Kent Chaplin explains why Lloyd's drive for proactive claims handling is central to its survival
Insurance can be a complex and insular business. Like any industry, it has its own language which it understands even if "outsiders" don't. But one word that everyone would recognise, along with its importance, is claims. This is the single most public-facing aspect of the insurance industry, and handling it well is essential to our survival.
Anybody, in any walk of life, can become involved in the claims side of our business. We all buy our house and car insurance. The money comes out of our account every month and we think little else of it. But when something goes wrong, when we need to make a valid claim, our perception of our insurer and the industry they represent hangs by a thread. If the claim is disputed, not paid for ages, or not paid at all, we are rightly furious.
Claims is the insurance industry's largest cost. It accounts for 80% of Lloyd's expenses, and in 2004 alone the market paid around £500m on claims-related fees to people like lawyers and surveyors. By getting claims right, there are fewer disputes and much of this unwanted extra expense is avoided. And so the simple fact is this: insurers who are good at handling claims are going to get more business, more capital, and spend less money.
As if that isn't enough, there are other significant benefits. Well-handled claims lead to accurate reserving, which is essential for making sure you get the price right on a risk. This ultimately assists reinsurance recoveries, and can lower reinsurance costs.
Putting claims first
This is why, at Lloyd's, claims have now been put centre-stage. It no longer sits hidden in the back office, but is dealt with proactively as a value-added function. This has involved working closely with every Lloyd's business to successfully introduce a series of eight claims management principles and supporting minimum standards. This ensures that everyone trading at Lloyd's is at least up to the same level, but many are beyond this. The next stage of this is being taken forward this month when the second round of minimum standards come into place.
Another big aim is to make it clear who is doing what in the claims agreement process, defining processes and procedures to enable valid claims to be paid quickly, and ensuring that the most experienced claims handlers work on the most complex and high value claims.
Lloyd's already has a strong reputation for paying valid claims. It is one of the market's key strengths, built up over three centuries. So why is it necessary to improve it further? As Lloyd's makes clear in its recent three-year strategy - Building the Optimal Platform - we are in an increasingly competitive industry, and you have to make absolutely sure you can compete effectively with other markets. You have to give buyers, insurers and investors a good reason to choose your platform over the others.
The start of change for claims came after the tragic events of 9/11. Lloyd's mounted a successful, coordinated response to the catastrophic losses of that day - paying around $5.9bn of claims to date, according to Xchanging Claims Services (XCS) - but it revealed opportunities to further improve and make the process more efficient.
Since then, therefore, we have been working closely with market firms on a coordinated approach to enhancing claims performance. Together, we have developed the Lloyd's Claims Strategy, and the first three stages of it were introduced on 1 July 2005. Eight claims management principles were introduced in 2005 with minimum standards for the three principles seen as a priority. These standards relate to claims reserving, selecting and managing external experts and performance measurement.
The big focus for the Lloyd's claims team now is to monitor businesses' performance against these standards, benchmarking the data that comes in and feeding back its findings to those firms so they know how they are doing. There is no point doing any of this if the team is not going to work with them to measure performance.
It should be stressed, however, that this is not a case of Lloyd's micro-managing businesses. Each firm recognises the importance and value of a proactive approach to claims. At Lloyd's, we are effectively a business partner providing the help, support and raw information they need to do this.
The second initiative that began last July was the creation of an effective "claims agreement for followers" process. At Lloyd's, there are now usually only two agreement parties when dealing with claims - the lead underwriter and the independent service provider, XCS. XCS manages claims for every underwriter signed up to a risk other than the leader, or the following market as it is commonly known. The number of following underwriters can vary widely, but having one representative for them makes the whole process far easier. Gone are the days when a broker had to see 15 different people in a day just to get a claim agreed.
The Lloyd's claims team wanted to improve this process even further though, and so it helped the market to establish a new contract with XCS. Since that came into effect last summer, it has started employing more claims experts into senior roles, providing further training for staff, and invested in new systems - in particular to provide better claims management information to underwriters. Overseeing much of this is the Claims Service Review Board, which manages the market's investment in change at XCS and ensures that performance continues to improve. It is made up of key people from Lloyd's, five Lloyd's managing agents, and XCS.
The third big change to come into place last summer involved revising the 1999 Lloyd's Claims Scheme - the rules for dealing with claims in the Lloyd's market. It was time to bring this up-to-date and into line with current market practices. The first decision was to dispose of the "leader only" claims agreement, which saw only the lead underwriter agreeing each claim. Other revisions include reinforcing the role of the claims agreement for followers and clarifying accountabilities for leaders.
So what is next in the drive for enhanced claims handling at Lloyd's? Minimum standards for the remaining five principles go live this month, and firms have until next January to meet them. This is effectively the "to-do list" for Lloyd's over the next eight months as the work on claims progresses.
The new standards require managing agents to:
- Have a claims philosophy outlining the business' overall approach to claims. This should be clearly documented and communicated to all staff;
- Have appropriate claims resources, skills and management controls in place, getting the best people to do the right jobs when handling claims;
- Ensure that claims are adjusted and processed in an efficient and timely manner. Few would argue with Lloyd's reputation for paying valid claims, but there has been criticism in the past of the time it can take to process them in such a large and complex market;
- Set standards for maintaining claims files, ensuring that the right file can be called up quickly and easily; and
- Ensure that the lead underwriter on a claim cooperates with and supports the role of XCS as it acts on behalf of the following market.
Tested by Katrina
Of course, the true test of all this comes when a major loss happens, and Lloyd's effective market coordination at such a time is one of its key strengths. An excellent example is last year's record hurricane season. When Katrina struck, a response team was immediately set up to deal with it. A free Lloyd's phone line was set up in the US for those with policy queries. To date, more than 5,000 calls have been taken in relation to Katrina, Wilma and Rita, and XCS has dealt with more than 6,800 claims.
It should be stressed again that claims is the insurance industry's biggest cost, and has the biggest influence on its reputation. It is therefore nothing more than commonsense to take a long hard look at it, see how it can be improved, and take action to ensure it is as efficient as possible. At Lloyd's, the work done so far on this is having a great effect. Businesses are dealing with claims proactively, the process is more streamlined and efficient, and valid claims continue to get paid.
- Kent Chaplin is head of claims at Lloyd's.