‘Among the Largest Catastrophe Losses in Canadian History’
About 2,400 structures in and around Fort McMurray lie in ruins in the middle of 700 charred square miles of northern Alberta.
The oil sands boom town, once known as “Fort Make Money,” is now going to cost money — at least $4 billion (C$5 billion) by early estimates — to rebuild after a monster wildfire swept around and through parts of town the first week of May.
The immediate insurance question is not the property loss in town; that is quite straightforward.
Rather, it is the length of the oil sands outage and two stages of business-interruption (BI) claims: immediate losses for the time out of operation, as well as possible contingent losses for refiners that rely on the oil sands for raw materials.
At the peak of the fire, 1 million barrels a day of oil sands production was taken out of service — about 40 percent of total output, and roughly one-quarter of all Canadian oil production.
Some operations have already airlifted in skeleton crews to begin safety checks in advance of resuming operations, but the bulk of production is expected to remain out of service for several weeks, if not a month or more.
The wildfires “will be a huge BI event,” said Paul Cutbush, senior vice president catastrophe management at Aon Benfield Analytics in Toronto.
“Even with no damage we will have to see when workers are allowed to come back — and then how many and how soon. A lot of these facilities have been used for evacuations, a goodwill gesture. A great deal will depend on manuscript wording for each policy.”
Waiting periods for BI claims will likely not be as large a factor as in past large losses, Cutbush noted. “It used to be that 90 days was standard. Today, that is shorter, 60 days, maybe even just 30.”
It may take longer than that to get claims sorted, because the size and scope of the fire has presented so many new unknowns.
“The biggest thing is getting people back to work,” said Cutbush, but they need places to live and shop.
“It is our understanding that a lot of the housing in the area was rental or temporary housing for oil sands and services workers.” That means not just property claims for the assets themselves, but lost value from their revenue.
Utilities and infrastructure also have to be inspected, repaired or replaced.
The fires continue to rage uncontrolled, but are now in the deep boreal forest south and east of town. The evacuation order and state of emergency for the area remained in effect as of May 11.
During a press tour through the town, Alberta Premier Rachel Notley gave the first official estimate of initial recovery time: “First responders and repair crews have weeks of work ahead of them to make the city safe. I’m advised that we will be able to provide a schedule for return within two weeks.”
Official numbers said 88,000 people, were evacuated, but a local source puts the number closer to 100,000, counting transient workers.
Remarkably, there has been no loss of life, not even any major injuries. And the vast oil sands mining and processing operations that sprawl for more than 100 miles in every direction around Fort McMurray were undamaged.
On May 10, Notley met with industry officials and was told the operations were secure.
“The magnitude of the current destruction suggest that the new fires will generate among the largest catastrophe losses in Canadian history, affecting both personal and commercial property writers,” according to an initial evaluation by the ratings agency Moody’s.
“I suspect some of the [energy companies’ insurance] coverage may be on the lean side.” — Jason Mercer, assistant vice president and analyst, Moody’s
“Early estimates of the wildfires peg the cost of damages rising to C$5 billion or around 1.5 percent of Alberta’s GDP — an estimate that could increase,” Moody’s reported.
“The Fort McMurray fires destroyed four times as many buildings as the Slave Lake [Alberta] wildfire of May 2011, which cost Canadian property and casualty insurers more than C$700 million in pretax losses.”
“Home and auto insurance coverage in Canada is substantially similar to that in the U.S.,” said Jason Mercer, assistant vice president and analyst at Moody’s in Toronto, who co-wrote the report.
“The only notable difference is that some lines, such as workers’ compensation, are typically government issued.”
BI is also similar in the two countries, Mercer noted. “There is named peril and all-risk. Both are available, but my sense is that all-risk is probably more difficult to get and more expensive, if only because of the higher number and cost of major losses in the province.
“More than half of the major losses in recent years in Canada have been in Alberta.”
Mercer also emphasized that the price of oil has been depressed for almost two years, leading some operators to tighten their belts – including insurance protection.
“I suspect some of the coverage may be on the lean side,” he said.
It will also depend whether companies have limited BI coverage — which would cover losses beginning with the evacuation and ending with the “all clear,” or extended coverage, which would “could run until there is a return to the profit level pre-event.”
Contingency Clouds Business Interruption
Broadly speaking, capacity across the U.S. for business interruption insurance (BI) is ample, and terms and conditions are far from onerous.
That said, brokers report that the utility sector as well as a few others have experienced unexpected high losses, both in frequency and in value.
A few carriers have reduced their exposure to BI coverage in general, or to specific sectors or sub-segments.
As a result, there have been several situations where insureds were in the uncomfortable position of having to file and pursue a claim or claims, and simultaneously seek new placements after underwriters declined to renew or sought smaller positions in the owners’ programs.
On top of those tactical concerns for owners and their brokers, there are also more strategic shifts taking place in BI and more generally in the property and casualty market, driven by the realization by underwriters that contingent coverage is far less quantified than had long been thought.
Overlooked Supply Chain Risk
The trends of outsourcing, just-in-time delivery, and electronic orders and billing have been highly effective in reducing costs and boosting profitability. But that same evolution leaves even the most stable companies vulnerable to small disruptions in the physical supply chain or the internet.
Several of this year’s Power Brokers earned their laurels sorting complex BI claims compounded by short-notice renewals.
Michael J. Perron, senior vice president for the northeast region and property placement leader in the energy and engineered risk group at Willis Towers Watson, has made something of a cottage industry out of slicing through Gordian knots in BI claims.
“In general, BI capacity and coverage are available,” said Perron, a Power Broker® in the Utilities-Alternative category.
“Some carriers have seen losses in the power sector, and a few other places, but generally P&C remains soft. Still, carriers are being especially careful these days on contingent coverage. They are finding they did not realize the full exposures they had. They are finding it difficult to get their arms around all the exposures.”
Part of the problem, Perron suggested, is modeling, especially in the catastrophe market. “For the most part insurers do a good job of monitoring CAT risk. But for the most part those models do not include supply chain.”
Even those that do can cause further complications for insureds. Perron recalled that recently one client wanted to increase its coverage. Based on limits, that should not have been a problem.
“But their carrier, which is one that is particularly good with contingency and with supply chain, also writes for several of their suppliers, so the carrier was concerned about aggregation risk,” he said.
That situation was resolved by going back to the market, but for other clients it hasn’t been that straightforward.
Solving Complicated Claims
In one instance, the owner of a hydropower plant had a failure in one of twin turbines. The second unit continued to operate normally, albeit under more careful watch.
The property insurer decided not to renew because they feared the second unit could suffer the same failure as the first. Only one of the units could be dewatered at any given time, so it was impossible to open the operating unit to inspect until the disabled turbine was back in operation. A real Catch 22.
It is difficult to compile traditional best practices for unique situations.
Several insurers would not write the risk. One offered to write the risk but excluded BI and equipment breakdown (boiler and machinery).
“That approach would render the policy effectively useless against common failures very different than what impacted the disabled turbine,” noted Perron.
Another insurer offered coverage, including BI and equipment breakdown, but with a deductible of $20 million for the turbines until the operating unit was inspected and found to be free of the problems that seemed to have damaged the other.
For a permanent resolution, Perron said he and his group “worked with several insurers to provide coverage that was not perfect, but better than the coverage offered by the first two to bid.
Two carriers offered coverage similar to the client’s expiring coverage with one key exception: They would exclude an event emanating from a failure similar to what had occurred.
Another insurer charged a higher premium, but provided coverage without this limitation.”
In another case, a gas-fired power generator sustained three very different losses: one involving turbine failure, another involving a generator breaker failure, and a third involving a transformer failure.
“In any loss, in any claim, you want to show that you are working to maximize recovery and minimize losses.” — Michael Perron, senior vice president, Willis Towers Watson
“The incumbent carrier recognized that the client had taken appropriate steps to address lessons learned from each of these events, and actually had taken steps to minimize the carrier’s claim payments with savvy negotiations with providers and others,” said Perron.
“Still, the carrier chose to take a reduced line on the renewal.”
It is difficult to compile traditional best practices for unique situations, but Perron does suggest some guidance.
“Together the broker and the client have to convince the underwriters that the owner is managing the situation,” he said.
“Losses happen. That is why you have insurance. It helps for owners to understand that if they have multiple losses, their carrier is going have internal questions from management about the situation and the insurability of this client.”
Just as Perron spoke with underwriters and the carriers’ engineers to understand their take on the loss, he urges owners to do everything they can to help insurers understand that the owner can manage and mitigate the loss.
That may seem counterintuitive; BI by definition is for events out of the owner’s control.
“In any loss, in any claim, you want to show that you are working to maximize recovery and minimize losses,” said Perron.
In one recent situation a client needed a replacement transformer. Rather than order a new one with a longer lead time from the manufacturer of the original equipment, the owner was able to rent a transformer. That enabled them to accelerate the recovery time, and also saved the carrier a million dollars.
That little maneuver also expanded the owner’s supply chain. Ultimately, the insured ordered a new replacement transformer from the rental supplier, rather than from the maker of the initial unit, thus broadening its portfolio of suppliers.
In the end, maximizing recovery and minimizing loss is not just a sound strategy for expediting claims and mitigating for renewal after the claim. It is enlightened self interest.
“Companies often underestimate the tremendous impact that business interruption has,” Perron said. “It is not just the loss of revenue. It can be loss of prestige in the industry. It can be loss of customers.” &
Advocacy: The Impact of Continuous Triage
In the world of workers’ compensation, timing is everything. Many studies have shown that the earlier a workplace incident or injury is acted upon, the more successful the results*. However, there is further evidence indicating there is even more of an impact seen when a claim is not only filed promptly, but also effective triage is conducted and management of the claim takes place consistently through closure.
Typically, every program incorporates a form of early intervention. But then what? While it is common knowledge that early claims reporting and medical treatment are the most critical parts of a claim, if left alone after management, an injured worker could – and often does – fall through the cracks.
All Claims Paths are Not Created Equal
Even with early intervention and the best intentions of the adjuster, things can still go wrong. What if we could follow one injury down two paths, resulting in two entirely different outcomes? This case study illustrates the difference between two claims management processes – one of proactive, continuous claims triage and one of inactivity after initial intervention – and the impact, or lack thereof, it can have on the outcome of a claim. By addressing all indicators, effective triage can drastically change the trajectory of a claim.
While working at a factory, David, a 40-year-old employee, experienced sudden shoulder pain while lifting a heavy box. He reported the incident to his supervisor, who contacted their 24/7 triage call center to report the incident. After speaking with a triage nurse, the nurse recommended he go to an occupational medicine clinic for further evaluation, based on his self-reported symptoms of significant swelling, a lack of range of motion and a pain level described as greater than “8.”
The physician diagnosed David with a shoulder sprain and prescribed two weeks of rest, ice and prescription strength ibuprofen. He restricted David from any lifting over his head.
By all accounts, early intervention was working. Utilizing 24/7 nurse triage, there was no lag time between the incident and care. David received timely medical attention and had a treatment plan in place within one day.
A critical factor in any program is a return to work date, yet David was not given a return to work date from the physician at the occupational medicine clinic; therefore, no date was entered in the system.
One small, crucial detail needs just as much attention as when an incident is initially reported. What happens the third week of a claim is just as important as what happens on the day the injury occurs. Involvement with a claim must take place through claim closure and not just at initial triage.
The Same Old Story
After three weeks of physical therapy, no further medical interventions and a lack of communication from his adjuster, David returned to his physician complaining of continued pain. The physician encouraged him to continue physical therapy to improve his mobility and added an opioid prescription to help with his pain.
At home, with no return to work in sight, David became depressed and continued to experience pain in his shoulder. He scheduled an appointment with the physician months later, stating physical therapy was not helping. Since David’s pain had not subsided, the physician ordered an MRI, which came back negative, and wrote David a prescription for medication to manage his depression. The physician referred him to an orthopedic specialist and wrote him a new prescription for additional opioids to address his pain…
Costly medical interventions continued to accrue for the employer and the surmounting risk of the claim continued to go unmanaged. His claim was much more severe than anyone knew.
What if his injury had been managed?
A Model Example
Using a claims system that incorporated a predictive modeling rules engine, the adjuster was immediately prompted to retrieve a return to work date from the physician. Therefore, David’s file was flagged and submitted for a further level of nurse triage intervention and validation. A nurse contacted the physician and verified that there was no return to work date listed on the medical file because the physician’s initial assessment restricted David to no lifting.
As a result of these triage validations, further interventions were needed and a telephonic case manager was assigned to help coordinate care and pursue a proactive return to work plan. Working with the physical therapist and treating physician resulted in a change in David’s medication and a modified physical therapy regimen.
After a few weeks, David reported an improvement in his mobility and his pain level was a “3,” thus prompting the case manager’s request for a re-evaluation. After his assessment, the physician lifted the restriction, allowing David to lift 10 pounds overhead. With this revision, David was able to return to work at modified duty right away. Within six weeks he returned to full duty.
With access to all of the David’s data and a rules engine to keep adjusters on top of the claim, the medical interventions that were needed for his recovery were validated, therefore effectively managing his recovery by continuing to triage his claim. By coordinating care plans with the physician and the physical therapist, and involving a case manager early on, the active management of David’s claim enabled him to remain engaged in his recovery. There was no lapse in communication, treatment or activity.
After 24/7 nurse triage is conducted and an injured worker receives initial care, CorVel’s claims system, CareMC, conducts continuous triage of all data points collected at claim inception and throughout the life of a claim utilizing its integrated rules engine. Predictive indicators send alerts to prompt the adjuster to take action when needed until the claim is closed – not just at the beginning of the claim.
This predictive modeling tool flags potentially complex claims with the risk for high exposure, marking claims that need intervention so that CorVel can assign appropriate resources to mitigate risk.
Claims triage is constant – that is the necessary model. Even on an adjuster’s best day, humans aren’t perfect. A rules engine helps flag things that people can miss. A combination of predictive systems and human intervention ensures claims management is never stagnant – that there is no lapse in communication, activity or treatment. With an advocacy team in the form of an adjuster empowered by a powerful rules engine and a case manager looking out for the best care, injured employees remain engaged in their recovery. By perpetuating patient advocacy, continuous triage reduces claim severity and improves claim outcomes, returning injured workers to the workforce and reducing payors’ risk.