‘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. &
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.