After tumultuous eight hurricanes in two years between 2004 and 2005, we haven’t seen a hurricane in Florida for over 10 years. Has the state learned from those storms? Are the insurance companies ready? What about the independent adjusting companies, do they have enough qualified adjusting resources to fulfill their contractual commitments? How about the reinsurers, are they ready?
Many of you have participated in meetings between insurers and reinsurers in London and Bermuda and have observed the normal due diligence relative to catastrophe (CAT) readiness. CAT readiness is validated through inquiry relative to the insurer’s management team, operations, financial stability, growth strategy, Probable Maximum Loss (PML) projections etc. Those meetings usually do scrutinize operational information, undoubtedly due to the level of detail required and/or the ability to verify information.
Consider the following: the last hurricane hit Florida in 2005; there are many small, new property insurers with no CAT experience. Many of the new insurers have outsourced most (if not all) of their operational functions (such as claims & policy administration services, accounting & reporting, customer service centers, etc.) to third-party vendors because they don’t want to initially build an expensive operational infrastructure.
The insurers, both new companies and those experienced insurers, have conducted very little due diligence on their vendor’s qualified resource capacity and capability and none have been tested throughout the last 10 years. Consequently, insurers don’t KNOW how much capacity their vendors can actually deliver to them. The insurers are counting on the fact that their contracted vendors will come through for them post-CAT because they are holding signed contracts indicating their commitment.
The vendors, who also have been untested for 10 years in Florida, recognize the reliance on the same resources with multiple commitments. Everyone needs to think about the fact that individual adjusters will sign up with more than one vendor, as they cannot rely on being selected by a single vendor for full time non-CAT work. Given that everyone from the adjuster to the reinsurer is unsure of their position should an event occur, all vendors, insurers and reinsurers are crossing their fingers that there will be enough qualified adjusters in the market when a sizable CAT occurs.
Recognizing that as vendors gear up to respond to an event, they will select the best adjusters for their best clients. This is the first level of differentiation between insurers. It is in everyone’s best interest to understand how the insurers monitor their vendors and the response process.
We must recognize that the adjusters have a choice as to who to work for and the vendors have choices as to where to put their best adjusters or how to distribute their resources. In addition, once the work begins, many insurers increase their willingness to pay higher fees to good adjusters to ensure their continued commitment to the insurer’s CAT response. Furthermore, if an adjusting firm has an unhealthy reputation for delayed payment to their adjusters, it could impact their ability to attract more qualified adjusters and the same principle applies if an insurer has a reputation of delayed payment to the adjusting firms.
With such complex issues apparent to vendors, insurers and reinsurers and with so many variables, this subject needs a great deal more consideration by all. This affects how vendors get paid and meet their obligations, and magnifies the differences in the total claim payments that individual insurers and reinsurers make after a CAT event.
There must be some basic fundamental questions that any insurer and reinsurer should ask.
- Do you have an achievable and tested CAT Plan? Does it include the detailed operational elements essential to vendor management?
- Who is the executive over the claims or CAT operations and what is the background and experience? Are there skilled personnel who have handled the logistics of a major event?
- If the operations are outsourced, do the vendors have an achievable and tested CAT plan? What are the details of their contract? Do you know to whom else vendors are committed and the extent to which they are committed? Is the vendor’s resource growing or shrinking? If the vendor is adding adjusters, what type of adjusters does the vendor contract? Are the adjusters being assigned with non-CAT work to assure their loyalty for an event?
- What is the insurer’s 100-year probable maximum loss (PML); how does that translate into how many claims and specific types of claim i.e., personal lines, commercial lines, flood etc.? These skill sets are different and will have a very different effect on how a claim is estimated for payment.
A CAT test properly done is one way for vendors and insurers to evaluate their ability to handle an event.
In the 2004 and 2005 hurricane events, the adjuster pool was inadequate and there were not enough commercial adjusters. Therefore, inadequately prepared adjusters were assigned to large commercial losses. Florida’s multiple storm experience clearly reflected the effect of those commercial claims in dispute with inadequate payment and some were inordinately overpaid. The problem of inadequate resources is exacerbated by the fact that Florida does not have a “Single Adjuster Program;” two adjusters will be assigned to a single claim with flood damage. Flood claims usually generate high percentage of dispute because of what caused the loss – wind or water? Any vendor, insurer or reinsurer for Florida needs to anticipate that this will continue to be a problem for any wind event with flooding.
Insurers need to provide significant capability information in order to distinguish themselves effectively for their reinsurers. By the same token, outsourced vendors need to help the insurers address the resource issues, as their operations are critical to the insurer’s success.
With the drop in reinsurance costs, insurers are increasing the amount of coverage transferred for events. As reinsurers balance writing more business to increase investor returns, they will become more sensitive to the overall total claim payment risk. Reinsurers should know the differences between good and average client’s CAT claim management capabilities that would directly impact their profit margins.
By the same token, insurers who have credible CAT experience and addressed the vendor issue properly with thorough due diligence should demand and expect to get the best pricing from the reinsurers. All the players – vendors, insurers and reinsurers – should have established benchmarks so everyone is clear on their performance expectations. These operational aspects should impact the price of reinsurance.
All aspects of CAT claim management should be tested and all scenarios considered. If Florida’s experience in 2004 and 2005 tells us anything, we did not assess this aspect of the risk adjustment process then and we have yet to do it now. This inherent risk can be measured and managed; after all, we are all in the risk management business.
Yong Gilroy, founder and president of Jacksonville-based Gilroy Consulting, has over 29 years of insurance industry experience working for Crawford & Company, State Farm Insurance and The Home Depot. Most recently he was chief insurance officer for Citizens Property Insurance Corporation and chief operating officer for Bankers Insurance Group. He can be reached at (904) 347-0502.
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