The growing insurer trend to reduce places on their loss adjusting panels is causing alarm in the disaster recovery sector. Small disaster recovery firms, in particular, may lose out, says Guy Anker
Norwich Union last week announced it was reducing the number of places on its household and commercial loss adjusting panels. The fallout from the review saw Cunningham Lindsey and Crawford & Company retain their places; but Ashworth Mairs Group, The Claims People and Capita will no longer be on the panels when their current contracts expire in September.
As loss adjusters play a prominent role in disaster recovery arrangements, NU's decision to cut the numbers on its panels will undoubtedly have a knock-on effect on the disaster recovery firms used. Fewer firms are likely to benefit from volume business derived from the insurer and this reflects a cross-industry trend, often with bleak consequences for the smaller firms operating in the market.
Many industry experts believe the trend to streamline panels is the result of an absence of severe weather and higher excesses. This has resulted in fewer claims, coupled with a drive by insurers to cut costs. Some commentators claim this is putting small disaster recovery companies out of business.
Large insurers are said to be using one disaster recovery firm in some instances to provide an all-round service, meaning there is little work for smaller, specialist firms.
"The panel system lacks attention to customer service," says Charles Jeffrey, business development manager at Revival, a medium-sized firm that specialises in restoration of buildings and their contents after a disaster. "The bigger companies don't do their homework - they just look at the cost but not the quality."
Document recovery specialist Document SOS is an example of a niche business concerned by the current panel arrangements. Managing director Georgine Thorburn says some of the niche elements of disaster recovery services are undertaken by the larger firms, despite the fact they do not have the specific knowledge of specialist business practices.
"It is like a professional cook peeling an onion as opposed to you or I - the bigger firms do not have the niche expertise that we have in document recovery," she says.
However, large disaster recovery firm Belfor denies this charge. "We have a document restoration facility and IT recovery facilities so we are more than capable of handling specialist work," insists marketing manager Helen Da Silva.
While the likes of Document SOS may still be up and running, similar-sized companies have not fared so well. Ms Thorburn explains: "Many of these big insurance companies are squeezing the margins of their suppliers, meaning some small and medium-sized companies have gone bust. Only the big disaster recovery services can survive because the insurers are tied in with the panels and they choose the big firms."
Those large disaster recovery firms Ms Thorburn refers to see things differently. Munters managing director Alasdair Phillips says it makes sense for large insurers to use fewer loss adjusters and disaster recovery firms, meaning companies on their panels are big and can handle all the work that comes their way.
"By working with fewer partners, big insurers get better discounts with high volumes and it is less work in terms of managing firms," he says. "Unfortunately, it does make it difficult for smaller firms."
The consequences of reducing the numbers on disaster recovery panels are not only felt by the ousted firms and their employees but by the industry as a whole, according to the British Damage Management Association. As a result, it claims there may be fewer skilled workers in the industry in future.
Gwyn Jones, the BDMA's operational development manager, says: "The effect of such policies on smaller companies means that overall capacity is reducing. Consequently, if a major event such as a serious flood occurs, or there is a change of policy in the future, there may be insufficient resources available."
This view of a potential capacity crunch is not a universal one, as Mr Phillips explains: "Those professionals from smaller companies that have gone bust are turning up at the surviving firms and are not necessarily lost to the industry."
While there is debate as to the consequences of smaller panel sizes, there is little doubt that those not on panels face a struggle to attract business. Mr Jeffrey sums it up: "The days of loss adjusters getting you a job are gone. If you are on a panel then you have got work; if you are not on a panel then you will not get as much." Revival is one of the lucky ones. "We are on about 10 panels," Mr Jeffrey adds.
When it comes to the distribution of adjusting and disaster recovery work via panels, it is not only the smaller firms that lose out. Capita, which has lost its place on NU's household and commercial loss adjuster panels, is one example. But Capita did retain its place on NU's major loss panel. As business development director Lee Gladwell points out, it is often a case of "swings and roundabouts" and the company now expects to get more business from other panels.
While loss adjusting firms play a significant part in dictating where disaster recovery work is directed, their influence is not as great as in the past. Maggie Cowing, regional specialist adjusting manager at Cunningham Lindsey, explains that even though the adjuster has its own disaster recovery panel, the choice is often determined by insurers.
"The majority of our clients on the domestic side have specified requirements," Ms Cowing says. "If we were called by NU, for example, it would want us to use Munters as first choice, followed by Rainbow and Chemdry; Zurich would want us to use DRL. Therefore, our first priority would be to check the requirement of the insurance company."
This is confirmed by Axa, which clearly states its intention to control the loss adjusters' disaster recovery panels. "In the past, damage restoration firms were often selected by loss adjusters but now many insurers want to take the relationship with disaster recovery services providers in hand," says Neil Whistler, head of claims procurement.
This means it is not uncommon for insurers to be in control of restoration work from the moment a disaster is reported, to the moment recovery is complete.
Mr Whistler adds that insurance companies are seeking a more controlled approach to claims spend, hence the cutting of panel member numbers. "Insurers tend to appoint one or two providers in an endeavour to reduce their supplier base and seek a solution of 'one size fits all' rather than segmenting their spend through separate arrangements for specialisms such as IT recovery," he says.
Explaining its decision to reduce the numbers on its panels after the company's recent review process, NU argues if it had a large number of firms on its panel then it would lose control and would be difficult to manage.
Along with NU, Royal & Sun Alliance is one of the many to have cut panel places. It is still deciding whether to employ a commercial panel at all.
On the domestic side, it does not have a panel because in addition to its in-house loss adjusting service, it only uses Crawford & Company, while Rainbow is RSA's only national disaster recovery provider.
In cutting the number of suppliers, major insurers stand accused of putting cost before service. Kevin Pallett, managing director of Lloyd's coverholder Fusion, explains: "A lot is driven by the insurance company's requirement to cut costs and not the requirement of the client."
RSA household supply chain manager Theresa Jones hits back at such a suggestion: "The priority is customer service but in a competitive environment, cost is also important."
Likewise, NU's senior purchasing consultant Ian Sinclair is adamant that quality comes before price. "We are not pushing on cost as we choose suppliers that match our requirements for good service."
Regardless of why insurers are reducing the numbers involved in disaster recovery arrangements, it is clear current policy is threatening the existence of many firms that do not appear on insurer panels, or are not the preferred suppliers of insurers or loss adjusters.
However, it seems not all hope is lost. At some point there will be more business for the industry when the weather turns or when there is a major catastrophe. Last month's bleak government study, which warned of major flood risks across the country in the coming years, is a sign that there will inevitably be claims to generate business for disaster recovery firms.
Ms Thorburn is one who still thinks there is hope. He says this is due to the fluctuating nature of insurance claims, the current situation may change. And Mr Jones states: "The disaster recovery industry is a new industry so there will be changes and natural developments; therefore, circumstances may alter as there is always a natural cycle of how things develop."
NORWICH UNION CASE STUDY
Most of Norwich Union's high-value claims go through its panel of loss adjusters, which have their own claims policy. NU says the appointment of an adjuster is based on a relationship of trust, openness and transparency.
There are links between NU and several disaster recovery firms, but the insurer still wants its adjusters to manage their supply chains. Those companies on adjusters' own disaster recovery panels are hand-picked by NU, to maintain control over the process. This is why it says it does not use small disaster recovery firms to handle large claims, as NU would then not be able to control proceedings. Smaller claims go direct to smaller disaster recovery firms but still with assistance from loss adjusters.
Falling claim numbers have prompted NU to re-think its strategy. Following a review, only Cunningham Lindsey and Crawford & Company are left on its household and commercial panels, although their position is subject to contracts being agreed. Its major loss and subsidence panels remain unchanged.
CUNNINGHAM LINDSEY CASE STUDY
The adjuster has been able to retain its place on many insurers' loss adjuster and/or disaster recovery panels. It has a supplier management service and its role is to agree disaster recovery arrangements. There is a list of firms it uses for domestic claims but these are determined by the insurance companies in 90% of cases. After a domestic claim, the first port of call is to check with the insurance company as to what disaster recovery firm to use. On the commercial side, there is less need to use insurers' preferred firms. Cunningham Lindsey has a list of companies it uses for commercial claims including Belfor, IDM and ISS Ark & General.
When the loss adjuster is required to use an insurer's preferred company, there are normally two or three to choose from. For major losses it is given more flexibility because response times need to be fast. The company is currently agreeing rates and arrangements with several disaster recovery firms for major loss claims. It is particularly keen to get agreed rates with disaster recovery firms so it has buying power and consistency.
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