Finding a Silver Lining

Article, Claims MagazineJanuary 2009

Insurance / Liability / Casualty

The current financial crisis with credit and liquidity issues are placing additional pressures on business owners. The worsening economy compounds these pressures, as well as the downgraded sales forecasts, increasing costs of raw materials and energy prices. If we add to this a catastrophic event that interrupts business, then the problems a business can face is multiplied. Simon Oddy discusses the situation in which the pressure on business owners is passed to the claim professional.

In a recent meeting about a loss insured by a major U.S. carrier, an adjuster told me that a mechanics lien had been placed on the insured by one of the vendors involved in the post-loss restoration work. This, the adjuster said, was something he had never witnessed in his more than 30 years of claim handling. The adjuster attributed the vendor's startling action to the current state of the economy.

Even if one does not fully comprehend the complexities and causes of the current financial crisis, the enormity of the crisis and its impact on confidence in the economy is not lost on anyone. Credit and liquidity issues are placing additional pressures on business owners. The worsening economy compounds these pressures, as well as the downgraded sales forecasts, increasing costs of raw materials and energy prices. Consequently, this results in reduced margins. If we add to this a catastrophic event that interrupts business, then the problems a business can face is multiplied.

Claim handlers have always been sympathetic to the pressures that such events place on the industry. However, the pressure on business owners is inevitably passed to the claim professional, as the insured reacts to restore the business while seeking assistance from the insurance carrier.

What's Different Now?

In the period leading to the current financial crisis, cash flow was good in many businesses. Receiving money from insurance claims was not irrelevant, but certainly less imperative than it is now. Today is a different story. Cash is once again "king," and claim professionals are feeling the squeeze from both insureds and their representatives - namely, brokers and claim consultants.

In the previous, less-volatile economic climate, it was fairly common for a claim professional to review the pre-loss sales history of a business for two years prior to the loss when analyzing a business income claim. This is done to develop a sales trend factor that would then be referenced to project sales during the period of restoration. Today, the past may not necessarily be an accurate predictor of the future. Depending on the type of business involved, past results may not accurately indicate what the future would have been had the insured event not occurred. While it is necessary to review past performance as part of the process of projecting future sales, it becomes more important to analyze the economic climate of the insured's business to properly predict sales during the period of restoration.

Current market conditions have created additional pressures on claim organizations, including the following: 

Increased demand for advance payments - In the typical life of a large insurance claim, two or three advance payments on an account might be requested and processed prior to the final settlement of a loss. Today, with increased pressure on a business' cash flow because of market conditions, the frequency and demand for such advance payments is likely to increase. In turn, this means increased pressure and a more frequent need for the insurer to respond to internal reporting requirements that allow a payment to be processed. For claim professionals, this translates to increased demand for efficient analysis and reporting so that an advance payment can be processed. In many cases, the insured overlooks this aspect of the claim process and simply expects payments as requested.

Reduced timeframe between advance payment recommendations and receiving payments - More than ever, insureds are expecting overnight payments. They will anticipate payments the moment they believe that they have provided everything necessary to support the claim. Even though it may have taken three months to piece the claim together, the insured may want a check cut the day the claim is delivered. For the insured, the clock has been ticking since the date of the loss. The fact that a documented claim is just now being received is irrelevant. This invariably results in pressure being placed on the insurer to make an advance payment immediately. Brokers and consultants will also be chasing updates and advance payments.

Increased trend towards settlement negotiations - It is likely that an increasing acceptance of negotiated claims will outweigh the desire to fully analyze a claim for a long period. For many insureds, the security of cash now will be worth more than cash later. Insureds will seek cash flow, as well as the opportunity to end the insurance claim processes and return to focusing on operations. The upside of this situation is that the insurer will have an improved bargaining position from which to develop a favorable settlement. While this may be a beneficial shortcut to a closed file, increased pressure may exist for an abbreviated review process to enable settlement discussions. Care should be taken if this route is chosen.

More difficult settlement negotiations - It is also likely that settlement negotiations will become more difficult. The impact of the economy and the increased pressure on the insured's business is likely to make the policyholder seek every possible dollar in a negotiated settlement. Fewer concessions should be expected.

Risk of inflated claims - With pressure on management to produce results in line with prior years' budgets - meaning before the financial crisis - losses caused by insured events may create an opportunity to blame the performance of the organization completely on the insured event. Claim professionals need to consider the cause and the effect even more carefully during claim review. Increased pressure to identify the actual impact of the event on the business will be more important then ever. Inflated claims could result if the impact of the insured event is misunderstood, and the event is used as a scapegoat for poor performance.

Responsiveness to requests for information - Insureds may not be willing to provide all of the requested information. They may instead want to compromise certain claim components without thorough review to shorten the time frame. It will be necessary to evaluate their positions and determine how important the information is to the overall picture.

Going concern - So if companies ultimately fail because of the financial crisis, then whom will be blamed? Claim professionals need to take care in responding quickly to claims to avoid becoming the obvious target. In such cases, there must be a full review of the financial health of the insured - before, during, and after the loss - to understand the root cause. Additionally, a company may not be in a position to survive for the full length of the period of restoration - irrespective of the loss - because of the economic climate. Thus, paying for a loss calculated on the basis that there is no going concern issue may lead to an overpayment of a claim.

Liens on insureds - As the credit crunch grips many claim response operations, such as salvage companies, restoration companies, engineering consultants, and so on, it is likely that these entities will become more aggressive in respect to the payments for their services. Failure to make such payments can lead to liens on assets. The result is that when a settlement payment or a payment on an account is made - rather than being used to advance restoration and get the company back in business - it will be drained by payments due to creditors.

What to Expect

As previously discussed, a number of businesses will undoubtedly fail over the course of the next 12 months because of the economic downturn. For those that also experience an insurable event, it is feasible that this event will be blamed for the failure. As a result, it is highly likely that the insured will point the finger at the claim industry for not handling the claim appropriately and causing the business failure. Cause and effect is key here. The claim professional must be able to separate the impact of the loss from the underlying financial crisis.

Litigation of any dispute, be it an insured event or other litigious action, requires cash flow. Any litigated matter is tantamount to an investment decision. It requires an injection of cash to cover legal expenses and costs for experts in the anticipation of a return on that investment. This comes in the form of an award for damages.

As with any investment, the timing needs to be appropriate. The current economic crisis is likely to lead to more litigation for some of the reasons cited above, but it is also possible that litigation will be delayed until the required cash is available for funding the case. The upside for claim professional is that the delay will allow time to assemble a team to respond to the litigation.

Practical Steps

The following measures may be helpful to claim professionals dealing with the additional pressures stemming from the current economic climate. First, partner with experts like forensic accountants whose reports are concise yet clear and who can provide you with a thorough understanding of the issues. This will allow you to get through the information and handle the claim payment process diligently yet quickly.

Secondly, research current market trends to assist in the projection of sales during the period of restoration if you are involved in a business income claim.

Thirdly, be sure to communicate with your experts. Let them know what you are dealing with, be it increased demands for advance payments or troublesome insureds. Make certain that they are aware of deadlines and response times.

Fourthly, educate the insured about the claim review process. Discuss the payment process and timing related to reports from experts, review of reports, recommendations for payments, and payment processing. Let the insured know what to expect.

Next, make use of technology. Shared database products exist to allow claim handlers to simply log onto a secure shared system to obtain immediate updates about the status of a review performed by an external consultant.

Lastly, be prepared for settlement negotiations. Arm yourself with alternate calculations and strong support for any assumptions. Take advantage of the potential for an early settlement.

The Real Silver Lining

So where are the opportunities in the deluge? The financial and economic crisis offers claim handlers the opportunity to recognize the increased pressure on insureds and to demonstrate their responsiveness and support to both the carrier and its customers. This enhanced response and support during difficult times will remind insureds as to why they chose a particular carrier. It will also remind the carrier why it chose you as the claim professional. Good service enhances the carrier's ability to stand out from the crowd while doing the right thing for its customers.

The far-reaching impact of the depressed economy is yet to unfold. Dealing with the insured's increased tension in the claim process creates an opportunity to reassure the insurance market that it is still "business as usual" amid the current perceptions of doom and gloom surrounding the economy.


As appeared in Claims Magazine, January 2009.

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