new certification, the conflux of daily change has tremendously taxed every player in the claims industry – insurance carrier, restoration contractor, independent adjuster, equipment manufacturer, information services provider, etc. No one has been immune from the pace of change.

The impact of these market dynamics – events like the dot.com bust, 9/11 and the rise and fall of toxic mold claims – created a very clear response in the market all across the board. Premiums rose for both property owners and commercial businesses. Legislation increased, as did litigation. Reported claims to insurance companies declined, though the number of physical losses experienced by property owners did not. Adjusters began scrutinizing claims even more closely and the funds necessary to pay all the necessary players in the value-chain of a claim moved more slowly. Everyone tightened their collective belts even more.

All these actions merely underscore the one very clear impact of this massive change – those entities that really knew how to compete and win in a rapidly changing market did, and those that were flying by the seat of their pants did not. Operational efficiency was rewarded; waste and indecisiveness was not. A large number of carriers either went out of business, or more likely were gobbled up, because they couldn’t compete in what Scott Biggs, CEO of Assured Performance Network, refers to as the “New World Disorder.” This is no less true amongst restoration contractors. Hundreds if not thousands of companies went out of business in the last five years because they could not handle the various ‘shocks’ to the system.

Of course not everyone went out of business. Those that remained lined up along the continuum that runs from exceptional market competitors down through marginal players, with virtually all of them seeking a change in the tide of the market. What they got instead was a tidal wave.

The late summer of 2004 represented the most concentrated series of storm activity in the U.S. in our lifetimes, with nine named storms hitting the U.S. mainland (Hurricanes Alex, Charley, Frances, Gaston, Ivan, and Jeanne and three tropical storms leaving behind over $42B of damage). Combined with the continued cleanup of the western wildfires at the start of the year and record tornado levels throughout (over 1,500 nationally), the totality of the year’s ‘catastrophe’ activity had a very interesting impact on the market, one that may be surprising, but one that also should be very encouraging.

Without a doubt, many market players expressed a sigh of relief regarding the year’s storm activity – a great number of restoration companies on the margin were able to remain in business for the foreseeable future, and many adjusters who were staring at the loss of their jobs were now in high demand. Equipment companies also experiencing challenges were now looking at revenue growth that would surpass anything that they could have dreamed of. Even the lodging chains and other ancillary service providers to the first responder industry were receiving unprecedented spurts in business.

However the most significant outcome of the year’s activity is that over the next six to 18 months, it will be very clear that the proverbial “rich will get richer and the poor will get poorer.”

Indeed, those companies that had very efficient, intelligent operations going into the year will end up capitalizing on the events of 2004. Those carriers that had strategically managed their underwriting risks and had strong alliances with a first responder network and other partners will end up with a highly loyal customer base and a very strong balance sheet. Those restoration contractors that had a pre-disaster plans in place with key clients and their own partner alliances were able to deploy their resources intelligently in the storm-stricken areas and provide high levels of service, while minimizing collections issues that are prevalent in catastrophe situations. Equipment providers who planned well had excess equipment in stock to ship to their best customers, ensuring their loyalty for years to come. Risk managers with pre-loss plans in place knew they would have a high quality contractor on site within reasonable time parameters to allow their business to re-open their doors quickly. All these things occurred, and occurred frequently, amongst the ‘best in class’ businesses in this industry. And make no mistake, 2004 enabled the strong to get stronger.

Those at the other end of the continuum will ultimately not fare as well. Without a doubt, many of their businesses or their jobs were saved by the storms. But the storm work will eventually end, and unless 2005 brings with it a storm year like 2004, there will be visible fallout. Restoration contractors that had problems before 2004, will still be saddled with the same problems, and will now be facing stiffer competition. Equipment manufacturers will be faced with a glut of equipment in the hands of their customers with no need to buy any more for a while. If the manufacturer doesn’t have anything new to sell, they will be in big trouble.

Carriers that did not appropriately manage their risk, if they weren’t wiped out by 2004, will feel the effect on their balance sheets for a long time to come. And as for the adjusting community, if their firms are not well-positioned in the market, their jobs are eventually no more secure than they were when the year started.

Without a doubt, 2004 was a very weird year, one that may go down as a huge anomaly in the history of our industry, but regardless of its differences from prior years, it should be remembered for its consistency.

2004 gave the superstars of our industry the best chance they have ever had to demonstrate why they are market leaders and they came through with flying colors, all across the board.

Dale Sailer is president of Disaster Kleenup International Inc., a network of the leading, independent property damage restoration contractors across North America. For more information, visit www.disasterkleenup.com.

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