Black Swan

Sub-Zero Sucker Punch

A double dose of ice storms batters the Eastern seaboard, plunging 50 million people and three million businesses into darkness and desperation.
By: | August 4, 2014 • 9 min read

During the cold weeks that follow the winter holidays, a low-pressure warm front moves quickly into the New England region, along with a high-pressure Arctic cold front. The two masses collide, causing heavy rains that turn to ice by the time they reach the ground.

Layers of ice blanket an area from Maine to Maryland and as far west as Ohio, making it look like a world made of pure crystal.

Northeasterners shrug and hunker down for a few days of wild weather. A thinner layer of ice reaches west to St. Louis and south to Charlotte. Southeasterners grumble about the polar vortex interfering with their routine.

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By the second day, trees fall and rooftops groan under the weight of nearly 3 inches of ice. Dozens of transmission towers buckle and collapse. Local power lines fall, pulling utility poles down across roadways.

Utility companies shift into crisis mode to assess the damage, which has plunged some homes and businesses into darkness. Utility crews from Georgia and Tennessee are dispatched to help get repair work underway, which is slowed by treacherous road conditions.

The worst, though, is yet to come.

Three days after the first storm hits, a second storm arrives, about 500 miles south. It wallops the Southeast and moves on up the Eastern seaboard, dropping another 2-plus inches of ice over two days. Heavy ice puts a death grip on everything from Memphis to Atlanta and on up through Washington, D.C.

The aging utility infrastructure can’t withstand the ice and winds. The fact that at least half of the Southeast’s utility workers had been deployed north makes matters worse — far worse. Four million customers in Georgia and Alabama alone are without power.

Hartsfield-Jackson International Airport in Atlanta is virtually paralyzed, stranding travelers and causing massive delays across the country. Gas stations shut down because pumps are inoperable.

Retailers with backup generators press on as long as they can, but shelves empty quickly of food and other essential goods. Some stores operate on a cash-only basis because payment systems are down.

On the East Coast, more than 50 million people and 3 million businesses are without power. More than 200 transmission towers are badly damaged. Water supply across the entire East Coast is at risk, as treatment plants and pumping stations begin to lose backup power. Cell network circuits become congested, causing delays and weak signals. Some networks fail altogether.

R8-14p26-30_01BlackOut2.inddDespite icy roads, millions leave their homes, seeking warmth and shelter. Some die from carbon monoxide poisoning or from blazes caused by open fires in their homes, attempting to keep warm. Many fires burn unchecked, resulting in widespread property damage.

States of emergency are declared for affected major cities. The National Guard is brought in to help clear roads, escort people to emergency shelters, and help maintain civil order among the increasingly frightened and desperate public.

Trees continue to fall for weeks, making power recovery achingly slow. It takes three to four weeks to get to 90 percent recovery for urban centers. Some outlying areas go without power for as long as three months.

Businesses struggle to reopen due to damage and lack of workers, as many have not returned to the area from wherever they sought shelter, or can’t get through to certain areas due to safety hazards.

Hundreds die from hypothermia, starvation, fires, auto accidents and small, localized riots. Tens of thousands more suffer injuries or become seriously ill. The very young, elderly and the poor are hardest hit.

National Geographic’s harrowing docudrama American Blackout depicts the catastrophic repercussions of a 10-day blackout affecting the entire country.

No Escaping Loss

This scenario was created using the Blackout Risk Model, developed through a partnership of Hartford Steam Boiler and Verisk Climate, led by Robin Luo, vice president at HSB; Clifton Lancaster, senior risk analyst at HSB; and Kyle Beatty, president of Verisk Climate.

HSB and Verisk estimate that the frequency of each individual ice storm would be one in 150 years to 200 years. The two storms combined represent a frequency of one in 1,000 years or more.

Robin Luo, vice president, Hartford Steam Boiler

Robin Luo, vice president, Hartford Steam Boiler

This scenario loosely resembles a juxtaposition of two historic North American blackout events.

In January 1998, ice pummeled Ontario, Quebec and New Brunswick for six straight days, destroying 130 transmission towers and leaving more than 4 million people without power — some for up to a month.

The insured losses from that storm totaled $1.6 billion, according to the Insurance Bureau of Canada. The total economic costs were estimated between $5 billion and $7 billion.

The second event occurred in August 2013, when a simple circuit overload led to cascading blackouts throughout North America, leaving 50 million people in the United States and Canada without power for up to six days. The estimated total economic cost of the outage was between $6 billion and $8 billion.

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Combining the duration, ice load and frigid temperatures of the 1998 event with the coverage footprint of the 2013 event would result in a catastrophe exponentially more devastating than any blackout in North American history.

Some experts downplay the amount of property damage typical for an ice storm, but others say the level of property damage wouldn’t be far behind Hurricane Katrina or Superstorm Sandy.

Because of the duration of the power outage and the extreme volume of ice involved, homes and businesses left abandoned would likely succumb to frozen and bursting pipes. Collapsing roofs would lead to additional damage.

Overtaxed emergency responders likely wouldn’t be able to prevent damage caused by the inevitable looting and civil unrest. Fires started by those desperate for warmth could easily burn out of control, consuming neighboring properties in the process, especially in urban centers.

Contaminated water supplies would cause lasting problems that would take months to remedy. Lack of running water would create sanitation hazards.

Industries needing refrigeration, such as restaurants, supermarkets and pharmaceutical companies would suffer heavy losses. Manufacturing would also suffer due to a dependence on power and the difficulty and expense of temporarily relocating equipment.

Of course, that only scratches the surface of business income losses for companies up and down the East Coast, as well as key suppliers and customers across the country.

 Wes Dupont, executive vice president and general counsel, Allied World Assurance Co. Holdings.

Wes Dupont, executive vice president and general counsel, Allied World Assurance Co. Holdings.

“Whether you’re impacted directly from the weather or indirectly, I don’t know how anyone escapes some sort of tragedy or economic loss from this,” said Wes Dupont, executive vice president and general counsel of Allied World Assurance Co. Holdings.

Even with power mostly restored in three to four weeks, there would be several more months of clean-up before normal operations resume. Some companies would have difficulty luring back clients that had switched suppliers in the interim.

Small businesses would no doubt be hard hit.

“Small to midsize companies, those that are not able to invest [in a standby power system] … they’re going to struggle,” said Mark Madar, director of risk management and regulatory compliance at CBIZ Risk & Advisory Services. “The companies that do not have a multi-location presence, especially your mom-and-pop types of businesses, they’re the ones who are going to take the hit here.”

But Lou Gritzo, FM Global’s vice president and research manager, said it would be a mistake to downplay the vulnerability of larger companies in this scenario.

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“It’s the weakest link scenario,” said Gritzo. “The bigger effects are going to be these cascading failures where one or two pieces of the operation can’t recover and then the entire company experiences the consequences.

“That in turn affects other companies all over the country and all over the world. I think that’s where the biggest impact is going to be,” he said.

Mind the Gaps

For many companies, having a solid business interruption plan will make the difference in whether they make it through such a crisis. More than two in five (43 percent) businesses that experience a disaster and have no emergency plan don’t reopen, according to The Hartford. Of those that do reopen, only 29 percent are still operating two years later.

Even the most sophisticated disaster plan, however, will not shield companies from some degree of loss in an event of this magnitude. Unfortunately for some, the claims process is unlikely to be straightforward.

“The bigger effects are going to be these cascading failures where one or two pieces of the operation can’t recover and then the entire company experiences the consequences. That in turn affects other companies all over the country and all over the world.” —Lou Gritzo, vice president and research manager, FM Global

Blackouts can be a monkey wrench in the works. Companies may assume they’re covered for business losses in the event of a power outage because they have business interruption (BI) coverage — or time element coverage — on their property policies.

But in most cases, BI must be tied to physical damage to an insured’s assets. Several commercial property policies specifically exclude coverage resulting from a utility service interruption that originates away from the insured’s premises.

Standard BI coverage won’t be triggered for businesses that don’t suffer direct physical damage but were forced to close or relocate because of lack of employees or power, or orders from civil authorities to stay away due to safety hazards.

Some larger, sophisticated insurance buyers will have policies that include the necessary extensions needed to trigger the cover, but smaller firms may be left unprotected.

“I think [utility service interruption coverage] is spotty when it comes to small commercial businesses, who would need to ask for those extensions, as well as clients who are on standard boilerplate preprinted forms as opposed to a manuscripted form,” said Duncan Ellis, U.S. property practice leader for Marsh.

Another wording nuance to be aware of, he said, is that some language may provide for damage caused by a power outage, as in the case of a critical manufacturing load destroyed by loss of power in the middle of the process. But the BI side of the policy still may not have an extension for loss of income incurred after the outage.

Even for companies with the right coverage extensions, time durations vary. Some policies may not cover losses related to a service interruption that goes beyond a week or two. In general, many companies could find that their BI losses far exceed limits.

Insurers would see a high volume of contingent business interruption claims from those whose key customers or suppliers were compromised by the event. But the wording of CBI policies is similar to BI policies, and many insureds will find their coverage declaimed.

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Companies with a regional base also may face push back from carriers on business income claims, said Mike LoGiudice, managing director of insurance and litigation support for CBIZ Valuation Group. “I might say, ‘I should have done [this amount of business] but for the property loss.’ ”

But the carriers may argue that regardless of damage, your customers would still be out of business themselves, so you wouldn’t have had any income. “They would take into effect the negative impact on your customers,” he said. “It would be a battle.”

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Additional 2014 black swan stories:

Bigger Than the Big One

When the 8.5 magnitude earthquake hits, sea water will devastate much of Los Angeles and San Francisco, and a million destroyed homes will create a failed mortgage and public sector revenue tsunami.

Toxic Tornado

When a nuclear reactor melts down due to a powerful tornado, deadly contamination rains down on a metropolitan area.

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Lead Story

Improving the Claims Experience

Insureds and carriers agree that more communication can address common claims complaints.
By: | January 10, 2018 • 7 min read

Carriers today often argue that buying their insurance product is about much more than financial indemnity and peace of mind.

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Many insurers include a variety of risk management services and resources in their packages to position themselves as true risk partners who help clients build resiliency and prevent losses in the first place.

That’s all well and good. No company wants to experience a loss, after all. But even with the added value of all those services, the core purpose of insurance is to reimburse loss, and policyholders pay premiums because they expect delivery on that promise.

At the end of the day, nothing else matters if your insurer can’t or won’t pay your claim, and the quality of the claims experience is ultimately the barometer by which insureds will judge their insurer.

Why, then, is the process not smoother? Insureds want more transparency and faster claims payment, but claims examiners are often overburdened and disconnected from the original policy. Where does the disconnect come from, and how can it be bridged?

Both sides of the insurer-insured equation may be responsible.

Susan Hiteshew, senior manager of global insurance and risk management, Under Armor Inc.

“One of the difficult things in our industry is that oftentimes insureds don’t call their insurer until they have a claim,” said Susan Hiteshew, senior manager of global insurance and risk management for Under Armour Inc.

“It’s important to leverage all of the other value that insurers offer through mid-term touchpoints and open communication. This can help build the insurer-insured partnership so that when a claim materializes, the relationships are already established and the claim can be resolved quickly and fairly.”

“My experience has been that claims executives are often in the background until there is an issue that needs addressing with the policyholder,” said Dan Holden, manager of corporate risk and insurance for Daimler Trucks North America.

“This is unfortunate because the claims department essentially writes the checks and they should certainly be involved in the day to day operations of the policyholders in designing polices that mitigate claims.

“By being in the shadows they often miss the opportunity to strengthen the relationship with policyholders.”

Communication Breakdown

Communication barriers may stem from internal separation between claims and underwriting teams. Prior to signing a contract and throughout a policy cycle, underwriters are often in contact with insureds to keep tabs on any changes in their risk profile and to help connect clients with risk engineering resources. Claims professionals are often left out of the loop, as if they have no proactive role to play in the insured-insurer relationship.

“Claims operates on their side of the house, ready to jump in, assist and manage when the loss occurs, and underwriting operates in their silo assessing the risk story,” Hiteshew said.
“Claims and underwriting need to be in lock-step to collectively provide maximum value to insureds, whether or not losses occur.”

Both insureds and claims professionals agree that most disputes could be solved faster or avoided completely if claims decision-makers interacted with policyholders early and often — not just when a loss occurs.

“Claims and underwriting need to be in lock-step to collectively provide maximum value to insureds, whether or not losses occur.” – Susan Hiteshew, senior manager of global insurance and risk management for Under Armour Inc.

“Communication is critically important and in my opinion, should take place prior to binding business and well before a claim comes in the door,” said David Crowe, senior vice president, claims, Berkshire Hathaway Specialty Insurance.

“In my experience, the vast majority of disputes boil down to lack of communication and most disputes ultimately are resolved when the claim decision-maker gets involved directly.”

Talent and Resource Shortage

Another contributing factor to fractured communication could be claims adjuster workload and turnover. Claims adjusting is stressful work to begin with.

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Adjusters normally deal with a high volume of cases, and each case can be emotionally draining. The customer on the other side is, after all, dealing with a loss and struggling to return to business as usual. At some TPAs, adjuster turnover can exceed 25 percent.

“This is a difficult time for claims organizations to find talent who want to be in this business long-term, and claims organizations need to invest in their employees if they’re going to have any success in retaining them,” said Patrick Walsh, executive vice president of York Risk Services Group.

The claims field — like the insurance industry as a whole — is also strained by a talent crunch. There may not be enough qualified candidates to take the place of examiners looking to retire in the next ten years.

“One of the biggest challenges facing the claims industry is a growing shortage of talent,” said Scott Rogers, president, National Accounts, Sedgwick. “This shortage is due to a combination of the number of claims professionals expected to retire in the coming years and an underdeveloped pipeline of talent in our marketplace.

“The lack of investment in ensuring a positive work environment, training, and technology for claims professionals is finally catching up to the industry.”

The pool of adjusters gets stretched even thinner in the aftermath of catastrophes — especially when a string of catastrophes occurs, as they did in the U.S in the third quarter of 2017.

“From an industry perspective, Harvey, Irma and Maria reminded us of the limitations on resources available when multiple catastrophes occur in close succession,” said Crowe.

“From independent and/or CAT adjusters to building consultants, restoration companies and contractors, resources became thin once Irma made landfall.”

Is Tech the Solution?

This is where Insurtech may help things. Automation of some processes could free up time for claims professionals, resulting in faster deployment of adjusters where they’re needed most and, ultimately, speedier claims payment.

“There is some really exciting work being done with artificial intelligence and blockchain technologies that could yield a meaningful ROI to both insureds and insurers,” Hiteshew said.

“The claim set-up process and coverage validation on some claims could be automated, which could allow adjusters to focus their work on more complex losses, expedite claim resolution and payment as well.”

Dan Holden, manager, Corporate Risk & Insurance, Daimler Trucks North America

Predictive modeling and analytics can also help claims examiners prioritize tasks and maximize productivity by flagging high-risk claims.

“We use our data to identify claims with the possibility of exceeding a specified high dollar amount in total incurred costs,” Rogers said. “If the model predicts that a claim will become a large loss, the claim is redirected to our complex claims unit. This allows us to focus appropriate resources that impact key areas like return to work.”

“York has implemented a number of models that are focused on helping the claims professional take action when it’s really required and that will have a positive impact on the claim experience,” Walsh said.

“We’ve implemented centers of excellence where our experts provide additional support and direction so claim professionals aren’t getting deluged with a bunch of predictive model alerts that they don’t understand.”

“Technology can certainly expedite the claims process, but that could also lead to even more cases being heaped on examiners.” — Dan Holden, manager, Corporate Risk & Insurance, Daimler Trucks North America

Many technology platforms focused on claims management include client portals meant to improve the customer experience by facilitating claim submission and communication with examiners.

“With convenient, easy-to-use applications, claimants can send important documents and photos to their claims professionals, thereby accelerating the claims process. They can designate their communication preferences, whether it’s email, text message, etc.,” Sedgwick’s Rogers said. “Additionally, rules can be established that direct workflow and send real time notifications when triggered by specific claim events.”

However, many in the industry don’t expect technology to revolutionize claims management any time soon, and are quick to point out its downsides. Those include even less personal interaction and deteriorating customer service.

While they acknowledge that Insurtech has the potential to simplify and speed up the claims workflow, they emphasize that insurance is a “people business” and the key to improving the claims process lies in better, more proactive communication and strengthening of the insurer-insured relationship.

Additionally, automation is often a double-edged sword in terms of making work easier for the claims examiner.

“Technology can certainly expedite the claims process, but that could also lead to even more cases being heaped on examiners,” Holden said.

“So while the intent is to make things more streamlined for claims staff, the byproduct is that management assumes that examiners can now handle more files. If management carries that assumption too far, you risk diminishing returns and examiner burnout.”

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By further taking real people out of the equation and reducing personal interaction, Holden says technology also contributes to deteriorating customer service.

“When I started more than 30 years ago as a claims examiner, I asked a few of the seasoned examiners what they felt had changed since they began their own careers 30 year earlier. Their answer was unanimous: a decline in customer service,” Holden said.

“It fell to the wayside to be replaced by faster, more impersonal methodologies.”

Insurtech may improve customer satisfaction for simpler claims, allowing policyholders to upload images with the click of a button, automating claim valuation and fast-tracking payment. But for complex claims, where the value of an insurance policy really comes into play, tech may do more harm than good.

“Technology is an important tool and allows for more timely payment and processing of claims, but it is not THE answer,” BHSI’s Crowe said. “Behind all of the technology is people.” &

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]