Top 10 Tips for Submitting a Claim
Napa residents and businesses were awakened early Sunday morning to the ground swells of a strong 6.0 earthquake. Buildings crumbled, glass shattered, gas and water lines ruptured, and other destruction ensued.
Now begins the unfortunate task of completing the repairs and, in many situations, preparing an insurance claim.
Below is a top 10 list of items to consider when faced with an impending claim:
1. Read your insurance policy.
Understand what types of losses are covered (earthquake damage, fire damage, water damage), what is insured (building, equipment, stock and supplies, business interruption, extra expenses), what deductibles apply, and whether there are any coverage limits that might apply?
2. Assemble a claims team.
All areas of your business may be affected and you should get the details from all facets of your operations. Impact to building and equipment, operations, sales, finance, and logistics should all be considered when trying to understand how your business has been affected.
3. Establish procedures to capture expenses.
Develop charge codes, purchase orders, or accounts to capture all claim-related expenses.
4. Designate a single point of contact.
Information about a loss has a tendency to change as more facts are known. Having a single point of contact providing information to insurers can avoid confusion about the details of your loss.
5. Manage expectations.
Keep management apprised about the details of the loss such as claim estimates, and timeframe to rebuild/restore operations as well as details regarding the claims process including the amount of time and effort that is required to adequately document and support a claim.
Be cautious of loss estimates and recovery timeframes that are too low or overly optimistic, which can result in a false sense of security and mismanage expectations internally and externally.
6. Prepare for meetings.
Coordinate your claim team in advance of insurer meetings to set the agenda, assemble supporting documentation, and ensure that the right people are present to answer questions that might arise.
7. Explain your business model.
Don’t assume that others have a thorough understanding of your business. Explain your business model so that the adjuster and his/her team will have better context around the measurement of the loss.
8. Help the insurance adjuster set the loss reserve.
Explain the areas of loss and provide sufficient information to allow the adjuster to set an appropriate loss reserve. Setting a reserve that is too low or too high can cause issues down the road.
9. Document substantive discussions with insurers.
Confirm discussions or verbal agreements in writing to maintain a record of the loss.
10. Request a cash advance.
Once the magnitude of the loss is determined, request an advance from the insurance company to offset expenditures you already incurred. Obtain additional cash advances as claim items are agreed to. This will limit the amount of open claim items at the end of the process.
Read all of Allen Melton’s Risk Insider contributions.
Bigger Than the Big One
When it starts at 2:12 p.m. on an October Thursday, residents of California old enough to remember previous big quakes assure themselves that they’ve been through this before.
But in another 10 seconds or so, they see that they are profoundly wrong.
The shaking, stronger than anything ever measured in the United States, goes on and on, not for seconds, but for minutes. Panic builds to horror as people are thrown to the ground, stoned by debris from crumbling office buildings or crushed in their cars under collapsed freeway overpasses.
This is a quake even bigger than “The Big One,” which modelers tend to peg as something in the 7.6 to 8.0 range on the Richter scale. This is an 8.5 magnitude quake on the San Andreas Fault with an epicenter at Cape Mendocino in Humboldt County, about 250 miles north of San Francisco.
According to modeling firm EQECAT, a subsidiary of CoreLogic, the rupture in Humboldt County triggers a cascade of four contiguous San Andreas Fault segment ruptures that end in Southern California at Indio in the Salton Sea.
It was fire that destroyed much of San Francisco in the legendary 1906 earthquake, but it is salt water this time that plays a substantial role in the undoing of that great city and its bigger cousin, Los Angeles.
In Southern California, the quake provokes a submarine landslide, 100 miles or so in length and miles wide, that runs from the coastal waters of Santa Barbara down to San Luis Rey in San Diego County.
That immense shifting of underwater soil in turn pushes water toward land in a tsunami that runs a mile or so inland in places, damaging large oil refineries in El Segundo and Torrance, and creating an environmental disaster.
Hundreds of billions of dollars of Southern California’s high-priced residential and commercial real estate is erased in 10 minutes. Thousands die within that same time span.
The Port of Los Angeles and the Port of Long Beach, the two biggest U.S. container ports, are shut down, severely damaged by the shaking and the tsunami.
To the north, the “Achilles heel” of San Francisco, its bay-side seawall, ruptures in multiple places, spilling bay water into the city.
The four-mile seawall, which runs from Hyde Street and Fisherman’s Wharf in the north to Pier 54 and Channel Street in the south, was cobbled together in 21 sections from 1878 to 1924. The land mass filled in behind the seawall is composed of sand, clay and gravel in places and liquefies under a quake of this magnitude, undermining the city’s Embarcadero roadway and severing crucial utility and public transportation connections.
San Francisco is far better prepared for seismic activity than any U.S. city. But when the seawall fails, the surging bay water undermines downtown office buildings already weakened by the shaking, and several of them collapse.
The destruction of the seawall shuts down the Transbay Tube, the underwater Bay Area Rapid Transit rail connection between San Francisco and Oakland, stranding hundreds of thousands of commuters in the broken cities.
Damage to the Bay Bridge shuts down first-responder access from the east. Damage to the Golden Gate Bridge cuts off aid from the north.
With emergency responders in the rest of the state frantically working to save their own populations, the city is sealed off from help, stricken and flood ravaged. Its residents tend to the injured and dying as best they can as spiraling smoke obscures the sun and sirens wail unceasingly.
According to EQECAT, the insured losses from a cascading San Andreas rupture measuring 8.5 on the Richter scale would amount to $140 billion.
Before the Tohoku quake of March 2011, scientists thought that an 8.5 on the San Andreas was inconceivable, according to Mahmoud Khater, chief science and technology officer with EQECAT. But before Tohoku, no one thought that the fault in Japan could produce a 9.0. The most it was thought capable of was an 8.4.
Tragically, the world now knows better, after more than 16,000 Japanese deaths and more than $30 billion in insured losses.
“It is really Tohoku that has altered the scientific and actuarial thinking,” Khater said.
The importance of the Ports of Long Beach and Los Angeles to trade with technology suppliers in Asia is just one piece of the extended business interruption and contingent business interruption aftermath of an 8.5 on the San Andreas that would lead to global economic losses of $1 trillion.
“We clearly agree that it would be a multi-year event,” said Jamie Miller, head of North American property for Swiss Re.
EQECAT estimates that there is $2.2 trillion in residential and commercial property exposure in California. The company said fatalities from the event we envision would run into the tens of thousands.
As gruesome as tens of thousands of deaths would be, and as daunting to the insurance industry as $140 billion in insured losses may appear, Miller and his colleagues at Swiss Re fear that even greater economic calamity awaits, should this event occur.
Alex Kaplan, vice president, global partnerships, public sector business with Swiss Re, points to the low take-up rate of personal lines earthquake insurance in California, the weak financial condition of the federal and local governments, and how that combination could balloon into a national economic calamity.
“You talk about firefighting and other ongoing expenses that aren’t passed on through insurance, coupled with less homeowners to pay for it. That to me is the black swan.” — Jamie Miller, head of North American property, Swiss Re
Consider, under Kaplan’s direction, that only 12 percent of homeowners in California carry earthquake insurance.
Modelers say 1 million homes would be severely damaged in the 8.5 quake.
“That’s 880,000 homes that are uninsured and 660,000 of those homes have mortgages,” Kaplan said.
Not only will there be hundreds of billions of dollars in damage but as a result of the earthquake, the rate of mortgage defaults and credit losses in California will spike, he said.
“Keep in mind that California has one-sixth of all underwater mortgages,” he added.
In addition, the federal government will be unable to sufficiently bail out local governments in California, which will suffer greatly reduced property tax collections just as public services such as police and fire protection are stretched to the limit.
“FEMA’s current funding scheme is inadequate to handle something like this,” Kaplan said.
From 2005 through 2011, the agency’s average disaster appropriation was $1.75 billion per year, Kaplan said. But spending on supplemental appropriations amounted to an average of $4.6 billion per year.
“There is no probabilistic modeling that goes into how the federal government allocates funds,” Kaplan said.
“You talk about firefighting and other ongoing expenses that aren’t passed on through insurance, coupled with less homeowners to pay for it,” Miller said.
“That to me is the black swan.”
Mitigation and Recovery
For years — since the Loma Prieta quake that struck the Bay Area in 1989, and the Northridge quake that hit Los Angeles in 1994 — governments in California have taken aggressive measures to limit the damage that would occur in a major quake and to make California cities more resilient.
In April, with a grant from the Rockefeller Foundation, San Francisco appointed the world’s first Chief Resiliency Officer, Patrick Otellini. The Rockefeller program will eventually fund 100 such positions worldwide.
“We have a mentality that we need to get over and that is we are the biggest country in the world with the deepest capital markets and The Big One wouldn’t be that big of a deal. I don’t think that’s true.” — Alex Kaplan, vice president, Swiss Re
In the new position, Otellini is putting to work his 10 years of experience in the private sector helping businesses negotiate the City of San Francisco’s permitting and code requirements process and his more recent job, which he still holds, as the director of the city’s Earthquake Implementation Program.
The host of initiatives he is working on include measuring the vulnerability of the city’s seawall and creating a plan to improve it, coordinating the various utilities whose services the city depends on to increase their post-disaster resiliency, and implementation of a program designed to speed up occupancy of hotels and other businesses post-quake provided they have been inspected by city-approved engineers.
Under Otellini’s direction, the city’s Board of Supervisors passed an ordinance last year that required owners to retrofit and make more earthquake-proof rental properties with wood frame construction, built before 1978, and having five or more residential units with two or more stories over a “soft story” — a story with large open spaces like a garage or retail space with large windows.
The city’s experience in 1989 told it that housing stock would be totally destroyed should The Big One hit.
Otellini said there are 60,000 residents living in rent-controlled housing who would lose that protection in a big quake had the city not taken action.
“Not to mention the impact on our city services and the fact that these buildings tend to be very defining of the architecture of San Francisco,” he said.
Although it’s not regulating a big piece of the city’s overall commercial and residential building stock, the measure is an example of how governments can begin to pick off lower hanging fruit and make their cities incrementally more resilient.
The Los Angeles City Council took note of the San Francisco measure and passed its own ordinance. The two city governments are now working together on a number of resiliency initiatives and to make state politicians more aware of what else needs to be done.
“I am very excited about that dialogue,” Otellini said.
The efforts of Otellini and others will lessen the cost of The Big One and bring businesses and communities back quicker, said Swiss Re’s Kaplan.
“I am very impressed with how public entities from the city level, to the state level, to the federal level are thinking about the physical resilience of a particular region,” Kaplan said.
“How do you retrofit the buildings, how do you communicate the risk, and they have done a tremendous job of enhancing that over the years,” he said.
“What I am still concerned about is the financial resilience, how are you going to fund these losses?” he asked.
Kaplan said he now sees U.S. cities taking a much more engaged approach to which insurance or insurance-linked securities solutions could help to remove the volatility from public sector balance sheets in the case of a disaster.
“The Mexican government is highly sophisticated in that regard and we see it is starting to happen in the U.S.,” Kaplan said.
“We have a mentality that we need to get over and that is we are the biggest country in the world with the deepest capital markets and The Big One wouldn’t be that big of a deal,” Kaplan said.
“I don’t think that’s true.”
Additional 2014 black swan stories:
When a nuclear reactor melts down due to a powerful tornado, deadly contamination rains down on a metropolitan area.
A double dose of ice storms batter the Eastern seaboard, plunging 50 million people and three million businesses into a polar vortex of darkness and desperation.
Beware of Medical Hyper-Inflation!
Historically, medical inflation rates nationwide have been fairly consistent. However, data is now showing that medical inflation is not a “one size fits all” phenomenon, with hyperinflation spikes occurring in some locations…but not others.
This geographical conundrum means hyperinflation can occur as narrowly as two hospitals having dramatically different charges on the same street in Anytown, USA. So, uncovering these anomalies is akin to finding the proverbial needle in a haystack.
“In recent years, workers’ compensation saw claim frequency decline, while severity rates went up. This basically means that increased job safety has offset increased medical costs,” explained Jason Beans, CEO of Rising Medical Solutions, a national medical cost management firm. “So, whenever a client’s average cost-per-claim went up, it was almost always caused by catastrophic, outlier-type claims.”
But beginning in 2013 and extending into 2014, Beans said, things changed. “I’ve never seen anything like it in my 20-plus years in this industry.”
“Our analytics made it very clear that small pockets around the country are experiencing what could only be described as medical cost hyperinflation. The big spikes in some clients’ claim costs were driven by a broader rise in medical costs, rather than catastrophic claims or severity issues.”
– Jason Beans, CEO, Rising Medical Solutions
Data dive uncovers surprising findings
On a national level, most experts describe medical costs increasing at a moderate annual rate. But, as often is the case, sometimes a macro perspective glosses over a very different situation at a more micro level.
“Our analytics made it very clear that small pockets around the country are experiencing what could only be described as medical cost hyperinflation,” explained Beans. “The big spikes in some clients’ claim costs were driven by a broader rise in medical costs, rather than catastrophic claims or severity issues.”
This conclusion is supported by several key data patterns:
- Geographic dependency: While many payers operate at the national level, only relatively small, geographically clustered claims showed steep cost increases.
- Median cost per claim: The median cost per claim, not just the average, increased greatly within these geographic clusters.
- Hospital associated care: Some clusters saw a large increase in the rates and/or the number of services provided by hospital systems, including their broad array of affiliate locations.
- Provider rates: Other clusters saw the same hospital/non-hospital based treatment ratios as prior years, but there was a material rate increase for all provider types across the board.
- Utilization increases: Some clusters also experienced a larger number of services being performed per claim.
One of the most severe examples of hyperinflation came from a large Florida metropolitan area which experienced a combined 47 percent workers’ compensation healthcare inflation rate. Not only was there a dramatic increase in the charge per hospital bill, but utilization was also way up and there was a shift to more services being performed in a costlier hospital system setting.
“The growth of costs in this Florida market stood in stark contrast to neighboring areas where most of our clients’ claim costs were coming down or at least had flat-lined,” Beans said.
An Arizona metropolitan area, on the other hand, experienced a different root cause for their hyperinflation. Regardless of provider type, rates have significantly increased over the past year. For example, one hospital system showed dramatic increases in both charge master rates and utilization. “Even with aggressive discounting, the projected customer impact in 2014 will be an increase of $773,850 from this provider alone,” said Beans.
ACA: Unintended consequences?
So what is going on? According to Beans, a potential driver of these cost spikes could be unintended consequences of the Affordable Care Act (ACA).
First, the ACA may be a contributing factor in recent provider consolidation. While healthcare industry consolidation is not new, the ACA can prompt increased merger and acquisition efforts as hospitals seek to improve financials and healthcare delivery by forming Accountable Care Organizations (ACO). ACOs, the theory goes, can take better advantage of value-based fee arrangements in existing and new markets.
“As hospital systems grow by acquisition, more patients are being brought under hospital pricing structures – which are significantly more expensive than similar services at smaller facilities such as independent ambulatory surgery centers and doctors’ offices,” Beans said.
Unfortunately, there is little evidence that post-consolidation healthcare systems have become more efficient, only more expensive. For example, a recent PwC study reported that hospital IT infrastructure consolidation alone is projected to add 2 percent to hospital costs in 2015.
Another potential ACA consequence is group health insurers may have less incentive to keep medical costs down. An ACA provision requires that 85% of premium in the large group market must be spent on medical care and provider incentive programs, leaving 15% of premium to be allocated towards administration, sales and subsequent profits. “Fifteen percent of $5000 in medical charges is a lot less than 15% of $10,000,” said Beans. “This really limits a group health carrier’s incentive to lower medical costs.”
How do increased group health rates relate to workers’ comp? In some markets, a group health carrier may use its group health rates for their work comp network so any rate increase impacts both business types.
In the end, medical inflation is inconsistent at best, with varying levels driven by differing factors in different locations – a true “needle in the haystack” challenge.
What to do?
Managing these emerging cost threats, whether you have the capabilities internally or utilize a partner, means having the tools to pinpoint hyperinflation and make adjustments. Beans said potential solutions for payers include:
- Using data analytics: Data availability is at an all-time high. Utilizing analytical tools to spot problem areas is critical for executing cost saving strategies quickly.
- Moving services out of hospital systems: Programs that direct care away from the hospital setting can substantially reduce costs. For example, Rising’s surgical care program utilizes ambulatory service centers to provide predictable, bundled case rates to payers.
- Negotiating with providers: Working directly with providers to negotiate bill reductions and prompt payment arrangements is effective in some markets.
- Underwriting with a micro-focus: For carriers, it is vital that underwriters identify where these pockets of hyperinflation are so they can adjust rates to keep pace with inflation.
“This trend needs to be closely watched,” Beans said. “In the meantime, we will continue to use data to help payers of medical services be smarter shoppers.”