Extreme weather events cause significant property damage, injury, and loss of life. These events can even threaten the existence of some species. Given the documented increase in ocean temperatures and increasing evidence of melting icecaps, global concern for climate change is at an all time high. An increase in global temperatures is also occurring because of the rise of extreme weather and climate conditions such as hurricanes. Moreover, coastal regions face the prospect of severe flooding and associated damages.
Many expect that governmental and regulatory agencies will increase scrutiny over business practices, particularly in terms of a company's readiness to deal with climate change and related losses. In March 2009, the NAIC adopted the "Climate Risk Disclosure Proposal," which requires insurers to reveal how they manage climate change risk. Such regulatory requirements will likely continue to increase. Over time, stringent guidelines will result in greater pressure on insurers to better quantify, manage, and track their risk exposures related to large weather events and long term climate change. Organizations will need to enact risk selection and investment management programs, which should continue to factor in climate change-related risks on their books.
Insurers can take some key steps now to address these challenges. Some strategies are outlined below.
Planning and Risk Selection
Insurers may find that a number of properties they have underwritten are concentrated in a single high-risk region. It is likely that a single hurricane can cause a significant loss on the insurers' books, virtually dismantling business. Some insurers went out of business following the impact of the 2004 hurricane season for this exact reason. Furthermore, after hurricanes such as Katrina, Rita and Wilma, some insurers found it difficult to cope with the amount of claims subsequently submitted. For example, State Farm, once the largest property insurer in Florida — with more than 22 percent of market share by amount of written premiums — chose to withdraw from the state altogether.
Prudent risk selection helps insurers maintain a healthy combined ratio. In the case of windstorm risk, assessing a new property's proximity to those already on the insurer's books is important. Furthermore, while writing new business, insurers need to assess how addition of each new risk impacts the overall capacity of the insurer on a near-real-time basis.
Today, technology has advanced to an extent where systems can aid underwriters in making prudent choices as to what risks to write. Using a combination of GIS technology and a powerful risk aggregation calculation engine, the underwriting team can make quick pre-bind checks. They can also use a map to pinpoint risk locations at a street level, highlighting conflicts and showcasing opportunities to underwrite risk within each zip code. The ability to ascertain an exact location allows the insurer to generate accurate risk assessments, conflicts, and aggregations in a matter of minutes. The insurers can then keep reinsurers up to date on their aggregates each quarter, presenting reports detailing exposure breakdown by country and risk type. Thus, these tools help insurers plan ahead and prepare a better response to hurricane related losses.
Accurate Claim Reserving
Another reason insurers face heightened pressure during hurricane season is because of inefficient methods of claim reserving. If too little is reserved, then you risk delays and poor customer service. Alternatively, reserving too much can actually reduce the insurer's capacity to write new business.
Celent's research indicates that investment in claim systems is typically assigned lower priority than investing in front office systems. The claim department is sometimes regarded as a back office function. However, an insurer's most important interaction with its customers is at the time of claim processing, which has a very high bearing on customer satisfaction and the likelihood of business renewal.
Just after hurricane Katrina, insurers responded in a number of ways to speed up the claim adjusting process. Many insurance companies set up dedicated phone lines or dispatched mobile claim management units to affected areas. While such acts are vital, it is nevertheless imperative to adjust and reserve claim processes at the same time.
For each expected loss following an event, insurers usually set aside a reserve to cater to arising claims. Loss modeling tools have matured into reasonably accurate estimates of expected loss, allowing the insurer to book reserves accurately.
Enhancing Customer Service
The quality of response is just as important as the speed of response. Early planning for response systems is crucial for companies to honor their claims. Many large insurers have put program and infrastructure in place, such as dispatching mobile claim handling units and setting up a dedicated helpline for affected customers after a hurricane has struck. However, the past few hurricanes exposed several gaps in service. For instance, what would a homeowner do with a timely insurance check when all banks in the region are closed?
If insurers are to retain their customers, then they need to differentiate themselves by providing appropriate responses in times of need. Insurers can offer cashless transactions using smart card technology as an alternative to settlement through checks or cash.
Additionally, insurers may find that interfacing with emergency response groups as well as public health and safety departments will create a competitive edge. They must look at innovative ways of using technology to their advantage. Today's smart phones have tremendous computing power. By using applications on handheld devices and smart-phones with built-in cameras, claim adjusters can report assessments and loss reports in real time, thus improving the speed of service.
According to the Insurance Information Institute, P&C insurers ended 2008 well- capitalized and prepared for the 2009 hurricane season, despite sizable losses in their investment portfolios. This is good news. Nonetheless, insurers must prepare for an expected increase in the amount of catastrophic losses arising from climate change. A means by which to accomplish this is technology. Successful adoption will enable insurers to analyze and select risks in high-impact areas while providing avenues to improve customer services and expedite the claim process. Insurance companies must further use technological innovation to stay ahead of the curve and provide the best services possible.
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