2005 represented the longest and most severe Hurricane season in history with the largest Hurricanes today known as the three sisters Rita, Wilma and Katrina. Five years after the devastating storms that swept through the Caribbean, Allianz takes the opportunity to look back and analyze the lessons learned from this major event.
In order to get a comprehensive overview of what happened and how Allianz was involved it is important to look at Allianz Reinsurer Allianz Re and the California based Fireman's Fund. Allianz Global Corporate & Specialty itself was only founded in summer 2006 after the catastrophe had taken place, as a merger between Allianz Global Risks and Allianz Marine & Aviation. However, many of its staff were closely involved with the 2005 storms in the preceding organizations.
After the hurricane hit, it was very difficult to get the loss adjusters into place due to the immense flood damage. Allianz has in-house loss adjusters who either directly handle losses or monitor the activities of external loss adjusters.
It was extremely important for corporate clients to monitor and act upon business interruption damages. This is why AGR set up a task force in order to assist clients to get them back on track and help not only evaluate but mitigate the losses for the insured. On-site loss adjusters engaged in drive-by inspections in order to get a first impression of the extent of the damage.
Andreas Shell, currently AGCS Head of Short-Tail Claims, led claims coordination within Allianz Group and was a member of the executive management team at Allianz Global Risks (one of the preceding organizations of AGCS). Shortly before Katrina hit, Shell and the Crisis Management team took a closer look at the early warning systems and already reserved capacity, working with external loss adjusters and lawyers in order to be able to start the claims adjustment as early as possible. In addition, for the affected claims staff a vacation ban was put into effect in order to make sure that the required support was available.
Limits to risk modeling
"It quickly became clear that the risk modeling had not been complete as it had not taken the flood damages into account", says Shell. Flooding due to levee failure had not been assumed, despite a FEMA (Federal Emergency Management Agency) study that had been conducted in the year before taking this into account. In any event it is extremely difficult to achieve more accurate modelling once water is involved since it brings in so many different factors.
Pure wind damages such as tornadoes by contrast can be modeled more accurately. Since even the best model only reflects reality to a limited extent it is difficult to give a good estimate of an insurer's exposures right after the event. Of course time is a critical issue, but Allianz follows the strategy of putting accuracy first. In the aftermath
of Katrina a lot of new claims data has been included in the models and improved them substantially. For instance, storm surge is now included in the models.
On site for Fireman's Fund
William Dalton, was leading the National Catastrophe Center at Fireman's Fund (FFIC), the Allianz Group P&C subsidiary in the United States, when Katrina hit in 2005. He stresses that the situation was extremely difficult as the city of New Orleans was shut down and communication was severely hampered. Hotel rooms were impossible to secure so FFIC decided to rent mobile homes for their staff on the ground. Flooding was the biggest problem in New Orleans – tricky because most insurance companies do not offer flood insurance in coastal areas.
"What really made a difference for us was having engineers on the ground to differentiate between flooding and wind damage," Dalton recalls. "It was key to get all business partners on board as early as possible and to maintain good communications through daily conference calls with all stakeholders. FFIC also installed a Catastrophe Center in St Louis, a very central location in the United States in order to be able to coordinate staff better."
Allianz Risk Consulting
Hurricane Katrina was also the trigger for Allianz Risk Consultants(ARC), the consulting arm of AGCS, to investigate the subject of windstorms & hurricanes even more thoroughly. This effort resulted in the idea of performing "Windstorm Surveys". Allianz Risk Consultants does not use the Windstorm Survey as a pass/fail test, but as a means to give the clients valuable recommendations used to improve the facility's ability to resist the effects of high winds", says Andrew Higgins, a windstorm expert at ARC. Ever since Katrina, AGCS has changed its approach to better identify key risks for properties located close to the coast line after risk assessments had given them fairly negative results.
Before the hurricane season starts, ARC shares a hurricane checklist with all clients who might be affected. This checklist outlines the steps clients can take in order to minimize their risks and includes getting their roofs inspected, boarding windows and preparing for flood damage. While specific prevention measures are fairly easy to implement long-term predictions for hurricanes are still difficult to make (both in frequency and severity).
Main lessons learned from Katrina
#1 Use common sense & prepare
Claims work starts long before a hurricane hits: it's about preparing the clients for the worst-case scenario. In the specific case of Katrina many clients were not prepared for this scenario at all. Just a simple example: once the storm hits, electricity fails, but this may not be a bad thing because once the electricity comes back damaged power lines can cause additional damages. Therefore, it's essential to turn appliances off as soon as possible to make sure that nothing happens when the power supply is restored. Another common-sense piece of advice is to negotiate agreements in advance with suppliers and those whom the client supplies to cover such emergencies.
"Clients need to be sure to have communications plans in place and have insurance policies at a safe location," says Shell. "I further suggest creating a separate booking account to which they can book the hurricane-related damages in order to be able to easily identify the loss amount incurred."
#2 Think about business continuity
Even though Business Continuity Management has become a real buzzword in the industry, few companies live best practices – this might be an opportunity to stand out. After the insurer has paid, this might only cover about 40 - 50 % of the total economic loss. Very often there is a loss of market share, suppliers, clients and qualified staff that the client has to deal with. Clients are thus strongly encouraged to think about questions such as: What can we do to be present in the market at all times? What kind of provisions can we take to ensure this? Do we have a crisis management plan in place?
#3Transparency is key for the insurer
An insurance-focused lesson learned by Allianz was the importance of its accumulation controls and maximum transparency in its international book. Today AGCS conducts much more elaborate portfolio reviews than there were five years ago, including a variety of different departments. AGCS now follows a globally coordinated underwriting approach, with extensive risk management controls and detailed accumulation modeling, rather than the localized approach which may have prevented transparency. Ultimately it is essential to take a global perspective of the business.