Chain under Strain

There is plenty of talk about supply chains today, their associated risks and the measures needed to build a robust supply chain. Discussions revolve around everything from avoiding the trap of focusing solely on cost savings to the challenges of managing increasingly complex supply chains and the need to implement risk management programs.

The fact that supply chain risk is topical today is a function of the transformation of business over the last 25 years. Supplies now come from parts of the world where risks exist (natural disasters, political unrest and labour stoppages, to name a few) that largely did not exist at home or were less severe or frequent.

Those risks, however, pose a threat to maintaining the supplies necessary for business to stay in business. Identifying the critical elements of supply and managing the associated risks to reduce contingent business interruption losses is fundamental to responsible business operation.

Discussions today about supply chain management risk issues are reflective of what insurers themselves have been doing over the last 25 years with one of their own critical supply chain links: independent adjusting.

Independent adjusters are concurrently facing both a high degree of scrutiny and demands to deliver with less. Do insurers really want their independent adjusters, those they hire to represent them to deliver their products, embattled and weak? Or do they want well-trained, responsible professionals carrying their brand and protecting their bottom line?

Over the last 25 or more years, property insurers in Canada have focused on cost-cutting when it comes to claim service suppliers such as independent adjusters and contractors – both of whom are integral to the whole property insurance proposition.

IMPAIRED INVESTMENT IN TRAINING, RECRUITING

Contractors can speak for themselves, if they dare. I speak from the standpoint of independent loss adjusting, a service that almost every insurer in this country utilizes to some extent – some significantly more than others. That said, they all buy the service in one form or another at some point.

Despite the importance of adjusting service to the “supply chain” – that is, the actual activity of determining what should be paid, no more and no less – many (although certainly not all) insurers have undertaken to reduce adjuster margins with the effect of reducing the ability of adjusting firms to invest in both training and employee development (recruiting).

Those who have perpetrated this process in the name of cost savings have been very much focused on the “little picture,” thereby reducing expense today to meet today’s targets, with seemingly scant consideration for the long-term effects of such actions.

One need only look back a few months to Calgary and Toronto and the sudden influx of substantial claims associated with the very sort of catastrophic weather-related events that many experts say are going to happen more frequently and with greater severity. 

CHAIN FRAGILITY EXPOSED

With those events, the fragility of the supply chain was exposed. Insurers did not have the capacity to deal with everything at once, so some of those claimants did not end up with what they would have received had the same damage occurred in milder circumstances. That is not fair to policyholders and that is not fair to shareholders.

I was brought up in the property and casualty insurance industry believing that fairness was the foundation on which the business was built. However, without the resources necessary to properly and fairly deal with losses, claims get paid that should not get paid and the amounts paid become less important than closing the file.

What savings are truly realized when this is the result of cost-cutting? How is it that the fundamental principle of insurance, to indemnify the insured based on the insurance contract, has given way to expediency and metrics measurement? The answer is simply short-sightedness.

COLLABORATIVE APPROACH KEY

The supply chain in the p&c business in Canada has been weakened considerably. In the absence of a more collaborative approach where insurers support and encourage their adjusting partners – viewing their engagement not with disdain, but rather as an investment in maintaining solid operations – the chain will continue to weaken and, one day, it will break.

Those insurers that have not given in to the “reduce costs at all costs” ideology will be well-positioned to remain in business and pick up customers from insurers that brokers will cease to want to represent. The additional rub could be that those customers, by then, may be a cynical lot.

Developing and maintaining a steady supply of effective independent loss adjusting service is not solely the responsibility of insurers. Adjusters must be committed to take the higher fees provided by those insurers engaged in the long-term view and use that to invest in training and talent.

Some adjusting companies in Canada today may have more focus on the rate of return to investors than investment in professional development that will pay off later. The combination of an insurer and an adjusting entity both narrowly focused on today’s numbers may be the biggest threat to the stability of independent loss adjusting in Canada.

An independent adjuster may well say that this point of view is tainted in that I have a vested interest in wanting to see insurers embrace and partner with adjusters to continue to develop experienced and capable field adjusters. Those independent adjusters would be right on that point.

Nearing the end of my career, it would be easier for me (and like-minded independent adjusters) to leave matters to those who would reduce claims adjusting to mindless processes that do not hold together the fabric of the p&c insurance proposition with the threads of fairness and respect. However, it is no option at all to simply watch the adjusting profession be weakened on the notion of saving a few dollars today.

Insurance industry insiders see the effects and understand the importance of identifying the perils associated with supply chain risk. Their peers would do well to take a good look at what they are doing to their own supply chain.