Cash converters

The old phrase ‘cash is king’ has never rung more true for the insurance industry than at the present time. In recent years, insurers have preferred to settle claims by using a supply chain route, which includes the costs of repairs and replacements in the overall indemnity spend. The popular view was that this option greatly reduced the risk for fraud. But fashion is fickle and the current economic climate has seen cash settlements firmly back in vogue.

This option creates obvious advantages for both the policyholder and the insurer. During hard times, this mode of settlement can greatly improve customer satisfaction, helping them with a much-needed cashflow boost.

Meanwhile, the insurer can close the claim without having to worry about managing supply chain problems or about extra costs. But as the industry swings in favour of cash settlements, the question remains over whether this is a passing trend that may increase the risk of fraudulent claims or if it will become an industry staple.

Aviva’s director of operations Greg Gladwell believes that throughout the marketplace insurers are now settling up to 80% of claims by cash compared to just under 50% five years ago.

“It is less important that things are physically replaced nowadays,” he explains. “People might want to trade up on their electrical goods or maybe they don’t want to replace their jewellery if they have been burgled. Maybe they want to hold on to their money for house improvements or they want to do something else because they have reprioritised.”

Adopting this approach can also reduce potential friction with clients over building repairs if they want to opt for a contractor of their own choice.

From an insurer point of view, this approach provides a cast-iron certainty about indemnity spend and increases the speed of settlement. Allianz divisional technical claims manager Roy Hebburn says: “If we can cash out on the claim, it gives us an advantage because it extinguishes our liability; it gives us certainty and cuts down the cycle time. We can release the reserves from our books and result in all-round less administration.”

Hebburn says the insurer’s cash settlement of household claims has risen by 10% over the past year. He adds that while cash settlements are more common in personal lines, this option is becoming increasingly popular in the commercial arena as customers choose the cash option in major business interruption claims.

AXA claims director David Williams points out that allowing customers to choose their own contractors can save insurers some considerable costs. “There are just so many good deals that can be done with contractors at the current time … half the price that it would have been 18 months ago, and our customers know that. Unfortunately, approved repairer networks and larger national networks have overheads that they need to continue to cover and are therefore less competitive.”

Furthermore, cash settlements can also spare insurers the hassle of dealing with irate customers unhappy with their appointed contractor. “We can close down our file and we don’t get service issues with regard to shoddy work by contractors. We don’t have to hear things like ‘your builder has come through my house with dirty boots’. The customer has chosen their own person,” Gladwell explains.

Groupama’s claims director Phil Bird believes that over-reliance on the supply chain rather than opting for cash settlement in recent years eroded claims-handling skills that can now be replenished. “Five years ago, companies very much got into the mentality of using supply chains and adjusters – they deskilled on the frontline,” he says.

Many hold that insurers embraced the trend for contractor networks without fully assessing their overall worth. “With these things, there is a massive rush to do something new and it settles down when you realise it doesn’t suit every case,” Fortis’s claims and operations director, Rob Smale, says.

Money pitfalls

There can be a downside to cash settlements, however. Williams argues that there may be problems for the insurer if the quality of the work is poor and it may lead to a greater future risk for the insurer. The other big worry is fraud.

“There is definitely an increased risk of fraud when dealing on a cash basis, and I would suggest there is an increased attraction to commit fraud if you know the likely outcome is a cash settlement. This is even more likely on replacement of goods claims,” Williams says.

He adds that temptation to commit fraud or even simple misunderstanding of the terms of the settlement may lead claimants to submit a claim for the same damage twice.

Bird argues that there might be less opportunity to assess the risk of fraud if the claims are settled quickly by cash. He says that often only one person may deal with a client when making a cash settlement, whereas the supply chain route may offer a greater scope for spotting dodgy claims.

“It is possible your replacement goods supplier could see evidence of damage started or evidence of the lost article,” he says.

But Gladwell believes that the improvement in fraud detection over the past few years has increasingly safeguarded insurers against fraud when making cash settlements. “I think technology and data has improved over the years … If a second claim for damage is submitted, we will almost certainly stop that. We have better fraud indicators and fraud identification, so we will spot many more things,” he says.

Zurich’s property claims director Anna Fleming adds: “There is always a risk of fraud, but I don’t think it is necessarily driven by the choice of the option. I think it is incumbent on us to make sure that we have the right scoping in place to make sure that we are replacing and validating correctly, and that we don’t overpay.”

False economy

Other client representatives worry that while some customers may jump at the opportunity of a cash settlement, it may have a negative impact in the long term, especially if the client has experienced a major loss.

“A cash settlement for a customer who does not have a loss recovery policy behind them may be a false economy. They may take the cash to shore up their immediate cashflow problem but it might bite them later on,” Lorega’s chief executive, John Sims, says.

Aon’s head of claims John Bell questions whether the drive towards cash settlements is being driven by insurers or clients. “Is the push from the client because they want the cash settlement or is it coming from insurers because they are finding that contractor networks are becoming a cumbersome entity to manage?” he asks.

Nonetheless, Bell adds: “We constantly hear requests from clients asking: ‘Why we can’t we just get paid in cash?’ So maybe this is just a sign that insurers are starting to listen to policyholders.”

But it is feared that the drive towards cash settlements may lead to future problems if claimants start to favour the supply chain route once again.Williams argues that certain events, such as the upcoming Olympics in London, put pressure on contractors’ capacity and increase the customer’s desire for the claims to be completely fulfilled by the insurer.

He says: “While cash is the solution of choice at the moment, the recession will not last forever and I have a concern that if insurers move too far away from procurement solutions and repairer networks, then we will have extreme difficulty in sourcing contractors.”

Smale warns that insurers need to be careful to avoid making sudden shifts from one claims solution to another. “You have to be careful not to lurch from telling your handler to use the supply chain to then suddenly lurching the other way in a couple of years’ time. Insurers need to have a set strategy or policy that allows them to decide what is the best method to handle the claim on a case-by-case basis.”

But for the moment at least, it looks like the trend for cash settlements is here to stay. IT