The road to smoother settlements

The recession has made claims – especially the ability and willingness of insurers to pay them promptly – the number one issue for most UK risk managers.

It barely needs stating that the way in which insurers pay claims has always been important, but the recession has turned this into a question of survival for some companies.

Because banks are unwilling to lend money to firms in times of need except at prohibitive cost, Airmic members are depending on their insurers more than ever.

Yet the settlement of a property and business interruption claim can continue for months – sometimes years – according to the nature of the loss and the type of cover.

During this time, the insured is likely to suffer severe cashflow problems, which in some cases can threaten the viability of the company. And the situation is made immeasurably worse if for some reason the insurer reserves its rights – serves notice that it may not accept liability for a particular loss – on the claim.

This is just one of the reasons why insurance has become a boardroom issue.

Buyers are having to educate their finance directors and other senior colleagues in what it all means.

Airmic has been trying to address the problem in a systematic fashion. This time last year we unveiled an initiative on reservation of rights.

It is a perfectly acceptable practice under the right circumstances, but there have been allegations that some companies were using it routinely to handle large claims. The result can be to slow down the whole process and increase costs.

Now, we have a voluntary agreement with seven of the largest insurers to have a 90-day cooling-off period in which informal negotiation can take place.

We have also produced a claims best practice guide as a tool for buyers, which will allow insurers to report back to members on how their own claims operations stack up against the principles set out in the guide.

The document identifies the hallmarks of excellence, looking in detail at such matters as culture, staff numbers and the way they are trained, internal communication and reporting, IT systems, the status of the claims department and the extent to which individuals are empowered to make decisions. It has been very well received.

None of this, however, amounts to speedy payment. We accept that very large claims are complex and that it can take many months to reach an accurate valuation.

However, we wished to agree with our partner insurers a protocol for making interim payments during the settlement process. This would put the insured in a cashflow-neutral position during the recovery period.

It is a subject about which we feel very strongly. At stake is the ability of companies to make investment decisions and retain or recruit staff. In some cases – a minority, but by no means as insignificant as you might think – it can make all the difference to an enterprise’s survival chances.

Research shows that firms often suffer severe long-term damage when they take a big hit, and the insurer wants to be sure they still have a client left to pay their premiums.

The response from the market has been positive and the seven major insurers that are Airmic partners are enthusiastic about showing their support.

We have also been in talks with the Chartered Institute of Loss Adjusters, whose members have an important role to play in all this. It would be unwise to discuss the terms of the agreement as it is still under negotiation.

At its heart, however, is the principle that the insured should maintain its cashflow position after a loss.

As so often, the devil is in the detail. But I am certain that at the very least we soon shall have an outline agreement to unveil.

Our members spend more than £5bn on insurance annually and in hard economic times it is vital that they receive a prompt, dependable claims service.

From our conversations with them, the major commercial insurers have got the message and are keen to respond constructively.