Evaluating a claim by the numbers

Article, Claims MagazineJanuary 2017


In Claims Magazine, Steve Rosenthal and Simon Oddy discuss how a forensic accountant can help review a range of documents used to determine the true value of complex claims.

As appeared in Claims Magazine and Property Casualty 360°, January 1, 2017.

By: Steven A. Rosenthal, CFE, Simon P. Oddy, FCA, CFE

For the first time in history, there are five generations together in the workforce. Pair that with the constant evolution of technology and a truly global supply chain, and there are major changes in the way business is done.

While much of business has moved to a digital platform allowing work to be performed from almost anywhere, the fundamentals of the claims process are not much different from 50 years ago. An insured event occurs, a claim is filed, the claim is reviewed and settled, and the insured gets back to business as usual – or at least that's the gist of what should happen. But as we all know, things don't always flow quite that smoothly.

The scope, size and scale of an event and subsequent insured loss can drastically change how the claims process is handled, and how long it takes for the claim to be settled and for the business to resume. Beyond the insured, the insurer and the adjuster, there may be a variety of other experts who should be brought into the process. It is important to consider the right parties to involve, and when to bring them into a claim. One expert who can be helpful in determining the true value of a complex claim is the forensic accountant.

Using the expertise of forensic accounting

Of all of the various external financial experts – forensic accountants, CPAs, valuation experts, economists – the forensic accountant is what one could call the investigator. He or she brings an investigative approach to the quantification of the loss, going beyond the summary documents presented, and instead often focusing on the source documents.

Forensic accounting consultants can provide an independent, unbiased evaluation of the financial impact of a loss. They take little at face value and strive to go behind the numbers to find the real story of what occurred. The original source documents a forensic accountant may review include an entire range of internal managerial documents, both financial and non-financial, such as:

  • Revenue and sales documents,
  • Balance sheets,
  • Expense documents,
  • Profit and loss statements,
  • Inventory reports,
  • Cash flow and
  • Business plans, budgets, forecasts and cycles.

The forensic accountant will also look at the history, changes and milestone events for the company, as well as the extenuating circumstances that affect the company's business cycle. He or she will look at the claim from many different angles and perspectives, analyzing financial data while also examining the contextual setting and what other factors are – or could be – affecting the loss.

This expert also talks to the people involved and looks at the business type, environment, business cycle and market conditions in which the company functions to generate independent models and assumptions about the value of the claim.

The forensic accountant may play a role in any type of loss, including catastrophe response claims, property losses, time element (business interruption/extra expense) losses, fraud and fidelity claims, product liability and product recall, personal injury, or cyber and crisis management losses.

When to bring in a forensic accountant

Involving a forensic accountant is often dictated by three main factors: size/scope of the claim, complexity of the loss, and a general sense that something is “not quite right.”

For many insurers, there may be a dollar threshold in place that dictates when to call in a financial expert. When the dollar amount of the claim is significant, the measurement becomes more sensitive and may require a finely nuanced understanding of accounting.

The complexity of the claim is also a common trigger to retaining a forensic accountant. Complexity may arise from the number of locations involved in the loss, the duration of the loss and partial recovery periods, the number of claimants involved (such as in the case of a product recall that may affect vendors both up- and downstream), or certain types of claims that require advanced modelling, projections and judgment on the loss measurement. Overlapping issues may exist, in which case the impact of the covered event may need separation from other unrelated, but contributing factors.

A forensic accountant may be brought in when things look normal on the surface but, upon further examination, something doesn't seem quite right. These may be claims where the numbers presented do not make sense given the context of the loss, or may be situations where fraudulent activity is ultimately discovered and it is beneficial to have an unbiased third party review the claim for independent analysis.

If involved early in the process, the forensic accountant can also help set a roadmap for the claim. This includes detailing all of the documents and information that will need to be presented for further analysis as the claim is developed and presented. Once the roadmap is established, the forensic accountant can step back from the process until the claim is presented for consideration, and he or she conducts an independent analysis.

Blending old and new processes

A number of changes are occurring in the insurance industry today. Many adjusters are nearing retirement, opening the field for a new workforce. Simultaneously, economic pressures are decreasing “office time” while technology is increasing and facilitating the amount of work done remotely. This dichotomy may result in less in-person training, on-the-job learning and mentoring than experienced by previous generations.

Technology is also impacting every aspect of the claims process, changing the way forensic accountants and claims managers work. What previously may have involved days of manually transcribing numbers from a ledger at the insured's facility can now be transmitted via email in a matter of seconds. As deadlines tighten, demand requires analysts to conduct their reviews much faster, reducing expected turnaround times and reporting in the claims process. It would not be surprising to see on-demand responsive modelling in the near future.

While some insurers are now increasing their in-house forensic accounting capabilities, there is still a key role for the external independent forensic accounting consultant in the claims process. Partnering with in-house staff, external consultants can offer a deeper and broader understanding of the market in various industries that will factor into the claims analysis.

As resources are shifting and technology is changing the speed at which business is done, there is still an important place in the claims process for human interaction. The very heart of insurance is about protecting a person's livelihood from future loss. Successfully settling a claim goes beyond analyzing data and cutting a check. It involves navigating the emotions to get the insureds back to business as quickly as possible, which requires a personal touch to guide them through the claims process.

And those working in the insurance industry in the future can count on one thing, they will continue to see an ever-changing evolution as new advancements and technology meld with existing practices.

Steve Rosenthal (srosenthal@rgl.com) is a founding partner at RGL Forensics and a leader in the field of forensic accounting. Simon Oddy (soddy@rgl.com), a partner at RGL, quantifies large, complex losses in fraud and liability claims cases.

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