Cash settlements are set to return as replacements lose favour. David Mansfield reports
They say what goes around comes around. And insurers' attitude towards cash settlement of claims is changing with the result that cash settlements are now a serious issue in the settlement of domestic claims; in a similar way that it was over 20 years ago.
Those with long memories will recall the hurricane of 1987. Faced with many millions of claims, the insurance industry took a pro-active approach announcing that all claims under £1,000 will be paid by return of post.
To make matters easier in those pre-internet days, insurance companies printed claim forms in newspapers. Cash settlements were made freely, which certainly cleared the backlog. But there was a dramatic unintended consequence - namely an increase in fraud.
From being a minority nuisance in domestic claims, fraud became a major issue. In the early 1990s, some unscrupulous policyholders made regular fraudulent claims, regarding this as an additional source of income.
Many saw this as a victimless crime. And policyholders were aghast to be considered as criminals. This affected the industry in two ways. First, the cost of paying the undetected fraudulent claims coupled with the increased cost of fraud investigation usually undertaken by ex-police officers.
Against this background an entire industry developed around replacement, repair and reinstatement of goods rather than insurers providing cash settlements.
The replacement business had by the mid-1990s become a major force and those who made claims had to get used to receiving replacement goods as opposed to cash. Many did not like this.
Typical problems revolved around jewellery with sentimental attachment, but also clothing and furniture, which could not necessarily be replaced on a like-for-like basis through the insurer's designated supplier.
Comments made by certain suppliers - for example, Gerald Ratner's description of his "crap" jewellery - did not assist matters or instil confidence in the insuring public. Nevertheless, the replacement market boomed and suppliers of all kinds of goods saw the insurance industry as a golden opportunity to enhance their sales.
Supply chains
Existing suppliers expanded and a raft of new entrants soon arrived to exploit this situation. This in turn led to the growth of supply chain management within the insurance industry which largely removed the decision-making process from the claims department to the area of procurement.
The buying power of the insurance industry dictated that significant discounts, including retro discounts, could be put in place to further reduce insurers' costs. While suppliers became more adept at providing a fast seamless service, problems occurred, particularly where the insured found his choice limited or restricted to certain suppliers rather than one that he had used for a number of years.
Additionally, replacement on a like-for-like basis was not always viable and often the insured benefited significantly when the replacement for stolen equipment was upgraded - which is almost inevitable in the case of electrical and consumer goods.
Replacement jewellery presented its own problems. Insureds are often unable to provide a precise description of their valuables and when submitting a claim often tended to exaggerate the value.
A case in point was a ring submitted without prior valuation for which the insurance company settled on a replacement basis for £10,000. Sometime later the stolen ring was recovered and it transpired to have a value of just 25%-30% of the replacement item. Naturally, the insured was reluctant to return the ring in replacement for the one recovered.
The insurance buying public is becoming more vocal and complaints to the Ombuds-man abound. Part of this vocal response is a backlash against insurers using their marketing muscle to effect replacement. While some insureds will prefer replacement, many prefer to do it themselves.
Competition means that in the main the public usually gets what it wants. And there are agencies who will negotiate better deals for claimants who are faced with what they perceive to be unacceptable replacement offers.
While there is a wider acceptance of replacements for electrical equipment, elsewhere cash settlements are becoming increasingly more common. All those involved in marketing will know that while people pass on good news to around three people, they pass on bad news to around 20.
Consequently, unsatisfactory claims experiences are a very damaging marketing tool. Many insurers now split their settlements between cash and replacement. This is becoming increasingly popular in the high net worth market who major on the fact that fraud apart, cash is nearly always an option in claims settlement. Even among the most standard policies, cash is used in around a third of all settlements.
One statistic recently published suggests that while many insurance companies are still offering replacement jewellery, more than two thirds of the insurance buying public expect cash. Only 5% believe that their choice should be restricted to one jewellery chain.
Additionally, insurers are finding that cash leads to quicker (and therefore cheaper in terms of administration) settlements.
Naturally, cash settlements need to be negotiated and this is where the skill of the loss adjuster or claims handler is vital. A good negotiator can produce a settlement that is acceptable to the insured and advantageous to the insurer.
This comes with knowledge of the policyholder and the goods they are describing. It is to be expected that claimants will either visit shops or search internet based suppliers for price and specification of their stolen articles.
Where a cash settlement is made, the insured can take advantage of any special offers or sales that are occurring, quite often through internet shopping, achieving deals that insurer supply chains would envy.
Dedicated resources
What of the future? Will the re-emergence of cash as a form of settlement bring about a further increase in the number of fraudsters?
My view is that all major insurers and loss adjusters are now taking fraud very seriously, with companies having dedicated resources such as fraud teams and adjusters working in house in fraud investigation units.
Fraud investigation is therefore at the forefront and this resource will ultimately deter those dishonest claimants who believe cash settlements to be a regular source of income.
While replacements will still remain important, if cash settlements are used wisely, a much speedier resolution of claims will occur, thus giving the claimant the opportunity to replace at his leisure and this in turn will bring about a reduction in elapsed times and consequent reduction in administrative costs for insurers. IT
' David Mansfield is a partner with Davies Chartered Loss Adjusters
