Damaged goods

In the eyes of many brokers, the claims handling service standards of insurers are becoming increasingly lacklustre. Behind this fall in standards is an alternative insurance cycle driven by key elements of service and price that end up undermining claims service.

In the regulated environment, brokers have no margin for error. They need to offer best advice, ensure their staff are well trained and that their business practices are robust and transparent. At the same time, increased costs of regulation mean brokers are also under pressure to win more business and increase their revenues. When it comes to managing their customers' claims, this creates an uneasy balance.

If the insurer is unable to offer the right level of service it falls to brokers to support the client. But there is only so much time a broker can spend out of the office attending time-consuming claims meetings, chasing up the insurer's adjuster and claims staff.

And for complex cases - for example major business interruption losses - brokers may not have the necessary expertise to assist.

Anecdotally, it seems that insurers are increasingly taking longer to pay up - and whether it is because they are sitting on reserves or simply do not have sufficient staff in place, the result is the same - disappointed and angry consumers.

Last year's Insurance Broker Market Survey conducted by Deloitte & Touche revealed that 54% of the brokers questioned thought insurers' claim services were only "fair", with 29% saying services were poor. Less than 1% thought services were excellent.

The service/price cycle provides an explanation as to the deterioration in insurers' claims standards.

Outsourcing
The catalyst for the cycle was the spate of mergers, starting in the early 1990s, which resulted in widespread redundancies affecting many insurers. Staff with core competence in claims and underwriting lost their jobs as insurers sought to manage with smaller teams and less skilled labour.

This trend has continued with outsourcing. While insurers justify the cost benefits of this approach, many claimants still want someone who understands their situation and can meet them, rather than deal with a remote call centre.

The lack of product differentiation resulting from the commoditisation of some personal and commercial lines focusing on price competition is a significant factor within the alternative cycle. Insurers will look to keep prices low to attract a larger market share.

Suitable premium
However, reducing price will inevitably lead to a reduction in profits and, potential vulnerability to losses. Underwriters will have an expectation of the volume and size of claims likely to occur so as to calculate a suitable insurance premium.

The reduction in profits leads us on to another important spoke in the cycle, namely investment issues. Plummeting stock markets have increased the pressure to produce adequate shareholder returns.

In a hard market, the profit margins are significant enough for insurers to consider reducing to win business, knowing they can still make a profit on that business.

But in a soft market, the insurer cannot afford to reduce its already stretched underwriting margins as this may lead to losses.

Reduced profits lead to lower dividends to shareholders and, therefore, disappointed investors. There are only two options for insurers - reduce overheads to improve profitability, or run the risk of losing investors. Both will result in a reduction in staff and systems investment.

Spending less on claims can seem like the best way to protect investment income.

But this is a false economy. As a technical service industry, it is important that those involved have sufficient technical understanding to ensure the consumer is kept aware of what is happening to their claim.

But these experienced personnel come at a price. If an insurer is looking to reduce overheads, it will be these people who go first.

With fewer experienced staff dealing with intermediaries and the public, there is an inevitable reduction in service.

Brokers complain about problems in finding someone with authority and, indeed, anyone who can deal with a case that does not fit the 'tick box' criteria.

Negative spiral
Even when a claim settlement is agreed in principle, obtaining the cheque or arranging for work to be done is invariably a frustrating process.

Similarly, the desire to cut costs has led to insurers reducing the number of loss adjusters they work with and, where possible, making do with those who are less experienced and who, hence, cost less.

The UK insurance industry has moved into a negative spiral in terms of product and service quality and price. The customer perception that there is nothing to differentiate one supplier from another, or one product from another. This leads to price being the only differentiator.

Maintaining these profit margins by employing less experienced, and therefore cheaper people, further reduces the quality of service.

If insurers continue to follow the service/price cycle it will create even bigger cracks in their 'shop window'. IT

' Frazer Dewey is sales director of loss recovery insurance provider Lorega Claims and Underwriting Services