Zapped! Claims Departments Feel the Heat

Although restricted terms of insurance underwriting and the pricing thereof has grabbed media headlines over recent months – with clients on both the personal and commercial fronts voicing their displeasure over steep rate hikes since 2001 – claims departments of companies are also finding the glare of the spotlight equally harsh. When CU asked claims managers and independent adjusters to identify “what are the key issues heading into 2004” – they irrevocably identified the industry’s damaged image crisis as being the top priority, while highlighting the positive role claims settlement can play in promoting the social value of insurance.

The recent vilification of insurers has become inextricably linked to auto insurance, with customer expectations and attitudes heightened by the double-digit rate increases introduced over the past two years. And, the continuing saga of auto promises to remain front and center in the coming months with the implementation of Bill-198 and the new Bill-5 in Ontario. Alberta is another hot spot, as insurers, lawyers and the government wrangle over new auto legislation. Needless to say, in such precarious financial times, the claims departments of insurance companies are under the gun to contain costs.

Cost containment is, however, proving especially difficult, claims managers say, given the rise of a “compensation culture”. Whether talking about auto accident victims invariably filing injury claims or the rising tide of lawsuits aimed at commercial clients over personal injury, shareholder disappointment, employee issues or product liability, claims departments are battling an attitude of entitlement that is infiltrating Canada’s legal system.

Looking at the insurers’ results for third-quarter 2003, almost every line of business is facing difficulties. Auto continues to be unprofitable except in terms of physical damage costs (see Chart 1). Personal property results worsened in 2003, due largely to losses from the B.C. forest fires and Hurricane Juan. And while both commercial property and liability loss ratios dropped in the first nine months, commercial liability losses remain extremely high, particularly in light of the projected reserve deficiency of almost $250 million for this line for 2002 (see Chart 2). As such, juggling the need to focus on loss containment with the demands of an unhappy public and the auto reform “curve balls” being thrown by provincial governments will indeed keep claims departments on their toes in 2004.

IMAGE CRISIS

“2003 was incredibly difficult from an image perspective for all of us,” says Irene Bianchi, vice president of claims for Royal & SunAlliance Insurance Co. of Canada. “We [insurers] are collectively portrayed as part of the ‘axis of evil’ if you will.”

And, comments Glenn Gibson, CEO of Crawford Adjusters Canada, “the publicity that has been on the front page has made it a more difficult environment for adjusters to work in”. Customers are leery of adjusters and unsure of how they will be treated during the claims process because of the negative publicity surrounding the insurance industry.

As well, the media attention and consumer ire has created an atmosphere of high customer expectations that is being felt at the claims level. “In most of the claims you get now, they [customers] are questioning why, and you have to have ready explanations,” notes Sebby Fernandes, assistant vice president of claims, CNA Canada. Claims departments are begin challenged to aim higher in terms of customer service, and specifically in terms of communicating effectively with claimants throughout the claims process.

It is understandable that customers would be unsettled when they are facing double-digit premium increases, says Jerry Dalla Corte, vice president of claims, The Dominion of Canada General Insurance Co. “There’s a challenge for the folks in the front-line of claims – they are in the best position to change that image.”

Claims managers do agree that their profession has a role to play in turning around the industry’s negative image. “Demonstrating value in the services we deliver to consumers is critical to helping overcome a leading issue facing the insurance industry – consumer skepticism and negativity,” says Bill Hornick, president of Cunningham Lindsey Canada Ltd. “We must strive to make each and every claims experience a positive one.”

Gibson observes, “when you look at the forest fires or Hurricane Juan, I don’t think we [as adjusters] get our due”. He adds that the media is more focused on controversy than on “good news” stories about adjusters helping to put lives back together after catastrophes such as these. “The industry has never done better work in terms of speed of delivery, customer focus, complaint handling…yet we face a moment in time where we’re not getting recognition for it.”

“We need to educate the public and provide them with examples of how we are here for them in their times of need,” agrees Bianchi. “We need to also win over the media with some ‘good news’ stories and perspective next year to regain some of our lost credibility. If we had done some of that work in 2002 or earlier, perhaps we would have had less of a crisis of confidence on our hands in 2003.”

AUTO FOCUS

Much of the negative attention aimed at insurers originates with auto insurance, a line that has been in utter turmoil for the past two years. “The biggest challenge for our industry is Alberta auto,” observes Dalla Corte. “We’ve got to do a better job of selling the issues around auto to the public out there and get away from the hyperbole [in the media].”

Alberta is just the latest hot spot – reforms have already taken place in Ontario and other Atlantic provinces, with New Brunswick continuing to investigate the avenue of public insurance – and insurers are going to bat heavily to ensure that changes made in Alberta do not make an already unprofitable auto system even worse.

The auto insurance melee is taking its toll on claims managers, says Bob Jewett, senior vice president claims, Allianz Canada. “It’s the resources required to manage not only the changes implemented, but the resources it takes to work on the proposals.” He, along with a team of insurer representatives, has been working with regulators in Alberta on the new system.

In Ontario, while it is “too soon to tell” how Bill-198 will hold up in practice, there is lingering concern over to what extent the system may be changed yet again by the newly-elected Liberal government. “With our history of governments in Ontario there is always that very real concern there will be further changes,” Jewett admits.

With auto representing more than half the p&c market in Canada, when governments tamper with provincial systems, the shockwaves reverberate, even beyond the country’s borders. “The uncertainty in how the products will look and be priced may have an effect on how capital is allocated going forward for Canadian businesses that have UK/European/US parent companies,” notes Bianchi. While the changes have been packaged as a way to reduce costs and therefore rates, she says that without real reform to the auto tort system, insurers will not see true cost savings.

In fact, claims managers agree, auto reform is not the heart of the issue. It is the “compensation culture” that has taken hold of Canada. “The courts play an integral part in determining the values of our society. If they continue to allow compensation for more and more aspects of an injury claim we will continue to encourage a compensation mentality in Canada,” Bianchi concludes.

“It’s become a cultural norm, there’s routes you can take to get compensation, whether you’ve been injured or not,” Jewett agrees. He adds that while accident frequency may be dropping, the number of accident benefits/bodily injury claims arising per accident is growing. “We haven’t seen a plateau on the number of claimants per claim yet.”

This compensation culture is making its way into commercial lines as well, and even insurers are finding themselves the object of lawsuits centered around bad faith claims , as in the White v. Pilot and Mazza v. Hamilton Township Farmers Mutual cases. “After Whiten versus Pilot, many insurers began seeing a plethora of claimants using bad faith as a negotiating tool,” notes Joe Turcotte, Toronto operations claims manager for FM Global.

SETTING STANDARDS

A new area where insurers, and claims staff specifically, will need to tread carefully in moving ahead is the federal privacy legislation which came into force for the industry from the beginning of January this year. The privacy waters are murky, claims managers concur. “I don’t think any company has a privacy policy [fully] in place yet because the privacy legislation is not clear. You’re in limbo,” says Fernandes. He uses the example of unclear protocol when it comes to obtaining information from a third-party that a claimant may not be aware of.

Furthermore, Jewett notes that there remains inconsistency within the industry on many privacy issues. “I’m looking at different companies handling it differently, independent adjusters handling it differently. This whole privacy issue, which looked to be fairly straightforward is bringing a whole host of issues.” Specifically in the area of consent, he notes that some adjusters are requiring consent forms be signed during each customer contact in a claims file, while others are relying on implied consent throughout the claims process. “Who’s setting the standard? It [the standard] is not clear in the legislation.”

However, the insurance industry can take pride in having a good track record, even prior to the legislation, in handling sensitive customer information. “I’m a firm believer that as an individual we already do an excellent job at complying with privacy.” The challenge, Jewett says, will come from the plaintiffs’ bar, which may seek to manipulate the legislation to be something other than what it is intended to be.

VARIABLE FREQUENCY

Overall, claims managers and independent adjusters predict that 2004 will see a further reduction in frequency, specifically in auto physical and property lines. “The industry experienced a significant decrease in reported claims in 2003 and this will continue in 2004,” notes Dan Watchorn, vice president of operations and claims at HB Insurance Group. “While many companies may wish to credit stronger underwriting, the truth is that the hard market created a situation where the public became very apprehensive to report claims fearing significant rate increases, policy restrictions or cancellations.”

This trend may have an unintended positive effect in that it will allow insurers to shift resources away from areas of lower frequency, i.e. physical damages, to areas of growing frequency, such as accident benefits and bodily injury, he adds. This focus, coupled with new reforms in some provinces to cap minor injury awards, gives insurers some “teeth” to tackle the escalating injury losses, Watchorn observes.

“From a claims perspective, leveraging opportunities with legislative/regulatory change will be key,” agrees John Greb, vice president of claims for Allstate Insurance Co. of Canada and Pembridge Insurance Co. “This includes carefully reviewing and interpreting reforms to contain loss costs and control fraud while meeting the intent of the legislation.” However, he adds, “It also means being proactive in driving additional needed reform and clarification to existing reforms. We cannot just depend on government to do what is right to control claim costs.”

Cost containment will, as always, be the watchword for claims managers, specifically the need to reduce leakage and maintain control over claims files whether they are being handled by inhouse claims staff or outside adjusters or legal counsel, Fernandes notes. Specifically he cites the need for regular audits of claims files by senior management through every step of the claims process, including subrogation.

One area where cost containment must be tempered applies to staff recruitment, training and retention, sources agree. “Staff training and development are key elements in this service delivery, particularly in the ever-changing legislative environment in which we operate,” says Hornick.

Dalla Corte cites a decreasing level of experience in some adjusting fields, due in part to veteran staff retiring, specifically in technical AB and BI adjusting. “We’ve got to make sure we get people in, reward them and train them, and keep them. We, as an industry, have to do a lot better job of recruiting, but more so in developing talent.”

Turcotte points out that, “some insurers reduced their claims staff and hired more consultants and outside adjusters so their expenses would appear to be reduced while their loss costs increased. However a smaller claims staff can mean fewer decision makers employed by an insurer, which can make it difficult to settle claims”. A strong claims staff reduces costs by mitigating losses, he adds.

For independent adjusters, a shrinking market due to insurer consolidation means turning staff in new directions. This can mean having specialist staff focusing on specific loss areas such as class action – it can also mean offering expertise on claims that fall below commercial clients’ self-insured retentions in a third-party administrator’s role. Within this challenging environment, top claims staff agree, the key will be to keep the morale of their forces strong. Faced with the industry’s negative public image and pressure to reduce loss costs in a shifting regulatory and legal environment, keeping a smile on the face of claims personnel will prove the tallest order for 2004.