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Record-Setting CAT Claims Require Special Handling

Even though 2011 socked the globe with catastrophes — and insurance companies with the resulting claims — carriers should stick to proven claims best practices. But that doesn’t mean clinging to old ways of interacting with policyholders.

The year was barely half over when Munich Re began to speak of record catastrophe losses in 2011. In an early-July press release, the global reinsurer noted that losses already were $45 billion higher than the previous record, in 2005. And that was before flooding overtook Thailand and a hurricane threatened the major U.S. megalopolis between Boston and Washington, D.C. By the time 2011 ended, Munich Re reported in January 2012, total catastrophe losses eclipsed those in 2005 by more than 70 percent, hitting $380 billion compared with the previous high of $220 billion.

2011 was so severe that at the 2012 P&C Joint Industry Forum in January, Liberty Mutual president and CEO David Long referred to it as "The year of non-modeled CATs." This reaction isn't surprising, says Ryan Ogaard, SVP of model management for RMS (Newark, Calif.). "Non-modeled risk is something people are talking about now," he says. "The potential for accumulation instead of one big event is getting highlighted."

In the wake of 2011, insurers should redouble efforts to manage their risk profiles, Ogaard adds. But, "We don't see that so much as an exposure issue," he explains. "It's more that they weren't looking at the full potential of loss from this kind of peril. Companies ... may not have been aware of the entire spectrum of exposures."

Claims have become the next battleground for winning and retaining customers. Insurance & Technology's April digital edition explores the new ways in which insurance companies are applying people, process and technology to optimize the claims experience and create competitive distinction.

One area in which insurers on the whole are revising their risk models is flooding, according to Howard Botts, EVP and director of database development for CoreLogic Spatial Solutions in Santa Ana, Calif. FEMA flood zone maps have long been the standard for establishing flooding risk, but with so many communities hit with flooding this year, carriers are looking for a more nuanced solution, he says.

"Almost every community in the country is revisiting their flood zone boundaries," Botts contends, and that is leading insurers to look for more of a continuum of risk, he adds. "Because it's [traditionally] been an arbitrary boundary, there's no way to establish what the true risk is."

A Good Ground Game

But preparing for the barrage of claims from catastrophe events — and creating the capacity to handle them — goes beyond trying to anticipate the events themselves and includes having a plan in place on the ground. Los Angeles-based Mercury Insurance ($79.5 million in Q4 2011 net income) has built flexibility into its claims organization so that employees can respond not just to the wildfire and earthquake risks in the carrier's home state, but also to the tornado and hurricane events that it encounters in the East Coast states in which it also writes business.

"After the hurricanes in Florida about five years ago, we didn't really have a very effective way to manage CATs in our sister states," says Mercury chief claims officer Joanna Moore. "The procedures were more regionalized, and it was difficult for people trained to handle California claims to transfer those skills to Florida. At that point, we said we need a basic framework of how we can all help each other out in any of our states."

Mercury's loss team was pushed to the limit this year due to windstorms in California, tornadoes in Georgia, and Hurricane Irene-related claims in Virginia and other Northeastern states, Moore reports. But the company's plan "really worked very efficiently," she adds.

"When we have a CAT event and claims resulting from it, we try to do a lessons-learned after the event and try to evaluate what didn't work as we expected," Moore continues. For example, "We had claims from Hurricane Ike in Texas [in 2008], and what you discover is getting your team on the ground and getting gas in the rental car is a challenge. We look to partner with providers that can help us function on the ground, communicate with each other and travel from one location to the other."

[For more on how carriers are finding shelter from the storm of claims, read about FDB Insurance's legacy modernization efforts.]

Nathan Golia is senior editor of Insurance & Technology. He joined the publication in 2010 as associate editor and covers all aspects of the nexus between insurance and information technology, including mobility, distribution, core systems, customer interaction, and risk ... View Full Bio

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