Last year, UK risk management association AIRMIC announced initiatives to promote better claims handling by insurers and to challenge the issuing of issuing reservation of rights when large claims are made. Graham Buck offers a progress report

What a difference an economic downturn makes. All at once some of what were the insurance market's biggest names are suddenly vulnerable, while an extended period of softening premium rates has abruptly halted.

The changed environment will significantly affect the issues of claims payments and claims service levels, which were hot topics even before economic growth went into reverse. Insurers have an opportunity to demonstrate service values and show empathy with their corporate clients beset with cash flow problems. At the same time previous recessions have evidenced that the incidence of fraudulent and exaggerated claims tends to increase when the economy catches a cold, so insurers could be more likely to investigate the circumstances around a loss and delay payment until satisfied that it is genuine. Cost-cutting is already being reflected in job losses and, while the impact is often falling on management, claims teams could also be affected.

The Association of Insurance and Risk Managers has increasingly focused its attention on claims handling and the speed of payments over recent years. As AIRMIC chief executive John Hurrell has observed, slow settlement of a claim can prove the catalyst that pushes the insured company from being a going concern into receivership

At one time there were plans to issue a league table, which would have resulted in ‘naming and shaming’ those insurers whose claims service was regarded as unsatisfactory. However, an alternative approach has been adopted that provides AIRMIC members with a much more detailed analysis of insurers’ strengths and weaknesses in their claims operations.

This involves a three-stage investigation of how insurers and their corporate clients can better manage their relationship over the claims process, from initial notification to final settlement. The first stage came last December, when AIRMIC announced that it had reached agreement with its seven partner insurers - Ace, Allianz, Axa, AIG, RSA, XL and Zurich - on the sensitive issue of reservation of rights issuance. Risk managers had been complaining that insurers were increasingly resorting to the practice automatically on being notified of a major claim, creating the potential for a lengthy legal battle on even routine claims. Under the new protocol, the seven insurers agreed in most circumstances to a 90-day ‘cooling off’ period for policies issued in England and Wales following notification of any £2.5m plus claim. The aim will be to settle any contentious matters informally over the intervening period without recourse to lawyers, while information and evidence will be reviewed to determine whether the claim is covered.

The second part of the initiative followed in January, when AIRMIC published its long-awaited claims guide outlining the constituent elements of good claims service. The guide sets itself up as a benchmark for both insurers and insurance buyers, with the latter invited to provide both positive and negative feedback on how the claims service they experience compares with the standard aimed for by their insurer. The guide is envisaged as a ‘living document’, reviewed annually and updated as necessary. The partner insurers are currently evaluating their own claims practices against these guidelines and their reports will be issued to members.

The third part, which could prove more challenging, is an attempt to accelerate the speed of claims payments or at least for insurers to offer clients greater certainty as to when they can expect to receive payment. When a company has suffered a major loss, the timing of a claims payment has major cash flow implications. With the impact of the credit crunch and recession deepening ‘there has never been a more critical time for insurers to recognise the cash flow impacts for clients that follow a major claim in the way they make their interim payments’ says Hurrell, as the bridging finance that was typically provided by the banks has suddenly become much scarcer. There are hopes that an agreement in principle on this particular issue may be available in time for this year's conference in June.

Stars and ostriches

The issue of claims service levels is one that brokers have also taken up in recent years. They include the ‘willingness to pay’ model devised by Aon which, says executive director Martin Thomas, ranks insurers into three groups of best performer, middle rankers and below average. ‘There is a big discrepancy between the best and the worst, although the position varies from one marketplace to another,’ he reports.

Thomas says that Aon has used the data in meetings with carriers, informing them how their performance compares against those of their peers. ‘The majority of responses are positive, but not all,’ he reports. ‘We divide them into three categories – the majority are enlightened organisations with a service culture, but there are a minority that can be classified as “ostriches” and a small number of “aggressive ostriches”.’

“The incidence of fraudulent and exaggerated claims tends to increase when the economy catches a cold.

Aon has found that the domestic market, where cover is likely to be written 100% by a single player, shows fewer discrepancies than the Lloyd's markets. However XChanging Claims Services – formed out of Lloyd’s claims office and since 2006 its authorised claims handler with a high level of delegated authority – has been working hard to improve the market’s claims performance.

Managing director Mark Thompson says XChanging is pursuing a strategy of having ‘experienced claims handlers, providing the right level of service to the right customers.’

‘We provide a project management service, with 85% of claims going through a standard and cost-effective route,’ he adds. ‘This has been implemented in the past three to four months and represents a massive step change for the Lloyd's market.’

XChanging has been at the forefront of introducing electronic claims files and finally ending the era in which brokers manually carried around paper files. Over this same period, XChanging has doubled its headcount to 320 employees, but Thompson says the group is keenly aware if the need to maintain the impetus. ‘Executives are looking at the way that claims perform, brokers are putting us under pressure and those who let their claims service slip will suffer from the increasing use of benchmarking.’

Cash flow to the fore

The impact of the credit crunch and recession means that, even more so than in good times, the focus during the early stages of a major loss is very much on cash flow, says Maggie Cowing, major loss development director at loss adjuster Cunningham & Lindsey.

‘If a company's customers hear that it has suffered a major loss such as a fire, their response is to stop paying while the banks become reluctant to lend so there is a double impact,’ she says. ‘Validating the claim as soon as possible enables cash to be forwarded to the policyholder.’ She adds that there has been a greater willingness on the part of insurers to make interim payments during the early stages of claim since the onset of the credit crunch, which has generated considerable goodwill. Although as she also notes, in some cases interim payments may only provide a brief stay of execution for a company that is heading towards insolvency.

Cowing admits that establishing whether the policy will respond to a claim is often a lengthy process and insurers have come to regard reservation of rights as a necessary safeguard. ‘Over the past four to five years, there appears to have been an increasing level of case law suggesting that insurers may inadvertently be affirming cover for a claim when they haven't intended to do so,’ she says.

Rob Powell, head of claims at Torus Insurance observes that, like many other trends, the recourse to reservation of rights originates from the US where there have been some ‘massive claims’ over recent years. Those relating to the September 11 terrorist attacks involved some particularly difficult areas and nuances of wording, especially in areas such as business interruption and contingent BI - although the practice stretches back to before 2001.

‘Traditionally, when insurers appointed loss adjusters they could speak eloquently to the insured in setting out the position regarding cover. But as claims became larger and more complicated, there was a feeling that it was wrong for them to speak about cover for the market generally - particularly where the subscription market was used for a placement and a number of insurers were involved.’

“There has been a greater willingness on the part of insurers to make interim payments during the early stages of claim.

So terms of engagement defined the relationship between insurers and the loss adjuster, whose role was strictly to report back to the market on the claim but without the authority to confirm whether it was covered. The reservation of rights letter was devised to cover the period during which this issue was determined.

‘This increasingly became a “knee-jerk” reaction, which was resented,’ says Powell. ‘London brokers particularly hated reservation of rights letters, which they regarded as a red rag.’ As a result of the protests, the onus has been put on insurers to explain their reason(s) for issuing a reservation of rights and to refer to specific sections of the cover that could be under question.

‘The problem with reservation of rights is its anonymity - an expert is appointed, but you don't know who it is and hiding behind an adjuster is not the best way for the insurer to communicate with a client,’ he adds. ‘Instead, the market leader should communicate directly with the risk manager.’

Cowing adds that cooperation between the loss adjuster and the insured accelerates the process of deciding whether a claim is covered. ‘If we can get them on board at the outset and explain that we have to make a number of enquiries, they are generally ready to cooperate.

‘Most of the time the approach works very well. But there are occasions when that level of cooperation isn't there, when the company feels that it is being compromised in providing the required information.’

Obstacles to progress

AIRMIC's claims best practice initiative was two years in development and its partner insurers were willing contributors to the guide, says Graham Lambourne, head of UK and Ireland claims operations at XL Insurance, which was one of the seven participants. He says the group was keen to demonstrate that its claims handling and service follows best practice, but also to be honest and transparent in its assessments. To this end, it allotted project teams to the eight areas covered by the initiative, which were culture and philosophy; communications; people; infrastructure; claims procedures; data management; operations and monitoring/review of claims. The reports received from each project team have provided ‘a useful exercise in illustrating both what we are good at while exposing either what we don't yet have in place or need to develop further.’

He is also confident that those insurers that remained outside of the initiative will steadily fall into line and follow its benchmarks once its success has been demonstrated and the resulting benefits become evident.

So far, so good. But could there be obstacles to hinder further progress? Certainly the third stage of the initiative - establishing guidelines covering the speed of claims payment from the insurer - could also prove the most problematic. It lends itself less readily to a common industry standard than service levels of a reservation of rights protocol suggests David Williams, claims managing director for Axa Insurance.

‘Some types of claim are particularly complex. As an example, for terrorism-related losses it may take some time to establish that a terrorist act is the cause,’ he says. ‘Business interruption claims are also complex. It may take some time to establish how much the normal pattern of business has been affected and to calculate what the correct level of payment is.’

“An overly aggressive focus on claims that aren't genuine may be at the expense of those that are.

Powell adds that the impact of economic slowdown on many sectors has a further effect on BI claims. ‘For steel or coal mining risks for example, business projections are likely to be much lower than those from a year ago - the same is likely for construction projects. Although we haven't experienced this problem yet, very likely it's in the pipeline.’ Companies will also attempt to maximise the lifetime of their capital investments, so decisions such as updating plant and machinery may be put on hold until the economic climate improves.

Interestingly, Williams suggests that one area of claims where clients could themselves accelerate the settlement process is through earlier reporting of employers' liability incidents. Notification can take as much as six months, which makes both achieving a good settlement for the affected worker and assisting through measures such as early rehabilitation more difficult. Too often firms hold back, in some cases because they believe the worker concerned contributed to the accident or injury but liability will attach to the firm regardless. ‘Often they fail to appreciate the legal position and - paradoxically given the complaint usually levelled against insurers - believe we'll pay out too quickly,’ he comments.

Recessionary threats

More seriously, as recession deepens the incidence of business claims will rise. As Williams notes, the last recession was marked by a doubling in the incidence of burglaries as the jobless total mounted. Insurers are already seeing a rise in the number of personal lines claims, with accidental damage losses up by 15% since the current economic downturn got underway. This is partly due to a greater readiness by individuals to submit a claim that they might have held back in more affluent times. The trend will inevitably extend into commercial lines insurance.

At the same time, the delicate issue of establishing whether a claim is exaggerated or fraudulent will come to the fore. In April, the Association of British Insurers reported that in 2008 the number of falsified claims exposed had risen 17% year on year to 107,000 claims, while their value increased by 30% to £730m. For cash strapped businesses, deliberately setting fire to a premise or staging an accident offer a tempting way to access funds.

‘I'm concerned that there is such a focus on the effects of the recession and the potential increase in fraudulent claims,’ admits Lambourne. ‘We've already seen items such as RSA's recent report suggesting that Britons are ready to submit false claims and this would tie in with the experience of the early ‘80s. But an overly aggressive focus on claims that aren't genuine may be at the expense of those that are.

‘Over the past 20 years, the claims world has made major improvements in focusing on what clients need. There has been greater transparency and openness, with claims handlers generally giving a more competitive service. There is a risk that we could now see a reversion to the old ways.’

Williams echoes this concern. He cites another danger of the recession; the possibility that cost cutting will lead to reductions in claims department staffing and the issue of claims service will ‘slip down the pecking order’.

‘Delivering best practice will be a challenge and, having agreed to higher standards, the industry may find it hard to maintain this promise,’ he says. Claims departments could respond to cost pressures by building up their in-house expertise and lessening their reliance on outside professional services, he suggests.

There is, of course, the prospect that other priorities will impinge on risk managers. A recent AIRMIC survey confirmed that, in the wake of American International Group's emergency rescue last autumn, insurance company security has risen up the agenda to become a major concern. As Powell notes, many have responded by expanding their portfolio of insurers so that there are consequently more participants on a placement. This, in turn, could potentially create more problems with a claim and make the claims process a little harder for both risk managers and brokers.