Handle with care

In the past, claims tended to be the Cinderella of the insurance industry. The focus was all on designing innovative covers, pricing competitively and quite simply getting the business in. The irony of this approach, bearing in mind that the primary value of an insurance policy for the buyer is that claims will be paid speedily and fully, seemed to escape much of the market.

Recently there have been changes in the UK. The national risk managers’ association AIRMIC can take some credit. After discussions with its partner insurers, last year it issued a statement of principles relating to reservation of rights letters which insurers had increasingly been firing off to their commercial policyholders as soon as a potentially large claim was notified. The principles state that insurers will avoid issuing a reservation of rights within 90 days of receiving a large claim, using this time to mutually assess information and evidence to aid a settlement without involving lawyers.

Also this year there have been further moves to improve claims handling in the UK. After market consultation, AIRMIC published its best practice guide, setting out the hallmarks of an excellent insurance claims service. By the time AIRMIC held its annual conference in June, five out of its seven insurer partners had prepared reports on how they line up against that best practice guide, says AIRMIC technical director Paul Hopkin.

He stresses that this is not a box ticking exercise. There are eight principles with an average of six sub components. ‘It’s not just a matter of simply giving a “yes we do that” type of answer. Typically, the reports we’ve received provide a detailed account of where each insurer is in relation to each of those sub components.’

Angus Tucker, president of CILA (Chartered Institute of Loss Adjusters), comments: ‘Our members have always tried to adhere to principles of best practice. However, AIRMIC has taken this a step forward by formalising some of the issues to try to get uniformity in the market. CILA welcomes this as it clearly makes life easier for everyone if insurers’ approaches correspond.’

Faster settlement

In this time of economic recession, AIRMIC has also tackled the thorny problem of speed of settlement – a particular issue with large business interruption claims, where slow payment could impede recovery or increase borrowing costs. Hopkin says that AIRMIC has reached an outline agreement with its partner insurers over a scheme to ensure that companies avoid the potential cash flow problems.

He explains: ‘Where a claim is in excess of £2.5m initial reserve, the insurer will sit down with the insured and other interested parties (for example, loss adjusters and banks) to produce a time schedule of costs and payments.’ Basically this means agreeing a schedule for interim payments throughout the claim restoration process that will ensure ‘cost neutrality’ for the claimant, by exactly mapping the costs that the claimant will need to meet at each stage to maintain cash flow at its previously forecast level.

Hopkin adds: ‘AIRMIC has been pressing for agreement on speed of payment, because the credit crunch has made it more difficult for firms that suffer major property losses to acquire bridging capital from their banks, except at prohibitive cost.’ He expects final agreement soon. ‘Agreeing principles means there will be an expectation on the risk manager’s part that this will occur, and that cash flow will be helped, unless the insurance company says it is not going to subscribe. If an insurer does not want to follow these speed of settlement principles, it has to inform its insureds and explain why on a case by case basis.’

While AIRMIC’s insurer partners represent the seven largest UK commercial insurers, is there any guarantee that smaller insurers will follow the same guidelines? Hopkin says: ‘An AIRMIC member who is insured with a non AIRMIC partner can go to that underwriter and ask that this best practice be applied. We believe that this will be an influential set of principles that represents best practice.’

Neil Greaves, UK practice leader, forensic accounting and claims services, Marsh Risk Consulting, comments: ‘In a stronger economic environment businesses often fund their property reinstatement or business interruption exposure through their normal cash flow, or their usual overdraft and credit arrangements. The desire for timely and regular payments on account may be less, as there is a willingness to fund the claim and recover their outlay from their insurer once the claim is quantified and agreed.

‘In a more difficult economic climate (with restrictions on credit) even the bigger corporates will want to receive regular and timely payments to avoid pressure on cash flow and credit.’

Greaves says that the key issue in relation to payments on account and speed of settlement is not about the practicalities of making a payment, but more about the adjustment process. ‘In some cases an insurer or adjuster will take the view that the insured should incur the cost and provide invoices before they will make a payment on account. In terms of business interruption, those same adjusters and insurers will want evidence of loss (ie that the insured has already suffered it) before they will make a payment. This is not helpful to a business.’

Greaves continues: ‘The flip side is that some insurers and adjusters, who recognise the challenges faced by clients in a difficult economic environment, will make advanced payments against anticipated expenditure and losses. A timely advanced payment on account puts a business in funds for reinstatement or to fill the hole in their cash flow before it becomes a problem. Providing the insured can make available sufficient information to give comfort that an advanced payment is within their ultimate liability,

our view is that insurers should commit to timely and “in funds” payments to support their clients following a loss.’

Claims preparation costs

Finally on the claims front, there is one issue which AIRMIC has not taken up officially, but which some UK risk managers feel strongly about. Chris Maurice, risk financing manager for BT Group, explains.

‘Most UK insurers do not include claims preparation costs as part of their standard property or business interruption policies. Historically, it has always been the insured’s obligation to prepare and negotiate any claim.’

Tucker comments: ‘The UK insurance market is out of step with the rest of the world, as most other markets like North America, the Far East, Australasia and continental Europe include claims preparation costs in policies.’

The problem is that the larger and more complex the claim, the greater degree of internal resources required. This may not have been a problem when companies had more people available to prepare claims and when the claims themselves tended to be simpler. Says Maurice: ‘In today’s business environment, companies are leaner, and business interruption and some material damage claims are becoming far more complex. For a lean organisation which does not have any slack resources to handle this sort of work it’s a real problem.’

‘Even a major disaster will generally not destroy a complete business, so management must continue with their normal duties as well as take on the additional work resulting from the loss, such as combating competitors’ attempts to encroach on their business,’ says Tucker. ‘They really don’t have the manpower to deal with the actual claim.’

The need for specialists

Businesses are now complex, so claims have become complex. Understanding the impact of a loss on the company’s business model, and finding the evidence of loss and presenting it are not easy tasks. Maurice explains: ‘The skills necessary to produce a claim are very much IT based. They are of a higher quality and more extensive than in the past.

‘Some progressive risk managers are realising they need to buy in external expert assistance to help prepare and negotiate claims. Even very large organisations realise this is a specialist activity and they need someone with the same skills and expertise as the loss adjuster to prepare claims and work with the loss adjuster.

‘It is expensive. Why should the company have to meet the cost out of its claims settlement? It should be built in as part of the policy. It has got to be in the insurer’s interests to have somebody whom the adjuster can talk to, who knows what is required and can work with the client on a day to day basis. Otherwise, a disputed claim can result in both sides ending up paying lawyers. Insurers would save money in the long run.’

Tucker maintains that actively managing and mitigating a loss can reduce the lifecycle of the claim, to the benefit of both insurer and policyholder, and possibly also reduce the value of the claim because there will be an experienced team to implement loss mitigation measures at an early stage.

Large companies with significant self insured retentions should be able to get a payment of claims preparation costs clause added to their property programme. Maurice says: ‘Smaller organisations may have to pay a bit more in the first year, but once it’s included, the cost will be assimilated when the programme is remarketed.’

It is important to choose and get to know the organisation that will be supporting you before you have a loss, says Maurice. ‘Selecting organisations and negotiating rates post-event could be a nightmare after you’ve just had a major loss as you need to focus on other things,’ he warns.

Do you really need cover for claims preparation costs? Maurice comments: ‘Many risk managers would react positively if they were asked if they could handle a £50m loss, but I think they are over confident. Sure they could do it, but they forget that they would have the “day job” to do as well. Risk managers need to recognise the fact that they do not have the time to fit a major loss into their lives. It’s too complicated and time consuming, particularly for complex claims. Having experienced claims under policies both with and without this cover, I would say that its internal benefits are immense.’

He also suggests that the cover wording should allow for payment of people relocated from other parts of the organisation to deal with the claim. ‘Organisations are often divided into different business units with their own P&L accounts. You can have the nonsensical position where one unit has surplus resources and another unit has a loss that it needs to recruit someone from outside to handle. You need to make sure that your claim preparation clause allows you to use internal resources from another area, and that the policy will pay for this. Generally, it’s cheaper to do this, so the insurer actually benefits.’

Hopkin sums up: ‘When you have a loss that gives rise to a claim, preparing the claim is part of the extra costs you suffer. It would seem to be a necessary feature of the policy.’ However, he adds that the terms and conditions of an insurance policy are for negotiation. ‘Individual buyers have to decide what is acceptable or not.’