The business interruption claim world is not a pretty place
The use of a parametric model for claims could save insureds and adjusters time when dealing with a covered peril.
It’s just so clear — business interruption (BI) claim handling proves that BI cover would best serve insureds, insurers, and economies if the cover migrates from an indemnity model to parametric. There’s entirely too much under-productive effort expended for insureds proving a claim, and too much claim handler time expended confirming the proof.
A real-world example helps prove the case. A business that averages less than $500K revenues per year recently suffered a covered loss that prompted the biz to experience a full shutdown over a full calendar quarter. The insured presented the claim with substantiation of prior year financial activity and proof of the current year’s activity comparatively to help the carrier to calculate the BI loss, BI cover being as defined in the policy as the reduction in net income for the covered period, and excess expenses incurred solely due to the effect of the covered peril.
Having overcome the initial shock of the loss, the insured forged on, compiled documents and numbers, and sent it off to the carrier, with the carrier utilizing a staff CPA to fill in six (yes, six) forms to crank out a net income BI settlement offer. It took five emails (probably some calls, too) to allow the BI adjuster to compose a net income-based claim settlement, a proposed BI settlement of less than $10K, with that being an amount far less than the insured’s expectations.
So:
- Several hours of the insured’s time to compile financial data.
- More than a few hours of the financial adjuster’s time to formalize the math and response.
- Claim handler time to manage and offer the settlement.
All this effort for what the insured ultimately sees as an arbitrary settlement amount because the cover is written for accountants to understand and is seldom explained to the insured.
What is net income, anyway? What are the excess expenses? If an insured does not understand that BI cover is a safety net when a covered loss occurs that disrupts business, how can a business truly plan for when bad things happen?
Using existing data
Insurance companies have plenty of financial data for small and medium-sized businesses. Plenty. Let’s use that data.
Insurance companies also sell CGL insurance, property insurance, and all those endorsements under a price competition basis. What if reality took hold and risks were priced realistically? Can’t keep kicking the SME product can down the perceived price elasticity road, can’t lead with price as a differentiator — it’s a fool’s game that disappoints the customer and whacks the commercial line’s loss ratio.
Plan for BI losses, plan to know the severity (insurance meaning) of a BI loss. The data are there; why not stipulate a parametric BI cover and schedule, particularly for those policies designed to cover net income? The respective company’s financials can be known; the insured can be a partner in choosing the limit.
Sure, there are chances where basis risk issues crop up, but that can be priced accordingly. Imagine not subjecting an insured to the paperwork indemnity BI cover requires? What if a CPA specialty adjuster could be used for a higher and better value role where financial and accounting skills are applied in a better way than plugging values into a spreadsheet?
Now, imagine the real scenario just discussed in an environment where thousands of insureds suffer BI losses at the same time or maybe hundreds of thousands. Nope, says the industry, we don’t insure systemic risks, too undiversified and too open-ended for severity. I say that’s, unfortunately, a good thing since adjusting thousands of BI indemnity claims would administratively bury claim organizations.
Fie on all that, I say. The current indemnity model is a vestige of parchment and quill pens. There are under-utilized data that can be leveraged to price BI risk. Smart people can explain to government treasuries that backstopping the market is more costly than helping finance BI cover upfront, and if parametric options are installed the cost of business interruption risk can be chosen, planned, and brought to the street for a single claim or thousands. Financial adjusters will line up to support the idea.
Patrick Kelahan, better known as “The Insurance Elephant,” is a building consultant and forensic market strategist with H2M architects + engineers, and many years’ experience in the insurance industry. He can be reached at pkelahan@h2m.com, and you can follow him on Twitter at @InsuranceEleph1. The opinions expressed here are the author’s own.
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