Merlin – what went wrong?

What happened at Merlin Professional Claims Services?
The Wirral-based loss adjuster fell into administration earlier this month. Around 200 people were almost immediately made redundant as administrator BDO looked to cut costs as the business is wound down. A skeleton crew of around 50 staff have been kept on to process outstanding claims. There had already been a signal of just how poorly the company was faring back in May, when 70 staff lost their jobs following the loss of Merlin’s account with home insurance specialist Legal & General.

Are the problems specific to Merlin or is it part of a deeper economic malaise?
BDO partner Mark Shaw has insisted that the company was struggling due to the “ongoing impact of market conditions, including an increasingly benign claims environment”. However, that Legal & General loss was a particular body blow, as it accounted for a huge chunk of its revenue. There was also a lot of debt on the balance sheet that was increasingly difficult to pay as margins softened. Chief technical officer Kevin Wood had claimed that there was enough other work to keep the business running, but his optimism has proven unjustified.

Could Merlin have survived?
It seems that the company was only hours away from salvation, having been approached by several firms since late last year. Richard Webster, the former chief executive, says that a deal to sell the business was “99% there” but collapsed on the final Friday in July – the day of the London 2012 Olympic opening ceremony. “It fell apart at the last minute,” bemoans Webster, who had already transferred his shares to the potential acquirer. When that deal went, the banks got tough.

Could other loss adjusters could also be hurting?
Yes, though the loss of such a major player will at least take some of the capacity out of what is a hugely competitive market: already, Midlands-based LAS Claims has announced that it will take on former Merlin staff in a move that will boost its own numbers by one-quarter. Otherwise, loss adjusters admit that losing a major insurer could badly hit their own business. GAB Robins UK chief executive Kieran Rigby says: “If someone came in next week and took an account from us next week I can guarantee you that we would be losing people. When you’re a big national player and you lose one of these big accounts then it absolutely causes pain.”

So, has pricing been too low?
Rigby says that some loss adjusters have kept pricing flat for “several years” meaning that the market is “very, very competitive”. AXA managing director of claims David Williams argues that “there are some absolute bargains in the loss adjusting sector”. Although that is a way of enticing major accounts, it also means that loss adjustors must process huge volumes of claims to be profitable. Put simply, there isn’t enough work to go around while there are still so many large loss adjustors in the market.

Why are there not sufficient claims volumes?
Williams points out that technology has taken over in some cases. He says: “More is being done by insurers in-house and there are alternative methods of assessment. With certain technology you can effectively scope-build a repair claim without leaving your desk. Some elements of traditional loss adjusting have been replaced.” The upshot was that prices dropped dramatically about five years ago and have failed to recover as the economy collapsed. In these recessionary times, claimants are also looking for cash settlements, which is a simpler, less time consuming process than hunting like-for-like replacements and making loss adjusters that little bit less necessary.

Have there been social, as well as economic, factors that have hurt the industry?
Rigby argues that the service that both insurers and claimants expect has changed sharply over the past five-to-10 years. He thinks that the advance of the Internet has created an expectation of expediency, which puts pressure on staff. Rigby says: “The individual now has a level of tolerance for anything less than immediate response that is probably pretty low. The service demand is increasing because that’s the society we live in today – and that requires more resources.”

Have insurers hurt the loss adjusting industry?
Yes, but only as a result of improving their own businesses in the wake of the financial crisis. Merlin’s Webster says that insurers had become “increasingly more efficient in their procurement services”, comprising dedicated schemes who could work out the most financially optimal contract structures with their chosen loss adjusters. Webster also believes that the establishment of the FSA in 2001 meant insurers were increasingly trusted to take loss adjusting in-house. The regulator would ensure that the insurer’s own loss adjusters would not be influenced by their employer’s financial wish to keep claims low. “Insurers became more competent,” admits Webster.