Are claimants getting a fair deal?

Over the past ten years, there has been a well documented claims revolution. In the previous 'more genteel' insurance world, a claims team would accept the post-loss value offered by the claimant and - admittedly after a slight delay - settle the claim in cash at this value.

Most contents claims today are settled with replacement goods after the value has been assessed by insurer appointed product experts. To come up with a value, they quiz the claimant about items lost and, to support their audited assessment, collect evidence to justify it.

What will the FSA say about this new process, which has saved the insurance industry millions of pounds and created a new insurance replacement industry?

After all, the need for, and the whole philosophy behind, regulation is that the industry must be scrupulously fair to the customer.

The industry should ponder first, the current practice of assessing post loss value, and second, whether the regulator will buy the insurers' argument that providing replacement goods via the insurers' choice of supplier is the fairest way of settling claims.

Claim validation
While replacement has undoubtedly cut claims cost substantially, the regulator is likely to seriously challenge the standard argument that replacement discourages fraud.

Take the claim validation issue first. To gain the regulator's blessing, this needs to be thorough, reasonable and totally transparent; such that two so-called experts would arrive at the same post loss value, given the same available information.

With these criteria strictly upheld, insurers can argue that such a process is much fairer than relying on the subjective and biased estimate of the claimant.

There has to be one substantial condition however. The industry forewarns the customer what to expect in the event of a claim. At the time of selling the policy, the customer must be told that in the event of a claim, he will need to discuss the loss with a product expert and may have to provide documentary evidence.

Few policyholders are currently aware of their part in this revised claims process.

Otherwise, without mention of how the claims process works in policy documentation, the regulator will say the insurer is not being fair to his customer by only insisting on these conditions at the time of the claim.

The other aspect of claim validation the regulator needs to address is whether it is fair to allow the same organisation to both fix the value of the loss and benefit from the sale of replacement goods.

While the insurer would argue the new process has taken away the claimant's incentive to bolster the value of his loss, the regulator may ask what protection the consumer has against the appointed insurance company supplier simply maximising his own replacement sales or liquidating unwanted and redundant models.

Also, the regulator is likely to take a dim view of the widespread practice of suppliers not charging insurers for claim validation as an inducement for maximising replacement sales.

Inevitably, there will be comparisons drawn with recent FSA pronouncements on the previous practice of stockbrokers providing free advice as a way of boosting transaction commissions.

Undoubtedly, some items lend themselves to product replacement more than others. An insurer who can home-deliver on Monday a replacement television for one stolen on Saturday can argue the case for an enhanced and fair claim service.

Electronic goods are generally well known brands and consumers have strong allegiances with brands, not suppliers. If the validation had been carried out thoroughly and professionally, the regulator should give such a service his blessing: it has quickly and efficiently returned the customer to the position he was in before the loss.

This may not be the case with valuable and cherished items. At LMG, we manage around 60,000 such claims a year, most of which are items stolen in household burglaries.

Often the items have been purchased from different sources and countries, typically over the lifetime of a loving relationship. At the more discerning end of the market, some 40% of items have been inherited.

Here you have to be particularly careful about insisting on a standard replacement as the items are often no longer available.

As jewellery has emotional and sentimental connotations, and because the actual product supplier is so important to the customer, the only beneficiary of insisting on one replacement goods supplier has to be the insurer.

If I bought my wife an expensive diamond ring from a particular designer jeweller and fully insured it, I would not consider it fair to have to go to an unknown supplier for a replacement, simply because my insurer had secured a good deal there. Surely the regulator would agree?

Rather than have industry practice dictated by high profile complaint cases, what is required - in conjunction with the FSA - are guidelines on what constitutes best practice (see box, left).

Without such agreed guidelines, it seems only a matter of time before the regulator has to intervene to resolve such complaint cases.

Before this occurs, can I make a plea to all working in this field to sit down to reach a consensus on operating procedures that elevates the consumer to his rightful position?

If we don't, the regulator will have no alternative but to impose a solution on us all. IT

' Tony Le Fevre is managing director of Loss Management Group

How claims best practice could work