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Mean Season

Hurricane Katrina threatened insurers' already low public image, but technology gave carriers a chance to redeem their reputations through effective claims processing.

With the early arrival of Category 3 Hurricane Dennis on July 10, speculation arose as to whether this hurricane season might be even worse than the 2004 season. That speculation was rendered moot by Hurricane Katrina, whose total insured losses have been estimated as high as $60 billion, surpassing the $21 billion in losses caused by 1982's Hurricane Andrew and the estimated $32.5 billion caused by the man-made catastrophe of Sept. 11, 2001, combined. Figures as high as $125 billion have been cited for overall economic loss caused by Katrina, dwarfing the effects of Hurricane Rita, which made landfall Sept. 24 and caused up to $7 billion in damage.

The damage caused by Katrina overwhelmed relief efforts, especially in New Orleans, where the post-storm breaching of levees caused widespread and devastating flooding. Similarly, insurers were limited in their abilities to respond to policyholders' needs. But if the storm demonstrated the limits of man's influence over nature, it also demonstrated the importance of insurers' increasing technological sophistication in not only claims-focused catastrophe management, but also in their abilities to evaluate and respond operationally to a changing risk environment.

Bad PR and Good Citizenship

Even more than the extent of damage and misery caused by Katrina, the storm distinguished itself by the amount of acrimony it generated. In an atmosphere where victimization of people by institutions came to be emphasized over people victimized by nature, the insurance industry was more likely than usual to be viewed as part of the problem rather than the solution. The industry's vulnerability was multiplied by the fact that flood damage generally is not covered by insurance carriers.

It was just as well, then, that the industry responded quickly and generously to the hardships caused by Katrina. Carriers across the board extended grace periods for premium payment, suspended cancellations and even established relief funds, including the "Big I Katrina Fund," sponsored by Independent Insurance Agents & Brokers of America (IIABA; Alexandria, Va.).

While those gestures demonstrated good citizenship on the part of the industry, it was through the handling of claims that insurers demonstrated their value. State Farm (Bloomington, Ill.; $56 billion in revenue) reported servicing 385,000 property, flood and auto claims throughout the area affected by Katrina. The carrier's efforts were aided significantly by the deployment of mobile catastrophe units - vans equipped with satellite technology and the capability to provide a local wireless hot spot to enable multiple adjusters and estimators to connect to the carrier's systems.

"We had the ability to communicate with the home office when there was no phone service," says Mark Winland, director, claims automation, State Farm. "We could write advance payment drafts to lay the groundwork to help people recover much sooner."

Allstate Insurance Co. (Northbrook, Ill.; $94 billion in assets) deployed more than 20 satellite-equipped communication vans to link its headquarters systems and approximately 1,500 adjusters sent to respond to customers affected by Katrina, according to Cathy Brune, SVP and CIO. "We are not dependent on a cell phone tower; we can automatically connect from the van to a satellite," Brune says. "The technology makes the adjuster's job less frustrating. The link gives adjusters confidence that they have all the information they need" for a quick settlement, she adds.

Tim Bowen, project manager, claims, MetLife Auto & Home (a division of New York-based MetLife; $320 billion in assets), says that technology has significantly improved the carrier's speed in responding to catastrophes over the past two years. During 2003's Hurricane Isabelle, for example, the insurer still moved paper files associated with catastrophe claims management. "With Isabelle, we were FedEx-ing paper files from the coast, through a review process, to a central reporting area," he recalls. "We were losing days when it came to servicing customers."

Now, the carrier's all-electronic response begins with the dispatch of adjusters. The claims team gets a feed from underwriting showing the numbers of policies by county and ZIP code. "We're able to extract data through Cognos' [Burlington, Mass.] Impromptu [reporting software] and dump it into [Microsoft] Excel and then import it into [Microsoft] MapPoint to determine how we want to position staff and independent adjuster resources," Bowen explains.

Field operatives are aided by Magellan's (Santa Clara, Calif.) 700 series GPS navigation system, whereas previously they used paper-based map books, according to Bowen. "This has helped us quite a bit because for this event we're dropping folks from all over the country into Mississippi, Alabama and Louisiana," he says. "And even if some are familiar with the territory, many of the street signs are gone."

MetLife also has standardized on Los Angeles-based Marshall & Swift/Boeckh's Integra claims estimating system, which nearly all of its adjusters now use. "We actually transmit the claims electronically to some of our vendors," Bowen reports. "The file goes directly to the vendor, and then they push that same file right to the resource on the front line - there's no keying of data."

Additionally, the carrier deploys satellite-equipped vans that are powered by generators and can work at broadband speeds. Further, a large majority of the carrier's field operatives also are equipped with wireless cards and Verizon (New York) EvDO high-speed wireless service.

Financial Disaster Averted

In addition to driving a more expeditious claims process, technology has played an important role in minimizing the effect of an event like Katrina on the fortunes of insurance companies and the industry as a whole, suggests Andy Castaldi, senior vice president, CAT perils, Swiss Re (Zurich; $32 billion in revenue). Katrina will not cause the financial problems and market uncertainty suffered by the industry following Hurricane Andrew, Castaldi contends. "That's because we've all been using CAT models and have a feel for what our exposure will be."

Castaldi emphasizes that CAT modeling still is a relatively new technology - having first been put to use little more than a decade ago - and can be expected to improve. But the technology is limited by the parameters that are applied. For example, use of the first models was flawed by the erroneous assumption that hurricane damage was caused exclusively by wind. In the case of Katrina, a question arises as to whether the reliability of the levees was adequately assessed. According to Castaldi, "Within anybody's bag of worst-case scenarios, it was not the levees failing [that was anticipated] - it was a tidal surge going over the top of the levees and causing extensive flooding."

In a report entitled, "After Katrina: What Now for the Insurance Industry?" Celent (New York) analyst Donald Light discusses the opportunity for insurers to tap technology to improve catastrophe preparedness in areas ranging from capital adequacy and actuarial to underwriting and claims. Katrina raised awareness about the utility of tools as crude as hand generators - to recharge laptops and cell phones - and as advanced as analytic processing for underwriting. "It's the classic problem," Light observes. "Someone in Bloomington, Ill., really doesn't understand the structure of levees, wetlands, piers and energy platforms 800 miles away unless they have some kind of technology to support them in that."

This story includes reporting by I&T's Maria Woehr and InformationWeek's Charles Babcock.

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio

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