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Contingency planning and claims handling
following large catastrophic events
Costa Navarino, September 2018
Jürgen Brucker
How to get started?
Speaker’s
new enemy
Distraction
Distraction
Distraction
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
20 September 2018 4Contingency planning and claims handling – following large catastrophic events
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
20 September 2018 5Contingency planning and claims handling – following large catastrophic events
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
20 September 2018 7Contingency planning and claims handling – following large catastrophic events
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
20 September 2018 8Contingency planning and claims handling – following large catastrophic events
▪ 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
20 September 2018 9Contingency planning and claims handling – following large catastrophic events
▪ 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
20 September 2018 10Contingency planning and claims handling – following large catastrophic events
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
20 September 2018 11Contingency planning and claims handling – following large catastrophic events
… 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.
20 September 2018 12Contingency planning and claims handling – following large catastrophic events
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
20 September 2018 13Contingency planning and claims handling – following large catastrophic events
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
20 September 2018 14Contingency planning and claims handling – following large catastrophic events
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.
20 September 2018 16Contingency planning and claims handling – following large catastrophic events
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
20 September 2018 17Contingency planning and claims handling – following large catastrophic events
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)
20 September 2018 18Contingency planning and claims handling – following large catastrophic events
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)
20 September 2018 19Contingency planning and claims handling – following large catastrophic events
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
20 September 2018 20Contingency planning and claims handling – following large catastrophic events
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)
20 September 2018 21Contingency planning and claims handling – following large catastrophic events
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
20 September 2018 22Contingency planning and claims handling – following large catastrophic events
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
Coordination of activities between the parties involved
The Contingency PlanTable of activities
20 September 2018 23Contingency planning and claims handling – following large catastrophic events
No. Action to be taken Insurer Reinsurer Adjuster
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
X = Involved party ● = Option
Contingency plans for natural disasters
Coordination of activities between the parties involved
The Contingency PlanTable of activities
20 September 2018 24Contingency planning and claims handling – following large catastrophic events
No. Action to be taken Insurer Reinsurer Adjuster
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
X = Involved party ● = Option
Nat Cat loss data – Typical Borderaux Structure
The Contingency PlanMinimum Requirements of Loss Information
20 September 2018 25Contingency planning and claims handling – following large catastrophic events
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
20 September 2018 26Contingency planning and claims handling – following large catastrophic events
Thank you very much for your attention
Costa Navarino, September 2018
Jürgen Brucker