Is it fair to say that in a hard market claims costs are a big driver of premium and in a soft market are not as important? We can leave that one to the actuaries but intuitively and from experience that would seem to be true.
So what bad habits formed in a soft market, where claims aren’t so important, prevail also in a hard market? And which of these have a direct bearing on controlling costs of risk, including premiums?
The most fundamental issue is systemic failure – an inability to track and monitor costs because there is no system in place to manage or report costs. If you have any frequency of claims in property or liability classes, you need a system to capture the risk and track the cost. In a soft market you get away with that but in a hard market, with higher deductibles and escalating premiums, the pain can be severe. You need to show your underwriters you understand and manage your risk, which means at minimum having a method of capturing, tracking and managing all incidents and claims.
In a soft market, claim management is often the last thing considered in a renewal process. Once placement has been set, a company may look around for assistance if there is some self-insured component to their risk. Often this leads to a situation where your placement advisor conveniently offers to assist with your claims for a fee. Usually a low fee. But if claims is not their core competency, how sure can you be that this is a good long term solution? Have they offered you alternatives? What is their capability exactly? And is it a complete solution that meets the need?
It is common for large corporates to underestimate the difficultly of managing claims well. Some common examples of attempts to ‘manage’ claims include:
- Creating an OHS incident management system – that may tick some risk and compliance boxes but doesn’t manage the claim once it gets past the recording of the incident
- Trying to manage claims with internal resources that are already stretched or lack expertise
- Managing claims with an existing partner that does not have claims as a core competency or the systems to effectively track claims and risk
- Going to external legal resources on claims that don’t really merit their expertise or cost
Even when large companies have some kind of system in place, there can be fundamental issues like:
- A focus on the costs of managing claims as against the cost of claims themselves….usually claims management costs are 5 to 10% of total costs, but when we see companies look at management options they often fixate on that small percentage of cost rather than the total cost. It is fair to say that specialist options may be more expensive than the convenient ones, but that is for a reason – they understand the resources and infrastructure needed to manage claims well and can bring those 90 to 95% of claim costs down.
- Encouraging an adversarial process – that never works. Successful resistance to claims comes from investigating and assessing each claim on its merits. If you default to no, you often fail to properly investigate claims, which makes it harder to assess your exposure and often leads to missed opportunities to resolve claims and loss development given you haven’t assessed your risk.
I have often said claims are easier to mess up than get right. For the best chance of success you need the right human resources with the right mix of experience and caseloads, as well as systems and support. It doesn’t take much to throw the mix out.
So if you are a bigger company with a frequency of property or liability claims, and you are facing pain at your next renewal, why not bring the conversation about claims to the forefront, as that is a key driver of your overall cost of risk.
Please contact Jon Broome on email@example.com for further information