Comment - claims: cutting the cost of claims

Advertising costs are one of the first casualties in our industry in times of economic hardship — along with headcount, marketing and training. But what about cutting the cost of claims?

As we will undoubtedly hear at industry conferences over the next 12 months, claims is the insurance industry's shop window but, despite all the modern technology and resources available to us, claims remains the sector's poor relation and it is fiendishly expensive to run.

Everyone knows how difficult it now is to get experienced claims personnel and there must be some correlation between that difficulty and the pay and status of claims handlers. But there may be a solution to that.

Shot in the foot
It might appear that I have already shot myself in the foot by suggesting cutting the cost of claims because that might imply simply not paying them. I don't subscribe to that philosophy at all but there is an alternative. I base my proposition on the fact that the industry has significantly improved its standards of qualification, training and competence thanks to the initiatives of some major insurers and the Chartered Insurance Institute, among others.

The next logical step would be to give these qualified people a reason to maintain the highest levels of professionalism and integrity especially those dealing with the industry's claims. It is, indeed, our shop window.

Few insurance professionals will disagree with the proposition that we have outsourced far too much of our claims work to loss adjusters, solicitors and claims farmers, with interests diametrically opposed to our own and those of our policyholders. It is also true that in paying these outsourced workers, their fees have been cut to the bone — and it is one of the best known sayings in our industry that when you pay peanuts you get monkeys.

I am not proposing that we should cut out solicitors and loss adjusters where they are truly necessary for the application of their professional skill and calling, but they should not be relied upon as the arbiter of what claims get paid and what rejected. That is a skill and responsibility of a professional insurer and should, ordinarily, be exercised by the insurance professional.

In recent years I have become increasingly focused on management of distressed claims, helping insurers and policyholders unblock the stalemates that so often occur in the adversarial process that commonly drives our claims industry. In doing so, the benefits of alternative dispute resolution have manifested themselves, not just in theory but in practice.

The outcome can be summed up in three things: policyholder satisfaction; significantly reduced costs; and a tangible demonstration of an insurance professional's skill and ability.

ADR is still a comparatively unfamiliar concept in the UK, although it is much more widely adopted and accepted in the US. Having studied and qualified as a CEDR mediator, I am much better informed than I was a few years ago about the realities of ADR in practice and have no hesitation in saying that it is consummately safe for both insurers and policyholders — provided that it is carried out under the strict professional terms of the experts in ADR practice.

A directional change
In January, the Insurance Institute of London research study group published an excellent 'bible' of ADR in practice — RS 263 — for the insurance industry. Launched in the Lloyd's library to a capacity audience of insurers, brokers, lawyers and, no doubt, mediators, there was a clear sense of desire for a directional change in the handling of claims. If claims is accepted as the shop window of the industry then to put a new product in the window will attract new shoppers.

There are principally five processes available in ADR: arbitration; litigation; mediation; expert determination; and early neutral evaluation. Each of these has strengths and weaknesses. From my experience, mediation is the most suited to most insurance disputes, excluding reinsurance, it being one of the least expensive and most practical from the parties' point of view.

So many people I come across do not understand that mediation is only binding if both parties agree. If they don't agree, no damage has been done, much has been learned and litigation or other forms of dispute resolution are still open to them without any prejudice suffered by either party. Arbitration is more similar to litigation. Mediation is nothing at all like arbitration and the IIL book explains this, eloquently.

The IIL book also explains the cost benefit ratio of different types of ADR and compares the US, French and UK systems to make its case. It is worth a read even if it is just for the insight it gives to another way of dealing with our industry's core product.

Collaborative and flexible
Above all mediation is collaborative and flexible. There is often a common sense shared purpose in mediation. Conversely, both litigation and arbitration are inherently adversarial processes. Through mediation, disputes can be resolved by deals that go way beyond any kind of apportionment of the issues between the parties. Insurance policies are ideally suited to this if the insurers accept the principle of utmost good faith as its central tenet.

Accepting that there are a minority of policyholders whose intent is to defraud the industry, the vast majority simply buy insurance as an economic necessity. It is not a game to them of bluff and counter-bluff, or a wager; nor should it be.

Settling claims without recourse to imperious policy points and time wasting litigation could be the summit of the industry's aims and objectives over the next decade — and it could be elegantly achieved by embracing the concepts, the skills and simplicity of cost effective ADR.

Last, and most important, if we are training men and women to become professionals in our industry, let them make powerful policy decisions in settlement and payment of claims and reduce our reliance upon outsourced competitors.

Roger Flaxman is the managing director at Flaxman Partners