10/27/2016

The Real Cost of Claims Professional Fee Concessions

Procurement people may be unaware of the unintended consequences of not balancing the better, faster, cheaper equation.

By Bob Johnston , John F. Fleming

Insurers historically have sought to obtain independent property adjusting services to balance better, faster, and cheaper outcomes. In years past, “balancing” was understood to be the operative word. Insurers’ property claims professionals were aware of the fact that a balance of these objectives was necessary in order to obtain optimum results.

In recent years, there has been a move toward a procurement process that largely places the insurer’s claims professionals on the sideline while agreements are negotiated. Once the procurement department has completed these agreements, the insurer’s property claims professionals and the organization as a whole often find that they have been unwittingly set up for failure. Why? Because most procurement people are not claims professionals and are, therefore, unaware of and do not consider the unintended consequences of not balancing the better, faster, cheaper equation.

The procurement department’s primary purpose is getting more for less, often resulting in independent adjusting services being treated as a product or commodity. The fundamental difference between procuring products and services is that quality suffers tremendously once services fall below a certain price threshold.

Independent adjusting companies are in the business of providing highly trained people over a large geographic area. The costs of competitive compensation, benefits, training, and proper supervision are not cheap and become costlier as each year passes. At the same time, these are the primary drivers of speed, quality, and customer satisfaction. When independent adjusting companies are forced into finding cheaper ways to handle losses, the quality of people is compromised and service can deteriorate.

Forcing those who interact with the policyholder to substantially reduce costs has an adverse impact on indemnity, cycle time, and customer satisfaction—the lifeblood of property insurers. These areas often are thought to be removed from procurement’s influence, but insurers should consider what marginal decreases in loss adjusting fees mean to their overall health.

When insurers inordinately squeeze claim costs, indemnity hangs in the balance. A good example is building materials. Materials used in most homes today are costlier than in years past, and although they appear to be high grade, most are not. Without superior independent adjuster estimating skills, carriers are very likely to experience indemnity increases as a result.

Indemnity also is increased as a result of protracted cycle times. When independent adjusting companies are forced into doing more with less, cycle times will increase accordingly. A couple of additional days elapsing before the inspection of a fire or water loss will almost assuredly cause a dramatic increase in the amount of the claim.

Protracted cycle times also are very costly to the carrier in customer satisfaction. Failure to promptly resolve a claim and failure to provide good and consistent communication along the way have both been long associated with low customer satisfaction scores. Forcing those who interact with the policyholder to substantially reduce costs has an adverse impact on indemnity, cycle time, and customer satisfaction—the lifeblood of property insurers.

Certainly insurers should seek to obtain the most favorable fees they can for field claims professional services. At the same time, insurers should not forget to properly balance this with the financial implications to all of their goals and objectives.

The best philosophy for insurers to maintain when negotiating field claims services is to obtain competitive pricing that is sufficient to accomplish the goals of controlling indemnity, keeping cycle time to a minimum, and maintaining a high level of customer satisfaction. Think of it as an investment in getting the best returns on the end goals as possible.

When field claims professionals fail because the insurer has not invested sufficiently, the insurer stands to lose a lot more financially than the value of the fee concessions. Understand and stay mindful of the point where independent claims professional fee concessions begin to work against you. Don’t put yourself in the position of having to deal with the negative consequences of trying to get good, fast, and very cheap services when in reality you get to pick only two of the three.

Please don’t think of field claims resolution services as a commodity, as some people tend to do. Consider independent adjusting companies as partners and, more importantly, treat them as such. Be honest with your partners and yourself as to how much you think is a fair cost to obtain the desired results that match your goals and objectives.

The best approach is to have an excellent working relationship between the procurement and claims management teams, leveraging the expertise of both to reach an agreement with independent adjusting companies. Some insurers have adopted this philosophy and already are avoiding the associated pitfalls and reaping the rewards.



Bob Johnston is a 28-year industry veteran and has held executive claims management positions with two large insurance carriers. He has been a CLM Fellow since 2016 and can be reached at (317) 753-2923.

John F. Fleming is vice president-director at Vale Consulting Services. He has been a CLM Fellow since 2016 and can be reached at VCSInfo@vale-ts.com.

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