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In Part 1 of this series we discussed the issues that the property insurance industry faces with the plethora of Schedules of Rates (SoRs) it has created. In Part 2 we turn our attention to the challenges that the property claim validation scoping and surveying models are creating and what this means for the future of our industry.
The combination of under-scoping, pressure to close claims as quickly as possible and new consumer regulations are creating a potential ticking time bomb. We believe that the insurance industry is possibly heading towards a new financial scandal – the mis-selling of cash settlements in policyholder’s homes.
From 1st October 2015 business will have to comply with the new Consumer Rights Act. The new law will put real scrutiny on the information provided by businesses that the consumer relies on in their decision/buying process. This has real implications for cash settlement, especially as a surveyor is essentially selling a service or solution to a policyholder in his or her home.
There are a few challenges facing the insurance industry right now when it comes to reliable property claim validation scoping and management of claims. Many insurers are increasingly turning to cash settlements as a way of settling claims quickly which is creating its own issues (see below).
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”.
Concerned with leakage and over-scoping some insurers have moved towards a surveyor-led approach, assuming that an independent surveyor is more likely to produce an accurate and well-priced scope of works than a builder hoping to get the reinstatement work at a later date.
In addition, more loss assessors are entering the domestic market, acting on behalf of the policy holders to ensure they receive the maximum settlement available.
But underlying all of these changes and new models is a need for accurate scoping. For every claim, whether it’s scoped by an independent surveyor, a loss adjuster or a builder, the insurer needs to be confident that the scope of works is accurate, fair for the policyholder, is good value for the insurer and is done in a timely manner. A poor scope of works creates delays on a claim, frustration for the policyholder and extra administration and costs for insurers and their agents.
An accurate scope of works is essential for an insurer so that they can make accurate reserves and reliably control their Core Operating Ratio. To provide an accurate scope of works we must ensure it is:
> prepared on a consistent basis,
> reflective of current rates for trades so they are keen to do the work,
> minimising the use of provisional sums and variability in accurate reserving,
inclusive of all necessary work, so reducing later variations.
As we explained in Part 1 of this series, surveyors struggle to prepare consistent scopes when they has 12+ different SoRs to work with, thousands of line items and very little time to carry out the survey. Our supplier Proserve summed up the issues they face with scoping, well:
“[SoRs] don’t all read the same – and line items don’t necessarily cover the same thing. Some are very basic with not all the line items you need and some read in a completely different way but basically cover the same job. This extends the time for the surveyor to upload the scopes as they have to spend time searching for items on the lesser used SoRs”.
Surveyor led model
The surveyor led model has several perceived benefits to insurers for property claim validation:
> Cost control – a surveyor who does not expect to benefit from receiving the fulfilment work will not over-scope. The surveyor should also be able to provide a consistent scope each time.
> Speed – on site settlements speed up the claims process for the insurer (but not the policyholder, see below) and ensure a claim is reserved and closed quickly.
> Cash settlements and repudiations can take place quickly on site. The surveyor can take the policyholder through the scope whilst still in the policyholder’s home and then agree a cash settlement or repudiation on the spot.
Our experience with this model finds that these advantages do not exist in reality and that problems are being created:
> Variations – a surveyor under time pressure and with multiple SoRs will miss works that need to be done. Here at MA Assist we are not seeing clear and consistent scoping. We are experiencing at least one variation for every pre-scoped claim. By comparison, only 40% of claims not involving a surveyor have variations. This is because once one of our suppliers has visited a property to assess a pre-scoped claim, knowing that they will have to carry out the works and make a profit, they often find that line items are missing from the scope.
> Delays and communication – by introducing a surveyor into the reinstatement process there is one more contact point for the customer and more potential for delays and mis-communication. Delays and poor communication are the biggest drivers for customer complaints. The more suppliers there are in the claims management chain, the more complaints insurers will receive for these issues. This has a detrimental effect on customer retention, as the real test of an insurance policy occurs when a claim is made – poor customer service at this stage means a lost customer at renewal time.
> Cash settlements – is a policyholder really in a position to understand the details of the cash settlement being offered and the options available to him/her to carry out the repair following a 20 minute visit by a surveyor? The FCA is aware of this issue – in the FCA thematic review TR14/8 Insurers’ management of claims – household and retail travel, the FCA stated that “we did not see many documented examples where the insurer had set out for consumers the implications of using their own builder or one approved by the insurer”. While immediate cash settlements get the claim closed quickly for the insurer, the claim is still ongoing for the policyholder. But there are even more issues to consider with cash settlements.
> Unforeseen works – a surveyor does not have the time or the incentive to try to foresee works that may not be obvious during a 20 minute survey. Damp hidden behind cupboards, evidence of possible asbestos and structural issues are all sources of unforeseen works. If a contractor is carrying out a survey, it is in his interest to carry out a more extensive survey to identify such hidden issues before he commits himself to a schedule of works.
On the spot cash settlement has the advantage of getting a claim closed quickly. But with the evidence that we have for under-scoping on fulfilment works, it is reasonable to assume that cash settlements are being seriously under-valued. In our experience pre-scoped claims attract approved, valid variations, often without challenge, of 52% of the original claim valuation. What impact would this have on an insurer’s indemnity spend?
Cash settlements are always discounted as certain assumptions are made about the solutions the policyholder will seek: Will he or she fix the damage themselves? Will they use a non-VAT registered builder? And the insurer will always use its own cost rates to calculate the settlement, knowing full well that an insurer should be able to get a proper repair done at a lower cost than the policyholder can.
The FCA has made rulings in relation to cash settlements including its notice of undertaking – Axa 29th February 2012 where it stated:
“We took the view that it was unfair for the terms to provide for a discounted cash settlement that reflected a supplier discount…”
The FOS has also upheld complaints following inadequate cash settlements. E.g. Case 92/10 in issue 92 of the Ombudsman’s news
If the cash settlement is too low, the customer is unlikely to find someone to do the repairs for the value of the cash settlement, and the damage may never be repaired. This just creates a new insurance claim at a later date. If the customer tries to fix it him or herself, then it’s likely that the repairs will be inadequate and a new insurance claim will be submitted later. So insurers are taking short-term gain at the expense of long-term profits.
If the customer can’t get the work done for the value of the cash settlement he or she has the right to go back to the insurer to ask for a better settlement. This has been clearly stated by the FCA several times. The FCA rules are clear that an insurer’s obligations to a policyholder do not end with a cash settlement – if the cash settlement is insufficient to get the appropriate repairs done the insurer must increase the cash settlement.This obviously has implications for reserving and there are costs associated with the re-opening of a claim.
But insurers may be creating a much bigger problem for the future as a result of under-valued cash settlements. Cash-settlement in the home is door stop selling, which attracts a lot of protection for the consumer currently, including the right to cancel.
And then there is the new Consumer Rights Act.
Consumer Rights Act
Businesses have until 1st October 2015 to implement the new Consumer Rights Act, which replaces 12 existing laws including the sale of Goods Act 1979 and the Supply of Goods and Services Act 1982. There are some serious implications for the property insurance industry which need to be addressed through accurate scoping and property claim validation.
The new laws will put real scrutiny on the information provided by businesses that the consumer relies on in their decision/buying process. This has real implications for cash settlement, especially as a surveyor is essentially selling a service or solution to a policyholder in his or her home.
The new law will require the surveyor to carry out the service (i.e. the survey) with reasonable care and skill. Also, information said or written to the consumer is binding where the consumer relies on it. This will include quotations and any promises about timescales and the results to be achieved. This applies if the consumer takes account of this information when deciding whether to buy the service, or to make any decision about the service subsequently.
With a cash settlement the customer is left with the job of repairing his or her home, whether or not he or she has any understanding of building repairs. They are usually given no advice on where to go to get a reliable builder, and often end up hiring someone who bodges the job and makes it worse. In this scenario, who is to blame? The dodgy builder, or the insurer who provided the inadequate cash settlement and then left the policyholder to fend for themselves in the world of cowboy builders?
The Consumer Rights Act will also give the consumer more rights in relation to the quality of work carried out during a reinstatement and the repair service provided. Depending on circumstances, if repair work is not done properly, or within a reasonable time and for a reasonable price, customers will have the right to have work repeated or put right. For example, if a repair job is done that does not match the schedule of works (or doesn’t match the promised quality), the contractor will be required to re-do the work quickly, without inconveniencing the customer, and he won’t be able to charge the customer extra to re-do the work. Obviously, when such a situation arises the customer will turn to his or her insurer to get it resolved.
If the repair involved replacing certain goods as well, any goods supplied on the basis of a description from the trader, a model (such as a display model on a shop floor), or a sample (for example a swatch of material) must match what was described or seen. Faulty goods will need to be repaired, replaced or refunded – timescales will vary, but generally the customer will have stronger rights to demand these remedies than they had before.
If the customer didn’t want the original contractor back in their home to re-do work, they will be able to sue the firm (in this case the insurer) for damages to recoup the cost of getting the problem fixed – no change to current law on this.
So, are policyholders being mis-sold a service? Quite possibly!
The next financial scandal?
So will cash settlements be the next mis-selling scandal? We think there is a real risk that the insurance industry is facing such a scandal through the under-valuation of cash settlements and poor communication and explanations of rights.
In the event of a property claim, some insurers are not informing policyholders of their choices and rights adequately. To offer a cash settlement which has little probability of covering the costs of an adequate repair, insurers are opening themselves up to all sorts of legal actions by policyholders.
If only there was a solution to head this off? Part 3 of our article, and new developments at the MA Group, may offer that solution.