Last month (21/10/99) we ran an article entitled Cutting Costs written by consultants QBA which prompted Tom Heward of loss adjusters McLarens Toplis to write this personal response.
Over the last five years our industry has seen dramatic re-shaping with merger after merger. The dynamics of merger attach obvious opportunities to review the claims processes and service providers. There will be economies of scale and some best of breed alignment. However, it is easy to throw the baby out with the bath water to achieve short-term notional savings.
How can savings of 35% referred to in the QBA article be achieved while service levels are improved? What on Earth have industry leaders, senior claims officials and leaders of loss adjusting firms been doing to have missed this one? Are we all incompetent or do the consultants have a miracle solution which can be explained without the generality of the business speak used in the article? The timing of the article is an unbelievable own goal given the current highly publicised difficulties of their client in the provision of a claim service. Perhaps in the rush to reduce adjuster's fees people took their eye off the ball and lost sight of the real objective.
It is vital that the long-term claims reputation of the insurer is not compromised for the indifference of the Footsie analyst. Service costs money! To improve it and dramatically reduce costs by 35% must be the Holy Grail itself for all insurers.
Real commercial partnerships do exist between insurers and loss adjusters and these are constantly evolving bringing long-term benefits to both. Adjusters are the public face of the claims operation and the insurers for whom they act. The balance between service and cost is paramount. The saying "You always get what you pay for" has never been more pertinent.
Wrong end of the telescope!
Savings in the overall cost of claims are vital for any insurer who wants to succeed and gain competitive advantage. Those who can deliver these savings are the more enlightened professional claims men and women within insurers and adjusters who have the unique experience to balance cost savings with service levels. Sadly the pressures to please the City analysts by delivering "false" savings has got in the way of the ultimate objective to reduce the overall claims spend.
The approach highlighted by the "Cutting Cost" article is tackling the problem by looking through the wrong end of the telescope.
So what are the options? Using the figures quoted by QBA, within a £400 million claims spend, £20m is spent on adjusters fees. The solution which attacks this £20m, however only reduces this figure to £7m. I prefer the alternative solution which concentrates on the £380m. A saving as small as five per cent in that part of the equation provides a far greater saving.
The constant attack on fees is counter-productive. Initially a fee slashing exercise saves expenditure, but very quickly in the process the negative aspects of the arrangements start to show.
The quality of the recruitment into the adjusters is lowered, and the ability to respond to the catastrophe reduces as the need to drive the available resource at full speed in normal periods becomes essential to satisfy the economic demands of the business.
Training and service development take a back seat as the level of income struggles to cover the historic overheads of the business. Without some flexibility in the financial arrangements to enable the adjuster to recruit at the right level and develop new initiatives, the claims spend rather than decreasing will rise and wipe out all of the fee savings and more.
The way ahead is far more wide-ranging, takes longer to deliver, but ultimately delivers that winning combination of long-term savings and a noticeable enhancement to the service provided.
Neither claims staff nor adjusters are Luddites and there are numerous recent examples of how the adjuster/insurer partnership has worked to mitigate losses and resolve difficult market catastrophes. Many of the internal insurer purchasing teams, who understand the business, have reduced panels, saved on fees, developed with adjusters achievable objectives for savings and service, but have not enforced suicidal fee levels for short-term gains.
The medium to long-term gains far outweigh the quick fix. There is certainly room within the process for the consultants who add external experience to the team, but there has to be a balanced approach. A margin to accommodate development as well as training is essential.
Within the claims supply chain there are enormous opportunities to reduce the overall cost of claims. However, the starting point should not be to destroy the viability of those adjusting firms which have served insurers very well through disasters too numerous to mention.
The claims services of the future requires talented people and above all investment. In the United States since 1997 commentators have reported "Growth is in, downsizing is out". American business leaders after a decade of downsizing had seen scant benefit from past regimes intent only on cutting costs. The focus has been on increasing revenue with whatever it takes, new products, marketing, investments and much more. This experience of the United States should not be lost. For cost cutting substitute value for money.
A far more meaningful approach is in the partnership development of new ways of working. Why do we duplicate each other so much in the claims process? How can we make better use of technology and share systems.
The internet is the fastest growing area of commerce but very few insurers and adjusters are working to harness the enormous potential that the system can bring. Some development is on-going now, but more is needed and in time industry protocols will have to be agreed if a professional worldwide internet claims system with direct settling arrangements is to be developed. Those who harness the technology first will reap the rewards far in excess of the counter-productive tinkering with fees.
Insurance is still at its core a people business, which thrives on long-term well-focused relationships. Those past relationships have delivered service to insurers, policyholders and intermediaries. QBA's glee at the destruction of these relationships shows a fundamental misunderstanding of the part that loss adjusters play in the service supply chain especially at times of peak demand.
For those popping the champagne bottles at their new deal via QBA, enjoy it whilst you can as the whole concept of "chop the fees" is ultimately doomed to failure. I predict that overall claims spend for those who adopt this approach will inevitably rise as standards and service decline.