Golden Opportunity

Hope springs eternal. As Canadian p&c insurers embark on 2005, there is renewed optimism on many fronts – that the industry can resist the temptation to fall back into “boom and bust” insurance cycles; that auto insurance reform can lead to meaningful claims savings; that the public image of insurers might actually be improved.

A great deal of the industry’s success or failure in achieving any of these changes rests in the claims departments, a fact of which claims managers and independent adjusters are fully cognizant. Industry claims leaders tell CU that among their key challenges in 2005 will be responding to the altered auto insurance landscape, and addressing the role of claims in improving the industry’s profile with consumers.

LOW FREQUENCY

Canadian insurer results for the first three quarters of 2004 are encouraging: the industry is not only posting record earnings and underwriting profits, but has managed to drag its loss ratio under 64%.

Certainly much of this success is attributable to premium increases, but the industry has also made a concerted effort to lower claims costs by tightening underwriting controls, introducing new exclusions and trying to negotiate favorable auto insurance reforms with provincial governments.

However, there is also substantial concern that some of the drop in claims costs is related to lower frequency stemming from a fear on the part of insureds to file claims. With the headline-making rate increases in the auto line specifically, consumers are reluctant to file claims which might result in further rate hikes. There is also anecdotal evidence that commercial clients are just as afraid to file claims, and certainly significant increases in commercial policy retentions has had a similar effect. But the resulting drop in frequency may be nothing more than a panacea.

The Insurance Bureau of Canada has highlighted auto claims frequency as a growing area of concern. “In 1993, the average claim frequencies in Alberta, Ontario, and the Atlantic respectively were 17.7, 22.7, and 17.9 claims per 100 vehicles insured. In 2003, claim frequency fell to 10.2 in Alberta, 12.0 in Ontario and 10.1 in Atlantic Canada,” notes the IBC in its May 2004 edition of “Perspective” (see chart 1). At the same time, insureds have increased deductibles as a means of reducing premium costs. “Between 1999 and 2003, the average weighted deductible on comprehensive car insurance policies across Alberta, Ontario and Atlantic provinces increased from $250 to $298. Similarly, while in 1999 just 7.5% of consumers purchased a policy with a $500 deductible, in 2003 this had risen to 15.5%,” the IBC adds.

The problem comes if government mandated auto rate freezes and rollbacks, or even the potential onset of price competition, remove the disincentive to file claims, and frequency returns to normal levels. “A financial simulation shows that if the number of claims returned to the 10-year average, consumers would realize an increase of approximately 15 to 20 cents per premium dollar,” the IBC explains (see chart 2).

“Is the real driver to reduced claim reports policyholder aversion to resulting premium increases that accompany claim frequency? Will the industry soften and frequency subsequently rise?” asks Linda Paccanaro, vice president, claims for Kingsway General Insurance Co. She says Kingsway has seen reluctance to report minor injury claims, however, she adds, “also evident is that claims of any significance are actually costing more”. This rise in severity on more profound injury claims may be related to advancements in medical technology which on the upside means that people are more likely to survive accidents which would historically have been fatal, but which challenges insurers to pay high medical, long-term care and income replacement benefits over a long period of time. “In addition, because private funding exists, services related to these [severe injury] losses are more expensive and expansive than the norm,” Paccanaro adds. Despite the implementation of auto reform in Ontario, which accounts for half the auto insurance market and a good portion of the p&c market altogether, she expects the growth trend on costs related to these kinds of injuries will continue to rise.

At the same time, many are questioning how long the “honeymoon” from reduced frequency will last. “There are doubts the drop in frequency we are seeing will be sustained long term,” notes Lissa Seguin, vice president of claims for Co-operators General Insurance Co. She adds that the industry needs to get a handle on consumer behavior in terms of whether the fear of filing claims will continue, but also if claims will begin to be filed at later dates.

Claims experts agree there remain many unanswered questions when it comes to auto reform, and the inability to predict what the trend will be in 2005 and beyond is a top industry challenge. “I’m interested to see and hear from the industry wizards, the trend analysis on auto changes,” says Glenn Gibson, CEO of Crawford Adjusters Canada Inc. He recalls the Canadian Insurance Congress in June, when insurer CEOs predicted an upswing in claims frequency would take place a year into auto insurance reforms, as claimants and plaintiffs’ lawyers become familiar with the new system. In Ontario, where Bill-198 reforms commenced in the fall of 2003, there is the added issue of a 52-week moratorium on cash settlements in auto injury cases – insurers wonder if this will simply cause a year-long delay in such settlements being made.

But Gibson is skeptical that for Crawford and other independents the decrease in claims, which has led to a very competitive marketplace, will end as a result of auto reform. “I’m not terribly optimistic it will result in an upswing in frequency in the first half of 2005.” And if there is a tick upward in frequency, he adds, this will only come on top of severely reduced claims.

SHIFTING GEARS

2004 was truly the “year of auto reform” and claims managers say there is ample evidence that ongoing reforms will continue in 2005. Specifically, the Ontario government moved in December to do away with the designated assessment center (DAC) system and has a “choice” system in the works which would see policyholders “buy up” or “buy down” on coverage options.

“There have been numerous changes to the auto legislation in recent years, and we expect there will more,” says Bill Hornick, CEO of Cunningham Lindsey Canada. But, he says, the claims industry has done a good job of keeping pace with the constantly shifting landscape.

This includes massive reform still in its infancy in Alberta, where legislation came into force October 1, despite last-minute changes which sparked insurer ire.

“For those insurers dealing in Alberta, the new regulatory changes will cause adjusters some anxiety as they work through the losses,” says Paccanaro, whose company no longer writes in the market. “With higher limits for accident benefits, I think it is reasonable to expect that costs will increase and that our Alberta colleagues will see developments similar to those we saw in Ontario with the introduction of extended benefits. These would include an increase in fraud, extended treatment periods and higher medical and administrative costs.” She say it is also hard to tell how the tort portion of the new system will play out, although she anticipates an increase in disputes as lawyers and adjusters struggle with how to interpret the new regulations.

At the same time, insurers have claimed some successes in auto reform, specifically with much of the Bill-198 reforms in Ontario, and in New Brunswick, where rates have lowered, availability has increased and the Facility Association – the industry’s pool for high-risk drivers – has been substantially depopulated. Seguin says her company is seeing progress in its relationships with regulators and governments, specifically in Atlantic Canada. “Our goal continues to be long-term, sustainable rates that will benef it both consumers and the industry,” she says, meaning insurers must work with authorities to address the drivers of claims cost inflation.

One of these drivers may be increasing tort costs, particularly in light of the February, 2004 decision in McIntyre v. Grigg, which saw Andrea McIntyre awarded $830,000 in compensatory and punitive damages for injuries suffered in a car accident with former Canadian Football League player Andrew Grigg, who was intoxicated at the time of the crash. The case raises the issue of whether insurers are expected to pay such damages on behalf of the defendant (the insurer in this case, Allstate, publicly stated it would pay), and how the industry will respond if this expectation exists.

Paccanaro says there is an expectation medical and future loss costs will continue to push tort settlements higher. And, she adds, for companies dealing in U.S. risks, the projections for rising tort costs are even more dire.

GOOD FAITH

Claims professionals will also be looking to the courts for a bellwether on bad faith claims. Gibson points to two high-profile punitive damages jury verdicts which are headed to the Ontario Court of Appeals this year, both involving fire losses. The insurers involved are Hamilton Township Farmers’ Mutual and Wawanesa, and Gibson says their cases will provide an interesting glimpse into the willingness of courts to impose or reject high-dollar punitive damages verdicts against insurers, such as in the infamous Whiten v. Pilot case. “Neither of those cases has the hallmark of a Whiten decision,” he stresses. “I will be interested to see what the Appeals Court does.”

“It is important to monitor these cases to ensure that we understand what the courts believe to be bad faith and ensure our actions neither approach that nor are perceived as approaching bad faith,” adds Joe Turcotte, Toronto operations claims manager for FM Global. However, he notes, given the current focus on customer service within the industry, he believes insurers are generally acting with the utmost good faith.

In fact, many claims departments are seeing an increased focus on customer service, as insurers strive to win back customer confidence. And claims professionals say they do not mind this onus on the consumer. Surveys by the Financial Services Commission of Ontario (FSCO) of auto insurers have shown generally high levels of consumer satisfaction, on the order of 85% of claimants generally satisfied with the various aspects of how their claim was handled.

It is time for claims departments to push their work into the spotlight, says Paul Hancock, vice president of marketing for Custard Insurance Adjusters. “We do a poor job of saying the good things we do. Look at what we did after Hurricane Juan, the fires in Kelowna. We took people in a tragic and severe situation and we put them back together, and we don’t promote that.” More recently, he points to the Peterborough, Ontario floods. “There were people [adjusters] awake 14, 16, 18 hours a day,” he says of the industry effort to deal with the massive claims which poured in last July. “Those are things we need to tell the public we do.”

“Our continuous efforts in providing excellent service to our clients and effective claims management, play a central role in restoring our [the industry’s] trust and reputation,” agrees Seguin. “We need to do a better job in sharing the positive stories our clients share with us.”

While there has certainly been consumer unrest over premium increases, both in commercial and personal lines, claims experts say the drive for higher levels of service also stems from a more general societal trend. “The recent [premium] increases may have something to do with it but I feel it is just an ongoing trend of expected continued improvement,” Turcotte points out.

“Today’s consumers want value for their premium dollar,” adds Hornick. “They demand immediate response, personal attention, and an understanding that we, as the adjuster and representative of the insurance company, understand their situation, have empathy for it, and will take swift action to help them get their lives back to pre-loss condition.”

This expectation is as much the case for commercial clients as for the general public. And, as Turcotte notes, is as much about the fundamental business of insurance and the need to maintain good clients as it is about industry image. Claims, he says, is less about selling polices than about making sure existing clients do not have a reason to shop around. “If you cannot make good on your promise to accept the insured’s risk, assist in mitigating their loss and provide funding as needed, then a client has excellent reasons to seek insurance elsewhere.” He has seen increased vigilance on the part of corporate risk managers in being fully involved in the claims process, including meeting with claims representatives before a loss even occurs to lay out expectations.

Claims professionals say they are all making customer service a top priority in the coming year, and this is driven by the top levels of company management, as well as the overall push by the industry to improve its image with consumers. The Insurance Bureau of Canada (IBC) recently announced a $2 million campaign to raise consumer confidence and understanding about the industry. But individual insurers and adjusters are making this a corporate goal as well in 2005.

Seguin says winning back consumers is “about more than PR”. “As an industry we have identified that we need to provide information to the general public about the overall satisfaction levels for claims service. Insurance is so much a part of everyone’s lives yet it is taken for granted, undervalued and misunderstood. Our industry plays a critical role for society at large, business, communities, government, individuals, and one by one we need to deliver that message.”

“We can’t just sit back and take it on the chin,” says Gibson of the negative media the industry has been hit with. “If we do, it becomes demoralizing to our workforce, they get pounded at the same time employers are asking for better service. It’s like stretching an elastic band, at some point it’s going to break.”

Claims professionals agree that their own people are the lynchpin of creating better relationships with consumers. “Our greatest asset in the claims department is our people,” says Segin. “They deliver on the promise made when the policy was sold.”

“We are licensed, we are experts in our field,” Hancock stresses, adding that this point needs to be driven home for consumers, to highlight adjusting as a “profession”.

While claims leaders see an increasing investment in claims technology, particularly now that companies have distribution and other systems on track, they stress the biggest investment needs to be made in staff – recruiting, training and retaining. “Although efficiency is important and technology can help with that I believe the industry is losing our attention to detail and our people skills,” Turcotte says. He says more companies need to put the emphasis on investing in training and development.

On a positive note, Hancock sees more and more young people being attracted to the insurance industry, mainly because it is a viable marketplace, particularly for those who take advantage of insurance-specific education, which is more widely available at the post-secondary level.

INDEPENDENT FORCES

Looking forward, one trend claims professionals expect to dominate the landscape in 2005 is industry consolidation, and this will not be limited to insurers. Mergers and acquisitions are expected to increase in the brokerage and independent adjusting sectors as well, sources say.

“The independent adjusting industry is a competitive market and at present there is over capacity,” says Hornick. “The costs of providing leading edge IT and the desire of clients to reduce the number of outsource vendors will lead to future consolidations.” He says this will challenge adjusters to differentiate themselves w ith not only the quality of service, but also the range of products they can offer insurers.

Gibson also sees consolidation for both insurers and adjusters in the future, as companies seek economies of scale. On the adjusting side, “there is a wave of firms (particularly small, “boutique” firms) looking to maximize their buying power with vendor relationships.” The “consolidation wave” is as inevitable for adjusters as it appears to be in every industry, Hancock notes. “It’s got to happen. Unless you’re specializing, the big are going to get bigger.”