The recent big freeze will not be the last, so how can insurers and loss adjusters minimise the effects of cold snaps? We find that for many the cost of responding to recent severe events will lead to a resourcing conundrum and higher premiums
As the?UK recovers from the big freeze that brought most of the country to a standstill over the festive season, the long-term impact of these Arctic weather conditions is still sending a shiver throughout the insurance sector.
According to the Met Office, December 2010 was the coldest December since records began 100 years ago. Unsurprisingly, the conditions in late November and over the Christmas period have put enormous pressures on insurers, causing weather-related claims to rocket.
What has been the impact of December’s severe cold snap? And how can the insurance industry better prepare for such events, which experts warn are set to become more common?
Many loss adjusters have reported that claims in the areas worst affected by the big freeze – the North West, Wales, Cumbria and Scotland – have soared by as much as 400%, leading to a spiral in claims costs. AXA head of personal lines intermediary Mike Keating has predicted that this season’s cold spell is likely to wreak a toll of more than £500m in claims costs for the insurance sector.
According to loss adjuster GAB Robins, commercial property claims across the UK during December cost an average £18,900, while average household property claims weighed in at £16,400. The majority of claims have been caused by burst pipes, followed by claims for roofs and gutters damaged by weight of snow, as well as business interruption claims.
According to the ABI, burst pipes alone have been costing the sector £7m a day since late November. “Burst pipe claims can be quite expensive,” loss adjuster QuestGates’ director Ross Macpherson explains. “If the property is unoccupied for a few days, the claim could easily amount to £100,000 once you factor in building contents and business interruption insurance.”
Supply chain hit
Unsurprisingly, the season’s unusual cold spell has presented a huge – in some cases unprecedented – challenge for insurers and loss adjusters. “This year’s big freeze has been over
an elongated period compared to last year,” Merlin client development director Alex Kilpatrick explains. “The snowfall has been substantially greater as well. The cost of claims will be more significant than last year, and the longer it goes on, the more it will also have an impact on day-to-day claims.”
He adds that Merlin would normally expect to see an average of 3,000 claims in the month of December, but the weather has increased this number by fourfold.
One of the major challenges has been the pressure on the supply chain network as loss adjusters and disaster restoration experts struggle to meet the surge in demand from customers. According to industry experts, trying to contact policyholders quickly during severe periods can be problematic. Furthermore, many homes require a drying-out process, and sourcing alternative accommodation can prove difficult during times of peak demand.
“The challenge is that a lot of our loss adjusters and disaster restoration companies are desperately trying to make sure they hit their service targets while providing quality at the same time,” Allianz property claims supply manager Ian Guest explains.
He believes that, as claims mount, ensuring continuity of service to all policyholders affected will be a major challenge for insurers and their supply chains. “While suppliers have been good at making the first visit, I am very concerned about ensuring the continuation of the claims process so that people are not just seen once and then left,” he says.
Temperatures may be returning to normal now, but the worst for insurers is far from over. Merlin’s Kilpatrick believes the pressure will continue to mount for many elements of the supply chain. “The big pinch point for the supply chain will come later as all the claims made over the past few weeks come through.”
In addition, insurers predict the sector should steel itself for a spate of commercial claims. “While there is often instant notification with household claims, with commercial claims there tends to be a lag. So there will be an increase coming through later on in the season,” Guest says.
One accusation often hurled at the insurance and loss adjusting sectors is that investment in training and recruitment is inadequate across the supply chain during milder periods, leaving it under-resourced during severe weather. The argument goes that ongoing investment by insurers in the supply chain network is vital to help loss adjusters shore up for such severe events.
“A large loss adjuster cannot operate a purely emergency-only service,” GAB Robins’ chief operating officer Mike Jones says. “It is easy to be lulled into a false sense of security in milder periods and expect that the required response will always be there. You never know when the next big event is around the corner and it is a facility that needs to be well resourced in milder periods as well as during extreme weather.”
But loss adjuster Davies’ head of claims operations, Jim Pittman, points out that the unpredictability of weather-related claims presents a conundrum for the industry. He believes that the sector would be hit hard by trying to ensure continual capacity for severe weather events. “If the industry were staffed for this type of event, then premiums would skyrocket and nobody would take out insurance. It is an impossible one to meet in terms of resource planning,” he says.
But AXA’s Keating warns that, following the severe flooding of 2007 and four severe cold spells over the past two years, the industry cannot afford to carry on covering losses of this magnitude. He adds that AXA is planning to hike household and motor rates following this season’s big freeze. “Looking at the pricing in the household market, there are not enough premiums being collected to cover these mini-events, and therefore without doubt prices will need to increase,” he says.
So what is in store? Claims experts point out that the winter is only half over and the possibility of further severe cold spells looms large.
If this happens, Allianz’s Guest believes that another severe cold period will hit the sector hard. “If we get another cold snap of this magnitude, or even half as bad, the way resources are stretched it is not going to be easy to cope.”
But claims experts say that the country – and the insurance sector – may have to get used to dealing with increasingly severe weather events. “Whether it is environmentally driven or cyclical is hard to say, but we are in a period where we are seeing more extreme weather and we are likely to see further cold spells throughout the winter,” Kilpatrick says.
So what are the main lessons from the big freeze? Kilpatrick believes that managing customer expectations and educating them about the possibility of occurrences such as burst pipes is a key challenge.
Ultimately, the insurance sector faces greater pressure to invest in supply chains and provide extra resources in order to have proper contingency plans in place. It may have been an exceptionally cold winter so far, but as Guest points out: “It may be an unusual occurrence, but it is becoming more usual.” IT
So how cold was it?
According to Met Office figures, December 2010 was the coldest across the UK since records began in 1910. The month has also seen exceptionally cold, with snowy weather across much of the country. Temperatures have regularly fallen to between -10C and -20C, with overnight and daytime temperatures in many places struggling to climb above freezing.
In December, the average temperature for the UK was -1.5C. That's 5.7C below the long-term average of 4.2C. Precipitation (rain and snow) was well below average, recording levels of only 45.1mm: only a third of normal December levels. This makes it the third-driest December since 1910.
Looking at the year 2010 as a whole, the UK's average temperature was 7.9C, making it the 11th coldest year since 1910.