Airmic Roundtable - how will your policy pay out when it really matters?

Taking part in this Airmic rountable were:

Paul Goulding, Head of Insurance, Heathrow Airport

Richard Henton, Claims Director, Willis UK Retail

Candy Holland, Managing Director, Echelon Claims Consultants Ltd

Chris McGloin, Airmic deputy chair

Matthew Porter, Practice Leader – Construction Claims, Zurich

Peter Shaw, Executive Director, Global Technical Services, Crawford

Airmic chief executive John Hurrell chaired the roundtable and Technical Director Paul Hopkin was also present, taking notes for current and future research projects.

Uncertainty over how an insurance policy will respond to large claims remains a top concern of Airmic members. A roundtable in December looked at the problems involved and considered how to overcome them. As Mark Baylis reports, the way a risk manager handles a claim is only one part of the answer. Success depends crucially on what happens when the policy is negotiated in the first place.

A lot of claims are paid efficiently and quickly, according to the risk managers present at this roundtable. Until, that is, a big loss comes along – in which case it is often a very different story. These larger events are, of course, the ones that really matter – the point at which insurance becomes a strategic purchase of importance to board members. It is when you really need your policy to perform.

The discussion revolved around identifying the obstacles to genuine contract certainty – and how to overcome them. Airmic deputy chair Chris McGloin pointed out that “insurance is an important plank in the decision-making process.” Whether or not a proposed project is insurable may determine whether or not it goes ahead.

“Insurance is an important plank in the decision-making process ... it must do what it says on the tin.” Chris McGloin

“If we’re buying it (insurance) for risk mitigation, then it must do what it says on the tin,” he said. In practice, however, it is rarely possible to give a categorical assurance when senior executives asked whether a particular project would be fully covered.

Paul Goulding of Heathrow Airport concurred, pointing out that his company’s investment plans require substantial borrowing. “A lot of our banking covenants require insurance to be in place. Our lenders take a tremendous amount of comfort from this,” he said. “I know perfectly well that if we had something really big the insurers would be all over us,” he said.

“I know perfectly well that if we had something really big the insurers would be all over us.” Paul Goulding

Even some smaller claims, he added, can be problematic, especially where reinstatements are concerned. Insurers are reluctant to replace older damaged equipment with something up-to-date, a like-for-like replacement rarely fits current business needs. “Nothing is ever simple with first-party claims,” he said.

Peter Shaw of Crawford agreed with Goulding about reinstatements, but did not doubt most insurers’ willingness to pay large claims: “In my experience, they’re looking to find a solution”. The time it takes is another matter, however. “What we’re seeing at the minute is the speed of the investigation process, especially where the police are concerned. They can just take for ever,” he said.

In defence of insurers, he said he had not seen much use of reservation of rights. At this point Candy Holland intervened. “This is not just about reservation of rights. You’re talking about the confidence that, when something happens, the policy will pay out fairly and quickly.”

Under questioning from the roundtable chair John Hurrell, Peter Shaw did acknowledge that the willingness to pay promptly and fairly could vary significantly depending on insurer. He cited an example, taken from several years ago: “I found their (the insurer’s) attitude, even when dealing with their adjuster, to be adversarial. Goodness knows what they’re like with their policyholders.”

He also acknowledged that claims can take a long time to settle when lawyers take over the process, as sometimes happens.

Candy Holland continued her theme: In the event of large claims, corporate insurance buyers often find it “very difficult to answer questions from the board such as ‘are we fully covered, how much can we expect to get?’" she said.

Not that this is entirely the insurers’ fault. “Most policyholders have no idea what they’re going to face in the process,” she said, pointing out that the burden of proof lay with the claimant. “By the time of the claim it may be too late. It’s important to have everything in place in advance. There’s a huge education process here.”

“By the time of the claim it may be too late... There’s a huge education process here.” Candy Holland

She emphasised the importance of scenario planning, bringing a response from Chris McGloin, who said that this was normal practice for insurance buyers. However, he continued, “there’s a gap between what you think is covered and what the policy says.”

Holland acknowledged that interpretation of wordings could vary from underwriter to underwriter. (“And lawyers as well,” added Peter Shaw.) She described some wordings as “ancient ... they have not kept up with the times.”

At this point Richard Henton of Willis turned the spotlight back onto insurers. “There’s a huge level of uncertainty following a major loss,” he said. “The insured has what they view as a straightforward claim. Why does it take three months before policy liability is accepted? What is the risk manager to tell his finance director?”

“There’s a huge level of uncertainty following a major loss. What is the risk manager to tell his finance director?” Richard Henton

The partnership approach, which can be so much in evidence when negotiating with the underwriter, can disappear when a large claim goes in because you are dealing with a separate group of people. Adjusters, he added, were often seen as favouring insurers and are sometimes seen by policyholders as an enemy.

He advocated that insurers should pay interest on claims. “It would give them an incentive to make an interim payment and speed the process,” he said.

Echoing an early comment from Paul Goulding of Heathrow Airport, he said that insurers were increasingly treating large first-party claims as though they were third-party.  

It was now time for Matthew Porter of Zurich, in the words of John Hurrell, to speak up for the entire insurance industry. He stressed the importance of having experienced and senior staff working on large claims – preferably ones who understand the industry concerned. In his own area – construction – this is common, he said.

Communication, he said, was key. It was important to manage expectations, especially in terms of the time a claim was likely to take and why, and the problems that might be encountered. He said his company “have a strong mandate that Reservation of Rights are not to be issued without stakeholder interaction and only with reason.”

"Communication with clients and managing expectations are key" Matthew Porter

He also reminded those around the table that most large risks are placed in a subscription market. Claims were sometimes made more difficult by “differing views of a small number of co-insurers.” In that situation the lead insurer has to manage the market to the best of their ability in order to provide a unified response to a client.” 

This last comment ushered in a whole new strand of discussion. Richard Henton of Willis, supported by Candy Holland of Echelon, said that it was quite common for following insurers to appoint their own adjusters. Reinsurers might do so as well.

A very important point, said Holland. “It’s what we encounter all the time. It’s reinsurers who’re calling the shots,” she said. Under questioning from the chair, it was generally felt that the buyer was normally unaware of these reinsurance arrangements.

“For some carriers it’s a patchwork quilt of how it’s arranged, and it doesn’t fill me with confidence,” said Paul Goulding, who felt that these complex set-ups can delay payment.

Matthew Porter of Zurich pointed out that reinsurers sometimes, unknown to the ultimate client, insert claims control clauses. “You can only be as generous as your reinsurer will allow,” suggested John Hurrell. “In essence yes,” replied Porter.

Chris McGloin suggested that, in situations where there is more than one adjuster, the claim is likely to gravitate to the lowest estimate. “Adjusters never adjust upwards,” he commented. Richard Henton said that 80% of any claim was typically non-contentious; the negotiation is normally around the remaining 20%.

“We don’t want yes-men (as adjusters),” Matthew Porter of Zurich assured the meeting. “We prefer healthy debate.”

In that case, according to Richard Henton, they are not necessarily typical. He recounted a claims meeting he attended where the insurer present turned to his adjuster and said: “When I want your views on policy liability, I will ask for them.” 

There was then a brief discussion about the merits of Agreed Value policies. They would, it was accepted, resolve many of the issues under discussion, but at the cost of higher premiums. Chris McGloin suggested that these might be worth the price if they avoided the frictional costs of making difficult claims.

Peter Shaw of Crawford then drew attention to the issues around local and master policies on global programmes. “Half of my workload,” he said, “is where the local policy proves to be inadequate and comes back to the master policy. And then you’re three or four months down the line, and you have to start again.” It was, the meeting agreed, a very relevant point.

“Half of my workload is where the local policy proves to be inadequate and comes back to the master policy.” Peter Shaw

Solutions

When it came to considering solutions, the group was not going to solve problems that have been troubling the insurance industry for decades in just 45 minutes. It did, though, come up with valuable insights.

The chairman John Hurrell divided matters into two: what happens before and during placement, and the claims process itself. The second topic can be, and was summarised quickly. Put simply, the most important work takes place before and during inception. Unless you get this bit right, you are going to have difficulties no matter how well you handle any big loss.

The conversation dealt, therefore, mainly with issues around placement. Hurrell drew out a number of questions around policy wordings, structures (for example, the role of co-insurers and reinsurers) and protocols.   

Many people around the table reiterated the point that timing is an issue. Early quotes from underwriters – which in turn depend on the insurance buyer presenting quality information in good time – are essential if the wordings are to be available at inception. The old view that vagueness in contracts could work in the insured’s favour in the event of a claim should be discarded; the opposite is now more likely to be true. And one person suggested that meetings with underwriters should be minuted to help bring about greater clarity.

One piece of advice was to meet the insurer’s claims people during the negotiation process. Another suggestion was to get the relatively simple negotiations such as those concerning damage to fixed assets out of the way early so that discussion could focus on the more complex aspects. “A transparent, open discussion between insurer and client about how the policy will work in practice so that there can be further talks about areas where there are gaps of lack of clarity,” advocated another speaker.

Claims protocols and bespoke wordings (or perhaps those recently developed by CILA and the CII) were another favoured solution – these are generally driven by the insured or their broker. Claims protocols should be incorporated into the policy wording so they are legally binding. It was felt that transparency over structures, especially where reinsurance is concerned, was going to be more difficult to achieve.

The overwhelming impression given by the discussion was that, although there is no silver bullet, these matters can and should work better and with greater simplicity than they often do. It requires planning, transparency, good information, a willingness on all sides to talk – not to mention clear wordings. It all takes time – time to work through a client’s requirements, matching them with the right policy wordings, which have to be tested through scenario planning.

The people with the required skills are, of course, a limited resource. And that, perhaps, is the nub of the matter. Time is money. How much are people – buyers, brokers and underwriters - willing to invest? Not just in contract certainty, but coverage certainty that in turn leads to the ultimate goal of genuine claims certainty.