Who will bell the CAT?

This article is from the Restoration Contractors Organization of Canada and
it describes the management of catastrophe events in the Canadian property
insurance and restoration industries

It is nearly that time of the year when the threat of severe weather sets communities on edge, insurers on watch, and emergency mitigation contractors on notice. Catastrophe (CAT) season is straight ahead.

A little-known fact is that contractors who partner with carriers on preferred vendor programs weather two resource-intensive challenges during every CAT. Read on to find out why.

First, a brief situational summary: During CAT season, insurance carriers expect that contractors’ emergency mitigation crews are ready to mobilize at any time (sometimes repeatedly across multiple regions). Crews, equipment, vehicles, and premises must be available 24/7 to handle major events as well as manage business-as-usual jobs. It’s a challenging service model that is fraught with real financial risk and resource burden for restoration contractors and potential service breakdowns for insurers.

The root cause of resource management failures during CATs is the absence of service agreements between contractors and insurers. This lack of pre-planning often results in sub-optimal service to policyholders and increases the cost of CATs. The industry requires a fix.

There are a number of barriers to overcome in the current state. From the contractors’ perspective, the low level of profitability on business-as-usual insurance-related jobs means that maintaining year-round 100% CAT capability is too great a financial burden. Insurers, on the other hand, generally assume that their Vendor Agreements include adequate CAT-related service requirements and no further planning is required; however, this one-sided arrangement usually fails everyone. The problem with SLAs is that they address just one side of the partnership that services policyholders and the inevitable service failures that this causes are proven repeatedly every year.

There’s also another perspective to consider. The definition of a CAT is straightforward: it’s a low-probability, high-cost event (usually a natural disaster) that affects the public. Whilst there’s no doubt that major events are outright CATs, this isn’t always the case with smaller, localised events. Some events don’t play out instantaneously. Insurers have dollar and volume thresholds that have to be breached before an event qualifies as a catastrophe. These thresholds are closely related to local PIF counts – the number of policies in force. Therefore, some insurers have many more risks (or high values) in an affected area than others. Thus, Insurer A may hit a predetermined threshold sooner than Insurer B and declares a CAT. The call goes out to contractors to pull out all stops with their business-as-usual resources. Everyone charges in, jobs are booked, and schedules are locked in. Then Insurer B’s thresholds are crossed. The call goes out and no one has the resources available to respond: all the local contractors are already busy with Insurer A. Mobile phones light up. Contractors start explaining the situation to frustrated vendor managers. Then they call other brand or branch locations to ask for help or place a call to temp labor suppliers.

This is often the point where results become compromised. Instead of concentrating on the loss event, adjusters and contractors commence negotiations on mobilization fees, labor rates, equipment costs, and daily allowances if travel is required.

There are myriad other issues that recur. Some insurers offer contractors a small batch of jobs with a promise of more business-as-usual claims if service is good. Inexplicably, the contractor is expected to treat these jobs with the same urgency as many times the number from another insurer. The opposite can also occur, with adjusters compelling vendors to accept high volumes of jobs that meet business-as-usual terms or risk losing their preferred status.

Then there are insurers’ reporting requirements (“We want a daily call at 10 a.m. with your management team and on-site supervisors”). Spreadsheets fly, estimates limp along, and, eventually, the dreaded Red Flags start popping up like a bad case of chicken pox. Scorecards die.

To add to the strain, some adjusters assign the same job to multiple contractors. The first one to get to the job site is allowed in, the others are turned away. Aside from the inconvenience and cost to contractors, this means that for every homeowner who sees three different contractors pull up within minutes of each other, there are two claimants that suffer a service delay and, possibly, greater property damage. This practice impacts capacity, adds to the administrative burden and seems to happen every time there’s a CAT.

There is, however, one recent exception to this predictable chain of events – the Fort McMurray Wildfire CAT. There was a two-week waiting period at the beginning of that event while first responders stabilized the area that gave everyone a chance to plan methodically. As a result, several insurers and contractors negotiated costs and standards in advance. It made a positive difference to the execution of the event and service to the community. And, although subsequent re-negotiations in the months following the event are now a concern, this is a good example of getting it right at the outset. All that’s missing is the will to implement.

We’ve listed the main issues; let’s move on to solutions:

A 100% solution to any business problem with so many connected parts is impossible so it’s best to break it down into manageable components. The main causes of CATs are fire, flood, or hail with the latter two being the most likely to occur. In terms of total numbers, frequency, and location, hail in Alberta is the most likely event in a given year.

With that in mind, we need a standard process, service, and fee agreement to bring some predictability into an uncertain event. It has to be broad enough to suit all stakeholders yet narrow enough to stem the flow of inefficiency currently plaguing the system. Here are some recommendations:

a.                Insurers should map their claims by postal code or neighborhood and assign blocks to the same contractor – and then lock that in and not assign the same job to other vendors without cancelling the initial assignment. A sub-set of this solution is for insurers to understand the capabilities and service areas of their vendors and not assign jobs in error only to withdraw and reassign these elsewhere.

b.                Mobilization fees should be agreed upon in advance; obviously not a dollar value but in principle.

c.                 Scorecards should be suspended during CATs for anyone helping in a CAT instead of penalizing contractors who get called out. Neighboring contractors are reluctant to assist as doing so may jeopardize their scores.

d.                Put all this into a stand-alone CAT Agreement that is refined over time to better reflect the circumstances and challenges of different types of CAT (flood, fire, etc.).

Identifying solutions is a good start. Now who will step up and finally bell the CAT?

The RCOC is open to discussions and keen to collaborate with stakeholders on achieving results.

? Restoration Contractors Organization of Canada