More and more insurance companies are replacing goods rather than offering cash for claimants, even more reason to value your contents and valuables properly. Mike Cooper reports.

Replacing lost or damaged goods is rapidly becoming the preferred alternative to cash for claimants and insurers. But for insurers and suppliers seeking to ensure customer satisfaction, the process of correctly validating claims appears to be the key.

Direct Line has more than one million home policyholders and like many insurers replaces items on a new for old basis.The insurer, one of the UK's ten largest, spends around £20m on goods replacement each year.

Terry Witter, head of claims supplier management for the direct writer, says that goods replacement has benefits for both insurers and the customer. Claims settlements are currently settled on the balance of 50% cash and 50% goods replacement.

He explains: "The cash element is still quite high because insurers do not tend to replace items of relatively low value."

He stresses, however, that the insurer's own research shows even in this area, things are changing: "Customers are increasingly accepting the idea of replacement, and are seeing its benefits in terms of removing hassle and being able to upgrade to better models."

Another advantage to customers choosing to replace goods is that they can receive a share of the discount Direct Line obtains from its suppliers. All this amounts to improved customer service, probably the chief reason why insurers increasingly prefer to replace goods.

Witter believes that further economies will flow from ecommerce. However, he says the insurer is reluctant to upset the personalised relationship it has with claimants.

"Direct Line is examining carefully the benefits of ecommerce in terms of the supply process. But we do not want to reduce the personal contact we have with our customers."

Dixons Group Insurance Services (DGIS) is the largest supplier of replacement white and brown goods to the insurance industry - supplying 2,000 replacement products each week.

Through the four major retail chains within the Dixons retail group, namely the electrical retailers Currys and Dixons, PC World and the mobile phone store, Link, it has more than 1,100 stores, which cover 95% of the UK population.

Billy Harley, commercial business manager for DGIS, admits that its size means it has a strong position in terms of market power.

"Since we buy for hundreds of thousands of customers, we can offer insurance companies a competitive price in terms of replacement goods," he says.

DGIS's replacement goods service operates from four offices, each dedicated to a specific part of the goods replacement process.

Its London office handles claims for top end photographic equipment; Hemel Hempstead concentrates on quality control and claims administration, Solihull deals with replacing personal computers and Sheffield with validations.

Keeping up to date
A real time computer link keeps each office updated on the progress of each claim.

DGIS validates claims using a database containing information about more than 60,000 electronic products, ranging from deleted items to the latest models.

This is used to ensure that customers are offered replacement goods with a similar or equivalent specification to the item lost or damaged. "This is important, as some electronic goods requested by customers are no longer available because they have been withdrawn by manufacturers."

Harley adds that customers also have the choice of upgrading to a superior quality item with the consent of their insurer. But they must pay for any excess.

Argos Business Solutions, the business-to-business division of high street retailer Argos, became involved in insurance replacement eight years ago as a means of enhancing its sales.

Insurance replacement manager Tim Thornton says offering replacement goods instead of cash has three main advantages: it minimises costs, reduces fraud and cuts delivery speeds.

"We can return the policyholder to the position he was in prior to his claim faster than insurers who provide a cash settlement can," he claims.

This was an important consideration for policyholders left stranded in temporary accommodation in the wake of last autumn's devastating floods. "People were able to obtain a replacement kettle and toaster almost immediately for use in their caravans."

More than 14 million people regularly shop at the retailer's 460 stores, and its catalogue is reputedly read by 70% of UK households.

Its extensive market penetration means that the catalogue is used by customers shopping for replacement items as a reliable price guide. .

This is particularly true where the replacement of smaller items such as kitchen utensils is concerned, (the average spend per insurance client has remained at £250 for the past four years) rather than for the larger fittings, such as furniture. In other words, as Thornton puts it: "Argos tends to get used for `sweep up' claims." Thornton says that its volume of business increased by 40% during 2000

Voucher system
It its partly because of the relatively small value of requested replacement items that Argos does not provide a validation service. Instead, the catalogue is used to identify the replacement values of lost or damaged items. As a result, validation is usually left to the policyholder and the insurer to settle between them.

Argos has developed an electronic voucher system similar to a credit card and based on the points cards available from petrol stations.

This system, says Thornton, has proved effective against fraud: "Vouchers ensure that a policyholder can never obtain cash from an insurance deal. We can exchange a diamond ring for a sofa, if need be, but by removing cash from the deal we are able to cut out a significant amount of fraud."

Insurers will be able to purchase the retailer's vouchers over the internet later this year, with invoicing arrangements also handled online. Discounts are offered to commercial buyers depending on the size of bulk orders. Jewellery, however, attracts a higher discount than most domestic goods.

These electronic vouchers can be loaded to the value of a claim and can be used by insurance customers in any Argos store within one day of their claim being received.

This is a vast improvement on previous working practices in the 1970s when insurance claims staff would consult a mail order catalogue for the value of missing or damaged items and despatch a cheque for settlement.

Another recent development is that Argos has placed its catalogue on the web. The advantage here is that it allows for regular amendments and updates instead of customers having to wait for the published catalogue to be reprinted every six months.

This means that customers and insurers can now browse for items online, and reserve goods for collection from local stores. They will soon be able to purchase goods online and have them delivered to their home.

Dharam Jewellers, specialists in the replacement of high quality 22ct gold Asian jewellery, also views validation as having an important role in the claims process.The Middlesex-based firm provides a validation service to insurers and loss adjusters in terms of assessing the value of a lost or stolen piece of jewellery.

Dharam Pal, project manager for Dharam Jewellers, says: "Insurers prefer offering replacement jewellery over a cash settlement, because it helps them retain the policyholder's business." The company benefits from having links with more than 100 associate jewellers, which enable it to source high quality jewellery at trade prices.

Mobile telephone replacement company Digital Insurance Services also believes the validation process to have a central role, particularly in the case of the replacement market.

Craig Wright, general manager of the Norfolk-based firm, says: "Some mobile phones have a shelf life as short as six months because the technology is developing so rapidly.

"Faced with a plethora of replacement options, insurers need to be assured that the customer is given the correct validation, so that he is restored to the position he was in before his claim."

Wright believes that mobile telephone-related claims will continue to rise, fuelled by demand from black markets overseas and the sheer numbers in circulation.

"Mobile phone use is becoming a global phenomenon, and in some Scandinavian countries market penetration is approaching 100%," he says.

In the UK, mobile phone use is spreading rapidly, particularly among teenagers, following the introduction of pre-paid mobiles, which has gone some way to counter the high-cost image.

Wright believes that the logical progression of these trends adds up to a buoyant future for the mobile telephone replacement industry.

Validation is certainly important to insurers and suppliers but for claimants - particularly those in the high net worth bracket - another pressing concern should be obtaining a correct valuation.

This was brought home dramatically to two clients visited by professional valuers from Paul Quastel Valuations.

One was a woman living in Cambridgeshire who had insured the contents of her five bedroom house for £40,000.

The valuer who called on her was amazed to discover the woman had a walk-in safe inside her house filled with silver antiques. Among the items was a set of four George III candlesticks worth £8,000 alone.

By the time the valuer had completed his work, he calculated the contents of the woman's house was worth nearly £1m.

"If she had had a claim, she would have been paid a pittance, if anything," says the Middlesex-based firm's managing director Paul Quastel.

But this was not an isolated case. Quastel estimates that 90% of people he sees are underinsured.

Another client, a titled gentleman living in a suburban London house was advised he should increase the value of his house contents cover from £100,000 to more than £1.2m.

The man in question said he did not fully realise the value of his belongings because most items were inherited from family members.

Quastel says both underinsured could have faced serious difficulties in the event of a claim.

"The advantage of a valuation is they will be fully recompensed if they have cause to make a claim, as they will be aware of the correct cost of replacing items," he says. Replacement antiques and valuable household items should be sourced from reputable dealers, he advises. The cases highlighted might have been avoided, he says, if brokers had taken the trouble to visit the clients.

"Although not every broker is remiss in looking after their clients, the trouble is that too many are."

But he stressed some insurance companies provide an excellent valuation service to their clients, which he says include, Hiscox, Albion, Independent, Chubb and Axa Nordstern.

He adds that an interesting exercise is forecasting the future value of valuable items. He cites the example of a mahogany writing desk made by modern furniture maker John Makepeace. In 1980, the piece would have cost £3,000 to replace. Twenty years later the cost was £16,000. But by 2020, this will have increased significantly to £80,000 and an astounding £420,000 by 2050.

A sobering thought for many policyholders with family heirlooms.