Protecting the lettuce patch

The managing director of a building repair company, serving the property insurance sector, recently admitted that putting the building repairer in control of liability and scoping decisions on an insurance claim, was no wiser than putting Peter Rabbit in charge of the lettuce patch.

If a repairer has a vested interest in whether the damage is covered or not, the decision is likely to veer towards insurer liability. In terms of the scope of work, will the repairer see this as a licence to print money – in this case, insurer’s money?

It is a little unfair to pass judgement on all repairers, based on one person’s comment. However on reflection his views do deserve greater consideration. In the lettuce patch, was Peter Rabbit simply taking advantage of the opportunities available, or was he guilty of outright theft?

With industry expenditure on property claims exceeding £2bn per annum and rising, insurers continuously seek ways of managing and controlling claims expenditure.

Outside the insurance sector, the construction industry continues to enjoy boom times, stimulated by urban regeneration, new housing and the inevitable impact of the London Olympics in 2012.

It’s a worrying thought that six times the annual spend on property insurance claims will be incurred on the Olympic development.

With such high level of demand on construction, no wonder there’s a shortage of labour and prices are being affected. Some are already predicting that it is not a question of whether average claims costs will go up, but rather by how much.

Does ‘leakage’ constitute fraud?

Claims cost control should be at the top of the agenda for all insurers who want to be profitable.

But when it comes to managing claims are insurers being naïve – are they key contributors to their increasing costs? By imposing unrepresentatively low repair rates on their supply chain, some repairers feel forced to be ‘opportunistic’ in their approach to repair scoping to keep labour and pay their subcontractors.

Can such behaviour be considered fraudulent? It’s a term the industry seems to have been frightened to use within the context of suppliers. Instead the euphemism ‘leakage’ is quoted – indicating some level of fraud or misbehaviour is tolerable.

Across the industry, claims cost ‘leakage’ is said to be greater than 15%, mounting up to an overspend of £300m per year for UK insurers.

In response to sceptics who may believe this figure to be too high, one independent roofing expert suggests the ‘leakage’ problem for roofing work is much higher at over 50%.

The big question is whether opportunistic behaviour can be considered as fraud. The key issue is that of intent. If a supplier sets out to deliberately inflate the scope of repairs, or decides under a delegated authority arrangement to deal with a claim which is not covered, due to say wear and tear, then surely fraudulent behaviour cannot be in doubt.

Cross checks and inspections

Insurers must ensure adequate controls and cross checks are in place, but even that is not a simple task.

“Tradesmen paid on a ‘piecework’ basis may be tempted to exaggerate what’s been done, especially in areas that can’t readily be checked when the work is completed. Were the radiator and all the light switches really removed to redecorate that room?

The issue, fundamentally, sits with how the actual tradesman working for the repairer is paid – on an hourly rate, or a ‘piecework’ basis (paying a set amount for each item of work completed).

Tradesmen paid on a ‘piecework’ basis may be tempted to exaggerate what’s been done, especially in areas that can’t readily be checked when the work is completed. Were the radiator and all the light switches really removed to redecorate that room?

One repairer employed an internal auditor to check these things and found that although the “spirit of teamwork and collaboration” was in full flow – it was in the wrong areas. The auditor was getting a backhander from the tradesmen so as “not to look too hard” at what was actually being completed.

At face value, any insurer, supplier manager or even fraud investigator scrutinising such a repair company, would seem satisfied. There was a process in place and an apparent control mechanism, but yet ‘opportunism’ was apparent. Was this fraud or poor management?

The UK’s repair networks, which are currently migrating from the management of suppliers to the use of a direct labour force, would be well advised to base their internal controls on the lowest common denominator of their process.

Increasingly the case seems proven for independent scoping and pricing of property damage, but with almost three-quarters of property claims falling under £750, the cost benefit of this continues to be challenged.

Insurers already take contrasting views on the most appropriate inspection level, ranging from 10% through to 30% of all claims coming in. Whatever figure is right, it still leaves a large amount in the trust of repairers who are left to their own devices, with insurers seeking to control their behaviour by costly and in most cases retrospective audit.

Addressing the problem

Where ‘leakage’ is found, insurers often seek to penalise their repairers by punitive deductions. With insurance repairers already grumbling about poor payment terms, unrepresentative insurer repair rates and excessive performance requirements which impact on productivity, for many this represents the final straw.

Other repairers simply see it as part of ‘playing the game’. Market experts believe insurers should place greater emphasis on dealing with issues of scope and liability instead of continually squeezing repair rates.

The introduction of new claims scoping and pricing systems, supported by analytics, will inevitably be part of the solution, moving claims management to new levels of competence.

However, technology is not a panacea, and the effective use of independent inspections should not be overlooked. Prevention has always been better than cure.

Although UK property insurers are reaping the benefits of extremely benign weather, there’s little evidence of complacency.

They are only too aware, that like the Beatrix Potter tale – Peter Rabbit always remained one step ahead of the farmer, Mr McGregor.

Property claims managers had better keep an eye on their lettuce patch! IT

Tony Boobier is vice president, International Solutions, Marshall & Swift/Boeckh