In series - Property claims: The price is right

Striking the right price for resolving property claims is central to an insurer's success. Too high, and it can lead to unbudgeted expense; too low and there is a risk of customer and contractor dissatisfaction.

"Pricing is important," says Kevin Wood, chief technical officer at Merlin Professional Claims Services. "You've got to set rates at the right level. If you don't, you'll create problems elsewhere." Insurers agree and recognise that getting the balance right is essential. Gavin Long, group sourcing manager at LV, explains: "On one side you have cost control, while on the other it's a question of customer satisfaction. You have to be mindful of both and find a balance that works."

A vast amount of research is undertaken to ensure prices are set at the right level. By way of an example, loss adjuster Cunningham Lindsey uses a range of pricing sources to set its rates. Peter Wassell, quantity surveying director, comments: "We do a lot of open book work with contractors to find out exactly what costs are involved in a job. We also carry out research with suppliers, such as builders' merchants, to set our rates."

Price data collation
A similar approach is taken by the lower volume, specialist adjusters. For instance, Questgates uses data it has collated itself from claims and through contractors, as well as data from independent sources such as the Royal Institution of Chartered Surveyors' Building Cost Information Service.

This service provides details of the costs involved with building and maintenance and is commonly used to help price building projects.

Joe Martin, executive director of BCIS, explains: "We produce a number of price books, listing the rates for individual items of work as well as indices tracking the price movement. Our research is carried out through a range of sources including a regular price check carried out on contractors listed in the Yellow Pages."

Benchmarking is another part of the process. This helps to ensure rates remain accurate and reduces the risk of leakage. As an example, Crawford & Company's managed contractor network, Repair Net, uses a number of different comparisons to underpin the validity of its rates. "We conduct extensive benchmarking," explains Simon Neil-Jones, its UK manager. "We'll compare our pricing against that of our competitors and then use an independent expert to validate the results. They also feed in ideas about prices." It benchmarks against the National Schedule of Rates, an independent source of rates that is used throughout the public and private sector to help set property costs. "We used to employ these as our rates a few years ago but they're not ideal for insurance, so we now use them as a benchmark," adds Mr Neil-Jones.

Other adjusters report similar processes. For instance, as well as undertaking regular checks on pricing, Cunningham Lindsey has a quarterly benchmarking exercise to ensure its prices are set at the market rate. On top of this, on a rolling basis, it also obtains quotations for work on the open market through its tendering unit to ensure rates don't slip.

Regularly auditing work to ensure rates are delivering the right standard of work is also important. "It isn't just about setting a rate, it's also about the quality of the work," says Mr Wassell. "When we price we need to know we're buying the right quality." To achieve this, a team of auditors will visit claimants' properties to assess the work carried out.

Another element that comes up for regular review is the length of time a job takes. "We benchmark ourselves against national standards to make sure we're taking the right length of time to complete a job," says Lee Sadowski, customer director at Rok Insurance Services. He also conducts regular reviews to check the rates charged by his contractors are in line with those in the market.

Setting these base rates is just part of the process. Rates have to allow for the different overheads involved. Mr Wood explains: "There are a number of prices for a job. You can have cash, a DIY price, a price for a local contractor and — what's often the most expensive — a price for a network contractor."

Option assessment
Regional variations are also common, with some stipulating higher rates for inside the M25 or within inner London or the congestion charge zone. Scotland can also command a higher rate and generally a different approach to claims settlement. "Once you get to the Highlands and Islands you have to really ask whether a fulfilment option is sensible," says Mr Neil-Jones. "It's generally cheaper to use a local contractor and this will typically be preferred by the customer too."

More specialist claims can also mean the rates serve more as a guide than a rule. This can be the case at Questgates where complex claims can mean contractors have to go off-schedule. "The schedule is designed as a robust reference tool," says Alistair Steward, its director of business development, "but for some claims it will only give part of the picture." He offers the example of claims on listed buildings where, to source the right type of stone for a rebuild, it has even been necessary in his experience to reopen the stone quarry that originally produced it.

Rate review regularity
When it comes to setting prices, for most companies an annual review is sufficient. For instance, Mr Neil-Jones says that his rates are only reviewed every 12 months and he isn't anticipating a significant change this time around. Setting prices for this length of time delivers stability and enables insurers to forecast costs for the year, but it doesn't take into account changes in the cost of materials. These can fluctuate greatly. For example, the price of copper rose by 140% in 2009 and oil prices can be particularly volatile, affecting everything from the cost of manufacturing and shipping materials to the price of the petrol in the contractor's van.

Likewise changes in legislation can also affect prices. Forthcoming changes to the VAT rate will have a knock-on effect while it is also important to keep an eye on building regulations as new requirements will influence prices.

Whether driven by a change in legislation or the cost of materials, these fluctuations can be disheartening for either the contractor or the insurer, depending on the direction of the price movement. Although Mr Neil-Jones admits that, where a price falls, they may look to pass this on to the contractor, most insurers and loss adjusters are happy to ride this rollercoaster. For instance, Mr Wassell says that although his firm monitors material prices on a quarterly basis, unless there is a major shift, rates will not be altered. "We do this as a way of checking on quality. We need to make sure that quality doesn't shift as a result of an increase in the price of materials," he adds.

Long-term pragmatism
Although it can hit them hard, contractors are generally pragmatic about the situation. Rok's Mr Sadowski accepts this is a condition of setting a long-term contract. "We're taking the risk away from the insurer that the price will rise. If it's a substantial increase we will review it with the insurer, explaining why prices need to increase," he explains. Furthermore, where a rate is likely to change, he will give the insurer early warning of this, "so underwriters can factor it into their risk decisions".

Others argue that although the cost of materials can affect the overall price, this is generally just a small part of the mix. "We do monitor material costs and methods of repair, but labour costs are often the larger part of the claims bill," says Mr Long.

But, whatever influences the price, setting the rate at the right level is essential. Without this, a number of problems can occur. For starters, if the price is too low, customer service can suffer. This could manifest itself in a number of ways. Where a customer wants to use their own contractor, they may be prevented if the price is too high. Similarly, if the contractor carrying out the work feels under pressure, they might not carry out the work to the expected standard.

These are problems that Candy Holland, managing director of Echelon Claims Consultants, recognises. Her company, which is part of Jardine Lloyd Thompson, represents insureds in large, complex claims. "Claims aren't one-size-fits-all," she says. "If there's a disagreement, it can create difficulties. But, if the sum assured is adequate and the policyholder is used to a certain standard of work, then it's perfectly valid to ask for this when the claim is settled. Insurers need to be flexible to avoid these problems."

Because of the size of the sums Echelon is dealing with, this problem can be avoided by discussing claims requirements at the point of policy inception. However, for large volume household business, this is usually not an option.

Setting rates too low can also affect relations with contractors. As well as potentially leading to lower standards of work, Mr Neil-Jones says that, where rates are too low, you can find contractors putting in a lot more invoices for spot or custom items to make up the perceived difference in rate. "You need to have controls and processes in place to ensure not only that the rates are right but that they're used," he adds.

Yet, while some argue that rates are carefully managed to strike the right balance, Jonathan Davison, strategic development director at the British Damage Management Association, says there is already a real danger that prices have sunk too low. "One of the concerns we have is that some prices are unsustainable. It's fair enough that the insurers' procurement strategies seek value for money from the supply chain, but there's a real risk this constant pressure on price will affect customer service. It's approaching breaking point," he says.

So, while the rate is clearly important, it is not the only factor that can influence the overall price for a claim. "It's a mixture of rate and scope," says Mr Wood. "Because the UK insurance industry is so driven by procurement, it is hung up on rates. But scope can make a significant difference to the overall cost of a claim."

Accurately scoping a job — and ensuring the contractor and customer are fully aware of what is included — can make a huge difference to the eventual cost. Stipulating what is included removes the risk of slippage if other jobs, which may not be covered by the insurance, are added in.

As part of its pricing mechanism, Merlin uses a scoping tool. "It's widely used in the US but is only just beginning to be used in the UK," says Mr Wood. He asserts this enables a much more accurate picture of the work required to be built up. For example, where a wall has been damaged by escape of water, the loss adjuster can specify the area that needs to be plastered and skimmed rather than leaving the work open. All the details can then be documented and provided to both the customer and the contractor so it is clear exactly what is included.

Mr Wood adds that this not only eliminates wastage but it can help minimise disputes with both the customer and the contractor. "Everyone knows exactly what's required. If you haven't got accuracy and transparency then disputes can start. This increases the life cycle, which pushes up cost," he comments.

Another important element that should be incorporated into the scope is the insurer philosophy. Mr Neil-Jones says that getting a handle on this is essential, especially with regard to treating customers fairly. "Different insurers do have different approaches," he explains. For example, one might prefer to strip out a property while another would rather make patch repairs. "Applying the insurer's philosophy across claims is important for your working relationship with them but, from a TCF perspective, it's also essential that you deliver a consistency of settlement across an insurer's claims."