News / Herding CATs
29 Jan
Herding CATs By Kabir Shaal

Eight of the 10 costliest disasters in Canada occurred after 2005. Of these eight events, seven occurred in 2010 or later. Four of the five most costly events occurred in 2011 or later. It’s hard not to see a trend.

Although it’s the major fires in Slave Lake and Fort McMurray that remain top of mind, 80 per cent of the top 10 events were water-related. Seventy per cent of these occurred in Alberta.

However, it’s not just an Alberta problem by a long shot. Under the federal Disaster Financial Assistance Arrangements (DFAA) program, the federal government steps in with financial assistance for homeowners and others hit by catastrophes (CATs). That makes these disasters every taxpayer’s problem – although not equally because the affected province or territory bears the brunt before Ottawa steps in. Given the spate of CATs in the past decade, the DFAA is working overtime, currently averaging close to $1 billion per year in payments.

In a January 23 article published in the Globe and Mail, Glenn McGillivray, managing director of the Institute for Catastrophic Loss Reduction (ICLR) explains the chain of costs attached to the DFAA program: “The reality is that when there is a catastrophe, taxpayers are generally left to cover a substantial portion of the expenses, both directly and indirectly. Not only must they pay the insurance deductible for their own property damage and pay out of pocket for any uninsured damage they experience, but their tax dollars must also go toward paying for first response, evacuation costs, damage to public infrastructure, overtime expenses for government and/or public utility employees, and government-disaster assistance.”

As helpful as the DFAA program is, it isn’t a financial panacea for all major disasters. For example, it “does not cover expenses where ‘insurance coverage for a specific hazard for the individual, family, small business owner or farmer was available in the area at reasonable cost.’ Consequently, DFAA coverage for individuals only applies to damage caused by overland flooding since reasonable cost insurance is available for the other perils (wind, hail, and winter storms),” according to Estimate of the Average Annual Cost for Disaster Financial Assistance Arrangements due to Weather Events from the Office of The Parliamentary Budget Officer in February 2016.

However, things are changing with regard to overland flooding insurance coverage. CBC News in a January 22 item quotes Blair Feltmate, University of Waterloo climate-adaptation expert: “It is simply a matter of time before all homeowners experience overland flooding, so preparedness should be in place now.” Feltmate goes on to note “In the last 12 to 18 months, many of the major insurers now do offer overland flood coverage – thus, if a homeowner now decides not to purchase this coverage, they would not qualify for overland flood compensation through DFAA.”

However, since the DFAA terms state that the coverage has to be “available in the area at reasonable cost,” it may still be possible for the homeowner to be covered by the DFAA under certain conditions. Nevertheless, The Insurance Bureau of Canada estimates that between 800,000 and one million Canadian homes are in high-risk zones for floods. That’s about 10 per cent of the total housing stock so this statistic points to major issues in the future as overland flood coverage becomes more widely available. With an average basement flood costing up to $20,000, that’s a $16 billion to $20 billion loss exposure.

To the federal government’s credit, it has recognised the need to promote and develop safer communities. In 2015 the National Disaster Mitigation Program (NDMP) was established to focus investment on flood risks and costs and to facilitate insurance coverage for overland flood for residential risks. That said, there’s a long way to go for this program to make an impact.

However, there’s more to CATs than a balance sheet looking for an owner. Every major disaster rolls out much more than a trail of indemnifiable physical destruction. There’s invariably secondary, less obvious damage that occurs in the hearts and minds of the people affected. A lot of this is caused by the lengthy displacement many people experience. Delays and uncertainty are challenging to handle, especially when dealing with the loss of part or all of one’s biggest financial investment.

There’s a collaborative opportunity here for the stakeholders that deal with every major CAT – first responders, insurers, independent adjusters, restoration vendors, builders, auto vendors, provincial governments and the federal government – to shorten delays and ease that uncertainty. The current gap between capabilities and actual service delivery is enormous in every segment listed above except first responders. There are good reasons for the effectiveness of first responders: they leverage technology, they plan, they train, and they communicate effectively. These happen to be exactly the things that the other stakeholders could significantly improve upon.

There is a surprising lack of information flow between the parties involved. The main reason for this is the presence of silos of control within the two stakeholders that control the flow of funds: insurers and the various levels of government.

Let’s examine a typical property CAT. Every major loss event is preceded by a waiting period while insurers independently assess the factors to declare a CAT. Sometimes, a CAT for one insurer is not a CAT for another. This sets off a series of service challenges for vendors – responding to Insurer A that has declared a CAT erodes service to Insurer B that doesn’t have a CAT event. That results in a negative impact on policyholder service and contractors’ KPIs. The upshot is that neither policyholders of Insurer A nor Insurer B get the best possible service.

This is usually followed by rapid negotiations about mobilization charges, reporting requirements, service standards and pricing. Often, contractors have to make blind investment decisions with no idea of when their short-term costs will be paid off. There is a great opportunity here to leverage and improve historical processes and arrive at an industry-wide set of minimum requirements.

Another common practice is for claims to be initially assigned to multiple contractors. The first one to get to the job site is allowed in, the others are turned away. For every lucky policyholder that sees three different contractors pull up within minutes of each other, there are two claimants that suffer a service delay and, possibly, greater property damage.

Independent adjusters (IAs) enter the theatre as required. They usually have their own service requirements. Often, TPAs bring another layer of management. It is quite common for restoration contractors to deal with different processes and standards from multiple carriers, IAs, and various sub-contractors appointed by these parties. It is not an efficient system because it leads to delays and this extends ALE and BI payments. Also, above all, it causes stress to displaced policyholders. Now factor in one or more levels of government. Different reporting and approval processes kick in again.

Layer upon layer of controls are always wasteful – especially when many process steps are duplicated. The end result is delays in indemnity payments to the policyholder, delays in invoice payments to the vendor, higher payouts in living expenses or business interruption, bigger contributions by taxpayers, and lower customer satisfaction.

There was a glimmer of hope in the Fort McMurray CAT when many insurers and contractors made the effort to pre-agree costs and standards and wrote these into signed agreements. There was also a useful amount of initial collaboration with the local municipality in securing various permits to get work started. However, there are no apparent moves to develop this model further.

There is a great financial and social need for the effective management of CAT events at every level of response. The existing process is often haphazard, wasteful, and is not customer-centric. A strong response framework that covers a CAT event from meteorological notification to post-loss counselling is within reach of the stakeholders. All that is required to get the process moving is a bit of initiative and a lot of communication. Each stakeholder has to accept the fact that they alone cannot create a holistic CAT service that benefits the public. Far too many companies attempt to treat their CAT processes as a competitive advantage. However, a CAT event is not the time for a single stakeholder to stand alone – they must work in close collaboration with all concerned parties for the common good of all policyholders.

Until then, we may as well be herding CATs.

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