‘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.”
Technology to the Rescue
The growing scale and severity of natural and man-made catastrophes makes it increasingly difficult for insurance companies and claims handlers to access affected disaster sites. It can take weeks or even months for loss adjusters to see the true extent of damage caused by events on the scale of Hurricanes Andrew and Katrina.
But that’s changing with the development of technology such as drones, satellites and 3D imaging, which allow insurers to gather data and images quickly and efficiently, ultimately better protecting their clients against future risks.
There are still hurdles for insurers to overcome, starting with Federal Aviation Administration requirements for operating drones in U.S. airspace, as well as privacy issues, and the potential for property damage or civilian death in the event of a crash.
But uptake is still rising because of affordable hardware as well as increasing onboard instrumentation and offline data processing improvement.
“A lot of this new technology is great at assessing and understanding potential risks in a pre-loss scenario, as well as when an event happens,” said Sheri Wilson, national property claims director at Lockton.
“In some cases, there will always be the need for boots on the ground before the check is written, but this technology can certainly be used to get a more complete picture of what’s going on.”
Rise of the Drones
Jimmy Johnson, assistant vice president of commercial property claims at Zurich North America, said the main advantage of drones is the ability to provide access to difficult-to-reach disaster sites, allowing insurers and their customers to understand losses in greater detail.
“Being able to obtain information almost in real time, whether it’s taking pictures or communicating those losses, is a huge advantage not only to the insurer, but to their clients as well,” he said.
“The app allows them to record and send pictures and videos to the insurer to show them the extent of the damage and it is then uploaded to their server for them to assess.” — Andreas Shell, global claims executive of new technologies, Allianz Global Corporate & Specialty
Helen Thompson, director of commercial marketing at Esri, a geographic information system provider, said that another benefit is the speed of response, as well as use in hazardous situations, such as the port of Tianjin explosion last year.
“Drones are able to quickly assess large areas and identify, with human observation, the scope and scale of the disaster,” she said.
The main sticking point remains that only a handful of insurers, including State Farm, USAA and AIG, have obtained FAA approval to test drones for commercial use.
Gary Sullivan, vice president of property and subrogation claims at Erie Insurance, which was granted a license by the FAA last year to use drones for claims and in catastrophe situations, said that the biggest advantage is safety, as well as the time and cost efficiencies gained.
“It means the difference between keeping our employees on the ground versus the time and risk associated with having them climb a ladder to get onto a roof, and, ultimately, the imagery we obtain from a drone is just as good, if not better than we would otherwise be able to take,” he said.
Among the disadvantages, he said, were the need for a pilot’s license and having to get clearance to fly in no-go zones, for example, near airports and military bases.
Andreas Shell, global claims executive of new technologies at Allianz Global Corporate & Specialty, said one problem is that drones can only be used if the operator is in close proximity and maintains visual contact.
On top of that, he said, there are a host of legal and regulatory requirements.
“Right now, government agencies are tightening up these requirements more than ever due to the number of private operators currently out there,” he said.
Varying Image Formats
Video technology such as Skype and FaceTime has allowed insurers to develop smartphone apps that can be used to record property damage.
“[They can] send pictures and videos to the insurer to show them the extent of the damage.”
Such technology could be used in low value cases where sending out a loss adjuster may be more costly than paying the claim.
David Passman, national director of property claims for North America at Willis Towers Watson, said that when it comes to assessing wide areas of damage, satellites are often the best technology because they can capture a lot of data quickly.
The downside, he said, is that the picture quality may not be as good as a drone or 3D imaging.
“It enables you to take pictures before and after the event, and compare them side by side to determine not only what has happened to the property concerned, but also to the terrain around it,” he said.
“This can also help clients to put into action their business interruption or continuity plan, for example, by knowing what transport routes are open and putting in place an appropriate logistics strategy.”
Future of Technology
Thomas Haun, vice president of strategy for PrecisionHawk, an aerial data provider, said that as with all of these technologies, being able to quickly quantify the extent of damage and understand how safe something is, is critical in the response effort.
“Drones give you that ability to respond quickly and effectively to these types of disaster, but also to prevent or mitigate against future events,” he said.
However, Bud Trice, vice president of catastrophe services at Crawford, warned that despite the many advantages, the biggest challenge with this type of technology is fragmentation, with the possibility of each insurer deciding to go its own way with a different solution, many of which may be incompatible with one another.
Randall Ishikawa, vice president of property risk solutions at EagleView, a 3D imaging company, said that in the long run, technology could help expedite claims handling and reduce operational and claims costs for insurers.
“At the end of the day it can save money for the insurance carriers, and from an underwriting perspective it can determine the viability of the risk concerned as to what action needs to be taken at renewal,” he said.
Erie’s Sullivan added that the potential benefits are huge.
“From an industry standpoint there’s enormous potential because in the future you might be able to fly the drones much more often and to assess the risks on your books in order to identify potential hazards before they happen,” he said. &
Compounding: Is it Coming of Age?
The WC managed care market has generally viewed the treatment method of Rx compounding through the lens of its negative impact to cost for treating chronic pain without examining fully the opportunity to utilize “best practice” prescription compounds to help combat the opioid epidemic this nation faces. IPS stands on the front lines of this opioid battle every day making a difference for its clients.
After a shaky start cost-wise, prescription drug compounding is turning the corner in managing chronic pain without the risk of opioid addiction. A push from forward-thinking states and workers’ compensation PBMs who have the networks and resources to manage it is helping, too.
Prescription drug compounding has been around for more than a decade, but after a rocky start (primarily in terms of cost), compounding is finally coming into its own as an effective chronic pain management strategy – and a worthy alternative for costly and dangerous opioids – in workers’ compensation.
According to Greg Todd, CEO and founder of Integrated Prescription Solutions Inc. (IPS), a Costa Mesa, Calif.-based pharmacy benefit manager (PBM) for the workers’ compensation and disability market, one reason compounding is beginning to hit its stride is because some states have enacted laws to manage it more effectively. Another is PBMs like IPS have stepped up and are now managing compound drugs in a much more proactive manner from an oversight perspective.
By definition, compounding is a practice through which a licensed pharmacist or physician (or, in the case of an outsourcing facility, a person under the supervision of a licensed pharmacist) combines, mixes, or alters ingredients of a drug to create a medication tailored to the needs of an individual patient.
During that decade, Todd explains, opioids have filled the chronic pain management needs gap, bringing with them an enormous amount of problems as the ensuing addiction epidemic sweeping the nation resulted in the proliferation and over-consumption of opioids – at a staggering cost to both the bottom line and society at large.
As an alternative, compounded topical cream formulations also offer strong chronic pain management but have limited side effects and require much reduced dosage amounts to achieve effective tissue level penetration. In fact, they have a very low systemic absorption rate.
Bottom line, compounding provides prescribers with an excellent alternative treatment modality for chronic pain patients, both early and late stage, Todd says.
Time for Compounding Consideration
That scenario sets up the perfect argument for compounding, because for one thing, doctors are seeking a new solution, with all the pressure and scrutiny they’re receiving when trying to solve people’s chronic pain problems using opioids.
Todd explains the best news about neuropathic pain treatment using compounded topical analgesic creams is the results are outstanding, both in terms of patient satisfaction in VAS pain reduction but also in reduction potentially dangerous side effects of opioids.
The main issue with some of the early topical creams created via compounding was their high costs. In the early years, compounding, which does not require FDA approval, had little oversight or controls in place. But in the past few years, the workers compensation industry began to take notice of the solid science. At the same time, medical providers also were seeing the same science and began writing more prescriptions for compounding – which also offers them a revenue stream.
This is where oversight and rigor on the part of a PBM can make a difference, Todd says.
“You don’t let that compounded drug get dispensed when you’re going to pay for it without having a chance to approve it,” Todd says.
Education is Critical
At the same time, there is the growing, and genuine, need to start educating the doctors, helping them understand how they can really deliver quality pain management to a patient without gouging the system. A good compounding specialty pharmacy network offering tight, strict rules is fundamental, Todd says. And that means one that really reaches out to work with the doctors that are writing the prescriptions. The idea is to ensure that the active ingredients being chosen aren’t the most expensive sub-components because that unnecessarily will drive the cost of overall compound “through the ceiling.”
IPS has been able to mitigate costs in the last couple years just by having good common sense approach and a lot of physician outreach. Working with DermaTran Health Solutions and its national network of compounding pharmacies, IPS has been successfully impacting the cost while not reducing the effectiveness of a compounded prescription.
In Colorado, which has cracked down on compounding profiteering, Legislative change demanded no compound could be more than $350.00 period. What is notable, in an 18-month window for one client in Colorado, IPS had 38 compound prescriptions come through the door and each had between 4 and 7 active ingredients. Through its physician education efforts, IPS brought all 38 prescriptions down 3 active ingredients or less. IPS also helped patients achieve therapeutic success (and with medical community acceptance). In that case, the cost of compound prescriptions was down to an average of $350, versus the industry average of $788. Nationwide IPS has reduced the average cost of a compound prescription to $478.00.
Todd says. “We’ve still got a way to go, but we’ve made amazing progress in just the past couple of years on the cost and effective use of compound prescriptions.”
For more information on how you can better manage your costs for compound prescriptions, please call IPS at 866-846-9279.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with IPS. The editorial staff of Risk & Insurance had no role in its preparation.