Insurance Insights. After the storm. Can insurers save businesses after disasters?

Insurance Insights After the storm. Can insurers save businesses after disasters? July 2012 Matt Pearson Executive General Manager - Claims Commercial Insurance Suncorp 1

Summary On 2 February 2011 the destructive winds of Cyclone Yasi smashed into the small North Queensland township of Tully. A large proportion of homes were damaged but the major impact of the cyclone on the area was the damage to Tully Sugar Mill. It not only badly damaged the mill it nearly destroyed a community. Many of the locals worked at the mill and it was the life blood of the surrounding sugar cane farms. It was crucial to have the mill operating four months after the disaster in time to crush the next sugar harvest. Insurer Vero, part of the Suncorp Group, had its Events Response Team in place within five days of the cyclone striking. Using its special relationship with building management multinational Lend Lease, the insurer was able to ensure the mill was up and running in time to meet the needs of the harvest. This was just one of thousands of larger businesses hit by major weather events in recent times. Small businesses are especially susceptible to the aftermath of a disaster. A storm in Cooroy, near Noosa, in February, saw the roof blown off a complete block of shops. Using an internal assessor and a preferred panel builder experienced in event response, Suncorp handed back the property, repairs completed, a month later. This achieved a major saving in loss of rent thanks to the quick response. A number of major weather events have struck Australia in recent years. 2011 was especially devastating. Queensland was still struggling with the widespread flooding at the end of 2010 and the beginning of 2011 when the northern part of the state was hit another blow by Cyclone Yasi. According to figures from the Insurance Council of Australia (ICA) insurable losses relating to the catastrophes of 2011 and early 2012 exceeded $5.3 billion, with insurers handling more than 300,000 claims. 2

2011... the Year of Disasters $2,500,000,000 $2,000,000,000 $1,500,000,000 73,250 58,685 $1,000,000,000 50,063 $500,000,000 7,983 410 405 $0 120,000 108,564 100,000 80,000 60,000 40,000 20,000 6,408 8,914 0 suffer major disasters and are not insured or are under insured fail within 12 months. However, with the present economic uncertainties there is evidence that some businesses are reluctant to ensure they have adequate cover. Putting aside the issue of the majority of SMEs being underinsured (a topic in itself and outside much of this paper), the need to recover quickly after events such as Yasi and the various floods is crucial to businesses. So can the insurance industry help them back on their feet? Number of claims Cost (current figures) Source: Insurance Council of Australia figures March 2012 Business requirements post-loss are different to those of consumers. Rapid settlement or repair is critical to businesses. Businesses have substantial financial commitments in respect of staff, rent and other fixed costs. Interruption to business activities, which starves cash flow, can threaten the viability of businesses. This is particularly an issue for small to medium enterprises (SMEs). SMEs generally operate on thinner margins, have less resilience, and suffer more significantly from underinsurance, particularly in respect of business interruption cover. It is perhaps sadly ironic that with the numerous weather-related disasters in recent times insurers have become better at doing their jobs. That is, moving rapidly and efficiently - both on the ground at the disaster and in the claims centres to help people and their businesses back on their feet as soon as is possible. But is the insurance industry ready for the Next Big One? How well positioned is the insurance industry to help businesses recover quickly post loss? How good are its processes and its people? Is the industry responding and adapting? This paper examines the readiness of the insurance industry and what is required by an insurer to be prepared after the storm to help businesses get up and running again. It also looks at what other stakeholders - governments and local bodies should be doing to ensure businesses and communities are protected. The impact of these events on SMEs has broader economic ramifications. The SME Association of Australia says the sector is a vital part of the Australian economy with about two million SMEs. SMEs represent more than 99.7 per cent of actively trading businesses and employ 70 per cent of the Australian workforce. Yet it is estimated that every year one in 500 Australian business will experience a severe disaster and half of the businesses that suffer major losses fail within two years. 1 The litany of major catastrophes in the last few years has dealt some severe body blows to SMEs. According to the ICA, most small businesses that 3

Background Cyclones are a fact of life across northern Australia. Locals live with this knowledge and children grow up hardened to the destructiveness of Mother Nature. But in the last decade, Queensland has had a frightening realisation of just how damaging cyclones can be for a thriving regional centre. Two events in particular have shifted the goalposts. On 20 March 2006, far north Queensland was reminded of the dangers of the storm season when Cyclone Larry, graded category 4, with winds of 240km/h 2, hit the coast and tore apart the town of Innisfail, south of Cairns, along with a number of towns nearby. Throughout Queensland, Cyclone Larry resulted in roughly $1.5 billion in total damage in its aftermath. 3 Larry was described as the second largest cyclone to hit Australia after the horrific Cyclone Tracey in Darwin in 1974 that is until Yasi took its place years later. In the early hours of 3 February 2011, tropical Cyclone Yasi which ultimately, reached category 5 4 - hit far north Queensland. It crossed the coast at Mission Beach and proceeded to destroy much of the townships of Tully and Cardwell before moving on to spread its damage across a greater area that once again included Innisfail and a number of townships that surround it. Many insurers were able to utilise their event response planning experience from previous events, especially Cyclone Larry. For example, event teams specifically created by Suncorp to manage natural disaster claims and recovery were so successful for Larry that the insurer still applies this approach to event claims management today. So, what are the key elements an insurer needs to have in place before an event to set them up for success in dealing with the volume and complexity to come? How can insurers become event fit in the off season? Forward planning Insurers have had so much practice in the last 10 years, that each would have its own lessons learnt from its responses. Having an event response plan similar to disaster recovery plans that most sophisticated businesses have is a critical element. Although no two events are the same, a robust plan as a base is essential. A focus on continuous improvement allows an insurer the ability to deliver a response in line with the needs of its customer base. Internal and external research is critical to understand what is predicted and what insurers need to deliver via customer experience. Inviting weather experts (for example, the Bureau of Meteorology) or disaster response personnel to share information, projections and planning can help insurers justify cost and rationale for investment into response planning. Inviting brokers and clients who have claimed as a result of natural disasters to share their experiences and ideas for improvement is critical for not only process refinement but also the creation of advocates and support within the marketplace. Simulation of disaster scenarios is critical to test that the business has the necessary process, people and infrastructure to provide a suitable response. While the industry had good practice with actual events, periodic simulation exercises are important for learning and pressure testing processes. Insurance businesses never stand still and might be, for example, implementing major IT infrastructure that has never been under the strain of events before. Auditing and post implementation review of the event response process is beneficial for providing insight into the effective management and the success of the response. Location, location, location Having assessment teams close to disaster scenes as soon as possible is paramount to speed up the process of helping businesses to recover after an event. Ironically, many insurers had event response teams already working on Queensland flood event claims when Yasi struck. This meant they were battle ready and better prepared for Yasi in the days before the cyclone made landfall. However, with a number of disasters the damage is so widespread that accessibility to devastated areas is difficult, delaying recovery operations. 4

Persistent rain in the impacted region in the weeks following Larry made the assessment process especially difficult. Some townships were completely isolated by flooding and, even where access was available, assessors and repairers could not safely access damaged roofs because of heavy rain. Mobility is the key. After Yasi, Suncorp launched its Customer Response Teams (CRTs), all-terrain vehicles with on-board office equipment and independent communication networks. They can be set up anywhere and are manned by a claims team ready to attend to the inquiries and needs of customers following a devastating event. Communication Communication internally within the insurance organisation, externally to brokers, their clients, and to the market is critical during event response. Event response planning allows identification of the parts of the business that play a role in the response. From this, communication protocols, plans and accountabilities can be designed and embedded. These can also be tested as part of simulations and post implementation reviews. Teams who manage internal and external communications play a critical role in keeping the business informed on how the response is proceeding and keeping the public updated on response actions. Claims teams managing claims arising from the event communicate constantly with brokers, clients and a range of people who support the response process assessors, builders, and repairers. The coordination of this web of communication is challenging to insurers but critical to the success of claims management and the response outcome. Strong process, training and support are required for claims officers during this time. They are generally the face of the customer experience, so they need to be skilled in delivery of information, appropriateness of messaging and have access to the correct tools to perform their duties. Expectation agreement, communication and management with brokers and clients are essential to a successful outcome. Resourcing/third party providers The close proximity of the Queensland floods to Yasi highlighted a number of major challenges for insurers. For example, there was a chronic shortage of assessors across the industry. Competitive pressure has led many insurers to cut back on excess resourcing in this area. This works well until catastrophes create demand for resources. Assessing can become a bottleneck since it is essentially the first stage. For Yasi, insurers had to bring in overseas loss adjusting teams to help the already overloaded local teams. The ability to quickly resource up when disaster strikes is essential. A core team of experts needs to be available at all times. However, the ability to bolt on further personnel on a needs basis as a disaster escalates is vital. For instance some insurers have drafted in their business development managers and sales personnel who have events management training and local knowledge, to assist with the multitude of claims that pour in after a disaster. Creating a reliable, cost efficient supply chain is also essential in times of rebuilding after a catastrophe. However, a large event, like a cyclone, creates widespread damage and the complexity around building project management is time consuming. The need for highly qualified third parties to partner with insurers for such major operations is imperative. Insurers faced a massive scale of damage after Cyclone Larry. There is a limit to how much insurers can lock down supply chain arrangements pre-event. Insurers need to understand not only their own resourcing limitations, but also their expertise limitations. The particular challenges of large scale catastrophes require skills more akin to construction project management rather than claims management. For example: Access to trades and vetting processes. This is particularly an issue in remote locations Scope control 5

Labour and material rates Businesses require rapid rebuilding or settlement to avoid business interruption impacts. Insurers also need to control cost (on behalf of both shareholders and reinsurers) and quality. During Cyclone Larry Suncorp partnered with building management multinational Lend Lease to implement a project managed approach to repairs. This meant that cost, quality and time were managed for customers and resulted in a controlled repair process. Suncorp worked with Lend Lease to recruit a panel of endorsed repairers including as many from the local area as possible - to undertake repairs for Larry claims. The Suncorp relationship with Lend Lease now immediately swings into action for any major events. Working with intermediaries Strong relationships between insurers and brokers are vital in the trying times after disaster strikes. But this is one area the industry can continually improve on. Working with brokers can assist in the flow of communication between insurers and end customers. Inviting brokers and customers who have claimed as a result of natural disasters to share their experiences and ideas for improvement is critical for not only process refinement but the creation of advocates and support within the marketplace. Suncorp carries out post event broker road-shows which prove invaluable in improving a greater understanding between the insurer and the brokers when disasters strike. An example of how an insurer and broker can work closely for the mutual benefit of the customer came in the recent Roma floods when Suncorp colocated with the broker who had the highest customer exposure to the event. This enabled the broker, who became part of the team, to provide valuable feedback and prioritisation of customers based on their needs or special circumstance. Technology Utilising the latest technology is key to how insurers will respond to natural disasters in the future. However, the industry s ability to use devices, including ipads and smart phones, will be dependant in the early stages of the event on the severity of damage to the telecommunications network in the effected region. Insurers found when responding to Cyclone Larry that most of the network was also destroyed in and around Innisfail with only limited coverage in the first week after the event. In 2011, post Cyclone Yasi, the communication network was not as badly affected. However, power outages can affect the early stages. In recent times effective claims management systems have made the handling process quicker, more accurate and trackable. Work from home capability means that staff who are prevented from accessing normal working premise can continue to service clients and brokers during event scenarios. (Suncorp s Commercial Insurance claims staff worked from home during the Brisbane floods as they could not get access to Brisbane CBD). Mobile technology means that claims staff, assessors and support staff can operate from the impact area, to provide that on-the-ground ' support to clients and brokers. Collaborative culture A unified approach across lines of business within an insurance company is important. All parts of the response must operate in a coordinated, planned manner to ensure customer confidence. Event response plans must capture and reflect the role of each participating business area, their role, and responsibilities. Benefits can be obtained from fully utilising all services on offer across the business (e.g. why go to an external communications company, when there is an in-house team who can provide the same services, with an existing understanding of the business and at a lower cost?). Benefits can also be obtained from utilising scale to leverage purchase costs, obtaining services (electronics, bulk accommodation or travel bookings), etc. Smart planning and a collaborative approach to response means that real estate can be shared, providing a more unified approach. In Roma, Suncorp assessors were working out of a broker s office. This is not just a cost saving, but means 6

fewer barriers to communications resulting in better outcomes, quicker results for customers. A key element of staffing is the continuity of event experienced staff. Insurers need a core of experience to tap into - not just experienced claims personnel, but those who have lived through events and know what issues can arise, and how to deal with them quickly. An insurer s event response plan should include recruitment and training plans. As mentioned above, it is much easier to scale up if the insurer has the base of event experienced staff. Economic resilience According to a Deloitte Access Economics research paper commissioned by Suncorp, the summer disasters are estimated to have reduced Queensland s gross state product by $6 billion and annual economic growth by 2.5 percentage points. 5 Insurance has a major role to play in promoting economic resilience of communities and the business within them. The income flows provided by insurance claims payments helped stabilise the economy following the initial shock from the disaster. The financial stimulus from claims payments promotes a more rapid adjustment to normality. Claims expenditure continues to flow through an economy after an event. This provides an important impetus to recover in the longer term, particularly by supporting employment and businesses continuity. Suncorp as the largest insurer in Queensland estimates its disaster-related payments contributed about 0.16% to the Queensland economy in 2011. Over a 10-year period, Suncorp s overall impact to the Queensland economy is projected to be $1.2 billion. This is over and above that provided by governments in their post disaster responses. Without private insurance coverage the economic impact on communities and businesses would be substantially greater. Perhaps ironically the underinsurance or absence of insurance of many businesses means natural disasters have, ultimately, a greater impact on the broader economy. Personal impact Even with experience, planning and resources in place, insurers felt the challenge of significant and consecutive natural disasters in the last few years. Many insurance employees were directly impacted by catastrophes (the Queensland floods especially), losing their own homes and personal belongings and, at the same time working on the claims of their customers. Others experienced fatigue from the long hours and the sensitive and upsetting nature of the work. Many insurers made counselling services available to their employees and their families. Stakeholder education There is a crucial role for the insurance industry - both insurers and brokers to educate businesses about the risk they face. Research carried out by the Cameron Research Group in 2010 found that 90 per cent of small businesses believed that they were adequately covered for their general insurance. 6 But in reality the research showed that many did not have the necessary insurance in key risk areas. More than half did not have business interruption insurance which can prove vital for small businesses but is often overlooked. This is primarily because of a lack of understanding of what types of insurance cover especially business interruption covers - were available to keep them in business. This is a clear opportunity for brokers, who can assist the more complex businesses to be adequately protected. Even micro businesses, which have basic insurance needs, can obtain appropriate covers online if they are aware they need it. Unfortunately, small business owners are reluctant insureds. It seems clear from underinsurance statistics that they often do not understand the importance of insurance or do not place the appropriate value on it. Earlier this year, the national Vero SME Insurance Index found that 40 per cent of SMEs surveyed did not believe they were getting value for money with their insurance. 7 7

The recent weather-related events have not helped win over businesses. The Vero SME Index noted half of SME decision makers have been made more wary of the insurance industry after the recent events. The perception that insurers are reluctant to pay on a claim has also hampered efforts to convince businesses of the need for insurance. Cameron Research noted that despite one in five small businesses enjoying a positive claims experience, the majority continued to fear being treated unfairly in the event of a claim. What the industry didn t do right While insurers now have well-oiled machines that can be brought in when disasters strike, inevitably things can go wrong. The sheer size and the chaos that follows an event and, not surprisingly, the human elements involved can lead to frustrations and even anger on the part of customers. While much energy and investment goes into improving how insurers communicate, this is an area where improvement can always be made. For example, insurers should invest time in the off season to consult with brokers to educate them on the response process and to look for improvement opportunities. A key issue is the education of businesses and the community on the value of insurance. As an industry we could do more to educate (see Stakeholder Education ). Both the Federal Government and the Queensland and NSW state governments have been fairly mute on the matter of mitigation. The insurance industry led by the ICA has been lobbying the various governments as well as the local bodies in impacted areas for some time on mitigation with slow progress. Yet, those communities protected by appropriate mitigation experienced substantially less damage and disruption from the recent catastrophes compared to those left vulnerable to extreme weather. Some areas have been proactive. For example, local Queensland councils in Charleville and St George have invested in levees and parts of Far North Queensland have reconstructed to higher building standards after Cyclones Larry and Yasi. A positive side effect of mitigation has been lower average insurance premiums in areas with welldefined mitigation plans. But other areas have not been so proactive. Roma in Queensland, for example, has had three floods in the last two years and nine since1983. Suncorp took the unusual step recently of announcing that it would not write any new policies for Roma and nearby Emerald until firm funding and timetables were in place for initiatives that better protect these towns from flooding. A levee is now under consideration in Roma. But local councils cannot work alone in developing robust mitigation plans. State and Federal governments need to take a leadership role in funding mitigation plans in risk-prone areas. Insurers can always respond quicker. However, there is a fine balance between responding without understanding the impact of an event (location, severity, volume of claims, and type of damage) and quickly responding when well briefed. It s not just up to the insurance industry While this paper has focused on what insurers can do to help businesses and the communities get back after disasters, activities by other stakeholders are crucial. The need for better mitigation, particularly flood management, was highlighted by the Queensland disasters. In a country where natural disasters are becoming more frequent, preventive measures to minimise the impact of the disasters has been poor. 8

Conclusion The frequency of major weather-related catastrophes in recent times has seen Australian businesses again and again trying to recover from the aftermath. While the damage to homes and communities made the headlines, the impact on businesses, particular SMEs, is often overlooked. Businesses are more vulnerable and the impact is often terminal. They cannot afford to be inoperative for very long. It can take weeks or even months to get a business back to full operation after an event such as a fire or flooding. All the while, expenses like rent and wages still have to be paid which can turn a profitable business into one that is making a loss. The businesses which have adequate insurance cover generally survive, with insurers well aware of the need for speed when disaster hits a business. Yet many businesses remain underinsured and with the economic uncertainties reluctant to maintain the level of cover they need. This is aggravated by the fact that, post the major catastrophes, many insurers have been forced to increase premiums. While businesses accept the increase in such costs as purchasing new equipment, they often baulk at ensuring they have the insurance to cover those increases. Businesses understanding of what cover they need is limited. There is a crucial role for the insurance industry to educate businesses about the necessity of proper insurance cover. The industry needs to work as one to demonstrate the value of insurance to businesses. The cumulative effect of the recent catastrophes on SMEs has correspondingly impacted on Australia s economy. Government help has been limited and it has often been the private sector the insurers who have been there to pick up the pieces. But this has come at some cost to the industry, both financially and in terms of resourcing demands. After the horror catastrophes of 2011 and 2012 insurers were expected to continue delivering despite the extraordinary circumstances and the unprecedented pressure on claims, assessing, hydrology and loss adjusting resources. And, not forgetting the toll on its own people. But while the spate of concurrent and consecutive natural disasters put an incredible strain on the insurance industry it, perhaps ironically, has seen some positive effects. The pressure has forced the industry to think outside the box and do things differently when each new catastrophe hits. From each disaster insurers have learnt how they can help customers better. The catastrophes have taught insurers about a new level of response and created new dimensions to review their portfolio of products as they piece together the costs, consider the heightened risks and work out how to deliver to their customers. No two catastrophes are the same, even if they are of the same type (cyclones, major flooding, etc) and insurers will have to continue to review and evolve their catastrophe response plans. Another by-product of the recent series of catastrophic events has resulted in growing community awareness of the value of insurance being greater than ever before. It has demonstrated that the insurance industry plays a vital role rebuilding communities and helping people at a time of need. However, while the insurance industry is proactively ensuring it can help businesses and communities when disaster strikes, governments and local bodies seem to be dragging their collective feet. The need for governments and local bodies to take pragmatic and practical mitigation action to minimise the effects of disasters is now paramount. The litany of disasters in recent times should be a trigger for authorities to proactively take measures to protect risky areas. Otherwise, insurers will either become more reluctant to insure various areas or be forced to increase premiums to cover the repeated costs they have to pay out on risk areas being hit time and time again by events. Claims are the moment of truth for insurers - and the insured. 9

APPENDIX ONE Sources 1 Disaster Recover Journal Volume 13, Issue 2 2 Bureau of Meteorology 3 Insurance Council of Australia 4 Bureau of Meteorology 5 The Road to Recovery: The impact of insurance following the Queensland summer of disasters (Deloitte Access Economics) 6 The Australian Business Market for Financial Services: 2010; Insurance and the Small Business Market (Cameron Research Group) 7 Vero SME Insurance Index 2012 (Suncorp) The Suncorp Group Suncorp Group Limited and its related bodies corporate and subsidiaries (collectively Suncorp ) offer a range of financial products and services including banking (Suncorp Bank), general insurance, compulsory third party (CTP) insurance, workers compensation insurance, life insurance and superannuation (Suncorp Life) across Australia and New Zealand. Suncorp has around 16,000 employees and relationships with over nine million customers. Suncorp Commercial Insurance (CI) provides a wide range of business insurance products to small and medium sized businesses as well as corporate customers. These products are distributed nationally both directly and indirectly through intermediaries. CI provides workers compensation insurance in Western Australia, Northern Territory, the ACT and Tasmania, and operates managed fund schemes in New South Wales. CTP insurance is provided in New South Wales and Queensland. CI offers a wide range of insurance products and distributes them under the Suncorp, Vero, GIO and AAMI brands. 10