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A “perfect storm” is an expression that describes an event where a rare combination of circumstances will aggravate a situation drastically. You may remember the 2000 film The Perfect Storm starring George Clooney and Mark Wahlberg, where an unusually intense storm pattern catches some commercial fishermen unaware and puts them in mortal danger. We don’t want to sound too dramatic, but we think a perfect storm is just around the corner for the property insurance industry which will be caught unawares without strong property insurance supply chains in a surge event, again.
So why will the industry get caught unawares again? Insurers need the depth of resource and skills that property insurance supply chains can offer to drive the behaviors needed to deliver a good customer service, in good times and bad. And those skills and resources are maintained through constant use and development. If you don’t use it, you lose it!
We have seen a huge shift towards cash settlements over recent years, either through the surveyor-led model or through insurers asking claimants to source two quotes and then settling with cash. Our views of cash settlement as a claims solution for the customer are well known from our previous opinion pieces.
But also, this is not a strategy that supports the property insurance supply chains and nurtures relationships, skills and resources for those surge events. It wasn’t so long ago that the FCA’s campaign “Treating Customers Fairly” created a shift towards customer choice – now we’re moving back again towards providing a homogenised service through cash settlements. But the FCA’s focus hasn’t really changed and, as cash settlements have increased, we have seen a sustained increase in complaints to the Financial Ombudsman over the last 5 years.
So is the property insurance industry losing it? Almost certainly! An event like a surge or a renewed campaign by the FCA will create a need in the property insurance industry for robust, experienced property insurance supply chains. Will they still be there when needed?
Capacity in the building industry
As insurers cut back on the amount of reinstatement work passed out to builders, then builders have no choice but to seek alternative sources of income. And with the current capacity restraints in the building industry, and the huge choice of building work available, such resources and skills will be difficult to entice back to insurance work in property insurance supply chains.
In February Zurich Insider published an interesting article called “Are we on the brink of a construction skill shortage?”. The article discussed how an increasing demand for new buildings and infrastructure projects is putting pressure on the construction industry’s skilled workers. It also drew attention to the fact that in the next ten years, up to 400,000 members of the current construction workforce are expected to retire, according to industry estimates. Supply has also been eroded due to company failures during the recession and the fact that there are fewer new recruits and apprentices entering the industry.
The report quotes research from the Royal Institute of Chartered Surveyors (RICS) highlighting just how tough it is to find skilled workers. In its UK Construction Market Survey for Q3 2014, RICS states: “Across the whole of the UK, the main factors which were found to be limiting building activity were a shortage of labour, followed by concerns over finance and shortage of materials… In particular, demand for bricklayers grew significantly on the previous quarter, with a net balance of 71% of respondents now saying that they are in great demand (compared to 59% in Q2 2014).”
An increasing shortfall creates problems for building companies when it comes to finding the requisite tradesmen and putting in place the right blend of experienced tradesmen, sub-contractors and trainees. According to the Construction Industry Training Board (CITB)36% of building companies had trouble recruiting skilled workers during 2014. All of this creates an increase in the amount of supervision required, but getting it right is important if firms want to avoid a rise in accident and defect rates.
It is also important to remember that in busy times insurance work is not as attractive to builders as other higher margin work. During hard times builders rely on lower margin insurance work to keep them going, the challenge is to keep those builders doing the insurance work even in the good times. That’s where looking after property insurance supply chains through good builder network management is so important.
According to the London Chamber of Commerce and Industry 20% more workers will be required on average to meet pipeline demand in 2014-17 than were needed in the 2010-13 period. In our experience capacity issues are specific to certain areas of the country, such as London, and are not a nationwide problem.
Capacity in the insurance industry
The insurance industry always struggles in a surge. Claims volumes soar, claim handling capacity is stretched and complaints rise too. There have been several surge events over the years, and each time the insurance industry is caught off guard. Pressure on premiums and from shareholders to make a profit mean that costs are cut in the good times leaving little spare capacity for the difficult times. The customer, when he or she really needs help from the insurer, is often disappointed and left to fend for themselves.
And we are all aware of the challenges facing the loss adjusting industry; a combination of business consolidations and fewer trainees coming into the profession means increasing pressure on loss adjusters. Some insurers are reducing their reliance on external loss adjusters and either bringing the work in-house or passing the higher value claims to builder networks.
Benedict Burke, Deputy President of the Chartered Institute of Loss Adjusters, drew attention to these issues during his recent speech at the Post’s Claims Club. He pointed out that by reducing the amount of “business as usual” work for external loss adjusters, insurers were storing problems up for themselves when the next surge arrives. Loss adjusting firms are reducing capacity as the day-to-day work falls, and will be unable to respond to the next surge. As former Davies CEO, Charles Crawford, said there will be “less skilled people for the times when you really need on-the-ground skilled loss adjusters”.
Insurers have been increasingly moving towards a surveyor-led approach, as a way of controlling claim costs and getting claims closed as quickly as possible. In surge times the industry tends to give more work to surveyors to get claims validated and settled quickly. But with the high volume of “business as usual” work being passed to surveyors we have to question the available capacity in the surveying networks to deal with a surge.
According to the Royal Institute of Chartered Surveyors (RICS) 85% of surveyors questioned in a recent survey said that a lack of qualified candidates meant they had problems recruiting. But more alarming is the amount of paid work being turned down by many companies. 43% of surveying firms turn down new business opportunities due to a dearth of skilled workers, with each of them passing up an average of five contracts per year. The problem looks set to peak in the next five years, with a further 11% of the industry saying that they too will begin turning down work by 2019.
So in summary the property insurance industry is creating its own perfect storm by not looking after its property insurance supply chains:
> Builders are sourcing better margin work elsewhere;
> There are fewer loss adjusters and surveyors available;
> We are in a boom period for the construction industry which is causing a skills shortage in all construction professions;
> Insurers are making little attempt at maintaining relationships with their supply chains during these benign years;
> Customer service is being demoted in favour of cost control.
And then there is the natural storm that is coming.
The common consensus is that 2015 is developing in a similar way to the most ever severe El Nino event seen in 1998.
In 1998, 4,200 properties were flooded in the Midlands and globally it is estimated that 23,000 people lost their lives. Global damage was estimated at £23bn.
Typically an El Nino occurs every 3 to 5 years. The most recent El Nino event was 2009-10 when the winter was the coldest on record in the UK resulting in a large number of claims being received for burst pipes. So we really are due the next one! The last 18 months have been very benign so it is likely that a weather event of some sort will occur even if 2015 does not turn out to be an El Nino year. Should El Nino occur this year it could significantly impact the insurance industry’s profitability, both through claims paid and investment return. So batten down the hatches and get ready!
Insurers also tend to increase the volume of cash settlements during a surge in an attempt to get claims settled quickly. If you read our previous discussion paper on Schedules and Scoping you will know our concerns about cash settlements and the values at which they are being calculated. But even if a cash settlement is fair, the customer still has to deal with the problem of finding a suitable builder during the surge, a busy time for builders as well as insurers.
The more vulnerable customers are of great concern during a surge, particularly the elderly. The needs of the individual can be forgotten in the drive to get claims pushed through as quickly as possible.
And as loss adjusters and surveyors are stretched further and further, there is little time to consider the implications of a rushed cash settlement and the ability of the customer to manage their own repairs.
Managing “business as usual” for our clients
Luckily for our clients, here at MA Assist we are maintaining our relationships with the supply chains and nurturing those skills and resources during the quiet years. We are very aware that treating contractors fairly during “business as usual” is key to ensuring their support during a surge.
We are constantly monitoring capacity by postcode and have a clear picture of where capacity is available. And we have developed sophisticated algorithms that help us predict where the next capacity shortfall will arise so we can address the problems before it becomes a real issue.
An article in the Financial Times in December 2014 reported on a survey that explained that “Contractors are now becoming far more selective” and that “Clients who have engaged in an adversarial relationship with contractors are finding the boot is on the other foot, withcontractors able to turn down work in favour of clients who have worked on a more collaborative basis”. The article also says that “Tenders for refurbishments and complex projects were more likely to be rejected”.
So with these industry findings in mind, how do we at MA Assist make sure that our clients’ work is prioritised over more lucrative work.
Firstly, we have that collaborative approach that is so important in maintaining business relationships, e.g. we work with the contractors to ensure that we are providing them with the right volume and value of work that they need. But probably the most important thing that we do is, pay them on time! Without fail, every Friday, the money hits their bank accounts on consistent payment terms. For any business a steady and consistent cash flow is really important, and our contractors tell us that this is the most attractive reason for working with MA Assist.
We also work with contractors to get interims arranged on larger jobs – we co-ordinate the payment of the interim by the client and pass it straight onto the builder.
We also make life easier for our builders in relation to systems and processes. We do much of their administration such as generating invoices and we manage the credit control with insurers on their behalf. We do the communication with the insurer on pricing, variations and approvals. We also mediate on complaints, providing an Alternative Dispute Resolution (ADR) service for them that is fair and reasonable.
And finally, we believe in giving our builders a fair Schedule of Rates (SoR). Several clients use their own SoRs and knowing that contractors need a profit margin to do the work well and consistently we will work with clients and contractors to ensure that an appropriate margin is achieved.
Business as usual” also includes tender and project management services carried out by our technical team (Cipher Professional). At a time when “Tenders for refurbishments and complex projects were more likely to be rejected”it is so important that we have a collaborative approach to ensure that those larger and more complex jobs can be carried out in a timely and effective manner for our clients and their customers.
We have a team of Supply Chain Managers that is always out on the road, inspecting the work done by our contractors, auditing and checking compliance as well as liaising between the contractors and MA Assist staff to ensure that everyone is working together in the best interest of the clients and their customers. In the Control Centre we have a team responsible for the day-to-day management of the contractors. Not only do they monitor the performance of the network but they are there to help the contractors should they have any problems or questions.
Managing surge for our clients
Once a surge hits, it’s too late to recruit new contractors. Compliance, auditing and training requirements mean it can take several weeks to get a new contractor up and running. So it’s important to understand the capacity of the existing contractor network for “business as usual”, as well as the extra capacity available during a surge.
Because of our collaborative approach during “business as usual” our contractors are very responsive during a surge and will draw on that extra capacity for us. They will take on more postcode areas, provide surveying and validating services, and ensure that staff are available to work overtime and pull out all the stops.
But we still have to compete against other demands on the contractors to get our clients’ work prioritised during a surge – we aren’t the only network management company out there! So a collaborative approach between us and our clients is important in such times as well.
Client support during a surge
MA Assist won the RSA Surge Supplier of Year in 2010/11. RSA had this to say:
“The award recognises the achievements of MA Assist during the surge period in which claims increased by circa 300% during a period of three months. The results achieved highlight the resilience of MA Assist surge plans and how these are put into action by its employees and trade professional partners. The selection criteria combined actual service delivery and compliance to service levels and customer satisfaction, coupled with a survey of RSA’s claims operational staff including RSA’s Loss Adjusting Services.”
So how can a client help us get the best out of the network during a surge? We have had experience of a few surges now, and have learnt a few things:
> Use the network during the good times as well as the bad. Loyalty is usually rewarded by loyalty.
> Improved payment terms. A sudden increase in work will have a detrimental effect on a contractor’s cash flow. If clients pay us quicker we can pay the network quicker. An escrow account is the ideal solution, but improved payment terms can also help.
> Interims on larger jobs are essential to keep work progressing. Any interim requests sent in by MA Assist need to be approved as quickly as possible.
> Improved SoRs. A temporary uplift on the existing SoRs will help ensure that a client’s work is prioritised over other work.
> Delegated authority. Any claim managed by us under a delegated authority will always progress more quickly as we do not have to wait for approval from an over-stretched insurer claims department. Retrospective audits can be carried out at a later date to give the client piece of mind that costs were managed well.
> Improved Service Level Agreements (SLAs). A relaxation of the SLAs is not essential, but neither MA Assist nor the contractors should be penalised for missing the “business as usual” SLAs during a surge.
> Team work. Communication and working as a team is so important, and we see the team as the contractor, MA Assist and the client. Clear and timely instructions as well as trust and flexibility all make a team effective.
Use it, don’t lose it!
So are you ready for the next surge? The summer is the perfect time for planning for that winter surge and here at MA Assist we are continuously reviewing our capacity for, and resilience to a sudden increase in claims. So if you need help with your surge planning, please get in touch.
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This opinion piece is an update of the Escape of Water (EOW) claims piece that we wrote in 2017. Read more