Sandy’s Lessons Emerging for P&C Industry

Property/casualty insurers may find themselves reconsidering their business continuity plans and reevaluating catastrophe models and claims response strategies, say industry analysts.

Information from the aftermath of Hurricane Sandy continues to trickle in like battlefield intelligence: a partial, spotty account emerges from sporadically available lines of communication. Many insurers remain incommunicado to one degree or another owing to continuing power outages, scattered employees and other factors —and of course P&C insurers remain preoccupied with both business continuity and claims concerns. Nevertheless Sandy’s lessons for the P&C industry are already emerging.

Foremost among these are questions of business continuity relating to the sufficiency of measures in place. “We’ve spoken with several of our clients, and most report that their disaster recovery plans are operating effectively,” comments Chad Hersh, an Austin, Texas-based partner with Novarica. “Nevertheless, many insurers’ websites were down in the wake of the storm, and that serves as a reminder that while back-end systems are mission critical, so are the systems that let clients reach their insurers.”

Many companies may need to rethink what constitutes the adequate geographical dispersal of IT capabilities and staff, suggests Chuck Johnston, a Connecticut-based research director in Celent’s Insurance practice. “The geographical range of this storm exceeded the distance between some companies' home offices and backup facilities,” Johnston notes. “The fragility of infrastructure has been demonstrated to be an issue as companies have lost not only wireless but Internet communications.”

Insurers, like other businesses, saw the need to close their offices, leaving employees scattered and without power in many cases, Johnston observes. “To deal with that and other challenges presented by storms, we will need to get more virtual and be ready to operate remotely and potentially without a large proportion of the workforce,” he says.

Sandy also calls into question the reluctance of many insurers to put capabilities into the cloud, according to Johnston. Insurers have a legitimate concern in the need for their sensitive information to be segregated from that of other companies, but that is a soluble problem, he insists. In many circumstances, he argues, insurers would do better to overcome reluctance to outsource certain capabilities. “Carriers can be better positioned by using geographically dispersed BPO with providers who are probably more resilient because of their own experience with weather phenomena such as typhoons and monsoons,” Johnson elaborates. “There are no facilities, even among smaller ones, that don’t have at least a 40 kilowatt generator.”

[For the latest Sandy updates from I&T, check out Eye on Sandy: Loss Estimates Double, N.Y. Exempt from Hurricane Deductibles .]

Sandy also calls into question whether catastrophe models accurately reflect the rarity of high-severity events, according to Donald Light, the Palo Alto, Calif.-based director of Americas Property/Casualty practice within Celent’s Insurance Group. “There’s a false sense of security created by calling something a once-in-a-hundred year event,” Light says. “For a ‘century’ event, insurers can’t set aside sufficient resources, but if it’s a one-in-five or ten years, then it has to be part of the insurance bargain.” Without saying that catastrophe models definitely do need to be changed, Sandy underscores the need of insurers and cat modelers to work together to see what revision may be needed, Light clarifies.

Insurers’ catastrophe response was complicated by the logistical challenge of where exactly to deploy resources, Light adds. “The size of the storm was a factor, as well as the differing response required to meet, say, 200 to 300 miles of coast with relatively sparse population and infrastructure, on the one hand, and the swath of territory between Baltimore and Boston, on the other,” he explains. “I’m sure that has been a huge challenge.”

Light expects that insurers have benefited this time from lessons learned during Katrina. “During Katrina everybody assumed use of mobile phones and power sources. Since then, at least the bigger insurers have done a good job realizing that they need to bring along their own communications infrastructure.”

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