Creating Opportunity From Catastrophe

As we head into what is predicted to be an active hurricane season, we can expect major property damage to hit the industry again. But as virtual adjusting and predictive analytics continue to disrupt the claims space, mega property claims remain stubbornly analog. We see the fallout in the headlines when these claims go wrong, but what about the complex property claims that go right?

My research into success in complex property and business interruption claims includes recent interviews with executive general adjusters and broker claims advocates with decades of experience dealing with mega property losses. They provided insights into what success looks like, and what needs to happen to make it more likely. The information here reflects the results of those interviews, and also of research into formal project-management concepts and techniques as applied to complex property claims projects.

In the last few years, hurricanes have left retailers with scores of stores damaged, isolated, and without power; large hospital systems unable to help patients due to flooded laboratories and doctors relocated to facilities far from their usual offices; and universities with hundreds of students displaced from classes and housing. These are the types of mega losses that executive general adjusters and broker claims advocates manage in the aftermath of hurricanes, and these professionals shared some of the ways they achieve successful outcomes for everybody involved in a complex property claim.

Catastrophe Claims Are More Complex in 2020

This year, market conditions are going to exacerbate notorious adjustment challenges such as windstorm-versus-flood definitions, mold sub-limits, and percentage deductibles. The property market continues to harden, and wholesale property brokers are reporting tightening capacity restrictions, so complex property programs will need more insurers to fill out capacity.

In these market conditions, claims in the tens or hundreds of millions of dollars will inevitably pierce several layers of a complex property program, and losses shared by as many as 40 or 50 carriers will continue to be the norm. Adjusters are increasingly encountering hard-market arrangements, such as sidecars and deductible buybacks, which add challenges in addition to the sheer number of insurers on the program. Underwriting creativity is welcome and necessary when it helps fill out the program, but applying some of these provisions to claims is troublesome, particularly when the insurers on the program don’t all agree about how they work.

What Does a Successful Mega Loss Look Like?

Major property claims are high profile, high stakes, and capture the attention of investors, boards, and the press. Employees and neighbors post about the event and the response it received on social media. Reputations are at stake, and failures can have serious consequences.

The interviews recently held with adjusters and brokers showed that successful complex property claims share three attributes. First, they are smooth running, effectively managed projects. An adjustment team that policyholder executives perceive as inefficient and chaotic can reduce trust and induce skepticism about the professionalism of the insurers’ response. Large organizations often have formal project-management departments; policyholders who deploy their project-management professionals to work with the adjustment team can help make processes much more efficient. Project managers understand how the organization works and how to obtain and funnel information to the adjuster and consultants, so engage with them and let them help run schedules and communications. If order is brought to chaos and the team can overcome seemingly insoluble problems, then business relationships are strengthened and personal reputations bolstered.

Second, successful complex claims projects meet the expectations of stakeholders, particularly expectations about the amount that will be paid, the time it will take to resolve the claim, and how much information will need to be exchanged. If insurers or the C-suite believes that too much or too little was paid, or the claim dragged out unreasonably, then it will be seen as a failure. While policyholders and insurers have financial interests that need to be met, individual stakeholders also have career and personal goals; a well-run major claims project can be an opportunity for rapid learning and can raise the profiles of all team members. Managing all these expectations is a key task of the project team leaders.

Finally, the outcome of the claim must be seen to be fair. When it comes to complex property and business interruption claims, there isn’t just one right answer. Circumstances and nuances arise that were never anticipated when coverage was placed, and the teams dealing with the claim must feel their way through to a resolution. Successful claims are those in which the teams working on the claim manage stakeholder expectations, establish trust, and communicate cleanly. The aim, as first-party claims professionals like to say, is that “everyone was equally unhappy at the end.”

So how can those faced with a catastrophic claim improve the chances of success? Here are three strategies.

Choose Quality Teams—and Control Them. The most complex projects require leadership with broad technical, intellectual, and emotional competencies. Adjusters and broker-claims advocates are going to be interacting with key operations executives and the C-Suite, so regardless of who retained them, they will be seen as representatives of insurers, the broker, and the risk-management department. Identify the key stakeholders and choose project leaders who can gain the respect and cooperation of the insurance industry’s ultimate customers.

Many of the adjusters and brokers interviewed discussed the consequences of not having a nominated adjuster named in the policy language on a large property program. Time and energy are very precious in the first few days after a hurricane hits; it should not be spent negotiating the choice of adjuster. Insurers have preferred adjusting firms and individual adjusters, and getting alignment after a large loss is far more difficult than when the adjuster nomination is part of the placement process. Hurricane reserves tend to develop as more damage is discovered and income losses accumulate, and as the adjustment proceeds up through the higher layers of the program, excess carriers may not agree to continue working with an adjuster appointed by the primary layers. It is in the interest of all parties to agree on an adjuster at inception and hit the ground running with that individual on day one of a loss.

 On the largest claims, it is common to have teams of consultants and experts working for insurers and policyholders. These can be building consultants, structural engineers, industrial hygienists, accountants, and specialist experts brought in to advise on quirks of the industry or on unusual claims circumstances. In claims with significant interdependencies—such as a pharmaceutical manufacturer moving active ingredients and packaging across international borders—logistics experts can help understand the profit impacts of moving affected processes to an undamaged location in another country. The most successful claims are those in which all of these individuals are carefully chosen, properly briefed, and controlled by the adjuster or project manager for the policyholder. Insurers and policyholders should not shy away from removing consultants who do not seem to be functioning well as part of the team.

Establish Relationships Early—and Share Information. When teams assemble at a hurricane-damaged location, they are meeting people with whom they will be working for months or even years to come. The adjuster, broker, and claims consultants have sometimes worked together before and likely understand the scope of the project, but the policyholder’s personnel may not realize that a mega claim will consume a large part of their working lives for the foreseeable future. Therefore, adjusters and brokers with decades of experience say that is it essential to quickly establish good working relationships between the team members.

Time spent building relationships in a catastrophic claims situation always pays off. Leadership should encourage the team to take lunch breaks together, tour the facility or the area, and foster team-building appropriate to the environment and the claim. Ideally, key stakeholders—such as the adjuster, the risk manager, and any key consultants retained—will already have met each other on previous claims or in an annual planning meeting, but this is only likely on the very largest property accounts.

It is only when relationships are working well that the team members will share information at the necessary level. Unsuccessful claims often go off the rails when both sides start withholding information, keeping facts or plans quiet in a misguided attempt to gain strategic advantage. If team members and decision makers trust each other, then information can be shared early, and difficult issues aired and overcome. A caveat should be added here that if serious disagreements over coverage or measurement matters start to emerge, then each side should take the advice of legal counsel in considering their information-sharing strategies.

Both insurers and senior executives for the policyholder may sometimes discourage informal relationships between claims team members, for fear that they are getting too close or losing impartiality. The seasoned claims professionals interviewed for this project, who all had between 10- and 40-year careers dealing with catastrophic property losses, unanimously agreed that early and good relationships are key to the ability to build trust, solve problems, and satisfy stakeholder expectations.

It’s a Cliché—Communicate! Everyone knows that communication is key to a successful outcome of any complex business negotiation. But the aftermath of a catastrophic loss creates one of the most difficult environments for good communications, and it is easy to let things slip. Formal and informal communications are equally important. In the first few days of adjustment, a regular cadence of in-person or virtual meetings should be agreed upon. These should usually be a series of meetings in which information is developed by various teams working on different aspects of the claim and fed through to the adjuster and policyholder personnel charged with making decisions.

While it’s recommended to keep meetings short and limit the attendees, the claims professionals interviewed for this article recommended a daily or even twice-daily meeting schedule at first; this can be decreased when there is less new information with which to deal. Meeting cadence is just as important toward the end of a claim, when the professionals have dispersed and are dealing with other, fresher claims. Sticking to a monthly call or virtual meeting can drive the claim to a resolution and maintain credibility with stakeholders as they receive regular updates.

Remember that good communications on large claims include role clarity. As with any complex project, it is important to identify roles and responsibilities early on. It should be clear who will make decisions and agree to the settlement, both for insurers and for the policyholder.

The Ultimate Success? Early Settlement

A hallmark of successful complex claims is the willingness of the principals to engage in negotiations and, ultimately, do a deal. If sufficient trust has been established, then adjusters and brokers can help manage expectations about what a settlement might look like. It is here that an early negotiated lump-sum resolution often becomes possible. Resolving a catastrophic claim earlier than expected, without having to account for every last dollar, brings certainty to the balance sheet on both sides and reduces the friction cost of the adjustment exercise.

As property-claims folks delight in telling us, it is still a people business. With COVID-19 part of our reality this hurricane season, we can expect major hurricane losses to be just as complicated, if not more so, than they have been in the past. Policyholders, insurers, brokers, and adjusters all benefit from fair claims resolutions that meet expectations and bolster reputations. Taking the time to gather quality teams, build effective working relationships, and foster clean communications will help create the conditions for success.

Editor's Note: This article reported on the results of the author's research undertaken for a master’s degree in loss adjusting at The Business School at Bournemouth University in South England.