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Last November the ABI released data that showed 23% of claims management companies (CMCs) were either warned or had their authorisation cancelled during 2014/15. The ABI said: “The current system is failing to provide enough of a deterrent to rogue firms.” Increasing complaints about cold calling and rogue companies had led to an increase in the number of punishments handed out by the Ministry of Justice.
But such reprimands seem to have had little effect. Tony Newman, head of motor claims at Allianz, blasted the current regulatory system and told Post: “Despite warnings and lost accreditation CMC practices have continued or even worsened. In essence it has had no effect. That demonstrates that current regulation is ineffective.”
Most of the reported problems have been caused by disreputable claims management companies chasing settlements for personal injury and PPI, but the term CMC applies to all sorts of organisations that are involved in claims handling, including MA Assist.
The ABI had been calling on the government to transfer the regulation of CMCs to the FCA throughout 2015. Knowing that regulatory pressures were likely to increase MA Assist applied for FCA authorisation in late 2015, and we were delighted to receive our authorisation on 1st April this year – just a couple of weeks after the March 2016 budget when the government transferred responsibility for regulating claims management companies to the FCA.
The FCA is concerned with Treating the Customer Fairly, and when you consider the FCA’s review of Outsourcing and Delegated Authorities, it’s clear that things are going to get interesting for all of us involved in claims handing.
The benefits of outsourcing
Most of the time an organisation is unable to handle all of the tasks and specialisms required for every business process, and so it often makes sense to outsource to an expert. Property claims management is a great example of where a service can be outsourced to an expert who has the knowledge, skills, relationships and systems specific to the management of builders and building projects. Construction is a highly regulated industry that has to comply with all sorts of regulations around Health & Safety, taxation and qualifications. Most insurers do not want the headache of managing regulatory issues such as Construction Design Management (CDM) or tax issues such as the Construction Industry Scheme (CIS). So outsourcing such issues makes complete sense.
An efficient and well organised outsourcing business can do the job more efficiently and cheaply, saving the insurer money on management and indemnity spend, without compromising on customer service. The outsourcing business will have invested already in systems and staff to deliver the outsourced service, leaving the insurer to invest in systems and staff that are more likely to generate growth in the business.
Outsourcing non-core activities enables the insurer to focus on what it’s good at – developing new policies and products, marketing and underwriting.
Outsourcing reduces overheads, and is particularly helpful where there are peaks and troughs. In the world of property insurance unpredictable surge events often happen. It takes too long to hire and train staff every time a surge takes place, but an outsourcing arrangement usually ensures that capacity is available when needed. So a prudent insurer sustains long-term relationships with its expert suppliers, in the knowledge that they will deliver for them in their customers’ time of need.
The disadvantages of outsourcing
Disadvantages that arise with outsourcing are often a result of choosing the wrong outsourcing partner. It’s important for a business to outsource to someone that it can trust with its business reputation. At the end of the day an insurer is giving away control of a business process, entrusting its brand and reputation to a third party. Get it wrong and it becomes difficult to synchronise the deliverables, track performance and maintain customer satisfaction (and renewals). An outsourcing partner needs to understand the client’s values and customers’ needs and have systems and staff in place that will support these values.
In the world of property insurance claims outsourcing can involve too many organisations in the supply chain. This creates operational friction (and hidden costs) and a lack of customer focus. It’s really important to ensure that an outsourcer can provide the data and information an insurer needs to monitor the supplier’s performance and the quality of the customer service.
Any outsourcing arrangement needs to ensure that it is clear to all parties where responsibilities lie. If there is any confusion then the customer suffers.
And we are all well aware of the need to ensure that customer information is secure!
FCA Thematic Review: TR15/7 Delegated authority: Outsourcing in the general insurance market
The FCA has been concerned over insurers’ oversight of outsourced arrangements and the potential impacts any shortcomings could have upon the delivery of products and related services to customers. It wanted to try to understand whether customers are genuinely placed at the heart of insurers’ business models.
In RPPD 1.2 the FCA set out an expectation that “a customer’s experience should not be affected by whether a product or service was provided and distributed by a single institution or by two or more institutions”.
We have picked out those some of findings in the Thematic Review that relate to claims handling and compared them to opinions we have expressed in the past. We also consider what this will mean for claims management companies and insurers in the future once claims management companies are being regulated by the FCA.
“Some insurers did not have or could not demonstrate clear arrangements for assessing conduct risks associated with delegating authority. Moreover, some insurers do not appear to regard the delegation of activities such as underwriting or claims handling to third parties as outsourcing”.
“Some insurers did not perform conduct focused due diligence when selecting third parties, with the decision to outsource sometimes solely an underwriting decision with little consideration of conduct risks”
The FCA identified insurers where outsourcing arrangements were entered into with limited appraisal of the relationships, products and potential risks for customers. Product wording and pricing in some cases did not take into account the legal and regulatory responsibilities for customer outcomes, particularly around claims.
We have already highlighted in our Primary Authority Advice that it is a criminal offence to carry out misleading actions or misleading omissions under The Consumer Protection from Unfair Trading Regulations 2008. The consumer must be given sufficient information to make an informed transactional decision. If he or she doesn’t have sufficient information and makes a transactional decision that they would not have made if they had been fully informed a criminal offence has taken place, even if unintended.
If you would like a copy of the Primary Authorty Advice, please do get in touch and we would be happy to send it out to you.
Treating Customers Fairly
“Some insurers had not considered whether the products they underwrite treat customers fairly; both in terms of the value the products offered and the service delivered to customers. The primary (or only) focus of product diligence and review was sometimes on financial performance with limited regard for conduct risks.”
“Some insurers exercised insufficient control over outsourced claims functions, in relation to both the design and operation of these functions. It was not always clear that potential conflicts of interest where claims were outsourced had been identified and mitigated.”
The FCA has significant concerns about the fair treatment of customers where functions are outsourced and multiple firms may be involved in the provision of products and services for a single claim event. These concerns relate to all stages of the product life-cycle and stem from the absence of a customer focused approach.
It also found that there is an increased risk of poor customer outcomes arising from the division of knowledge and responsibility that occurs in outsourcing underwriting and claims handling authority.
The Review also draws attention to ICOBS 8 that sets out the regulatory requirements applicable to insurers in relation to claims handling. ICOBS 8.1.1R states that “an insurer must handle claims promptly and fairly; provide reasonable guidance to help a policyholder make a claim and appropriate information on its progress; not unreasonably reject a claim (including by terminating or avoiding a policy); and settle claims promptly once settlement terms are agreed”.
Insurers who outsource claims handling therefore need to ensure that they do so with appropriate care and due diligence so that they are able to continue to satisfy this regulatory responsibility and ensure that customers receive fair outcomes.
For the customer, the claims cycle and process is the most important element of the delivery of insurance products and services. This is the point where a customer finds out whether the product meets their expectations, both in terms of whether any loss they have suffered is covered and the quality of service they receive through the claims process.
In our paper called “Getting Off The Rollercoaster” we identified the issues customers face with long supply chains that do not have a customer-focused approach and create operational frictions that delay the progress of a claim.
Our research showed that there is a clear correlation between customer dis-satisfaction and the number of parties involved in a claim. Detractors consistently complain of having to do too much effort – chasing the insurer or its agents, taking time off work and liaising with many different parties.
The FCA also identified additional risks to customer outcomes where decisions about their claims are being made by parties who have different regulatory responsibilities than the insurer for the outcome, and who may have an interest in not agreeing their claim (depending upon the remuneration arrangements in place between the insurer and intermediary).
Such conflicts of interest arise in some claims models. For example, surveyors who are incentivised to settle a claim quickly for cash at a low value are not providing a good outcome for the customer and negatively impact the reputation of the insurer. Our case study “Like a Hole in the Head” clearly demonstrated a conflict of interest and a poor understanding of conduct risks in a surveying model.
Allocation of responsibilities
“For functions where activities and tasks could be performed by either party there was sometimes no clear allocation of responsibilities”.
The FCA identified that arrangements can be complex and the delineation of responsibilities and tasks can become unclear. As we explained in our last opinion piece “The Future’s bright…” at the moment insurers buy by commodity not by peril. Such a purchasing system is at odds with the customer journey in the event of a claim and creates inefficiencies; cost efficiencies achieved by tendering by commodity are easily lost in operational inefficiencies as the supply chains become too long and complicated and frictions and touch points are excessive. Involvement by the insurer escalates as different parties have to be co-ordinated during the claim, creating hidden costs within the insurer. Ultimately, customer satisfaction diminishes and complaint volumes increase and renewal is at risk.
Integrated technology along with processes driven by the customer and a peril-led contractor model would create a seamless and efficient service for the customer and savings for the insurer with clear responsibilities.
“Lack of oversight also extended in some cases to shortcomings in complaint processes, handling and outcomes. It was not clear that complaints data was complete and accurate, or that it was collated, analysed, reviewed and acted upon.”
Our paper on Alternative Dispute Resolution examined the new law on ADR and how MA Assist has access to an accredited ADR process through its TrustMark scheme operator status.
We also talked about our RESOLVER process. Managed by our Client Services team, RESOLVER is an ADR process; the RESOLVER staff mediate between the client, customer and contractor to find an effective solution for a complaint.
Lack of appropriate over sight
“There was a lack of appropriate oversight and monitoring by many product providers (both insurers and intermediaries) of the delivery and performance of the product, particularly in relation to meeting customers’ needs. This was often contributed to by poor or incomplete MI.”
Our team at MA Assist are well known for their love of numbers, statistics and MI. We measure and report on the performance of our business, our clients and our suppliers. We have a wealth of data which we examine, analyse, understand and report on. Regular reports circulated internally and to clients include:
> Net Promoter Scores (NPS) for suppliers and MA Assist – to measure customer satisfaction. We analyse detractors to understand where MA Assist, our suppliers and our clients can improve and feed the information back to the relevant parties.
> Service Delivery Performance Indicators (SDPI) for suppliers – to measure supplier performance. We look at average repair values, durations, complaints and conversions through a balanced score card system. We also look at capacity and performance against SLAs.
> Quantity and Quality assessments for our Control Centre staff, to ensure we are providing the best service we can.
> Daily Ratings and Reviews where we know what NPS scores have been returned in the last 24 hours as well as data on incidents and complaints so immediate and appropriate action is taken.
> Volume and Value to identify trends in the claims being assigned to us by insurers and how it impacts our service.
We are always happy to provide any of our clients with data on the business they give to us, so please do not hesitate to get in touch if there is any additional MI that you would like from us.
Impact on relationship between insurer and CMC
“..insurers sometimes [were] unable to explain the claims philosophy, claims handling processes and service standards in place”.
Our WORLD CLASS NPS results demonstrate how well we deal with claims – our suppliers regularly get scores over 75% while MA Assist consistently sustains over 60%.
It is surprising to read in the Thematic Review that insurers sometimes couldn’t explain their claims philosophy, claims handling processes and service standards in place. Such insurers can’t deliver a great claims experience if they are not clear on the process and service standards that their claims management companies have in place.
If an insurer has a limited understanding about what its CMC is doing, how will regulation of CMCs change things?
> If the FCA finds a CMC to be under-performing, will the insurer be culpable as well as the CMC?
> Will insurers reduce their monitoring and focus on claims management companies in the knowledge that CMCs are themselves FCA regulated and so there is an assumption that they will comply with the required FCA regulations?
> Will regulation of CMCs reduce some of the responsibilities of insurers in relation to claims handling?
Where a CMC can see operational or frictional issues in the claims handling process that does not Treat Customers Fairly, and alerts the insurer to it, who is responsible in the eyes of the FCA?
Even where there is a good relationship and understanding between the insurer and its CMCs, FCA regulation of CMCs will change that relationship to some degree. Our clients have always expected us to comply with FCA regulations even before we became a regulated business in our own right. Even so any change in the emphasis of regulatory responsibilities will change the nature of our client relationships to an unknown extent.
A recent article in PostOnline talks about the FCA’s review of Outsourcing. It points out that outsourcing offers a hugely flexible and cost-effective model for insurers, but it can be at the risk of losing sight of the outcomes for customers. The FCA is encouraging insurers and providers to take a more holistic view of the overall value of insurance products to consumers, rather than allowing each organisation to focus solely on its own discrete part in the chain.
Whilst we applaud this approach, it is very difficult to get multiple suppliers in a long claims handling supply chain to work together seamlessly unless one organisation is responsible for handling the whole claim. Which brings us back to the peril-led contractor model that we have talked about before. The PostOnline article goes on to argue that with the focus on customer outcomes becoming ever sharper, and levels of transparency around customer experiences rising, insurers and providers will have to maintain a robust focus on conduct if they want to continue reaping the benefits of outsourcing.
We believe that outsourcing property claims handling with a trusted partner adds value to insurers. Handling a property claim is a complex process that needs a specialist to do it. Keeping the supply chain small and manageable with a focus on perils rather than commodities, with a clear understanding of the customer journey, will deliver benefits to everyone involved.
If you would like to know more about our peril-led contractor model, please get in touch.