Lorega in the News
Publication: Brokers’ Monthly
Author: John Sims
Job Title: Chief Executive Officer
Date: 03/11/08
Bridging the gap between aspirational fantasy and economic reality
While the regulator’s Treating Customers Fairly initiative requires insurers to provide fair claims settlements, currently the ability of many companies to do that is seriously hampered by the economic realities and the way they operate. The gap between what actually happens in practice and the aspiration to provide fair claims settlements is as wide as ever as insurers tighten their belts like there’s no tomorrow.
Part of the drive to reduce claims costs involves applying supply chain management to squeeze the lowest possible prices from contractors and suppliers. The practice by some carriers of paying loss adjusters bonuses based on their achieving a reduced final settlement is a symptom of how some insurers currently address claims cost pressures.
This is frankly unacceptable in my mind as it flies in the face of TCF and just doing the right thing by the customer. With the return on investment severely reduced by stock market falls the need to produce a sub 100 underwriting result under the current system inevitably means reviewing the amount paid out in claims. While this may be undesirable, desperate times call for desperate measures.
Having said that, I do think some insurers are missing a trick. With the regulatory, economic and market pressures now bearing down on the industry it is time to rethink the current model. An increase in claims costs due to fraud is, I’m afraid, on the doorstep.
According to the Arson Prevention Bureau fraudulent fires already cost over £50m a week. Groupama also recently reported £1m worth of arson claims in July 2008 compared to zero in the same month in 2007. Axa has told of an 80% rise in the detection of fraudulent claims while Airmic has further warned that: “the credit crunch is a breeding ground for fraud”. These figures only show the fraudulent cases that have been detected – the real number is anyone’s guess. While fraudulent claims can usher in rate hardening, which would obviously alleviate the current pinch point for insurers, that in itself does not address the disconnect between what happens at the coalface and the desire of most carriers to provide fair claims settlements.
The solution therefore must address the economic considerations while simultaneously improving customer service. The answer to this, and the trick insurers are missing, I believe, is providing policyholders with loss recovery insurance (LRI) funded assistance in the event of a claim – as evidenced right across continental Europe. This assists clients through the entire claims process with the help of a qualified chartered loss adjuster and is also proven to help insurers contain claims costs in a number of ways.
First, usually most insurers through their own adjusters and supply chains leave it up to clients to get estimates for repair or replacement costs. You can almost hear the builders saying to the customer “is this an insurance job, sir?” But if an independent adjuster is in there representing the policyholder and broker they can often see how it can be done for less. This reduces the amount of overall cost without impinging in any way on the quality of the work.
Additionally if the price is currently being driven down through adjuster or insurer supply chains it is because of the need to supplement the adjuster’s fees. This means the quality of the work can and does suffer; not a fair and equitable ideal.
LRI also helps contain claims costs by educating the client to help them understand what is fair. This is half the battle as most clients’ expectations tend to be higher than the reality. The model as it stands is also open to confrontation as the client feels like their back is against the wall with the insurance company and their adjuster against them. With a trusted advisor telling clients this is actually a fair offer and you should accept it the system has proven to work better.
Insurers’ costs are further kept low because a LRI funded adjuster spends dramatically more time with the client than an insurer’s adjuster so they are far more likely to pick up any irregularities, such as misrepresentation or attempted fraud. This also gets around insurers often clumsy attempts to prevent fraud which can alienate and annoy genuine claimants by treating them with suspicion.
In terms of fraud the industry is more vulnerable than ever before. In the HNW world the move to “no proposal” was a marketing dream, but an underwriting nightmare. Vetting has effectively been replaced by trusting the broker to bring bona fide clients to insurers. The reality is however much we all laud this approach, brokers see their customers less and less, if all in some cases because their margins are also being squeezed. In a perfect world most brokers would want to undertake due diligence on customers before deciding whether to take them on, but they just do not have time.
If the industry is serious about closing the gap between the current situation and its aspiration to provide fair claims settlements, both insurers and brokers seriously need to consider changing the current model. Providing LRI funded independent adjusting support for the policyholder when a claim occurs won’t solve all of the market’s ills but, as Continental European experience shows, it can transform an often tortuous and expensive process into one that is far more equitable all round.
