When the Rain Came
Colorado is not a state that is normally associated with floods. It’s literally one of the highest states in America, with plains in the east that rise up into the Rocky Mountains in the west. It can be arid. It’s seen droughts. But one year ago that all changed. The floods came.
The rain started falling on the mountains of the Front Range on Sept. 9, 2013. The state had had a summer of drought that year, so some probably welcomed the rain.
But the rain kept falling. And got heavier. And by Sept. 15, the resulting floods had resulted in 18 counties being covered by federal emergency declarations, as emergency services personnel mobilized to deal with the disaster.
Deb Darnofall, risk manager for the City of Longmont in northeast Colorado, told Risk & Insurance® that the rain was “biblical” in its scope and extent.
“It started raining on Sept. 9 with 15 to 25 inches of water dumping over 200 miles of land north to south in a week. I had seen concentrated areas of rain in the past, but never the breadth and duration of the September storm,” said Darnofall.
“When I received the call to respond to the Emergency Operations Center at 3 a.m. on Sept. 12, my heart sank, but simultaneously my adrenaline kicked in.”
The rain was caused by a confluence of events. “Moist air was drawn up from the Gulf of Mexico and combined with a low-pressure system and a cold front over Utah,” said Joseph Becker, scientist at catastrophe modeling firm AIR Worldwide. “The area’s mountainous topography caused air to cool as it moved upslope, producing heavy precipitation.
“When I received the call to respond to the Emergency Operations Center at 3 a.m. on Sept. 12, my heart sank, but simultaneously my adrenaline kicked in.”– Deb Darnofall, risk manager, City of Longmont
“Many rivers, drainage ditches and irrigation channels filled with water to remove the large quantity of runoff. This increase in river discharge was so intense in some areas that it damaged the river gauging stations used to monitor the amount of water flowing in the river. Some river gauging stations that withstood the flows recorded the largest discharge since measurements began, while others recorded the largest flood in over 30 years.”
Last Major Flood Was 1941
Longmont had experienced flooding in the past, based upon how one defines flood.
“Since 1919, the St. Vrain River — which runs through the City of Longmont — has reached flood stage twice … 9,400 cubic feet per second [cfs] in 1919 and 10,500 cfs in 1941,” said Darnofall.
“These were both the result of severe rain events or ‘cloud bursts’ in addition to snow runoff. Along with these major events, 12 other years produced flow rates in excess of 2,000 cfs.”
Although the 2013 floods battered Longmont badly, procedures for such an event were in place, said Darnofall.
“Knowing that road closures were likely, I relied upon the state’s iPhone application for road conditions and closures. The response was amazing — the dedication and professionalism of the city workers was magnificent; the coordination of care of neighbors; [and] the faith-based, nonprofit and other governmental entities were magnificent. And the citizens of Longmont and the surrounding areas were … patient and resilient. It was my pleasure to serve, having had only a small part in the immediate response and recovery efforts.”
For Colorado as a whole, the damage caused by the floods was significant — and very widespread.
“You can’t control water — it will go where it wants to go and not always following the flood maps and zone designations.” — Duncan Ellis, U.S. Property Practice Leader, Marsh
According to the Colorado Department of Transportation, at one point more than 30 state highways or interstates were closed due to infrastructure damage or water standing on the highways. A total of 102 bridges were damaged or destroyed, along with thousands of houses and other buildings, and 10 people died. The economic cost of the flooding has been estimated at around $2 billion. Sadly for residents, little of the flood risk was insured.
“This was a very localized incident,” said Duncan Ellis, U.S. property practice leader at Marsh. “It didn’t really impact any major cities, but it was so violent that it almost erased some towns in the area. … It could happen again, this time over an area more populated, with more insurance coverage, and thus be even worse.
“The probability of getting such rain in one spot again followed by another bout of it is highly unlikely, but not improbable,” he said.
Exacerbating the problem, Ellis said, was that Colorado was suffering from drought conditions at the time. Drought causes the ground to become less absorbent, dramatically increasing the amount of runoff as well as causing significant erosion.
Locating Flood Areas
“The flooding in Colorado could encourage insurers to pay attention to the catastrophe sublimits in a policy, as well as locations — what’s near water or rivers,” said Ellis. “They could be looking at modern technology to map locations’ proximity to water.
“You can’t control water — it will go where it wants to go and not always following the flood maps and zone designations.”
A year after the floods and there is one question that needs to be asked: Could it happen again?
Darnofall has a very clear answer: “Absolutely. The mountain passes and year-round running rivers and streams have been created through erosion caused by melting snow, hail and rain over thousands of years.
“Mathematically, there is a 1 in 100 chance of having a flood event of approximately 10,000 cfs in any year. There is a 1 in 500 chance of having a flood event of approximately 20,000 cfs in any year.”
Darnofall said that the long-term attitude towards flooding in the area has changed.
“The reality shifted from ‘It could happen,’ to ‘It did happen,’ and we intend to be prepared,” she said. “We recognize the need to maintain and adhere to land-use regulations, strictly enforce flood plain management, recruit and train staff for experience in emergency operations, develop and rehearse emergency plans, and maintain healthy fund balances and reserves.
“Real-world data from the September floods has been compared to the 100-year channel study. Primary changes have been made based upon an overlay comparison of actual flood outcomes compared to engineered estimates of what the waterways coming through the city would have done under similar circumstances.
Having to repair and replace the infrastructure damaged in September has accelerated the completion of the 100-year channel improvement timeline that was already in place.”
In the meantime, it would be fair to say that the insurance industry has been looking at the lessons that can be drawn from the Colorado floods.
Clare Salustro, manager of the model product management team at Risk Management Solutions, said that flooding has long been an area of concern for U.S. insurers, especially in the wake of flooding events from hurricanes such as Ike, Katrina, Irene and Sandy.
“Severe flood events happen every year, and can happen in any state in the country,” Salustro said. “These events have highlighted some gaps that modeling can help to fill.” She said that the main tools for understanding flood risk today are the FEMA Flood Insurance Rate Maps (FIRMs).
These maps provide limited information (i.e., 100-year flood extent and severity, 500-year flood extent) on flood risk for most communities in the United States.
However, as was seen during Sandy, some maps are severely out of date — FEMA last updated their maps in the 1990s for some of the areas affected by the 2013 flooding — and flood risk is mapped in piecemeal, with no unified set of input data or risk assessment technology.
“The insurance community has long been interested in having another view, apart from FEMA, which is where the catastrophe modeling community can contribute, said Salustro.
“Catastrophe models can provide consistent flood risk information, using the latest input data and modeling technologies, in a far more flexible format than FEMA FIRMs. For example, instead of estimating that the Colorado 2013 event was a 1,000-year event, this can be quantified, for different areas, using catastrophe model results. Even more severe events can be analyzed as well.”
Salustro added that the Colorado floods reinforced the issue of low insurance penetration in many parts of the country.
“Most residential flood insurance in the U.S. is provided through the National Flood Insurance Program [NFIP],” she said. “Participation in the program varies significantly — take-up of NFIP policies is highest along the Gulf and Atlantic coasts, where hurricane awareness is higher. Areas in the Midwest along major rivers such as the Mississippi River are also relatively flood-aware. But participation in the NFIP in the West is much lower, even though these areas are at risk to flash flooding, as seen in 2013.”
In the meantime, Colorado will mark the anniversary of the flood with, no doubt, mixed feelings. For those who bore the brunt, such as the people of Longmont, the fact that the dangers are now more apparent is cold comfort for those who lost property — or even friends or family. But the sad fact is that by studying what happened before, we can plan ahead for future events.
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.
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.”