London insurance market needs to create special unit to deal with complex claims, urges marine specialist Nicholas Gooding
By James Brewer
A call for the London insurance market to set up a Complex Claims Unit has come from leading marine consultant Nicholas Gooding, in a speech to underwriters that strongly criticised “market modernisers” for their approach towards claims management.
Mr Gooding said that the market should channel money away from “blue-sky thinking” in order to inaugurate a special unit, which would make cohesive use of claims expertise and be funded out of the settlement of the claims with which it dealt.
He said that this would help restore what he called the “loss of focus” at top level on the claims process. The unit would consist of claims practitioners, lawyers, surveyors and adjusters selecting the relevant experienced individuals to assist the leading underwriters and adjusters as and when required. It would be a “dormant panel with no expense attached unless they were called into action.”
The innovation would be of particular assistance in large claims in the marine and energy market, but would be useful to all sectors of the market, Mr Gooding said later.
He said during his presentation that a system of claims adjustment that had served the market wonderfully well over the years had been “destroyed” by the Claims Transformation Programme.
That programme was adopted by Lloyd’s in 2008 with the stated aim of enhancing customer experience and “to remain ahead of competitor markets with regard to complex claims service and to be competitive on standard claims, ” according to the Lloyd’s website. New claims agreement practices were rolled out to all classes of business from July 2012.
Mr Gooding set out his stinging appraisal in a lunchtime lecture in the 2016 programme of the Insurance Institute of London. Mr Gooding, who is the alternate officer at the International Maritime Organization for the International Union of Marine Insurance, was speaking in a personal capacity.
The meeting, at Lloyd’s Old Library, was chaired by Richard Tomlin of Atrium Underwriting, chairman of the marine committee of Lloyd’s Market Association and chairman of the London joint hull committee.
Mr Gooding said that the London cargo market “has a very experienced underwriting and claims community which is supported by some excellent survey firms, maritime lawyers and recovery agents all of whom are in close proximity. In addition we have probably the most experienced cargo broking firms in the world placing business in our market.
“However the jewels in the crown, in my opinion, was the fact that we had a central claims bureau as the second pair of eyes – originally Lloyd’s Claims Office and then Xchanging; we had the Salvage Association and last and by no means least Lloyd’s Agency network.
“It was the general expertise that was so valuable. No single claims adjuster working for a syndicate or a company could ever build up the level of expertise that came from the sheer variety and volume that came across the desks of the adjusters working for the following market.
“Today, I don’t believe that claims and underwriting are as close as I think they should be. I put this down to what I call Claims Inc.” By this he meant that “senior claims managers – note, not adjusters – have tried to make claims a distinct business unit away from the underwriting team.”
This could be traced back to the recruitment into the market from run-off companies of highly qualified talent to deal with long tail legacy claims that had been the bain of the market during the 1990s and early 2000s.
Individuals in the run-off companies used ground-breaking techniques to package and commoditise hundreds of individual claims and used advanced mathematical data in their complicated settlement talks. It is not surprising therefore that coming into a market where the way claims were handled was largely unchanged over many years, “they looked to modernise the process. They looked to turn claims handling into a process which I believe has led to de-skilling of handling claims in general and cargo claims in particular.”
They introduced the Electronic Claims File (ECF) which “overnight took away much of the claims adjuster and claims broker interaction, which was a significant mistake.” ECF was actively championed by people including a former Lloyd’s chairman and one of the market’s chief executives.
ECF was the first piece in what Mr Gooding called “the Claims File Olympics” where metrics were put in place to judge performance “and the winners are the best box tickers not the best claims departments.”
With ECF, the adjusters lost the ability to intervene immediately and connect with the claim “which is vital in terms of the appointment of surveyors, lawyers and other third parties as well as raising, from the outset, any queries on coverage.”
Of the new system, “overall it has led to, in my view, a complete loss of focus on the end product.”
Mr Gooding hit out at the “panel concept” in which third party service providers had to take part in a “beauty parade” to see if their discounted fee rate were acceptable to senior management. The concept was “bonkers… it was simply one of the most stupid decisions I have ever seen in my career and I have seen plenty of them, I can assure you.” The market should concentrate on the service provided, rather than the fee rate.
He viewed the Claims Transformation project as regressive. “For the marine cargo market we have gone from a system of claims adjustment that has served the market wonderfully well over the years to one which destroyed it in the blink of an eye with an untried and ill thought out replacement.”
Some claims were highly complicated with coverage or quantum issues, and practitioners could “become so emotionally involved that they lose all sense of reality.”
He maintained: “This is where you need advice from people who have the experience, have the independence and are emotionally uninvolved. This is an example of how the second pair of eyes is and was so valuable.”
With the demise of the bureaux the market no longer had the ability to manage such claims in a consistent way “which I think will inevitably lead to problems when the next major event comes along.
The solution was a Complex Claims Unit, and there was precedent for such a scheme with at least one other such panel, in a different field, at Lloyd’s.
Mr Gooding asserted: “I think it has been the case that in many organisations claims has been seen to play second fiddle to underwriting. I believe this entirely wrong and claims and underwriting should be seen as equals in opportunity, career development and remuneration.
“This becomes ever more important as businesses and markets, increasingly, can all compete on price; the real differentiation will come from a world class claims service and honoring our promise to pay. To do this, in the future, you will need motivated claims teams who, most importantly, are empowered to take decisions and understand the need for speed of settlement.”
As for the Claims Transformation Programme, the experience lost could not be easily replaced but by training and regular dialogue between adjusters “some of the ground that has been lost can be made up.
Mr Gooding said that generally the controls around the business were “much better than they were in the past, even if the prevailing trading environment is the worst it has ever been. Overall I think we work in a great business with highly skilled people and we have, despite senior management-made obstacles being put in our way, honoured our promise to pay valid cargo claims.”
He spoke of “an explosion” in the number of actuaries employed in the market. There were reserving actuaries, pricing actuaries and even Solvency II actuaries.
Businesses placed a lot of faith in the modelled pricing data “but I don’t buy into it for three main reasons.” For cargo in particular there were too many variables and not enough homogenous data to build a realistic pricing tool for the millions of different cargoes shipped worldwide.
Secondly, every business had its own model and therefore if there were 10 subscribing underwriters to a risk, “you have 10 different modelled prices. One person’s 150% of benchmark is another person’s 60% yet they are writing the same risk but making widely different assumptions on the relative pricing.”
Thirdly, and most importantly, such data was a distraction in the underwriting process.