Coming to the crunch

Delivering value and customer service to construction industry policyholders, while avoiding being targeted by fraudsters, is one of the greatest challenges insurers face in the current economic crisis, writes Arthur Rackstraw

As the credit crunch's bite deepens, it is now more important than ever for insurers to get their claims handling correct. Those insurers handling building-related claims will face some key challenges and must address them carefully to reduced fraud costs and drive greater customer satisfaction.

When money is tight, insurance claims increase. People still see insurance companies as cash rich and take the view that they have paid out for a policy for many years without a return. This is the case not only in the personal lines sector, but also in commercial lines as businesses feel the squeeze - and the building sector is not immune.

A report by consultancy Kroll found that across the globe, the average building firm's loss to fraud rose significantly in the past year alone. The Kroll Global Fraud Report found that the average construction company's loss to fraud has increased by 69%, driven largely by tough economic conditions. In the past year, the average loss per company more than tripled, from £2.9m to £9.3m.

It is not unusual for policyholders to ask loss adjusters about the amount they can claim before an insurer will investigate, rather than simply pay the claim. This type of mindset makes it particularly difficult for insurers that are keen to do the right thing. During the windstorms of the late 1980s, for example, some insurers decided to immediately pay claims under a certain figure. Once that figure was known, a large number of claims were lodged that were all below the stated figure, on the promise that the claims would simply be paid without questions being asked. It is a lesson that has been learned, but insurance companies in the past have viewed indemnity spend as just that - with no questioning of how the figures are made up.

Without doubt, the insurance market is more sophisticated now and fraud detection has changed. Insurance companies have invested heavily in an array of technology and other systems that are used to identify, or at least highlight, potentially fraudulent claims, and there is little doubt that they are working in some areas of the business.

But the fact remains that fraudsters have become more cunning and are driven by the view that there is an opportunity to be had if they can get away with it. Despite the technology now in place, and accepting the desire for speedy settlement of a policyholder's claim, the best way to verify a valid claim is to visit the policyholder. Indeed, there is much anecdotal evidence of claims being withdrawn when the policyholder has been told someone will visit them to discuss the claim.

The request by insurance companies for policyholders to source quotes for remedial work - particularly in terms of building claims - does not benefit the insurer or policyholder and, in fact, raises significant problems.

Past experience shows that when there is an economic slowdown, the building and construction industry is impacted and that out-of-work construction workers are left looking for employment. Placing the onus on policyholders to organise repairs leaves them vulnerable to unscrupulous trades people quoting inflated prices for work that does not need doing. It also leaves them vulnerable to traders carrying out work to the poorest of standards.

Even if the policyholder gathers three quotes, is there any guarantee the work will be carried out? Or can insurers be certain that the policyholder will not complete the work themselves and retain the money? Insurers have sought to send cheques payable to the contractor to the policyholder's address, but there have been cases where the contractor will simply charge a handling fee for the cheque and split the amount without any work being carried out.

Estimate gathering

It also begs the question whether insurers are providing a decent level of service to the policyholder by asking them to undergo the estimate gathering process? Insurers want to pay a fair cost for the claim, as well as meet the needs of their policyholder and in some ways, they are in danger of doing neither.

Rok Insurance Services researched a variety of building claims recently and found that in the majority of cases, the claim had been significantly over scoped. It is extremely difficult, particularly in building claims, to identify the level of work that needs to be carried out after the repairs have been completed, and the industry could make significant inroads in its efforts to reduce claims costs by taking steps to eradicate over scoping of claims.

The use of trusted repair partners can be of great help. Of course, such partners need to understand the insurance company's culture, claims ethos and the need to deliver a service that does not just satisfy, but exceeds the expectations of the client.

In the gloomy economic climate that we face for the foreseeable future, the insurance industry will seek to look at the costs of doing business balanced against the ability to exceed the expectations of policyholders. The challenge will be to deliver value and excellent customer service, while avoiding being targeted by fraudsters.

- Arthur Rackstraw is insurance services director at Rok Insurance Services.

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