Responding to catastrophe

The Carlisle flood in January 2005 resulted in insured losses of £240m. The October 1987 windstorm known in the insurance industry as 87J was an insurance event 10 times larger. Yet, Carlisle has caused soul-searching in the industry and led to changes intended to strengthen the response of insurers and loss adjusters to the next catastrophe, whether natural or man-made.

Gareth Bowers, UK catastrophe manager for loss adjuster Crawford, explains the contrasting impacts of the two events. "The difference between the events is that in 87J while there was widespread damage, there was less severity. In Carlisle, there was a nucleus of extensive losses." There was also more disruption. "It took a long time for properties to dry and if you don't dry correctly, you will have problems later," says Bowers.

An event as devastating as Hurricane Katrina is unlikely in the UK. The worst case scenario for the UK is generally acknowledged to be a flood in London with storm surge up the Thames and failure of the Thames Barrier.

Loss estimates for such an event exceed £7bn, compared to about $45bn (£25.8bn) insured loss for Katrina.

- Natural catastrophes resulting in losses of £1bn or more are not uncommon, however. The winter floods of 2000-2001 cost insurers more than £1bn, and such events could become more common as a result of climate change and increased concentrations of wealth, according to the ABI.

Catastrophe modelling companies AIR Worldwide and Risk Management Solutions (RMS) are both releasing upgraded versions of their European windstorm models this spring. RMS says that in many cases the changes are a result of additional learning from important windstorm events that caused significant damage to parts of Northern Europe and provided a timely reminder of the loss potential.

Flooding costs

RMS adds that it is not just windstorms that pose a large risk. "Although the UK has been spared any major flood events since 2000, the Carlisle flood of January 2005 and the current flooding in Germany also highlights the costs of river flooding to the industry," comments Claire Souch, director of model management for RMS.

The insurance industry recognises that while not on the scale of a US hurricane or earthquake, such catastrophe losses have an impact on their resources that requires a different approach. Man-made events, such as the Buncefield fuel storage depot fire in December 2005 and terrorist attacks, can create extensive disruption and large insured losses.

Norwich Union (NU) set up a major incident response plan for domestic property more than a year ago. Jason Harris, NU's senior claims manager, explains: "It was really as a result of Carlisle and the lessons we learned there. It was used with Hemel Hempstead (the Buncefield fire), which we couldn't have anticipated. It all kicked into action and, while we learned lessons, we were pleased."

Now NU is intending to create a similar scheme for commercial property and last month it set up a team to develop the plan with the aim of having it completed by the end of June. Harris explains that commercial losses tend to be more difficult technically, mainly because of the business interruption issues.

AXA Insurance has had a multiple claims catastrophe plan to co-ordinate claims handling resources for about two years after an event, but looked at it in the light of Carlisle and made it more robust, according to claims director David Williams.

In the wake of Buncefield, Andy King, who is leader of forensic accounting and claims services for Europe and the Middle East at Marsh and a past president of the Chartered Institute of Loss Adjusters (Cila), says that insurers have organised the claims process better, although he points to a change in the reporting lines for commercial claims which can be unhelpful.

The change relates to the use of forensic accountants to handle the business interruption element of a loss and report directly to the insurer, while the loss adjuster deals with the physical damage element. "They may not even be in the same countries, which can make difficulties for the broker to coordinate and manage client expectations," King says.

Loss adjusters are more often involved in managing catastrophe claims, but Bowers says there are always things to be learned, and Crawford holds debriefings both internally and with major clients. One of these was a conference in London in March which focused on best practices in response to the huge claims volumes from incidents like the Buncefield explosion, hurricanes in the US and the Danube/Elbe floods in Europe.

Even before Carlisle, the industry recognised that flood claims management could be improved. In 2003, a group of insurers, loss adjusters, damp experts and the University of Wolverhampton created the Flood Repairs Forum. It has just published a Guide to investigation and repair of flood damage to housing and small businesses.

Yet, for Williams there is room for considerably more coordination across the market in a natural catastrophe. Through Cila, insurers have agreed protocols for dealing with the aftermath of a terrorist attack, especially one involving chemical, biological or nuclear weapons.

Market cooperation

Williams asks why the same approach should not apply in natural catastrophes as many of the same issues would arise. "In one case, access is restricted by the police, but access could also be restricted by the event. Or for something as local as alternative accommodation, it would be better if there was more market co-operation. Take liaison with local authorities.

Do they really want to be speaking with 27 insurers?"

As a result, Cila is now looking at how the protocol it developed about a year ago in co-operation with the ABI, the Association of Chief Police Officers and Local Government Association, which deals mainly with access and communication after a terrorist attack, could be adapted for natural catastrophes.

Cila is also working with the insurance industry on a pre-event protocol, dealing with aspects like the industry's own business continuity.

"Each company has a lot of initiatives which could probably be done jointly," explains Graham Cave, executive director of Cila.
- Lee Coppack is editor of Insurance Times' sister publication, Catastrophe Risk Management.