Become a True Sales Organization

Managing the Business of Restoration

September 2016 | Vol. 53 No. 8 | $9.00

CR&CLEANING & RESTORATION

A PUBLICATION OF THE RESTORATION INDUSTRY ASSOCIATION

The Changing Restoration Landscape

4 Cleaning & Restoration | September 2016 | www.restorationindustry.org

I N T E R N A T I O N A L P E R S P E C T I V E S

W hen major ires, loods or storms strike, insur-ance companies turn to their preferred networks of restoration contractors

to help policyholders recover from their losses. Natural disasters triggered thousands of insur-ance claims that stretched the ability of carriers and their vendor partners to serve their mutual clients. Each event taught hard lessons.

Given the disruption caused by these catastro-phes (CATs), insurers started ramping up their supplier networks a couple of years ago to ensure there would be capacity in their supply chains to handle all CATs. Most major insur-ers have signiicant redundancy built into their networks so that there is always at least one contractor available to service policyholders. Larger towns and cities get many more layers of protection with overlapping vendor service areas. This is a sound strategy in principle; however, it has ended up actually reducing capacity. Here's how it played out.

THE BACKGROUND

More than a decade ago, insurers started to favor full-service restoration contractors. This pref-erence showed up in early RFPs when insurers would try to identify contractors who did more than pick up a phone to round up a net-work of subcontractors. The rationale was that having in-house capability leads to better quality control and service and, probably, lower cost.

Given the potential of the business volumes driven by these vendor programs, contractors bought in immediately. Overall, it was a viable and stable business model on the surface.

REASON #1: UNSUSTAINABLE COSTS

Insurance vendor programs came with a few caveats. First, insurers wanted rebates or dis-counted prices (generally negotiated by reducing overhead and proit allowances on jobs).

Secondly, there were higher administrative costs involved because insurers mandated that their choice of software had to be used on their claims. This invariably meant adding central estimating experts to the contractor's payroll because the software was complex. Often, data entry resources were also required. Licenses and transaction fees added up quickly and get-ting billed in U.S. dollars didn’t help.

Thirdly, some carriers brought in third-party administrators (TPAs) to handle their claims. TPAs manage contractors’ performance and costs in return for a fee paid by the contractor.

As a result, property insurance jobs started yielding lower margins while administrative costs rose. This was not a major concern at the time because most of the margin reductions happened in restoration jobs. Emergency jobs always yielded signiicantly higher margins than restoration work and regular CAT events subsidized everything and paid the bills. That didn't last very long, unfortunately.

Three Reasons Why the Insurance Industry Lost Its Way in CanadaBy Kabir Shaal

COMMENTARY:

NOT ALL ADJUSTERS

ARE THE SAME

There are still adjusters out there who can work

with contractors in an open, communicative

environment. They recognize the value of the

relationship, with the ultimate goal of policyholder

justice. This doesn't mean we don't abide by

policy limitations. This doesn't mean we don't

quickly identify the fraudsters out there. But we

work toward the satisfaction of a job well done:

indemnifying policyholders, allowing contractors

the resources to execute a competent and

ethical restoration, and getting paid for our own

expertise at resolving insurance claims. That's

what makes me, and adjusters like me, tick."

— Peter J. Crosa, AIC, RPA at Peter J. Crosa and

Co. and president of the National Association

of Independent Insurance Adjustors (NAIIA)

www.restorationindustry.org | September 2016 | Cleaning & Restoration 5

REASON #2: CATS AND MARKET CAPACITY

Things began to unravel when the weather there weren’t nearly enough CATs to keep average margins in the sweet spot. However, there was enough going on in other regions to keep the big networks reasonably happy, so this local situation was generally ignored. Nevertheless, many people began to realize that the industry's reliance on storms and loods was a dangerous weakness in the system.

Then insurers were hit by a couple of signiicant CATs in quick succession that severely strained vendor network resources and put Alberta in urgent need of a capacity ix. It seemed obvious that vendor programs required more contractors to ensure that the next time a major loss event happened, there would be enough capacity for claims to be handled quickly and eficiently. It didn’t take long for insurers to sign up additional contractors on their vendor programs. They didn’t stop in Alberta — the “capacity ix” headed east. All of a sudden, contractors were staring at dimes where dollars had once lowed.

REASON #3: UNDERWRITING CONTROLS

There was one last step to the tipping point: Insurers tightened up their underwriting because water losses had become a problem for them. Before long, less cover-age, higher deductibles and tighter acceptance standards resulted in fewer losses making it through the job assign-ment pipeline to contractors. Now, not only were fewer water damage losses coming in, they were smaller in scale. All the years of relying on water mitigation losses to make up margins meant that once that revenue channel shrank, the entire pricing model folded up and collapsed.

THE OUTCOME

The combination of higher operating costs, lower mar-gins and declining revenue was devastating. Contractors found themselves battling to manage ixed costs in a time of plummeting revenues. Cash low is a persistent problem for contractors, but banks were always willing to provide lines of credit as long as there was a reasonable amount of invoicing every month. That changed quickly. Lower revenue meant lower borrowing. Contractors grouped together in 2015 and, through the Restoration Contractors Organization of Canada, made a desperate attempt to speed up their receivables from insurance companies. They met with some success but, in many cases, it was too little too late.

In a relatively short period, 18 restoration irms went down hard. The rout was national. It didn’t stop there. Surviving restoration irms faced ongoing challenges and the larger owned networks progressively shut more

branches because of eroding revenues, declining margins and rising relative costs. Astonishingly, it all happened with barely a ripple. News doesn’t travel far in this indus-try. Finally, one of the largest restoration irms bottomed out and had to reach across the border for a lifeline. That triggered a buzz, but then the Fort McMurray ire hap-pened and attention turned to that.

The result of all this: Capacity has shrunk drastically in most markets. It’s going to get worse: Every major resto-ration contractor is earnestly looking outside the insurance industry for new business channels. Non-insurance com-mercial business is the target market for everyone. That’s where the marketing dollars and strategic planning are now focused. Contractors inally feel like they may have a chance to control their futures, and they’re going to work as hard as they can to develop this new revenue source. Of course, that means that a growing slice of capacity is disappearing from the insurance restoration market.

Insurance companies in Canada need to rethink their strat-egy before job-handling capacity erodes any further.

Kabir Shaal is a Canada-based consultant specializing in corporate strategic planning, project delivery and leadership development in the P&C and restoration industries. He can be contacted at kabir@shaalconsulting.com or via his LinkedIn proile: https://ca.linkedin.com/in/kabirshaal.