Virtually all meteorological experts agree that hurricane activity will remain high and will continue to present serious risk of loss to the U.S. This prediction means it could be a very expensive summer for insurers. But how can insurers account for the unaccountable?

The simple answer is that all property/casualty companies that write policies in hurricane-prone areas need to be proactive in their preparations. In doing so, these companies must create and enact operational plans for handling higher claim activity, which is something included in an overall enterprise risk management (ERM) methodology.

Risk management must be at the heart of all decisions made by property/casualty insurers. A quality ERM strategy is invaluable, as it helps not only to measure and manage a single risk, but also to integrate it with all of the other risks unique to that company.

Some of the risk factors that must be considered in a successful ERM strategy that will prepare insurers for extraordinary acts of nature include the following: a thorough analysis of concentrations of risk; correlations with other risks; implications on the company's capital; profitability and growth of a full spectrum of underwriting; reinsurance; and capital management decisions.

One area to address in anticipation of a large catastrophic event is the operational issues involved in handling a very large volume of claims in a devastated geographical area. Insurers should be able to answer the following questions:

  • Are there "people resources" in other geographical areas who will be able to mobilize quickly to assist with the increase in volume of claims?
  • What are the communication tools at hand for use during the adverse conditions that exist immediately after a hurricane hits land? What tools will be used to communicate with claim professionals?
  • What housing accommodations will you provide for the extra personnel needed to adjust the claims? From where will they work? How will they get from their lodging facilities to the workplace?

In addition to these processes, preparations must also include determining third-party relationships prior to an event. In the aftermath of a hurricane, additional outside personnel resources are beneficial for two primary reasons. First, third parties can provide the necessary amount of adjusters to handle the extra claim volume resulting from the event. Second, they hold the credentials demanded by the state and understand the local regulations for processing claims. Although many companies can temporarily relocate adjusters from offices in other geographic locations, these claim professionals may not hold the necessary credentials or know specific state regulations.

Additionally, the benefits of sorting out the details of a third-party relationship in advance extend beyond the competitive nature of the agreement to other financial drivers, as well as customer satisfaction. If the details of the third-party relationship are agreed upon beforehand, the claim agents will be able to work in conjunction with insurers and policyholders immediately when needed. This shortened time span will ensure better service to your policyholders and increase customer satisfaction. Furthermore, there is a correlation between the speed of the claim process, the satisfaction of your customers, and the likelihood that the customers might inflate their claims or file complaints with the state's insurance regulatory body. In essence, the proactive formation of a solid third-party relationship can lead to lower losses and more satisfied customers.

Despite the best efforts of meteorologists, actuaries, and a host of other professionals, catastrophic events like land-falling hurricanes are impossible to predict with 100 percent accuracy — and they always will be. However, there are still ways for insurers to prepare, and these preparations are becoming even more important in the soft market with razor-thin margins. When followed, the precautionary actions mentioned here can be the difference between profitability and financial ruin.

Alice Gannon is senior consultant of EMB, a global actuarial consultancy firm in the property/casualty industry. She may be reached at (210) 826-2878, alice.gannon@embamerica.com, www.embamerica.com.

NOT FOR REPRINT

© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.