Claims management in the London Market could be a much more efficient operation, according to Tim Woods and Michael Cook
As with so many other aspects of its operations, when London performs claims management well - it does so outstandingly well. Just consider how the market came together as a unified whole to share information and expedite claims payments following the World Trader Center (WTC) disaster.
On more routine claims, however, the standard of claims management is often so uninspiring it hardly merits the name.
Many internal claims functions are over-stretched and under-resourced, often lacking the basic information to manage claims effectively. External claims managers and run-off service providers compete so fiercely on price they can afford to function as little more than processing houses. Claims management appears de-prioritised for all but the largest highest profile losses.
The result is that payments which in other markets take just days to reach the policyholder can take months in London. Insurance buyers today have greater choice of markets than ever before. If London is to continue attracting business from around the world, the market must demonstrate the professionalism of claims teams based here and find ways to speed the settlement of agreed claims.
Closing the files
So what has gone wrong in London - and how can it be addressed? As claims consultants in the London market, our company frequently has the opportunity to gain insight into the issues. A few weeks back, a client asked us to review a large number of claims files on which they had seen no update in more than three years.
We wrote to notify the broker that we would be reviewing the files and 10 days later sat down in their offices with the files in front of us.
In the intervening period the broker had requested and received updates from the cedants and policyholders, adding their responses to the file.
As a result several of the files could actually be closed.
What does this - by no means atypical - example tell us? Clearly the brokers' role in the process is anything but proactive. It would be easy to blame brokers for all the delays and inertia in the system - easy, but lazy. The real onus should be on the re/insurers, who have the most to lose or gain.
There are companies and syndicates in the market making a real effort to manage claims efficiently and effectively but they are very much in the minority. Looking through the file did not reveal any mass of update requests from other re/insurers. If no one is asking the question, the broker has little motivation to get an answer and notify the market.
Releasing the redundant reserves on these closed files identified by our review - none of which were particularly high-value claims - reduced our client's reserves by more than £500,000 (for a couple of hours of consultancy time). If you multiply that by the dozens of other carriers on each slip, then by the countless other claims files in the market that could be closed, you could be talking about hundreds of millions, if not billions, of dollars in overstated reserves - a discrepancy that can ultimately affect underwriters' pricing.
Why is this issue not being actively managed? Why are the questions not being asked? Resource is one explanation. Actively managing claims costs time and money. But when a claims person costing £50,000 a year could save millions, the logic is hard to discern.
One of the things that makes proactive claims management seem such a daunting challenge in the Lloyd's and London company market is that individual claims teams are working in isolation and often with what, to anyone unfamiliar with the market, would be considered a mind-boggling lack of information.
To any objective outsider it would seem incomprehensible that hundreds of millions of dollars of claims are paid each year on the basis of bordereaux that contain only the briefest indication of the claims concerned. There is a certain irony that relatively tiny claims in the personal lines arena are routinely subjected to a level of scrutiny that far larger losses regularly bypass.
There is little effective sharing of claims information in the London market. This is partly a function of the way the market is structured, with only a couple of the 'leaders' on the risk seeing the claims information, leaving other participants with little to go on. This also causes major delays in the carrier's own reinsurance collections, because most following insurers have no supporting documentation for claims on their books.
The issue is partly bound up in the traditionally close-handed culture of Lloyd's, where players jealously guard any conceivable source of competitive advantage. But if you consider how well things work when a major loss transcends this parochialism - and how poorly the rest of the time - there must be a case for some pooling of resources.
This does not have to mean giving away claims authority. Simply comparing notes on areas like programme business - where there could be a dozen different syndicates all looking at different years and different layers - would show up unusual patterns of claims far more effectively than working in isolation. Offering a first-class claims service will be attractive to prospective buyers and there is no basis for competition among underwriters when it comes to dealing with claims as a marketplace.
In an ideal world where all claims are genuine, this would be less of an issue. But, back in the real world, simply nodding claims through all the way down the line does not amount to claims management. If carriers appear not to care - or even to want to know - is that not an invitation to exploit the system? Experience strongly suggests that where regular audits are carried out and questions asked, claims experience tends to behave subtly differently.
Taking a lead
Could Lloyd's take more of a lead on managing claims? With all the information gathered on syndicates' performance, results, reinsurance recoverables, and an array of other measures, Lloyd's must be in an increasingly good position to draw conclusions from which the market as a whole could benefit.
We have seen, after all, how a more centralised approach enabled claims to pass rapidly and efficiently through the market after WTC.
So what should London be doing to control and mitigate claims costs?
Asking questions is always a good place to start - as is gathering more information and maybe even sharing it with other market entities. Questioning established practice and processes could also prove fruitful. Are you applying the right expertise? Why use that law firm, those loss adjusters, those consultants? Are they giving you the information you need to manage claims effectively? Could another approach prove more effective?
Technology clearly has a role to play. Look beyond the slick websites and the BlackBerrys, and technology has made little impression on the London market since the 1970s. There are plans, of course, to create a market-wide electronic claims process, but this could still be years off - even assuming it escapes the fate of all those other market initiatives that have come and gone. "The English approach to ideas is not to kill them, but let them die of neglect."
Many proposals have been advanced for creating a faster, more effective market approach. Lloyd's has set out minimum 'requirements' that syndicates will need to adopt. These include several initiatives that will cost money ... and there is the rub. Claims departments are notoriously under-funded and investment is badly needed in the following areas:
- in technology, to support electronic claims file circulation;
- in people, to attract and/or train experienced claims practitioners;
- in process, to support information circulation, and agreement procedures; and
- in reviewing current practice (eg, reserving techniques, third party expert management and 'peer review' of claims decisions)
Does London have the appetite for this investment? The signs are not encouraging. Consider the major headlines in the market in 2004 and their combined effect on the market's ability to prioritise these investments in 2005:
- Continuing low interest rates
- Disappointing stock markets
- No major US tort reform
- Market rates in general down
- Four major hurricanes
- Asian Tsunami
- Spitzer fall-out.
Technology can help
The claims community certainly has the desire to make improvements, but putting this into practice requires serious investment from their boardrooms.
The prize should surely be big enough to persuade decision makers: better service, faster payments, enhanced reputation, cost savings, reserving accuracy, and lower overall claims payments.
But let's return to our example of the forgotten claims files. The vast majority of updates from cedants or original insureds come in to brokers' offices by email. What happens next is something most other industries would find shocking. The broker prints off the email and puts it in the claims file. Possibly the file will then be physically taken round the market. Probably it will not. Here is a major technology-related improvement that could be made with minimal investment.
Getting basic claims information to insurers simultaneously need not wait for the big bang of market-wide electronic claim files and all the system changes that entails. Allowing insurers to view the claims reports does not depend on the huge effort required to allow the various repositories to talk to one another.
If brokers simply set up an email group for each claims file, they could circulate information as and when it became available - just by clicking to forward an email. This would instantly remove a major hold up in the system. All it would require is someone's time to go through once and set the process up.
Many similar improvements could be introduced without any major market-wide investment. In the time it takes the various committees and groups representing all parts of the market to agree the myriad of issues surrounding market-wide change, make plans, and - crucially - find the funding, a number of relatively simple changes could be implemented that would deliver substantial progress.
Such initiative could serve as a pilot to test the market leaders' commitment to improving claims management for the long term. It is always good to talk; but a little more action in the meantime would not hurt.
- Tim Woods is managing director and Michael Cook is an associate director of Navigant Consulting UK.