The catastrophe of delay

A catastrophe is, by definition, a sudden and widespread disaster. But, while it may occur in an instant, resulting in great loss and misfortune, the consequences of such an event can reverberate across the globe for weeks, months, or maybe even years after.

It should therefore come as no surprise to hear that 15 months on from what was regarded as the most costly period of catastrophe activity in recent history, nearly half of insurance and reinsurance claims for Hurricanes Katrina, Rita and Wilma (KRW) have yet to be paid.

Aon Re has conceded that of those claims linked to "the three ugly sisters", billions of dollars worth of liabilities still remain outstanding on its book of business.

At the end of the third quarter in 2006, only 25% of claims, worth around $10bn, had actually been paid, which as deputy chairman of Aon Re, Charlie Cantlay, puts it, "is a hell of a lot of cash for people to find to pay those claims for 2007 and beyond".

By the end of 2006 that figure had admittedly risen to around 50% and appears to fall in line with the claims experience of other brokers in the Lloyd's market.

The jump in settlements, Cantlay says, is due to more surveys and reports being completed, as well the desire by companies to finalise the year and reach a position of accuracy.

On the other side of the industry fence, insurers are also suffering from a post-KRW hangover with a significant chunk of more complex claims yet to be paid.

Stuart Willoughby, claims director at Markel International, says of those claims affecting the non-marine market, which concerns homeowners and small-to-medium sized businesses, nearly all have been settled.

"Putting a percentage figure on it, I'd say it would be nearer 100% than 50%," he says. "Admittedly they were slower to settle when compared with previous hurricane experiences, but that is due to a number of factors including accessibility, displacement, logistics and a lack of independent adjusters."

But of the larger commercial claims, settlement rate lies in the region of 50%, due to the complications brought on by business interruption. Claims settlements in the marine market have also been hampered, as much of the damage was sub-sea, which restricted access.

While the true picture of how many of the estimated $80bn worth of claims have been settled is difficult to quantify, the fact is that the wheels of the settlement process on such catastrophic events is slow in turning.

This, according to Aon's Cantlay is not abnormal, but he estimates that unlike Hurricane Andrew, where it took nearly five years to settle all household and commercial claims, a much more sophisticated industry will be quicker to respond.

Insurers and reinsurers alike are quick to point out that the length of time to settle claims is not a case of the industry dragging its feet.

"It is the complexity and volume of cases that impacts on the speed of settlement," insists Jeremy Pinchin, claims director at Hiscox, who was previously head of claims at Lloyd's in the aftermath of the 9/11 attack.

Sheer volume
"Just the sheer volume of small homeowner claims through to complex larger claims, where you have to assess the damage, understand the case and then calculate the business interruption, is what makes this so time consuming."

He expects the process of adjustment to near its conclusion on large cases in the next few months, ensuring that finality will be achieved on a substantial amount of claims by the third or fourth quarter of 2007.

This is in stark contrast to the insurance industry's experience following Hurricane Andrew in 1992.

Lynton Hussey, head of reinsurance claims for Aon Re UK, says: "[Hurricane Andrew] was a steep learning curve for the market, but now we are better placed to understand the complexities and respond accordingly. We are now in a much more sophisticated market than when Andrew occurred."

So why has the industry been slower to respond and why are people still living in temporary homes on patches of wasteland wiped out by the disaster?

"On every large catastrophe loss there is a considerable development curve between understanding the losses and payment against those [claims]," explains Tim Fillingham, chairman of energy at Aon.

One of the contributing factors, according to Fillingham, is the lack of talented claims handlers and adjusters. "There's simply not enough specific talent that exists in the world to visit all the claim sites, adjust them all and then carry out all the engineering work that is required."

While some in the loss adjusting sector are quick to jump to the defence of their industry, others express little surprise at this claim.

"This is something that a number of us have been warning against for about two or three years and now the reality is starting to bite," says Angus Tucker, director of insurance claims services at Grant Thornton.

"Over the past few years one of the real problems that we have seen is that the [insurance] market has been undervaluing the expertise and experience of major commercial loss adjusters."

Tucker says the lack of care and attention has in turn diminished the adjusting pool, which stretches back to Hurricane Ivan, which struck the Caribbean in September 2004.

"The reason we are still running off Hurricane Ivan claims is because of the lack of claims resources to deal with them out in the field," he says.

Jonathan Clark, senior vice president of quality and compliance, at Crawford & Company, adds: "It is not that there is a dearth of talent, it is just stretched to capacity and if it's not rebuilt, not just in adjusting but across claims, there will be problems down the line."

This, according to some loss adjusters, cascades down throughout the market from top-end catastrophe claims, down to small-to-medium sized fire or water damage claims in the UK.

The issue of reinstatement, according to Tucker, also compounds the problem of settling claims.

"Because there was so much damage as a result of Ivan, in the case of Katrina we found a real problem with sourcing both materials and labour, either from general building or specialist industries, simply because of the high demand. That undoubtedly then has a knock-on effect to Katrina, Rita and Wilma cases."

Markel's Willoughby adds: "Visiting the area [affected by Hurricane Katrina] in mid-December there were still large parts of wasteland where there were once many homes. There are still trailers where people are living, and we are talking 15 months on.

"This is broader than just insurance and I suspect this is partly a political issue, as far as getting people to reinvest in an area that has been hit by a natural disaster, which could reoccur."

David Williams, claims director at AXA, says that this problem is not exclusive to areas devastated by US wind storms. "[In Buncefield] there will be people who will not be allowed to rebuild in some manner or even at all," he says.

But while reinstatement can delay claims conclusion, it also provides an opportunity for insurers to be innovative in their response.

"The old-fashioned way was to wait until the planning work has been developed before settling claims, but that is not the way to do business," says Williams. "Now AXA tries to be as creative as it possibly can to help people get back into their premises and minimise the effect of business interruption.

"It is certainly an opportunity for the insurance industry to show its worth, otherwise it could damage its reputation." IT