Hurricane Katrina exposed the costly problem of arbitrary overrides to analysts examining the effect of insurers’ inflated loss ratios resulting from the disaster.
Naturally, a number of price overrides are justified based on specific loss conditions, and a disaster the magnitude of Katrina certainly creates compelling conditions for legitimate overrides. But, in many cases, the price override signals a missed opportunity for the adjuster to negotiate a fair price with a repair vendor. Even a costly emergency like Katrina offers ample opportunity to keep costs down and loss ratios manageable. It depends heavily upon the ability for claims adjusters and managers to be aware of and counter a costly trend we have identified: that some adjusters in a CAT situation have increased prices based on contractor estimates rather than engaging in informed negotiations.
One of the world’s largest re-insurers, Munich Re, now estimates that companies will have to pay out a total of $45 billion to cover Katrina-related costs. Less than one month after Katrina, sister storm Rita added $10 billion more to the figure of incurred losses. The burden of costs such as these can constitute a massive problem for some insurers — more so than a single jolt to the loss ratio bottom line. As of June 1, A.M. Best noted four insurer failures that have been tied directly to the punch of the 2004-2005 storms.
Getting Tough on Overrides
No matter what the scope of the loss, implementing a tougher override policy by management will certainly be a step in the right direction toward reducing costs wherever possible and keeping a carrier’s claims function as profitable as possible during a time that typically generates considerable losses.
Anticipating problems with overrides related to this year’s storm season, MSB’s professional claims analysts looked at overrides from its client companies resulting from adjusting storm damage due to Katrina and found a troubling pattern for claims managers to consider. In terms of dollars overridden, based upon MSB’s review and analysis of data collected for the storm-ravaged area, it was determined that 5.8 percent of the total of loss payments for Katrina was the result of overpayments made due to overriding. If this percentage were applied to the total dollar figure of Katrina-related costs, it would amount to roughly $2.6 billion. Several materials categories were flagged as accounting for a high percentage of overrides themselves. Two categories alone, Debris and Shingles, constituted fully 34.8 percent of the insurers’ total override dollars.
A full-fledged effort to moderate the costs associated with the CAT takes place when MSB’s research staff begins its immediate response to the storm. As soon as the storm hits, the researchers designate an area to conduct an investigation into prices as part of an analysis of supply and labor costs following the storm. They talk directly to suppliers and labor sources to find out if the cost of specified supplies has changed as well as to determine if the labor costs have themselves changed or remain the same.
“Our focus is typically on shingles, drywall, carpeting, and windows. However, if there is something unique to the region, we’ll add it to our list for examination,” MSB’s Claims Data Product Manager Kevin Bye explained.
A Higher Level of Analysis
The research staff’s examination may continue for eight weeks but could run as long as six months. As MSB Research sees prices change, they produce a detailed storm database of prices for that region and make it available to their clients within a week through MSB’s Web site.
Two MSB Analytics Account Managers issued a caveat to claims professionals regarding overrides. John Loveall and Martha Ducharme, encourage their clients, risk managers, insurers, and adjusters, to be especially diligent in researching their own data to verify that the figure they are going to change in an override of an estimate line is in line with actual costs, not just something being requested by a contractor. Loveall recommends segregating the costs to make precise determinations about what is actually going to be overridden.
“Adjusters need to ask themselves, ‘Do the changes reflect just the price of material or are they changing labor costs as well?’ Adjusters must delineate between the two; and they definitely shouldn’t change a line item purely to accommodate a contractor’s estimate,” Loveall noted.
The Exception, Not the Rule
Ducharme also warned, “Adjusters should certainly not change a line item without substantiating the validity of the price requested by the contractor. In fact, as a general rule of thumb, adjusters shouldn’t need to override often at all. The override should be the exception, not the practice.”
Naturally, some changes need to be made to reflect regional conditions. If the changes are valid, Ducharme said, the adjuster needs to submit a Request for Information (RFI) to MSB’s research team. The researchers will then verify the accuracy of the pricing that has been requested for the adjustment. The level of validation is detailed to help claims departments keep their severities down to a minimum.
If the adjustment is valid based on the researched pricing, MSB will change the price in its own database system to reflect the new pricing, Loveall explained.
Richard Furlick is a claims analytics communications specialist for Marshall & Swift / Boeckh, a provider of building cost data, claims technology, and claims analytics services to adjusters, carriers and risk managers throughout North America and the United Kingdom.
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