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Managing insurance claims through catastrophic weather events and global economic pressures

Recent weather events have caused havoc on the Eastern Seaboard and, in sharp contrast, parts of Western Australia have suffered as out-of-control bush fires cause catastrophic damage.

George Grasso, UAA Group chief claims and services officer, discusses the impact these extreme weather events and other global economic pressures are having on the insurance industry and what the crane sector can expect to see in terms of increased premiums.

“As we know, Australia is a vast continent and, as we have seen recently, the weather can vary vastly from state to state. We saw bush fires rage out of control in WA whilst the East Coast experienced extreme flooding. And, needless to say, our ever-changing global climate is now the new norm. This is amplified by weather patterns such as the current La Niña weather system, which is predicted to remain until October 2022,” said Grasso.

 “In terms of the effect on claims, depending on the accumulation and severity of such weather events, it has a direct impact on claim’s resources including UAA’s claims personnel and service providers.

 “Not only does it impact a client’s assets and livelihoods, the enormity of the emotional impact it has on our clients and communities, as well as our suppliers and our staff in claims, cannot be underestimated. When these disasters occur, the first person the customer turns to for help is the insurance broker and the claims consultants. At UAA, our role is to ensure we collaborate with our brokers to assist our mutual clients in need,” he said. 

 These recent weather events, between March and April 2022, have seen over 124 flood-related claims and approximately $24 million of losses incurred. This is the largest weather event loss in UAA’s history. Five of the claims have exceeded $2 million each. 

As a comparison, the January 2011 floods in Brisbane and northern New South Wales finished with a total of 77 claims and $7.7 million of loss. The largest claim was $1.9 million, and every other claim was under $1 million.

 “124 claims may not sound like a lot, particularly when you compare this with other insurers in the commercial, domestic, and motor vehicle space that have incurred thousands of claims,” said Grasso. 

“However, these weather event claims on UAA can involve the clients’ fleet of assets per claim. You are looking at thousands of items combined, and each asset is then treated as a separate claim where it is assessed individually, and determination of indemnity is considered for each item. Then you factor in that some of our customers were hit twice with these recent floods, three weeks apart, the claims task is enormous.

 “Most of these items are a total loss, some we have been able to repair, but it requires working with engaged clients to achieve a positive outcome. Such clients recognise the value of mitigating their insurance claims exposure and also appreciate that many machines are impossible to replace in the current market, including parts almost impossible to obtain and/or have long lead times in the current market.

George Grasso, UAA Group, chief claims and services officer.

“Most clients are accepting total loss, and several are purchasing the salvage wreck of their machines in the hope they can restore them and to keep their businesses afloat. As underwriters, we need to be mindful of such total loss machines returning to their schedules and understanding there is a risk of further potential loss post the self-repairs conducted.

“However, we also need to remain commercially sensitive and compassionate to the measures our clients need to implement in order to survive and, in every way we can, UAA will support the sustainability of the machinery industries,” he said.

 It is also important to understand that UAA is dealing with a ‘perfect claims storm’ at the moment, which includes:

1. Claims inflation post-pandemic, which is causing increased costs of loss and extenuating timeframes on the supply of parts and materials causing delay in repairs, meaning claims are open for longer. This further impacts on claims resources’ inability to finalise claims sooner, thus incurring greater incoming enquiries and further frustrations from clients and brokers, which is outside of UAA’s control. 

2. Simultaneously managing the largest catastrophic weather event seen in the history of UAA.

3. This is further compounded by new regulatory insurance claims compliance born from the recent Haynes Commission. With the recent changes imposed on the claims departments by ASIC and the General Insurance Code of Practice (including RG271), there is enormous pressure on claims service level agreements and detail of complaint management requirements. This has required UAA and other insurers to implement more steps in its processes, further involvement from lead underwriters, additional staff in claims, and changes to systems to measure and monitor these regulatory obligations.

“As importantly, our claims team continues to remain diligent and resilient and doing their upmost best to provide the service they strongly believe our clients deserve, and in turn they continue to receive compliments about our service,” says Grasso. 

“This is by far the proudest accolade our team could receive. The team is dedicated to the on-going support they and their colleagues nationally continue to provide.”

To further elaborate on the claims inflation, Grasso highlights a number of global factors impacting the insurance industry during this post-pandemic period. 

“We are seeing significant increases from four main sections of the global economy which are impacting on our claim’s costs. The first of these is freight, which has increased around 30 per cent on average.

“Globally, the freighting industry globally was in somewhat disarray leading into the pandemic. However, the problems have now been compounded by the pandemic and the recent Suez Canal incident, which has led to huge delays in many supply chains. 

“Dramatic increases in online shopping and high disposable income has created a further demand on products globally, which has seen shipping prices soar. As an example, in the past, the cost of shipping a 40ft shipping container out of Singapore would average between $3,000 to $5,000. Today you are looking at $13k to $15k, a 300 per cent increase,” said Grasso.

“This has had an impact for UAA, particularly on large part items such as machine cabins, and other large bulk items. During the pandemic, air freight has also soared. With passenger flights grounded for almost two years many parts that would normally be flown in on commercial passenger airlines have had to wait for specific freight airlines, causing extensive backlog and price increases.

“Needless to say, the increase in fuel costs are also impacting the increase in freight costs. The global fuel price is largely controlled by the Organization of the Petroleum Exporting Countries (OPEC), who alter the crude oil prices based on demand. This organisation is made up of approximately 13 countries mostly north, northwest of Africa, including the Middle East and Venezuela.

The increase in fuel costs are also impacting the increase in freight costs.

“The cost of parts has increased by at least 15 per cent. With the closing down of global manufacturing during the pandemic, this dramatically increased the demand for parts and manufacturers are finding it impossible to supply the parts in the volumes required. This is further compounded by the greater demand for machinery globally as many governments recognised the importance of keeping the construction economy afloat during the pandemic. This has secured long-term projects for the construction industry globally, but construction equipment and crane OEMs for example cannot timely supply enough machines to satisfy the demand.”

This includes all components that make up certain parts, he adds. As an example, microchips are in high demand and the manufacturing sector, including China, cannot satisfy the demand. This has placed pressure on equipment manufacturers and dealerships to review the technology offered on machines and vehicles, with many forced to consider supplying machines and equipment with
downgraded technology. 

“This inability to service the demand for new equipment has seen value of the second-hand equipment market soar,”
he said.  

“In some cases, second-hand machines can be more expensive than new equipment, particularly those between 0–3 years of age, with purchasers needing to access machines immediately rather than wait the 18 months to two years for new equipment. This is also evident in the used car market.

 “It is the same for second-hand parts. One benefit we are seeing though is the increase in salvage wreck returns. We are seeing in some cases up to 60 per cent of the sum insured on salvage wreck returns. This offsets some of our total losses to some degree, but it does create more pressure on our ability to repair.

“We have seen the cost of labour rise by at least 20 per cent. With the increase in demand for equipment in our sector, the demand for skilled labour has increased accordingly. Employees are commanding higher wages/salaries, with many moving from business to business seeking the best deals. The crane industry, for example, was already experiencing a skilled labour shortage prior the pandemic and this continues to be a problem.

“In addition, some employees have not returned to their previous work. They are now looking into new industries – seeking the ability to work in hybrid work environments, including working from home, with many moving from large congested industrial and city environments. They are re-evaluating their life/work balance, and this is also evident with real estate pricing increasing dramatically in areas well outside of major cities. The freeze on migration has also seen an impact on employment here in Australia and other parts of the world,” he said.

There has been a major rise in the demand for raw materials such as iron ore, which has led to increased pricing for steel, electronics, plastic, materials such as paint, hardware, oil and gas, parts and componentry, which has led to pricing increases of more than 20 per cent. For all of these reasons UAA and other insurers are seeing an increase in claims costs, says Grasso.

“As always, we will try to keep the premium increases to a minimum and we will continue to work hard to deliver the best service and product we possibly can. We thought it was a good time to advise the industry that we are operating in difficult times, and we are facing many challenges that are completely beyond our control.

“We ask our valued clients to remain vigilant during these weather events and, where possible, prevent loss by moving equipment to higher ground if a flooding situation is imminent. UAA is here to support you every step of the way and if disaster strikes – our claims department is dedicated to getting you back on your feet as quickly as is humanly possible,” said Grasso.

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