Standard definitions of hazard terms – is that a good idea?

Standard definitions of hazard terms – is that a good idea? | Insurance Business Australia

Technology

Standard definitions of hazard terms – is that a good idea?

Claims Summit panel debates the issue

Technology

By
Daniel Wood

“I know a bit about insurance,” said Ron Arnold. “But if you can work out what the flood covers look like from company to company, you’re going very well.”

Arnold, managing director of consultancy firm 11eight, was chair of the recent Claims Leaders Summit in Sydney.

Treasury is currently exploring mandating standard definitions of hazard terms in insurance contracts for natural catastrophes, including floods and fires. At the Claims Summit, Arnold asked a panel discussing catastrophe preparedness and claims handling, what they thought of standard definitions?

“I don’t have a view personally,” said Liam Walter (pictured top, left). Walter is the Insurance Council of Australia’s (ICA’s) senior advisor for mitigation and catastrophe management.

“The Insurance Council’s view is that there is some place for standardization or maybe simplification – this is a better way to put it – where that’s feasible,” he said.

However, he was concerned that this could be challenging.

“The difficulty is that it’s a competitive market and there are a range of different propositions that the insurers bring to market and the differences in coverage gives options,” said Walter.

He suggested that better communication by insurers to their customers about what policies actually cover could help alleviate definition issues.

“The problem only seems to arise at claim time,” said Walter. “So that’s something to think about in terms of communication with customers.”

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“I think we’re seeing history repeat”

Arnold asked QBE’s Dr Joanna Aldridge for her view?

Aldridge, who is group head of catastrophe modelling research, said the standard definition review by the Treasury is currently active so she couldn’t comment on behalf of QBE.

However, she offered to give a perspective looking back on her two-decade industry career. Aldridge, has a degree in applied mathematics and is a hazards and risks expert.

She was working at IAG in the wake of the east coast floods of 2010-11, the worst inundations in Australia since the 1970s.

“It’s sad to see that the industry has walked away from it [standard definitions],” said Aldridge. “I think we’re seeing history repeat.”

Following this “bad phase of flooding” in 2010-11, she said IAG brought in some standard definitions and pricing models. Aldridge said at that time there were no comparable flood models available.

“So we had to start with a definition and then be able to price for it,” she said. “Over time, that’s become eroded.”

Aldridge said there is “room to revisit” standard definitions again.

“But at the same time, the standard definitions have to be able to work,” she said. “To keep the insurer solvent, whatever the definitions are, we need to be able to model them.”

She said insurers will also need to be able to “differentiate those definitions from claims data.”

“We [also] need to be able to reinsure for it as well and it needs to fit with what the reinsurer’s expectations of catastrophe events are,” said Aldridge. “So it is a huge challenge and it will be interesting to see where it comes out.”

Parametrics and data primacy

For a view from a provider of parametric flood covers, the chair asked panellist Lynn Roehrig (pictured top, right) from Descartes Underwriting.

“Obviously, our product tackles things a little bit differently,” said Roehrig, the firm’s head of business development for Australia and New Zealand. “We’re not getting into whether something’s fluvial or whatever it may be.”

He said the parametric approach to flooding is data driven. The products Descartes offers, he said, focus on data like the millimetres of rainfall or river heights by measuring water levels using sensors.

“So we’re working with clients to understand at what point the river rising impacts your site and how many dollars is that impact,” said Roehrig. “At the end of the day, we don’t really care whether it came from the sky or it came from a body of water.”

He said “it’s all about data” which can then be verified through third party modelling and certifiers.”

Standard definitions can bring contract certainty

The fourth panellist was Nick Vernon, claims manager for property with Berkshire Hathaway Specialty Insurance.

He said his answer to this definitions question was a personal view and not necessarily the official position of his firm. From the perspective of an insurance contract, Vernon liked the idea of standard definitions.

“I quite like contract certainty in certain ways and I think there are opportunities for some things to be done in a way that will provide certainty across the industry,” he said.

“That was helpful to our teams because we were able to refer to an expanded body of case law,” said Vernon. “As much as anything, it should always be a goal of insurers to try and get as much contract certainty as we can so that we know what the product is, the customer knows what the product is and so there are less likely to be disputes.”

What do you think of the issue of standard terms and definitions for insurance contracts? Should there be mandated definitions for natural hazards? Please tell us your view below