There are forces that operate in this life that move in certain, easily identified and oft-repeated patterns -- and then there's the weather. Claim professionals and executives know this all too well. Many are exhaling a sigh of relief as 2010 gets underway, having had a chance to catch their breath due largely in part to a catastrophe season that wrapped up last month with the fewest named storms and hurricanes since 1997.
It was an unexpected surprise, especially after insurers began the first six months of 2009 waging a losing war with Mother Nature. When claim estimates from natural catastrophes and man-made disasters were announced in July, the total was nearly double the average of the last 20 years. Beads of sweat began percolating on the brows of claim executives everywhere, as they wondered what would happen when August, September, and October rolled around.
But the tropical storms never made landfall, and the year ended with a whimper instead of windstorms. Thomas Hess, chief economist for Swiss Re, said it best in his company's summary report of the season: "In 2009, we (thankfully) saw no such event like Hurricane Katrina, which caused $71 billion in losses back in 2005," he said. "We were lucky, but that may not be the case next year. Though losses from natural catastrophes and man-made disasters have continuously trended upward in the past 20 years, we still see high volatility from year to year."
How bad could it have been? One need not look far into the past. According to estimates from Swiss Re, the total cost to society from natural catastrophes and man-made disasters decreased by 81 percent, from $267 billion in 2008 to just $52 billion in 2009. Additionally, insurers' costs dropped more than 50 percent. While insurers were on the hook for $50 billion in catastrophe-related claims in 2008, that number had dropped to just $24 billion in 2009. Most importantly, however, was this grimly positive statistic: just 12,000 people were killed by catastrophes in 2009, compared to more than 240,000 in 2008.
In Like a Lion
In whatever way a catastrophe season unfolds, there are always lessons to be gleaned. This is especially true for 2009's seemingly split personality.
"It's been a tale of two seasons for the industry at large and certainly for us," said Kevin Frawley, chief executive officer for Crawford & Company's property/casualty unit for the Americas. "It was active in the first six months, particularly in the Southeast. Then, of course, the traditional hurricane/tropical storm season was fairly inactive. We had a lower-than-expected number of named storms, and none of them were of the nature of Ike or Gustav, which occurred in 2008."
Statistics back up Frawley's assertions. According to Swiss Re, three of the world's five costliest disasters in 2009 took place on American soil -- and all three occurred before the end of June. February's winter storms combined with wind to snowball insurers with $1.3 billion in losses; April's tornadoes ripped open a gash of claims to the tune of $1.1 billion; and June thunderstorms struck with devastating force, resulting in more than a billion in losses.
One glaring omission from these figures is the late-2008 ice storm that hit the Midwest, which adds another layer to 2009's catastrophe strata. "The freezing that went through Kentucky, Ohio, and surrounding areas in December 2008 generated a huge number of claims," said Bud Trice, vice president of catastrophe services for Crawford. "When we opened up for business on Jan. 1, we were handling a sizeable number of them."
Hurricane Ike's trot across the nation also contributed to increased activity early in the year.
"For many in the industry, 2009 seemed to follow a trend of having a slow year occur right after an extremely busy one," said Kevin Hromas, an executive general adjuster in the Houston area. "The main difference was that the biggest event of the 2008 season -- Hurricane Ike -- impacted one of the largest metropolitan areas of the country, and the carry-over of claims from that event into 2009 saw a localized strong employment market for those more experienced adjusters."
Even when hurricanes do not make landfalls at high intensities, they can still generate large-scale losses across the country. "When Tropical Storm Ida hit, Nationwide received less than 100 claims initially," said Joe Centanni, vice president of claims for Nationwide Insurance. "When the remnants of Ida combined with a nor'easter, we received more than 3,100 claims from that 'non-hurricane' event in the form of wind and water damage, not to mention flood damage. The bottom line is that hurricanes are not the only enemy, as evident through Nationwide paying more than $500 million in catastrophe claims in the first half of this year."
Out Like a Lamb
Of course, insurers and independent providers must always prepare for the worst-case scenario. How do insurers, independents, and restoration firms stay flexible and keep employees satisfied during less active periods? It's all standard operating procedure for companies like Crawford, Nationwide, and Paul Davis Restoration.
"We're always looking for ways to fine-tune our practices and processes," said Centanni. "Every year, we bring a large team of regional and natural catastrophe associates to take a look at what we've done well over the course of the past year, and discuss how we can make further enhancements to our program. Each year, we find a few opportunities that provide even better support to our customers."
"In a slower season, you're not going to have the opportunity to use catastrophe adjusters in storm situations," said Frawley. "However, there are other opportunities. We apply the resources that we have -- the cat adjusters -- to mass tort, for example. There are other ways to deploy them, too. For example, if there is a surge in claims from a client in traditional business, then we can deploy cat adjusters in that circumstance. So we maintain flexibility in what might be seen as an inactive or slow natural catastrophe season."
Experienced adjusters like Hromas understand that work schedules can fluctuate each year -- it's the nature of the job. However, he feels that larger issues loom for these industry professionals.
"The effects of a generalized slow-down of business for independents is merely a repetition of the same ebb and flow that the industry has faced for the past 20 years," he said. "The domestic industry looks at the independent adjusting field much like the extra help put out in retail stores for the holiday seasons. The problem, however, is that the specialized insurance knowledge required to properly provide the service required in an insurance contract is not something that can be pulled off the shelf every couple of years and put to use."
Independent providers are aware of the dangers of allowing talent lists to rot due to disuse. To prevent that scenario, Crawford uses slower periods to conduct a thorough review of its roster. The company also provides updated training and certification opportunities to its staff.
"One thing we did this year was run a list of those who had California Earthquake Certifications that were set to expire," said Trice. "That became part of our training sessions, to renew all of those for affected adjusters. When adjusters are not actively working, they certainly want to be positioned to be first called in the event of something like an earthquake."
This approach also builds loyalty to a company, something that employers like Crawford hope will be remembered when storm activity and demand returns. But they can still face cannibalizing competition when lean times hit.
"Retention is dependent solely on consistent, available work," said Hromas. "Companies that focus on catastrophe work can use 'down' seasons to try and further streamline their internal processes and training. Nevertheless, there is a limited number of potential catastrophe losses in the market. The catastrophe-focused independent adjusting companies usually find themselves spending a large amount of effort trying to pick off clients from other companies during these times."
Restoration Effects
A slow catastrophe season, it seems, is all in the eye of the beholder. Insurers are generally relieved that losses remain low, while independent adjusters are forced to sit at home, waiting for a phone call. For restoration professionals, there is generally an upside to a slow disaster season.
"Catastrophes cause a demand surge for materials," explained Tracy Bachtell, senior vice president of business development for Paul Davis Restoration. "A Gulf Coast storm will increase the cost of sheet rock in Idaho. It's the same for lumber and roofing shingles -- prices and demand surge across the country. As a result of this year's slow disaster season, though, prices has declined."
Bachtell also explained that the restoration industry competes for materials with the new-home construction industry. With that market still at a standstill due to a struggling economy, other expenses have dropped in price across the board.
"It's not just materials, it's also the availability, quality, and cost of labor that declined" he said. "For instance, the availability of finish carpenters is at an all-time high. So we're impacted in a somewhat positive way during a less-active season."
In the end, all three industries reiterated the fact that staying diversified is the key to balancing out the unpredictable.
"We don't budget for an active or inactive season," said Frawley. "We budget for a norm of our day-to-day business and what is a reasonable, historical expectation of catastrophic activity. If it's less, we deal with it. If it's more, then we spring into action. But the analogy is that you have to keep the car tuned and use it day to day. It's got to be ready to hit the highway and get you to the higher speeds when you need it."
