Cutbacks by insurers may prove a false economy, warn disaster recovery contractors

Escalating fears about the impact of climate change and the threat of terrorism in recent years have thrown sharper focus on the services provided by the disaster recovery market. In many cases, this sector plays a key role in helping people get back on track after their homes or livelihoods are hit by disasters, such as floods and fire. And, for many businesses, a swift and efficient clean-up can hold the key to future survival.

According to the London Chamber of Commerce, 90% of businesses that lose data from a disaster are forced to shut within two years, while 80% of businesses without a well-structured recovery plan close within 12 months of a flood or fire. “It takes less than a day for a serious disruption from a fire or flood to have a significant impact on a business,” Biba’s technical and corporate affairs executive, Graeme Trudgill, points out.

The widespread havoc wreaked by the summer flooding in 2007 highlighted the importance of this sector to the UK economy. Figures from the ABI show the number of flood-related claims surged to 180,000 that year, costing the insurance industry £3bn. Meanwhile, the overall number of disaster-related claims has continued to rise steadily. Fire-related cases increased to £1.3bn last year, from £1.15bn in 2006, while weather damage cost the industry £904m in 2008, compared with £473m three years ago.

However, while there has been a rise in disaster-related claims, the recession has taken its toll on the sector. Increasingly, insurers have cut spending on services in favour of arriving at speedy cash settlements with customers, leaving the onus on policyholders to address the problem of disaster recovery independently. “With regards to the supply chain, there is a constant emphasis on cutting costs, which does have an impact on contractors,” says the British Damage Management Association’s strategic development director, Jonathan Davison. As a result, the association reports the sector has seen a 25% reduction in the volume of claims passed on by insurers over the past year.

But Davison adds that, while insurers are opting to arrive at speedy cash settlements to save money, leaving policyholders to find their own contractors can backfire. “If you have a lot of people choosing their own contractors, most often don’t have the resources to understand whether the people they have chosen are doing the work properly or not.” He adds that getting a good service in such situations can be a matter of luck. “One person could get a contractor in and they could be great, but another could get one in and they could be a cowboy. This means the work is not done properly.” Davison suggests that this could push up the cost of claims as policyholders seek to repair the damage caused by negligent independent contractors.

A shrinking pot

As the number of projects tendered by insurance companies continues to contract, competition within the sector has increased. The industry is dominated by these firms: ISS Damage Control; Rainbow International; Munters; Belfor; Chem-Dry; and The Revival Company. According to ISS’s managing director, Shaun Doherty, each company held control in different segments of the market before the recession. ISS and Belfor dominated the market for major losses, while the others held sway over smaller-scale claims.

However, these parameters are shifting as more companies attempt to infiltrate the higher end of the market. “Some of the people that operate in the lower and mid-sectors are trying to move up because they are working on higher volume claims with lower margins. Everyone is chasing profits and that is why we are facing stiffer competition,” he says. “Whereas before we would have had the choice of ten jobs, now there are only five.”

Elsewhere, The Revival Company’s marketing and sales director, Matt Cooper, says that as insurers become more selective in choosing contractors, there will be increased pressure on companies to be compliant with the regulations of the FSA. He adds this will cause a contraction within the market as companies unable to meet this extra cost will be forced out of the market. “Smaller companies will struggle to be FSA compliant,” Davison says. “To be FSA compliant requires resources. That is not going to be a viable option for a small independent contractor.”

Counting the cost

In addition, fears are mounting that, as the harsh economic climate leads to a flurry of cost cutting, the sector could face the possibility of a skills shortage in the coming years. This could leave many companies ill-equipped if there is a sudden surge in the demand for services. And climate change will be a major factor in driving up future demand. Many point to the noticeable shift in the sector’s seasonal work over the past ten years as a sign of things to come. “Looking at the turnover of our business over the past 25 years, there is a definite shift in what we would have expected to see in January compared with July,” Cooper remarks.

He adds that, in the past, cold winter spells meant the sector was kept busy dealing with the wide-scale problem of burst pipes. But as the weather becomes warmer and harsh winters less frequent, summer has overtaken winter to become the market’s busiest time of year as large-scale flooding becomes more commonplace. This means the disaster caused by the 2007 floods is unlikely to become a distant memory as the effects of climate change become more acute.

“If the insurance industry places too much emphasis on cost cutting, its supply chain will have to cut costs themselves. Trained staff will be lost and reinvestment in equipment will be reduced accordingly,” Davison warns. He says that insurers will have to think carefully about the long-term repercussions if they insist on pushing down costs when recruiting disaster recovery services. “If we have any kind of disaster flooding, and we all know this is going to happen more in the future, any surge is going to have an impact. If one company has had to cut costs, they can only cope with so much work.”

As the case study demonstrates (see below), in times of disaster, it is vital for both the insurer and its client to receive a swift and capable response from the disaster recovery firm. Forcing cutbacks now could compromise this, and ultimately cost the insurer more.

Case study: Thessco Solpro

In June 2007, floods hit businesses along the River Don in Sheffield, submerging millions of pounds worth of machinery, tools and equipment. Electronic component factory Thessco Solpro was one of the worst hit, as water levels reached head height in the reception area. As the water spread across 16 departments, more than 350 complex machines and thousands of tools were covered by water and were in need of restoration. Power supplies were cut and huge press pits were full of thousands of gallons of water. One pit alone contained enough water to fill 17 large tankers.

In response, ISS Damage Control moved 86 engineers and technicians onsite to start a damage mitigation programme. This involved spraying all water-affected equipment with oil to halt corrosion. Water was pumped out, floors and walls dried and cleaned, and complex machines were stripped and restored. ISS Damage Control provided portable generators to enable production to restart, while engineers worked on repairing sub-stations and reconnecting the factory to the National Grid. Production was restored in some areas of the factory within ten days.