The debate surrounding incentives in the handling of household building claims is masking the real problem in the sector, claims Max Dunworth. He explains the real issue is the need to find a better model to fit with the current market upheaval.
The recent debate surrounding the handling of household building claims is perhaps unsurprising given the current turmoil within the sector. Much has been written about validation and cash settlement, and this has run in parallel to the negative views expressed about loss adjuster-operated repair networks. The two issues are linked by the context of market developments.
Dealing first with the criticism of adjuster networks, a number of ill-informed critics have made inaccurate and irrelevant assumptions surrounding commission arrangements. All networks are entitled to recover their costs and an appropriate margin for their business and this is factored into the pricing.
Secondly, all arrangements are subject to strictly monitored commercial agreements and these are becoming increasingly transparent so the client has full knowledge of cost and pricing structures. Furthermore, insurers contract with networks across all their building claims" not just those handled by the adjuster concerned" so the same commercial terms apply with or without adjuster intervention.
The question is one of behavioural approach by the adjusters at the time of negotiating settlement and I am unaware of any incentives in place that reward adjusters over and above their normal remuneration for directing a claim through their own network.
Finding the right model
That distraction aside, the real issue facing all those involved in the building claims sector is finding the right operating model to fit with the significant upheaval taking place in the industry. There are widespread insurer reviews of the approaches taken to manage buildings claims; cash settlement and independent validation are becoming more prevalent; new propositions and market entrants are appearing, while the largest repair business is for sale; and loss adjusters are re-emerging in the household arena.
There are two principal reasons why this change is good for the industry. First, building repair networks have routinely delivered poor service and cost management and, in the absence of any differentiated service proposition, insurers are rightly looking for alternative solutions. In short, networks only have themselves to blame for this situation.
Second, insurers must shoulder some of the blame for a lack of clear building claims management strategies and philosophies, relying instead upon strong procurement and supply chain management to drive their indemnity spend objectives. Not only has this created unsustainable repair solutions, it has relegated front-end validation and quantum to a lower priority in the building claims value chain and, therefore, ignored the factors that actually determine claim cost outcome.
While companies such as Lloyds TSB and Fortis are good examples of having clearly defined claims strategies in place, many insurers remain ambiguous in their thinking. This results in poor, ground level decision-making and a lack of control in both cost and customer service.
Having recognised existing solutions are not providing the best in customer service and indemnity spend control, reversion to cash settlement is seen by many as the way forward. In doing this, the concern for insurers continues to be whether they should relinquish control of repairs to the policyholder.
Potential fraud, health and safety issues raised by poorly qualified customer appointed contractors, and an overall feeling of not fully resolving the customer's problem are seen as the major issues. Consequently, insurers are seeking a solution" or combination of solutions" that provides the best of all worlds, and gives them the flexibility of choice for themselves and their customer.
This reverses thinking from the present channelling of claims directly to repair, to a reliance upon expert front-end claims handling that delivers an integrated validation, scoping and settlement negotiation capability to support both cash settlement or hand-off to the approved network.
However, all too often the distinctions and interdependencies between validation, scoping and fulfilment are misunderstood or ignored and there remains the fundamental problem that combined validation, scoping, settlement and fulfilment capabilities do not currently exist at a price most insurers are willing to pay.
This has all previously been provided 'free' by the networks and insurers are reluctant to accept the cost of quality building claim validation as an additional item against overall claim spend. Ultimately, this could become the major barrier to an effective, quality solution being provided.
Despite this fundamental hurdle, we are seeing a number of new propositions entering the market. Among these are moves to improve household adjusters' capabilities to include advanced building techniques and practices. Although good progress has been made by the likes of Cunningham Lindsey and Merlin, there remains concern that despite an adjuster's ability to investigate, confirm liability and price/validate a schedule of works, creating a workable programme of repairs to facilitate all aspects of site work, requires greater practical building knowledge and experience.
Similarly, surveyors and validators with good building repair expertise are being tasked with providing claims handling and liability decisions through enhancements to their technical insurance skills. While this may improve their ability to handle claims arising from a single peril, there are clear limitations when claims involve multiple factors and commodities beyond a simple property damage claim.
These solutions are coming at the same problem from diametrically opposed corners and it will be interesting to see how they evolve over the coming months. However, there remains one overriding issue for both sides: claim validators must be able to generate a full and accurate schedule of works capable of being used for cash settlement" and, therefore, used by a third party contractor" or for the approved network contractor to be able to programme works without the need to resurvey the site.
This is where all previous attempts down this route have failed, as poor scoping has resulted in a lack of trust on the part of contractors. Working in true partnership with contractors to remedy this provides the only chance of success.
The current examination of the market can only be good news for all concerned. There still remains a huge opportunity for any service provider that creates a high quality, sustainable, flexible proposition which fits with the reversed way of thinking by insurers.
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