Giant step forward

Claims is often seen as the wallflower of insurance, fading into the shadows as its more celebrated siblings – underwriting and sales – hog the limelight. But the time has come for a makeover.

At the start of the year, Lloyd’s introduced a pilot for its claims transformation project. It’s a scheme that promises to overhaul processes within the market and deliver a “fast and fair” claims service to clients.

The pilot’s key steps are based on the recommendations of the Lloyd’s market steering group, which has been charged with developing a long-term view of how claims are delivered.

Under current governance, Lloyd’s requires that every claim in the market is overseen by two agreement parties. The leading underwriter undertakes the first decision while outsource provider Xchanging Claims Services (XCS) is responsible for making a decision on behalf of the market.

Following consultation with 16 managing agents and 14 brokers, the steering group concluded that this approach needed updating. It argued that managing agents should have more options to deal with claims in-house rather than following a mandatory requirement to outsource them.

A claims implementation board will oversee the pilot’s progress in the market over the next two years. If the pilot is deemed a success, the project could be rolled out across the market by 2012.

LIoyd’s head of claims Kent Chaplin explains that, under the project, claims will be segmented according to value, which will also allow for greater choice in how they are managed.

“Segmentation means looking at claims differently, which means looking at their complexity, value and volume. It is not about treating all claims the same,” he says.

As a result, the pilot scheme will allow for claims with a value of up to £100,000 – which accounts for 74% of all claims in Lloyd’s – to be decided by just one party. This, they argue, will create a swifter, more efficient process.

“In practical terms, I think the segmentation of claims will have a big impact. Around three-quarters of the claims at Lloyd’s are for less than £100,000 apiece, but in aggregate they only account for around 5% of the total value of claims,” Beazley’s director of risk management, and chair of the Lloyd’s steering group,

Nick Furlonge, says.

“If we can speed up their processing it will be a big win. These claims will now need to be agreed by just one ‘agreement party’, not two. They will be agreed exclusively by the lead underwriter or by an outsourced service provider with delegated authority from the lead underwriter.” 

Focus on bigger claims

In theory, this will allow for greater focus on the next two tranches. Under the pilot the second tier (those with a value of £100,000 to £5m) and the third tier (complex claims in excess of £5m) will be decided by two parties.

But under the new provisions the leading underwriter now has the choice of allocating the second agreement to a second underwriter, known as a ‘follower’, or XCS. This, Lloyd’s says, will allow for greater flexibility while also enabling the second underwriter to challenge the decision of the leader on those risks.

The project also recommends that parties other than brokers take responsibility for notifying claims and envisages that insurers will be able to settle directly with clients via electronic platforms.

Hiscox head of claims, and member of the claims implementation board, Jeremy Pinchin believes this scope for increased choice is a logical development.

“The scale and growth of managing agents and their ability to manage more of the claims in house had become evident over the years with the changing dynamics for claims management within the market,” he says.

Markel International claims director Stuart Willoughby believes increased competition will be a major benefit to the market. “At present, there is a sole service provider. By creating this environment, more people can act in that space,” he says.

“It is a first step in creating a more commercial environment. Hopefully this will improve pricing because competition should have an impact on pricing and the quality of service available.”

Industry sources acknowledge the pilot as a laudable vision but also an ambitious one that will add considerable pressure on the market. Put simply, there will more onus on Lloyd’s to ensure that syndicates are up to scratch when it comes to grappling with their new responsibilities.

“Lloyd’s will have to increase their resources substantially because they will be responsible for policing the managing agents conforming to the new requirements. That will mean testing reserving philosophy, claims handling capabilities, managing the claims files. That is quite an expansive role,” Willoughby argues.

Furthermore, the syndicates’ additional responsibilities will call for a greater need for claims expertise; a skill set that remains in short supply.

Pilot problems

There are also concerns that the project will fail to deal with enough claims during the pilot to determine whether it is a success. Currently, the pilot runs across just three classes: direct and facultative property, marine hull and casualty treaty reinsurance.

“We have yet to have any claims to put through the pilot. The concern is that the volume of claims is so low. If we continue the way we are, we will not have achieved a great deal because a significant number of claims won’t have gone though the pilot in 12 months,” Willoughby says.

Chaplin says: “If there is not enough volume to determine whether the pilot has been a success, it is likely the claims implementation board will recommend extending the pilot by introducing new classes of business in 2011.”

But rolling out the pilot across other classes of business could create other challenges. While the new process was designed with greater flexibility in mind, some argue the division of claims in monetary terms fails to take into account the challenges particular to different classes of business. Classes such as professional liability, where claims often involve litigation, bad faith allegations and severe injury, may prove more difficult to ease through.

“In certain classes, you may have a number of claims that fall into the exception category because of the nature of the business itself,” Willoughby says.

But Lloyd’s stresses that overhauling the claims process will be a gradual process rather than a dramatic transformation, and there will be plenty of time to iron out any potential problems.

“It’s important to stress that the steering group thought that implementation should be step by step, not big bang. We are conducting a pilot project to validate our assumptions,” Furlonge says.

The spotlight is finally on claims, but it could be a while before the market can appreciate the full benefits of the changes. IT