Concerns mount over claims in hard market

Claims are becoming more difficult in the hard market, with mounting concern that problems caused by buyers using multiple insurers to try and build scare capacity in some lines will only worsen, according to risk managers and brokers.

Members of UK risk and insurance management association Airmic report rising claims disputes as the ‘harsh’ market intensifies. Almost half of insurance buyers taking part in the association’s latest Pulse Survey saw a rise in claims challenges last year.

The survey found that some 27.7% of members polled in January had seen a slight increase in claims challenges from insurers, 10.6% a moderate increase and 8.5% a big increase.

Reasons given by insurers included the use of basis clauses or conditions precedent, late claims notification, inadequate insurance purchased, breach of warranty or other policy conditions, and policyholders failing to provide information requested.

It is worth noting that Airmic members did not report a big increase in litigation from insurers over claims, but said when claims were paid it was either slower than normal (28.6%) or much slower (19%), even factoring in Covid-19.

They said they are more likely to instruct their brokers (32.6%) and lawyers (39.1%) to support future claims as a result.

Spanish risk managers are also concerned that the effects of the hard market are moving beyond difficult renewals to claims.

“This is a perception that is growing among some members of Igrea,” said Lourdes Freiria, general director of risk and insurance at Grupo San José, during a virtual conference organised by the Spanish risk management association.

According to Carl Leeman, Chief Risk Officer of Belgian logistics firm Katoen Natie, claims aren’t running as smoothly as they once were, partly because of Covid-19 and partly because of new tactics by insurers in the hard market.

“We have seen work happening around the clock but with less efficiency and sometimes surveyors, for example, seemed not to have easy access to needed materials. Also, there has been more and more reporting to upper management before anyone can make settlements,” Mr Leeman said.

And brokers tell a similar story.

Aon’s global chief claims officer, Neil Harrison, told Commercial Risk Europe that there has “definitely been increased claims challenge” in the market.

“What we have seen from the insurers’ side, partly linked to the resource challenge caused by Covid-19, is more use of external counsel, questions being raised around coverage and a general slowing down of the process in some lines of business. There are a number of macro factors that have played into that,” said Mr Harrison.

He stressed that although claims are now more difficult, most are being resolved and many outcomes remain positive. But the claims process is causing problems and often leaving a bad taste in the mouth, he added.

“I would say the outcome is still achievable and results are pretty much what we saw in the past, but the journey or the process is the pain point right now. So from an insurance reputation point of view we are in a bit of an environment where even a good claim outcome can leave a bad taste in the mouth because of the often difficult process. It is more difficult to get that payment and so insurers are losing the good will that comes from a positive claim outcome because of the number of information requests that our clients have to go through,” said Mr Harrison.

He noted that liquidity matters to many buyers in the current environment, with pressure increasingly coming from CFO’s and financial directors, rather than just insurance managers, to get claims paid. “So the efficiency of the claims process is coming more into focus than ever before,” said Mr Harrison.

Growing problems with claims are adding to insurance buyers’ frustration in the hard market and putting the idea of partnership and collaboration at risk, he continued.

“If you change rate at renewal that always elicits an emotional response, then you have the changes in wording. If you then overlay the more difficult claims process, the collective certainly creates the perception of a less collaborative environment,” he said.

Rob Powell, global chief claims officer at Marsh, said the claims environment is challenging for clients due to a number of factors. Some of these are linked to hard market conditions as insurers seek to boost profitability.

Mr Powell said insurers are using coverage counsel and external experts such as forensic accountants “more than ever”. “This creates distance between insurers and clients; furthermore, these experts are not independent, and how they measure success and demonstrate their value proposition to their principles is not necessarily aligned to our clients’ needs or success factors,” he told CRE.

He added that claims teams are changing behaviour as insurers focus on profitability, specifically in certain finpro and long-tail products.

Mr Powell said more and more insurers are also trying to settle claims within their original loss reserve, despite this being an “artificial target that is nothing more than insurers’ financial provision”.

In addition, concern over social inflation, a growing shortage of technical claims talent and the fact more insurers are now sitting behind reinsurers’ decisions to refuse to accept coverage or make decisions, are making claims more difficult, he said.

Mr Powell added that although risk managers do not expect insurers to pay non-covered claims, they do need timely access to decision makers, and also expect carriers to consider how their behaviour impacts commercial relationships with clients.

Mike Russell, head of claims solutions UK and Ireland at Marsh, said claims are “increasingly more challenging” to settle. The hard market isn’t the only cause of problems, however coverage and capacity restrictions, along with deteriorating relationships between insurer and insured, are contributing to the current environment, he added.

Insurer and reinsurer executives taking part in the Igrea debate denied that they have instructed their teams to apply more restrictive claims processing criteria than usual. In fact, they said they are trying to make claims more efficient to help clients through the current difficult business environment.

But José Ramon Morales, country leader for Spain and Portugal at AXA XL, said the perception of more difficult claims may have been fuelled by the fact more insurers are often now involved. This is a result of insurance buyers having to build towers with multiple carriers to secure the capacity they need in the hard market, he added.

Risk managers at the event agreed that when a group of insurers has been used to deliver capacity, it can cause resistance to claims.

Ms Freiria, of Grupo San Jose in Spain said, therefore, that the market should make sure mechanisms are in place so panel leaders can make decisions that are respected by followers: “That is something that does not always happen right now.”

Mr Leeman agreed that this is a growing problem. “A new phenomenon is that people who had difficulties in filling insured capacity were forced to take on insurers no matter what conditions, or no matter what the wordings… So, you are starting to see people with different wordings on different layers. Claims-wise, that will have a big impact because it could be that a fronting insurer agrees that a claim is covered but others on other layers will not. If you don’t have a policy with a follow clause allowing the fronting insurer to decide, there could be a problem,” he said.

Michel Josset, head of AMRAEs property damage commission and risk manager at Faurecia, agreed that the rise in co-insurance, as buyers seek to build capacity, is making claims more difficult.

“Large scattering of capacities with more and more actors and co-insurance based on insurers taking successive lines in a programme is making the logistics of claims management… more and more cumbersome,” he told CRE.

Raymond Hogendoorn, global head of shorttail claims at AGCS, said during a Commercial Risk webinar that problems caused by various wordings, limits and sub-clauses in different layers have traditionally been more prevalent in the US, and he hopes it doesn’t spread to Europe.

“I would sincerely hope this practice will not be exported to Europe because it makes claims handling ten times more difficult,” he said.

Aon said the fact that more towers and panels are being used to build capacity in the hard market is complicating claims, with co-insurers not always following the lead position in many large losses. It fears this trend could worsen as the hard market continues.

“We are seeing it and as we look ahead we think we will see it more,” Mr Harrison told CRE.

“If you have a tower or a quota share in a programme more people get involved. We try to make sure that on any individual placement there is a follow the leader clause, or a claim coordination clause, so that ultimately we are speaking on behalf of our client with one entity and everybody follows. That is more the norm in some lines of business than others. But in certain lines of business where every individual participating insurer wants to individually adjust the claim, by definition you get a multiple of all the delay points, which can be very frustrating,” he said.

Adding: “In a certain size of claim it is pretty obvious early when a particular layer is just going to be exhausted. We are of the view that quickly paying an obvious limit loss, making interim payments and putting cash flow into the client are things that insurers can do to help their policyholder while that broader adjustment is going on.”

Marsh’s Mr Powell said the increase of claims agreement parties in the market is “not ideal”, particularly for non-Lloyd’s, non-bureaux carriers.

He said it adds more administration burden and can put more demand on the lead insurer that has to coordinate the market and ensure a consistent approach.

The broker added that the involvement of reinsurance in claims further complicates matters.

“As global risks increase in scale and complexity, different insurers will have different risk appetites driving either less or greater purchase of reinsurance. Where a reinsurance market is in play, it can overlay a further complexity to be navigated. During large incidents, though the two claims are supposed to be divorced and the policyholder’s claim settled before recourse under a reinsurance policy is sought, the insurer would be [unlikely] to not ensure all details are combed over thoroughly so that they are not left in a situation where they pay a claim and their reinsurer says it doesn’t believe that it was covered. This is an additional set of eyes from the reinsurer, with perhaps a different claims ethos – and even less of a client focus,” he said.

Commercial Risk is hosting a Claims Management Conference on 27-29 April 2021. We have worked with a number of European risk management associations to bring together a group of experts in a virtual forum to discuss how best to adapt to emerging long-term risk trends and explore the type of claims patterns that these new exposures are generating. Click here to secure your seat at the event.

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