contingency planning and claims handling following large ... · contingency planning and claims...

Contingency planning and claims handling

following large catastrophic events

Costa Navarino, September 2018

Jürgen Brucker

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20 September 2018Contingency planning and claims handling – following large catastrophic events 2

Alternative

Agenda

1. Economic effect of large NatCat events

2. MR strategy NatCat management

3. Nat cat management – Loss Example – Earthquake Chile 2010

4. Lessons learned

5. Contingency plan details

20 September 2018 3Contingency planning and claims handling – following large catastrophic events

Economic effects of natural catastrophes

The overall economic effect results from both the direct

and the indirect effects


1 Exemptions are droughts and heat waves which directly impair GDP

Source: Munich Re Economic Research

Overall effect

Direct losses

Direct consequences of the forces

of nature

▪ Usually not directly evident from

the development of GDP1

▪ Personal injury

▪ Direct economic losses, e.g.,

damage to capital assets and

resources

Indirect effects = “positive” + negative indirect effects

All effects not caused directly by the natural catastrophe but by the resultant

direct losses

▪ Indirect effects are usually changes in GDP compared with the hypothetical

development of GDP in the absence of a natural catastrophe

“Positive” indirect effects,

e.g., through

▪ Reconstruction stimulus

▪ “Prosperity incentives”, e.g., construction

of new, better-quality houses

▪ “Creative destruction”, e.g., the

destruction fosters innovation; new

production facilities are more modern than

those destroyed

Negative indirect effects,

e.g., through

▪ Loss of production due to destroyed

installations

▪ Degradation of human capital

▪ Damaged and destroyed infrastructure

▪ Often higher inflation

▪ Frequently, an increase in government

debt

Example: Although the EQ in Haiti and NZ were of roughly

similar strength, the effects in Haiti were far worse


Haiti earthquake (2 Jan. 2010)

Magnitude 7.0

New Zealand earthquake (4 Sep. 2010)

Magnitude 7.1

1 Ratio of insured losses to overall losses 2 Calibration based on von Peter, von Dahlen and Saxena

(2012): Unmitigated Disasters? BIS Working papers No. 394.

Source: Munich Re Geo Risks Research, Economic Research; source right-hand photo: National

Geographic, UN Development Programme, IFRC;

US$ 200m (2.5%1)Insured losses

285,000Houses destroyed

222,570

(2.5% of the population)

Fatalities

US$ 8bnOverall losses

-3.5% of GDPCumulative indirect effect2

US$ 5.2bn (80%1)Insured losses

100,000Houses damaged

0Fatalities

US$ 6.5bnOverall losses

-0.4% of GDPCumulative indirect effect2

Image: Benjamin J. Myers/Corbis Image: dpa Picture Alliance

Example: In Chile, government borrowing increased by

around 70% in the earthquake year of 2010

20 September 2018 6Contingency planning and claims handling – following large catastrophic eventsSource: Munich Re Economic Research, IMF

-40

-20

0

20

40

60

80

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Government debt (left axis)) Growth rate of government debt (right axis)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Government debt Chile [bn pesos]

Start of 2010:

Earthquake in Chile

NatCat Claims Management


Individual

major claims

Mass Claims:

Very large number

of small/medium size claims

Residential risks Commercial/industrial risks

Two different groups of claims that have to be tackled using different strategies

Munich Re strategy in NatCat claims management


▪ Preparation of internal contingency plans for managing NatCat Claims on different Cat scenarios

▪ Establishment of direct contacts with the claims departments of our ceding companies with the

purpose to develop common contingency plans

▪ Holding seminars and workshops on NatCat claims management and contingency planning on

individual markets or for individual clients exposed to natural catastrophes

Preparation phase

Reaction after a

catastrophic event

▪ Immediate formation of a claims management “task force” and deployment as soon as possible in

the affected country

▪ Immediate contact with brokers and ceding companies

▪ Release of advanced payments in order to secure cash availability to our cedents

▪ Assist our clients on the elaboration of efficient claims adjustments processes for mass claims and

in the adjustment of individual large claims

Munich ReNatCat claims management initiative related to Chile


▪ Munich Re held a seminar in Santiago, Nov. 2008 on:

NatCat Claims Management and Contingency Planning in the Insurance Industry

▪ Munich Re held a workshop in Santiago in collaboration with the Chilean Association of Insurers,

Dec. 2009 on:

Earthquake simulation and implementation of a contingency plan

Preparation phase

Objective:

to show the importance of a sound preparation through contingency planning for

an efficient claims management and to identify weaknesses of the existing

contingency plans of the individual insurers

27F EQ Chile


27F

Chile

27 Feb. 2010

Earthquake of magnitude

8.8 Richter

+

tsunami

Casualties: ~ 500

Insured loss: US$ 8bn

Munich Re reserve:

US$ 1.1bn

27F – Response of Munich Re

In reaction to the event Munich Re took the following steps


… installed a task force in Santiago 5 days after

the event

… contacted the cedents immediately and offered

quick support in form of advanced payments

… agreed with cedents efficient processes, for e.g.,

adjusting massive numbers of small claims

… consulted the cedents in selecting loss adjusters

or forensic accountants for large, complex claims

… conducted claims reviews at the claims dept. of

ceding companies

… collaborated with the local association of

insurers for drafting lessons learnt

… showed continuous local presence for the whole

year 2010 with claims managers actively

participating in loss surveys

27F – Response of the Chilean Insurance MarketProblems in the immediate aftermath of the event

▪ Weakness of the infrastructure in the affected area aggravated the situation

▪ Utilities (electricity, water, telephones/communication network incl. cell phones)

interrupted for several days

▪ Damaged roads, fallen bridges, i.e., difficult access

▪ Hotel capacities largely reduced

▪ Curfew limited the mobility during the initial weeks

▪ Employees of industrial companies did not go to work for several days in order to stay with their families.

▪ Lack of manpower and of construction material retarded the beginning of loss minimisation measures and

of repair works.


27F – Response of the Chilean Insurance MarketProblems related to the loss adjusting process

▪ Chilean law allows adjustment only to locally authorised loss adjusting companies

▪ Chilean law requires full settlement of claims affecting private lines within a timeframe of 3 months from

the date of the loss notification. Enforcement by the Superintendencia de Valores y Seguros, Chile (SVS)

▪ Mass losses at private buildings/apartment (mortgage insurance)

▪ Multiple loss notifications from the insured, the broker or the bank

▪ One building/several owners/different insurance policies

▪ Difficulty to decide on demolition vs. repair

▪ Large industrial risks: Lack of clarity of certain insurance policies, i.e., on sums insured for

business interruption

▪ Uncertainties related with the preliminary loss estimates, in particular with business interruption claims

▪ “Public Adjusters” who work for the insured and raise expectation of higher indemnifications


27F – Response of the Chilean Insurance MarketRole of the Loss Adjusters

▪ Number of loss notifications superseded by far the initially available capacity of local loss adjusters

▪ For the adjustment of large, complex losses some of the local loss adjusters had to require the help of

their own or affiliated international organisations as well as forensic accountants expert in business

interruption losses

▪ After 4–6 weeks the loss adjusters managed to drastically increase their capacity in terms of manpower,

office space, office equipment and could start to work efficiently

▪ Due to the very large number of claims the loss adjusters could not comply entirely with the SVS

requirements. They had to demand for and obtained a general postponement of the compulsory time limit

of 3 months for claims settlement.

▪ By the end of 2010 the vast majority of the householders claims could be settled


27F – Response of the Chilean Insurance Market

20 September 2018 15Contingency planning and claims handling – following large catastrophic eventsSource: Superintendencia de Valores y Seguros, Chile – SVS

Total 31 Aug. 2010 28 Feb. 2011

Paid indemnification: USD 2.190 bn USD 4.656 bn

Commercial/Industrial 31 Aug. 2010 28 Feb. 2011

Number of claims notifications: 31,866 31,811

Liquidated claims: 16,970 28,294

Closed claims (paid or to be paid): 8,793 15,666

Not indemnifiable (e.g., below deductibles): 7,298 12,152

Paid indemnification: USD 3.365 bn

Homeowners 31 Aug. 2010 28 Feb. 2011

Number of claims notifications: 190,199 189,491

Liquidated claims: 156,242 188,478

Closed claims (paid or to be paid): 105,694 125,904

Not indemnifiable (e.g., below deductibles): 46,336 62,574

Paid indemnification: USD 1.291 bn

27F – Response of the Chilean Insurance MarketContingency Plans

▪ In general, all insurance companies as well as loss adjusters and brokers responded very

quickly and acted pro-actively.

▪ Basically all of them had a contingency plan with a major or minor degree of elaboration.

▪ However each of these plans was focused on their own activities of the own organization.

A coordinated action of the market had not been pre-agreed.


Recommendation

To work out at a market level with the local

insurers’ association master contingency plan,

for the coordination of the several parties

involved in order to ensure the effectiveness of

the loss adjustment processes.

27F: Mass ClaimsImpact of Deductible

Regulations in Chile


Deductibles are regulated for residential and commercial risks as follows

▪ Residential risks: 1% of sum insured, min. UF 25 (approx. USD 1,000)

▪ Commercial risks: 2% of sum insured, min. UF 50 (approx. USD 2,000)

Consequences

Homeowners started complaining against the height of the deductibles and this

turned out to be a political issue. The Superintendency (SVS) asked the insurance

industry to withdraw the deductibles.

The insurance industry did not accept and explained why deductibles are

absolutely needed in case of NatCat.

Number of Claims vs. Deductible [UF]

27F: Mass ClaimsImpact of deductibles on a residential risks portfolio (example)


0

10.000

20.000

30.000

40.000

50.000

60.000

70.000

80.000

0 25 50 75

Claims below deductible (22.000)

Deductible [UF]

Number of claims UF 1 = approx. USD 40

Indemnity 100% [USD] vs. Deductible [UF]

27F: Mass claimsImpact of deductibles on a residential risks portfolio (example)


Millions USD

Deductible [UF]

0

20

40

60

80

100

120

140

0 25 50 75

Claims below deductible (ca. USD 28 m)

UF 1 = approx. USD 40

27F: Lessons learnt regarding design and building codes

▪ In general: Sound and solid design of the vast majority of modern buildings,

i.e. the ones which were insured

▪ Cause of major failures of individual buildings mainly related to non-adherence to building codes.

▪ Very large wave frequency spectrum of the EQ. Long distance, low frequency waves were not expected

and were not foreseen by local building codes

▪ In certain areas the critical subsoil conditions were not adequately considered in the design of buildings

and roads

▪ Behaviour of non-structural elements not considered in existing norms


Consequences

Chilean norms/building codes being in part revised at the moment

27F: Active Claims Management

For the time being, we can summarize the situation as follows:

In the 14 months after the Earthquake, Munich Re

Munich Re have gained good control of the adjustment, and our contribution has been appreciated and

valued by the cedents (and even by other reinsurers)


participated in many loss

inspections

kept close and continuous

contact to loss adjusters

and cedents

discussed claims

adjustments, and

assessed cedents

instructed additional

experts and legal

counsels, etc.

A final consideration can be made once all claims

are closed.

Significant input and work is being required in the

cases, in which public adjusters are intervening

for the interests of the insureds, inflating absurdly

the claimed amounts.

Several large claims are still open and need close

follow up from our side.

Work

goes

on …

Contingency Plans for Natural Disasters

Coordination of activities between the parties involved

The Contingency PlanTable of activities


No. Action to be taken Insurer Reinsurer Adjuster

Volum.

anal. Expert

Accounting

expert

Restoration

company Insured

1 Identify cat scenarios and areas of risks that may be affected X X X X

2 Elaborate own business continuity plan X X

3 Review general policy terms X ●

4 Issue policies and properly inform insureds on scope of cover and limits X

5 Inspect the risks and draw up loss prevention recommendations X ● X

6 Agree collaboration with adjusters, experts and restoration companies X X X X X X

7 Obtain individual contingency plans from adjusters, experts and

restoration companies

X X X X X

8 Inform loss adjusters and accounting experts on scope of covers and limits X X X

9 Agree on method of reporting X X X

10 Prepare check lists X X X X

11 Establish funds for dealing with losses immediately X X

12 Establish adequate reinsurance conditions (treaty/fac) X X

13 annual meeting: to update contingency plans with all parties involved (for

hurricane scenarios, before the start of the hurricane season)

X X X

1. Preparation Phase

X = Involved party ● = Option

Contingency plans for natural disasters





Volum.

anal. Expert

Accounting

expert

Restoration

company Insured

1 Organise a emergency meeting to coordinate concrete activities

when a hurricane is imminent or in the immediate aftermath of a cat event

X ● X X X X

2 Quantification of staff needs X X X X X

3 Assign specific works and tasks X X X X X

4 Instruct/engage adjusters, experts and restoration companies X ● X X X X

5 Inform again loss adjusters and accounting experts on scope of covers and

limits

X X X

6 Coordinate travel to the disaster area X X X

7 Coordinate lodging and service offices X X X X

8 Purchase/hire of generating equipment and fuel,

including operating and servicing personnel

X X X

9 Coordinate mobilisation of restoration equipment and materials X

10 Mobilisation to the disaster area X X X X

11 Obtain accommodation/food/drink in the disaster area X X X

12 Mobilisation of equipment and material X X

13 Set up provisional/temporary offices, workshops for restoration work X X X

14 Hire sheds to carry out the restoration work and keep the salvaged goods X X X

15 Inspect the risks affected / agree on measures to minimise damage X ● X X X X

16 Start restoration work asap X X X

17 Estimate of total damage X X X X

2. Actions following the Nat Cat occurence


Contingency plans for natural disasters





Volum.

anal. Expert

Accounting

expert

Restoration

company Insured

1 Carry out survey, evaluation and documentation of individual losses together

with the Insured's representativesX ● X X X X

2 Clearly separate direct damage from improvements or normal maintenance

worksX X X X

3 Draw up correct basis for unit prices and labour X X X

4 Estimate real cost of indemnifiable repairs and fix property damage reserves X X X

5 Coordinate repair and replacement work X X

6 Obtain financial data on the operation affected X X X

7 Estimate repair times and establish LOP reserves X X X

8 Recommend advanced payments where appropriate X

9 Advanced payments where appropriate X X

10 Verify appropriate execution of repair/replacement work affected X X X X

11 Obtain and verify of invoices for repair/replacement X X

12 Quantification and sale of salvage X X

13 Final report on property damage X

14 Obtaining of accounting data on all of the property affected X X X

15 Verify that operations are resumed after completion of repairs

16 Final report on loss of profit X

17 Final indemnity payment X X

18 Draw up recommendations to avoid similar/identical losses in the

future or at least minimise them as far as possibleX X X

3. Loss adjusting


Nat Cat loss data – Typical Borderaux Structure

The Contingency PlanMinimum Requirements of Loss Information


Company’s claim number/reference

Company’s relevant policy number

Inception date of the policy

Expiry date of the policy

Line of business

Date of loss

Location of loss (e.g., postal code, CRESTA zone)

Sum insured of the policy

Loss amount (100% FGU)

Company’s loss amount – paid

Company’s loss amount – outstanding

Company’s loss adjustment expenses – paid

Company’s loss adjustment expenses – outstanding

Allocation of loss in net loss, facultative and treaty cessions

100% incurred loss for PD and BI split u

▪ Industrial

▪ Commercial

▪ residential

Insured

Currency of original policies

Currency of reinsurance treaty

Occupancy

Deductible (only for fac. risk)

Salvage

Munich Re Participation

Summary

1. Interests of all stakeholders involved should be aligned

2. Importance of the preparation phase is to accepted

3. Overall co-ordination is required

4. Fast and decisive actions are required


Thank you very much for your attention

Costa Navarino, September 2018

Jürgen Brucker

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