Money down the drain?

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The surge of claims seen last summer led to an increased use of cash settlement. Edward Murray investigates whether this is a step backwards for the insurance industry

There are two everyday phrases that in many ways sum up 2007 as far as the insurance industry is concerned: 'it never rains but it pours' and 'cash is king'. Certainly the inclement weather last summer created a level of claims that have not been seen in many years and using cash settlements to deal with the surge is a topic that has left the industry split.

Are cash settlements the best option? Do they cut disaster recovery firms out of the equation? Are they now becoming a solution of choice for insurers? Over the past 15 years, there has been an increasing reliance on managed contractor networks as insurers have sought to gain better control of the restoration and claims settlement process and, for many, offering an increased number of cash settlements is a backwards step that opens the door to poor service, potential fraud and future problems.

Not an issue

However, as far as insurers are concerned, it seems that sending a cheque out to policyholders is not the big issue that it was a number of years ago. Despite spending a lot of time, money, resource and effort establishing supply chains, a growing number are happy not to force all of their claims down this route.

Graham Gibson, claims director at Groupama, comments: "We have recognised that the supply chain is not the be-all and end-all solution." Indeed, he goes on to say: "The more suppliers you impose the worse the service gets sometimes."

The view from Allianz Insurance is similar and Jeremy Baker, property claims supply manager at the firm, believes that insurers were looking to settle with cash on a more regular basis even before the flooding. As he says: "I think that prior to the flooding insurers in recent times have looked to use cash more often. It can offer a better solution and is certainly more flexibility."

So what are the pros and cons of using cash settlements? The most obvious benefit is the speed with which a claim can be settled and at times when there are significant volumes to deal with it is not surprising that this becomes a very attractive option.

However, many also believe that policyholders do not always like to be told which firms they have to use and wait for the firm to fit the work in around other commitments. They like to get the money in hand and get the job done through a contractor or supplier of their own choice.

Certainly, in terms of domestic contents, there is an argument that because the UK is a fast-moving consumable-goods environment, providing a cash settlement lets policyholders spend the money on a replacement item of their choosing, avoids the insurer having to organise delivery and does not necessarily lead to a higher incidence of fraud.

Claims handler training and advancements in IT have made insurers better than ever at detecting fraudulent claims, quickly validating those they believe to be genuine and valuing the claim accurately in light of what has been damaged. As such, Mr Gibson believes the fraud issue has been dealt with earlier in the claims process and so is not an issue when it comes to cash settlements for contents.

More complex work

Most are happy to accept this line of thinking but not all are so sure that offering cash settlements works as well when it comes to building, structural and more complex work. However, even in these cases, Mr Gibson believes that if a policyholder wants to take on the claim themselves it is normally because they have a good contractor they have used before and are confident they can get the work done to the standard required. He asks if this is the case, then why should the insurer prevent them from doing so?

Jonathan Davison, past chairman and current director of strategic development at the British Damage Management Association, is not quite so sure that cash settlements are the right option for the more involved claims. He says: "I understand why cash settlements are necessary - especially on the contents side of things but I think they are dangerous in terms of flooding and its long lasting damage to property."

Highlighting his concerns over the ability policyholders have to manage the work effectively he adds: "Most policyholders do not have a relationship with contractors, they do not necessarily understand them and have not gone through the same measures to ensure the quality of the work."

Furthermore, Mr Davison believes that it is with this type of claim that insurers and policyholders are most at risk when it comes to fraud. During the floods earlier this year, the BDMA put together a leaflet so policyholders had an idea of what they should expect from a contractor and how to go about managing any relationship. He explains: "We would not have done this if there were not a lot of rogue traders out there and the public knowledge of dealing with these things was good."

The problem, he believes, is that because policyholders do not understand the costs involved and are unable to make an accurate judgement on what they should be paying, they are happy to accept the inflated quotes that some rogue traders may put in to do the work.

The insurance industry has been stung by contractors chancing their arm in this respect in the past and it was exactly this lack of control over the supply chain that led them to set up and establish their managed contractor networks in the first place.

Inflation of costs

Andy King, forensic accounting specialist at Marsh and an ex-president of the Chartered Institute of Loss Adjusters, is in no doubt that in the past insurers have suffered at the hands of contractors who were pushing the scope of the work required and inflating the costs involved.

However, he also believes that if insurers have done away with the use of loss adjustors and deal with everything in-house, then using a managed supply chain will not necessarily address the problems and he comments: "If adjustors are not involved, will the brief be extended?"

The bottom line as far as Mr King is concerned is that there is a place for cash settlements and supply chain networks but in both situations the scope and cost of the work has to be agreed up front.

It is also important for insurers to look at the contractors they use and increase the number of firms they have at their disposal, rather than entering into solus contracts, which mean it is almost impossible to deal effectively with large surges in claims.

Michael Cooper, marketing specialist at Richfords Fire and Flood, says: "We have found that the insurers we choose to work with have a more open supply chain where multiple damage management firms are pre-vetted and available for use under surge conditions."

Rob Withers, chairman of the National Insurance Repair Contractors Association, is in firm agreement with this and adds: "The industry is voicing a lot of concerns over contractor efficiency, capacity and equipment shortages, yet in many cases these issues have arisen because of the restrictive processes in place. Those using their traditional supply chain tactics in a surge situation must think outside the box and look to the wider resources available to them."

As with so many things, an either/or attitude to cash settlements and managed networks is not the best approach. The key is in being able to ascertain which is the best route and make sure that the claim itself is settled efficiently, whichever tactic is employed.

As Vic Noble, national customer service manager, property at loss adjuster Crawford and Company, says of the work carried out on the back of the flooding: "Every claim was looked at individually and the best option for both the policyholder and the insurer was considered. A cash option would not be forced on the policyholder, but if requested, would be considered in either part or full of the settlement option."

The problem of co-ordination

The basic problem is one of co-ordination. How do insurers determine the right response to each and every claim? How do they provide what is best for the policyholder at the same time as delivering the best service and efficiency standards?

This issue is of particular importance when it comes to flooding and Shaun Doherty, managing director at ISS, says that if multiple insurer claims could be split into geographical areas, it would be much easier for houses to be dried out more quickly and efficiently.

Drying equipment is now capable of dealing with three or four properties at a time and so if a single disaster recovery firm had responsibility for an entire street then the job could be done a lot faster. And things could be a lot better according to Mr Doherty: "If multiple insurers for properties in a single street could get together and agree to cash settle, then the owners could appoint a single disaster recovery firm to dry them out and it would be a lot more efficient."

This presents significant logistical problems in terms of managing multiple claims to multiple insurers but if such a system could be arranged then the collaboration would be well worthwhile.

In determining which solution to apply to which claim, there are a number of things to consider. In the first instance, the claim has to be validated and if this does not throw up any problems then agreeing the scope and value of the claim is the next issue.

In terms of claims relating to contents, there seems little reason to doubt the flexibility and speed cash settlements can offer and in the main consumers are happy to go out and buy replacement items without needing their hand held through the process.

With more complex claims, many policyholders may wish the expertise and management skills that insurer networks can bring to the process and certainly there is no room for carriers to be forcing cash settlements onto policyholders if this is not the solution they want.

Mr Doherty points to a recent case in which the firm involved took a cash settlement, hired the equipment needed and then got a local contractor to do the work. The job was finished quicker than it would have been otherwise and left the company in question with money left over.

Clearly he does not want to see the disaster recovery sector losing work, but he feels that if policyholders can deal with a particular claim more effectively than a contracted network, they should be allowed to do so.

As ever, the whole issue boils down to two things: communication and resource. The better the various parties involved in claims handling and resolution can communicate and the better they can manage the resource they have, the easier it will be to deal with large scale situations to everyone's satisfaction.

There is enough capacity in the UK to handle the work that significant natural disasters throw up and never before has the ability to communicate been better. The real issue is how these two strands of the equation can be entwined to create a market where response times are quicker and logistically insurers are capable of directing the best solution to each and every claim.

Gelling together

Nobody refutes the role that cash settlements and supply chains have to play, but equally nobody has managed to gel them together into a cohesive solution for policyholders. By debating whether one is better than the other, the insurance industry is simply wasting time. Time would be better spent looking at how these two solutions can be used in tandem.

As Rodger Arneil, managing director of disaster recovery firm Arepa, concludes: "It is universally accepted that last summer's flooding was a major event but, if the forecasters can be believed, it may well happen again. Next time the industry has to be better prepared to protect its customers."

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