AMM 101 CLAIMS MANAGEMENT

Assignment 4
Short Question
1. Reserving is to estimate the future cost of claims as the process would involve delays. How these delays
can occurs. (10 marks)
The objective of claims reserving is to estimate the future cost of claims. The insurance market and the
processing mechanisms that operate within it involve various delays. These 'delays' occur between:
Incident and notification of a claim to the insurer. There may be a delay between the date at which a loss
arises and the date the loss details are notified to the insurer (often via a broker - which can cause further
delay).
Notification and settlement of that claim by the insurer. An insured may have notified a claim to the insurer,
but settlement of the claim may take some time. For example, additional information may be required by
the insurer prior to settling the claim, or the insurer may have a processing backlog, which may delay
matters further.
Because of these delays, an insurance company will need to set up reserves in respect of these unsettled or
unnotified liabilities.
2. Discuss the many ways of Estimating and Reserving. (10 marks)
Whereas there are various methods that can be used to produce 'global' claims reserves (that is, reserves
covering the whole book of business) there is only one way to produce individual estimates - a case-bycase approach. Companies will usually place an estimate on each individual file in order to have a basis for
negotiation with the claimant.
a) Case-by-case estimates
This type of estimating involves making allowances for all the known facts about the claim (or classifying the
claims into homogeneous groups and ascribing a value to the claim on the basis of past experience with
claims in each group). For some types of claim (such as motor damage) this process can suitably be carried
out by computer. However, for larger claims (especially liability) the claim factors cannot be quantified
explicitly, and the process is carried out by claims assessors. In essence, a value is placed on each claim. An
allowance for direct claims expenses (such as loss adjusters' fees) is then added, and the result is adjusted to
take into account the estimated date of payment and likely changes in the intervening period such as
inflation, social change and legislative change.
Although experienced claims assessors possess a wealth of knowledge of the legal and claims environment,
it is possible that two assessors analysing the same claim file could produce widely varying claim estimates.
This reflects the fact that case-by-case claim estimation is not a science and that two apparently similar
claims can produce very different claim settlements.
Many companies use case estimates as the basis for their claim negotiations but utilise statistical methods
(explained below) for other purposes, such as their published and management accounts.
The actual procedure used can vary widely based on the class of business and the company involved.
One approach to producing global claims reserves is simply to aggregate the case-by-case estimates, and
to add an allowance for indirect claims expenses and IBIMR. Other methods involve the use of statistical
reserving methods (which we have defined as any method which does not rely on an examination of the
individual claim file). These methods are explained below.

b) Statistical reserving methods

The collapse of a number of UK companies in the latter part of the twentieth century and increased
regulatory supervision led to a greater need for more sophisticated and statistical reserving techniques. The
approach to reserving has developed over time to cater for large volumes of data and the varying
characteristics exhibited by different classes of business. The actual method used will depend upon:

the purpose for which it is required;

the volume of data;
the class of business;
the quality of data;
the types of claim; and
the company carrying out the projection.

The following are the most commonly used methods of claims reserving.
i.

Loss development factor method (LDF method)

The LDF method (also known as the 'chain ladder' method or 'link ratio' method) assumes (hat future claims
costs can be estimated by extrapolating historical claims information. This method relies on the inherent
assumption that the future development of claims will follow past claims experience. It is suited to more
mature classes of business which have a relatively stable development pattern.
ii.

Loss ratio method

This method relies on the use of estimated ultimate losses - i.e. the estimated aggregate amount for which
claims will finally settle, including claim expenses (if such expenses are included in the claims data being
projected). Under this method an estimated ultimate loss ratio (the estimate of ultimate incurred losses to
earned or written premium) is applied to the total premium for a class of business to calculate claims
reserves. This method may be used for new lines of business or classes of business with little development.
The loss ratio method produces stable results but does not take into account actual loss reporting. When
using this method, consideration should be given to the level of premiums. For example, in a soft market,
where premiums are reduced, this calculation is more likely to result in a lower claims reserve, which-may be
inaccurate.
iii.

Bornhuetter-Ferguson Technique (B-F method)

This method was developed in 1972 by two US actuaries and is a combination of the LDF and the loss ratio
method. Under this method, the reserves are initially calculated using the loss ratio method. The company's
actual claims experience is used to determine the proportion of total reserves that have not yet been paid
or incurred (known as the Proportion). This is calculated using the LDF method.
The projected ultimate claims figure results from adding the current value of claims to the undeveloped
proportion of the claims liability. This latter term is evaluated as the product of the Proportion (as defined
above) and the loss ratio (as applied to the relevant premiums). The reserves are calculated by deducting
the paid claims to date from the estimated ultimate claims.
This method is suited to classes of business where the reporting of incurred losses is more volatile or where
there is insufficient historical development. Such circumstances would include:

liability and other long-tail classes of business;

recently occurring accident years;
change in type of business written; and
new classes of business.

iv.

Exposure based calculations

This method is used for long-tail liability, such as asbestos, pollution and health hazard claims (APH claims)
and LMX claims. LMX claims arose from the London Market Excess of Loss spiral business in the 1980s as a
result of London market insurers reinsuring each other. For LMX business, the reserving specialist (usually an
actuary) can assess the maximum exposure by taking into account limits of liability and the number of
reinstatements (i.e. the restoration of the limit of liability after it has been reduced through the payment of a
claim).
With APH claims, in particular, it is difficult to determine any one accident year as it is hard to predict which
years will be triggered by the loss. By analysing the insured parties, cover written and sums insured, the
reserving specialist (usually an actuary) can calculate total exposure. By estimating whether these policies
will be impacted, based on rr irket knowledge, the reserving specialist can estimate a range of reserves
based on likely scenarios.
v.

Average cost per claim

This is similar to the LDF method. By analysing the claims history (in terms of claim numbers), the insurer can
estimate the number of claims and settlement pattern which will arise in future years. By applying the
average cost of claims to the number of claims it anticipates in future, the insurer can calculate the cost of
future claims. This method is suitable tor liability claims for personal injury, for example.
vi.

Benchmarking

In tracking trends, there needs to be some sense of the ultimate outcome, given what has happened
already. The information should help answer questions such as whether the insurer is on track to deliver the
plan and whether there needs to be a change in policy or in what action is being carried out. The basis of
benchmarking is to generate a set of expected values for a given monitoring period. These milestones, if hit,
would suggest a particular planned result. Comparing actual results to these milestones will provide an
indication of the extent to which the planned outcome will be achieved.
Another approach is to use a set of standard multipliers which will be applied to reported values to
generate projected claim values. In general, the larger these multipliers, the less reliable the projections will
be, since they are likely to contain a greater amount of error. They are also highly dependent on reported
claim values and can be skewed by large claims.
Where such multipliers would otherwise be large, it may be more realistic to assume the claim development
from IBNR results will be a percentage of premium earned to date. Although this technique would provide a
more stable claim projection than purely using claim multipliers, it is less sensitive to actual claim
notifications. The advantage, however, is that the tracking is relatively automatic rather than dependent on
extensive analysis which is generally inappropriate for monthly reporting.
A further option would be to adjust the earned premium pattern to allow for standard claim delays (when a
stable pattern can be demonstrated and no changes have occurred which might disturb that pattern in
the future). This would mean that, provided claims were reported according to that standard pattern, the
loss ratio as at each milestone would be constant in theory.
Benchmarking techniques at least ensure that comparisons are made on a consistent basis and they should
be sufficiently sensitive to identify significant variations from plan. They are, however, no substitute for
estimating ultimate loss ratios directly from the data.

vii.

A combination of methods

The company may well use more than one method in an attempt to produce what it considers to be the
most reliable claims reserve. For example, for a motor book of business, it is possible that the following
methods will all be used and the most appropriate result, or a point within the range of results, selected:

the loss development factor method (LDF method);

the loss ratio method; and
the Bornhuetter-Ferguson technique (B-F method).

3. There are many phases involve in outsourcing a function or sub-function. Analyze and discuss such
phases.(10 marks)
There are essentially four phases involved in outsourcing a function or sub-function:

assess the potential requirement;

choose a provider;
prepare the outsourcing contract; and
begin operations.

We shall analyse each of these in turn.

Assess the potential requirement
Ideally, an analysis of strengths and weaknesses should be performed in respect of the particular function or
sub-function potentially to be outsourced. This will produce a list of the specific weaknesses to be
addressed, which will help in determining the best choice of provider at the next stage of the process.5
Only in this way can an economic decision be made.
The potential gains and pitfalls of the following factors should be analysed:

strategy (e.g. concentration upon core activities versus dependency);

costs (e.g. cost savings versus additional co-ordination costs);
service (e.g. wider skills base versus quality management); and
personnel (e.g. fewer internal resources required versus legal issues).

We shall analyse the advantages and disadvantages of outsourcing in the following sections.
Choose a provider
The most important criteria in the choice of provider are:

experience;
cost; and
flexibility.

We shall analyse each of these in the context of the providers available.

Experience
The apparent experience of the outsource vendor is of paramount importance and can be ascertained
from:
references from current and former users, which are indicators of the total experience available;

 clearly defined service levels, which display the fact that the learning process has been completed.
A TPA, for example, will often agree so-called service protocols with the insurer. These set the
standards by which the provider will be judged. These cover such areas as:
turnaround times for advice on liability and investigations;
regular provision of management information;
attendance at meetings;
advice and payment arrangements; and
the quality of the processes used, which are an indicator of the provider's implementation
ability.

Cost
Although cost reduction is one of the main reasons for considering outsourcing in the first place, the cost of
the service is, paradoxically, not the most important factor when considering which provider to choose. This
is explained by the fact that the biggest potential problem in outsourcing - that of choosing an
incompetent service provider - is considered more vital. An inappropriate choice could damage the
insurer's reputation.
On a subject related to cost, fee arrangements usually vary according to the type and number of losses to
be handled and the level of service required. Fixed fees per claim may be offered on bulk but rarely on
complex claims, as such long-tail exposures (e.g. liability business) require a more structured approach to
remuneration to be negotiated, to include some allowance for the length of time spent on the claims.
However, problems can arise when the provider is paid purely by the hour since it can be difficult to review
the actual work performed.
Flexibility
Flexibility in this sense relates to the outsource vendor's willingness to adapt its standard service, and even
fee arrangements, to meet the specific requirements of the user organisation.
Flexibility can be demonstrated by:
the inclusion in the contract of service of certain additional services, such as monthly status reports
on large claims, as standard with no extra charge;
willingness to amend the format of management reports to fit the organisation's standards;
with regard to reinsurance, the adaptability of the consultant to meet the needs of the claims
department, whatever they might be, on a mutually agreeable fee basis.
In essence, the user should be provided with the service which meets its specific requirements (covering
those areas of weakness highlighted in the strengths and weaknesses analysis) rather than being required to
accept an off-the-shelf service which suits the service vendor.
Prepare the outsourcing contract
This will cover the scope of the duties to be outsourced; detail the service protocols referred to above; and
provide a clear definition of the fees payable.
Begin operations
In accordance with the outsourcing contract a certain date will be set for the commencement of the
operations.

In the insurance industry, the first three phases - assessing the potential; choosing a partner; and preparing
the contract - should take no more than a few weeks. The outsource vendor is usually ready to start
operations immediately.
4. What are the responses of reinsurance consultants to the changes in the reinsurance market, on
outsourcing? (10 marks)
Naturally, many of the issues regarding the decision to outsource and the advantages/disadvantages of
outsourcing apply equally to the reinsurance industry. However, differences in emphasis, such as the
demand for such services, are worthy of comment.
Market changes favouring outsourcing
Firstly, the claims management sector has been heavily affected by the unprecedented change in the
global reinsurance market during the past two decades. Frantic merger and acquisition activity during the
1990s has followed the emergence of latent loss exposures and a concentrated spate of natural
catastrophes. This has led to a dramatic rise in the number of reinsurance companies running-off their
liabilities.
The cumulative effect of these changes is:

a drive to reduce costs, including claims costs;

an increased claim workload, especially with respect to latent claims, e.g. those related to asbestos,
which require high reinsurance technical skills (such as a thorough understanding of loss
aggregation);
skills shortages in reinsurance companies, resulting from acquisitions or from staff preferring not to
work in the run-off sector; and
a more litigious environment where legal arguments, for example that claims are time barred, have
been used as technical barriers to paying claims.

Thus there would appear to be an increased demand for a skilled claims resource as offered by outsource
vendors.
Market changes precluding outsourcing
However, certain factors have reduced the demand for outsourcing:
the reinsurance mergers and acquisitions have increased the size and expertise of in-house claims
resources;
reinsurers are becoming increasingly global which makes outsourcing to external companies
concentrating their efforts in one geographic area less attractive; and
reinsurers are generally reluctant to hire permanent external assistance in the claims area due to the
perceived loss of control and possible increased costs.
The response of reinsurance consultants
In order to combat these problems, service providers are adapting to keep up with changes in the market
and have sought to provide reinsurance claims assistance on a temporary basis to address problems of:

excessive workload;
skills shortages, particularly in relation to latent claims;
development of a corporate claims philosophy; and
claims department reorganisation and strategic review.

5. What are the main types of intermediaries? Identify and explain in brief. (10 marks)
Until January 2005 the General Insurance Standards Council (GISC) provided voluntary regulation for
insurance intermediaries in the UK. The introduction of the non-statutory regime of the GISC in part replaced
the Insurance Brokers Registration Council (IBRC), which ceased to carry regulatory weight with the repeal
of the Insurance Brokers (Registration) Act 1977 (IBRA).The role of the GISC was taken over by the Financial
Services Authority (FSA) in January 2005.
The FSA-was given its full powers and responsibilities on 1 December 2001 (known as N2) under the Financial
Services and Markets Act 2000 and it became the single statutory regulator responsible for regulating
deposit taking, insurance and investment business. In December 2001, the Treasury decided to extend the
FSA's powers to include insurance sales and administration from January 2005. Consequently, by January
2005 companies and individuals selling general insurance had to be authorised by the FSA
The CISC recognised several types of insurance intermediary, which are now regulated by the FSA. We shall
consider these in the following sections.
Independent intermediaries
An independent intermediary is one who is capable of offering advice on the basis of a fair analysis of the
market. Following the repeal of the Insurance Brokers (Registration) Act 1977 any such intermediary can call
themselves a 'broker' if they wish to do so.
Independent intermediaries act on behalf of their clients not the insurer when placing business and
demonstrate their expertise by recommending to their clients the most appropriate insurer for their needs.
As well as placing the risk, many independent intermediaries offer other services to their clients such as:

risk management;
claim notification;
recovery of uninsured losses following a claim incident;
mid-term changes;
reviewing client needs; and
negotiating renewal.

Lloyd's brokers
In order to act as a broker at Lloyd's it is necessary to be accredited by Lloyd's. In order to do so they must
satisfy Lloyd's as to their expertise, integrity and financial standing. They must also satisfy the requirements of
the FSA's rules for independent intermediaries. Only those accredited as Lloyd's brokers are permitted to
place insurance with Lloyd's underwriters in the Room at Lloyd's of London.
Appointed representatives
An appointed representative is an individual or company appointed by an 'authorised person' under the
terms of a contract. Appointed representatives do not have to be authorised by the FSA because their
principal, the 'authorised person' (usually an insurer or another intermediary), takes full responsibility for their
actions.
The appointed representative can represent as many principals as they choose, in which case a multiple
principal agreement will be required. Generally, however, the complexities involved limit the number of
principals it is practical to represent.
Appointed representatives are often those whose main occupation is not insurance, such as motor
garages, freight forwarders and associations, who are in a position to introduce insurance business to an

authorised person. They may also simply be firms which, though their main occupation is insurance, decide
that they do not wish to take on all the compliance responsibilities associated with being authorised.

Multi-tied agent
A multi-tied agent is one who, in respect of any product type, offers or sells the general insurance products
of only one insurer. They may in fact offer the products of many insurers but for each product type they may
only offer the product of one insurer.
Single-tied agent
A single-tied agent only offers the general insurance products of one insurer.
Long-term insurance
Intermediaries involved with long-term insurance and other financial products are also regulated by the
State under the auspices of the FSA. Unlike general insurance, appointed representatives can only represent
one principal.
6. Define Delegated Claims Settlement Authority and Parties operating under the same.(10 marks)
We can define delegated claims settlement authority as:
The transfer of the decision making process of a self-insurer, insurer, or reinsurer (the 'delegator') to accept or
reject a claim, to another party (the 'delegatee').
Parties operating under delegated claims settlement authority
The delegation is made by:

a self-insurer (such as local authorities, utility companies and large corporations);

an insurer;
a reinsurer; and
an insurer's agent which itself has authority to delegate this function.

Delegation is made to:

another underwriter - either as a leading underwriter for following underwriters or one pool member
with authority to settle on behalf of other pool members;
agents of the insurers (or reinsurers) which include:
a. third party administrators - these are claims handlers and co-ordinators of the claims
investigation process who are responsible for the handling and management of the portfolio
of claims delegated to them. They may form part of a loss adjusting company or be entirely
independent,
b. loss adjusters - these are professional claim investigators appointed by insurers to investigate
marine, aviation and fire claims as well as large claims in other types of business. They are
usually given a specific scope of authority within which they are free to make their own
decisions. In the first instance their role is merely to report the circumstances and
approximate extent of the loss to the insurer,
c. other agents - occasionally, insurers will authorise solicitors or brokers to agree settlement on
their behalf. In addition, brokers may have settlement authority delegated to them under the
terms of a binding authority,

d. underwriting agents - who have such authority in accordance with the terms of the
underwriting agency agreement,

e. Lloyd's agents - these are situated in the leading ports and cities of the world. They either
conduct loss surveys or arrange for such surveys to be carried out. If appointed as claimsettling agents they have the authority to settle claims abroad and this function operates as
a separate entity within Lloyd's. As way of background, there are presently some 900 such
agents (and sub-agents). They are not salaried employees of Lloyd's but charge their
individual principals for the services rendered on their behalf.

Long Question
1. There are advantages and disadvantages brought upon by outsourcing of Claims Function. Analyse and
discuss through the 4 main areas of :i) Strategy
ii) Cost
iii)Service and
iv)Personnel
(20 Marks)
i.

Strategy,

By this we mean management strategy for the future direction of the insurance/reinsurance organisation.
Here the advantages of outsourcing are:
Concentration upon the core activities of the insurance/reinsurance company. However, the core
activities themselves require definition before it can be decided what functions to outsource. If we
define core activities as those key activities of an organisation which serve to make it unique, then
many insurers and reinsurers may regard the claims function as a core activity (e.g. attracting or
retaining customers on the basis of excellent claims service). Some, however, may regard
themselves as being in the risk management or perhaps asset management business and consider
their financial strength in relation to risk transfer to be their core activity.
Possibility of radical change in the structure of the company, especially in the IT area. Outsourcing
can often turn out to be a trigger for change in the organisation: for example, lean and efficient
business processes may need to be implemented and unnecessary hierarchical structures swept
aside. In the area of information technology, outsourcing often proves to be an 'agent of change'
with existing IT structures being revised.
Transfer of economic and technological risks (such as the obsolescence of computer hardware and
software) to the outsourcer.
ii.

Cost,

Outsourcing often, but not always, results in a saving over the cost of carrying out the function in-house. This
may be explained by:
the provider's specialisation in the area (leading to higher efficiency);
economies of scale;
office locations in a lower rent environment, possibly within the UK, but often abroad (e.g. India);
and
the provider's pro-active approach to claims handling (resulting in lower claims costs).

Increased cost-consciousness in the organisation resulting from the process of analysing the internal costs of
processing claims may also lead to a cost reduction as a side-effect.
iii.

Service

By this, we mean the service available to the customer (the insured). Higher standards of service may be
achieved through the improved performance of the computer system as a result of access to new
technology; and through access to a wider skill base (for example, the provider may employ several
specialists in liability claims analysis, whilst the insurer or reinsurer requires such a skill only occasionally).
iv.

Personnel

The advantages of outsourcing are:

releasing the management from routine work;
reducing the personnel requirement (and associated problems) in the outsourced area; and
avoiding peaks and troughs in workload and personnel requirements.

The disadvantages brought upon by outsourcing of Claims Function can similarly be categorised under the
following headings:

i)

strategy;
costs
service; and
personnel.
Strategy

The strategic disadvantages of outsourcing lie in three main areas: loss of control over the outsourced
function; reduction of in-house expertise; and dependence on the service provider.
Loss of control
This is as much an emotional issue as a practical one: managers like to be in control. Whereas internal
management, and the claims manager in particular, can control each stage of the claims process when it
is handled internally, this control will be lost, or severely reduced, by the use of outsourcing. Critically, the
corporate claims philosophy previously interpreted by internal staff may be less strictly interpreted by the
outsource provider, resulting in higher claim payments. The promises of the external supplier may not be met
in practice. Frequently, the only method of guiding the service provider is to audit them regularly and
provide feedback. This process is by definition costly and takes up the insurer's time, which may go some
way to outweighing the initial perceived benefit.
Lack of expertise
Outsourcing can result in the opportunity to develop in-house expertise being lost - if an external company
deals with all of the complex claims, how can an internal claims department develop expertise in such
claims?
Dependency
A company can become highly dependent on its outsource service provider. This dependency can arise in
two main ways:
After handling the claims for a few years, the provider is likely to be the only party fully conversant
with the technical and IT requirements.

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 There can be a 'snowball effect' with future outsourced functions or sub-functions being likely to go
to the same provider since a working relationship will have been developed and the IT structures will
be known.
Dependency may prove problematic if the provider decides to exploit the situation, or if service
deteriorates.
Costs
Some industry sources suggest that savings from outsourcing are overstated, and that it does not always cut
costs. Instead, most decisions to outsource are driven by management choosing to focus on their core
activities. The problem with measuring the cost reduction, if one exists, is that the comparative cost of
keeping the function in-house is often difficult to calculate precisely. In addition, when the issue of renewing
the outsourcing contract arises, the insurer/reinsurer may no longer possess the resources (either personnel
or IT) to offer the service internally, thus making the provider's tender price the only viable alternative.
Particular problems with costs are:

The occurrence of unforeseen problems. Classic examples are:

o IT incompatibilities or difficulties;
o legal headaches; and
o deadlines not being met. This is exacerbated if the fee is time based.
Extra co-ordination, audit and review costs.
The provision of extra services. It should always be borne in mind that the service provider is itself
profit-making and will tend to maximise any opportunities to provide extra services, which are often
charged on an hourly fee basis.

Service
The user may experience problems with the quality of the outsource service provided to customers. The
outsource provider may also fail to take into account the importance of retaining business from major
insured customers when handling claims, whereas this would be an important consideration for the user.
Personnel
The disadvantages of outsourcing from a personnel perspective are:

if one function is outsourced, employees carrying out other functions may feel uneasy about their
own future prospects; and
in the event that internal staff are employed by the outsource provider, there may be legal and
contractual issues to overcome.

Most significant disadvantages

The greatest disadvantages are:
relinquishing exclusive control to the service provider;
high dependency on the service and the provider; and
loss of opportunity to retain and develop expertise in-house.

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2. There are expected roles by intermediaries in Claim Process. Discuss the roles expectation from an
intermediaries (20 marks)
Role of the intermediary in the claims handling process
When the insured wishes to make a claim, the intermediary is often involved by advising the insurers
concerned and by collecting the claim money. The intermediary's presence eases the flow of information to
the insurer, and relieves the insured of the need to communicate with different co-insurers, if more than one
insurer is involved in the risk. The intermediary provides a channel of communication and supplies the
expertise necessary to minimise misunderstandings between the two parties.
The actual procedure for handling claims varies according to the class of business, the type of cover, the
amount of the claim, and whether it is a personal or commercial risk insured.

Indirect roles

There are certain roles performed by an intermediary which, although not directly related to claims
handling, have an important impact on the ability of the insured to recover from their insurers. We refer to
these as indirect roles. Such roles include helping the insured to choose the right policy and to disclose all
material information.

Selecting an appropriate insurance policy

The ability of the intermediary to:

recommend the appropriate type and level of insurance cover;

recognise subtle differences in cover between the various policies on offer; and
select an insurer which provides an efficient claims service;

will often increase the ease with which the insured makes claims recoveries or, alternatively, reduce the
likelihood of a claim dispute arising.

Disclosure of material information

At proposal, the intermediary can be acting as agent for both the insurer and the insured. It is essential to
ensure that all information material to the risk is disclosed to the insurer, as otherwise the insurer may have
the right to avoid the contract for non-disclosure or fraudulent misrepresentation in the event of a claim.

Direct roles

The intermediary can have a considerable impact on the efficient handling of an insured's claim. Specific
roles include providing assistance in various aspects of the claim process. The ICOBS rules give specific
direction to intermediaries involved in the handling of claims. They are required to act with due care, skill
and diligence and to avoid conflicts of interest.

Claims notification

Where an intermediary is involved in the purchase of an insurance contract, notification of any claims
arising under it normally takes place via the intermediary. One of the key claims provisions in an insurance
contract is the condition requiring the insured to notify the insurer of a possible claim within a reasonable
time following the loss occurrence. The purpose of this condition is to enable the insurer to take steps to
investigate claims (or occurrences which might give rise to claims) in order to minimise its exposure under
the policy. It enables loss adjusters and lawyers to be appointed and generally allows the circumstances to
be investigated so that detailed evidence is not lost. In addition, it gives insurers the opportunity of
investigating possible recoveries from third parties. The key issues with regard to the notification condition
are:

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 Those circumstances that must be notified to the insurer - this depends upon the class of business. For
certain policies notice of every accident which occurs is required. Other policies require notice of
any 'circumstances which might give rise to a claim'.
The timeframe specified in the contract - this also depends upon the precise policy wording. It may
range from a specific timeframe such as 28 days, to a less specific period such as 'as soon as
reasonably practicable'.
The consequences of the insured failing to notify in a timely fashion. In most cases, the insured will be
liable to pay damages to the insurer for the extra expense flowing from the insured's late notice, if
prejudice can be demonstrated.
Irrespective of the class of business involved or the particular policy wording, it is clear from the above that
the intermediary should draw the insured's attention to the need to:

notify claims (or even potential claims) promptly; and

disclose all material facts in relation to the claim. (If the intermediary is concerned that the insured
has not reported the claim in a true and proper manner the intermediary should ask the insured to
make a true, fair and complete disclosure.)

It should be noted that, legally, the insured's notification of loss to the intermediary is not deemed to be
notification to the insurer - Roche v. Roberts (1921). Therefore, the intermediary must ensure that the insurer is
informed of the claim in a timely fashion.
In the event that third parties are involved in the loss, the insured should be asked to pass on to insurers,
unacknowledged, any communication which may be received from a third party. This is because insureds
may lack the necessary expertise and may prejudice the insurer's position if they attempt to deal with third
parties themselves.
It is important for the policyholder to notify claims quickly to avoid the insurer missing the tight deadlines
involved in the Civil Procedure Rules. Although these rules only apply where claims result in litigation, it is
good claims management practice to follow this procedure for all claims. Since it is impossible at the outset
to tell with certainty whether or not a claim will result in litigation, insurers need a system in place to respond
to the issuing of proceedings. They must be able to say why the defendant is not liable and be able to
substantiate this with evid nee. The key issue is the speedy investigation of the claim as soon as it is notified.
Immediate notification by insureds of loss events (e.g. policyholders informing insurers as soon as an
accident happens and forwarding of letters of claim received from third parties) is imperative and brokers
must play their role in this process.

Help with claim documents

Intermediaries often complete, or assist the insured to complete, the claim form to be presented to the
insurer. In addition, other documents or information (such as correspondence or copies of cover notes or
policies) needed in support of the claim may also be provided by the intermediary.

Claim review

The intermediary will want to review the claim for two main reasons:

to identify any area that may otherwise delay the claims agreement and settlement process. In
essence, this involves ensuring that all the required information has been provided with the claim
presentation and that no obvious mistakes have been made by the insured (such as not deducting
the excess);

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to ensure that they fully understand the circumstances of the claim to enable the claim to be
broked to the insurer, if appropriate.

The intermediary reviews the claim details provided by the insured and relates the circumstances of the loss
to the terms and conditions of the insurance policy to determine whether the claim falls within such terms
and conditions. The onus is on the insured to prove that they have suffered a loss by a peril which is insured
by the policy. Some of the questions considered by the intermediary may include:

Is the claim covered by the policy?

Do any policy exclusions apply in the circumstances of the loss?
Has the insured complied with relevant policy conditions including payment of the premium?
Has the insured complied with any warranties imposed by insurers?
Has the insured applied any applicable deductible?
Is the insured submitting sufficient proof of loss?
In the event of a third party claim, are sufficient details of the third party and the third party's cause
of action provided? This is required in order for the insurer to take steps to protect their, and their
insured's, interests.

If the intermediary feels that additional or more detailed information will be needed by the insurer, the
matter should be discussed with the insured and further information or confirmation provided.
Under the Civil Procedure Rules, immediately the claimant has sufficient information available to sustain a
realistic claim, they should send two letters of claim to the potential defendant. (This claim does not need to
address the quantum issues in detail.) The claimant is encouraged to supply more detailed information
about the claim such as a full summary of the factual background at an early stage. This is referred to by
some as the 'cards on the table approach'. The intermediary should emphasise this methodology and
educate the policyholder in respect of the procedures which should cover their requirements, as well as the
consequences of non-compliance.
As noted above, responding to the claimant (i.e. the insured or a third party) is largely governed by the Civil
Procedure Rules. In general terms, the insurer (or the insured) is required to convey their claim decision within
three months of the date of the defendant's acknowledgement of a letter of claim from the claimant. This
response can be either:

admit liability (i.e. accept the claim in broad terms); or

deny liability, giving reasons.

In addition, the insurer must provide standard disclosure of relevant documents which substantiate their
reasons for denying the claim . In practice, depending upon the circumstances of the claim, there is also
the possibiiity of the insurer making an offer of settlement to the claimant. (This is referred to as a Part 36 offer
under the Rules.) The intermediary must ensure that they play their role in helping the parties meet the tight
deadlines involved by providing a swift and effective communication channel between the insured and
the insurer.

Recording and monitoring of the claim

An intermediary, upon receipt of a claims advice, will establish a claim file with all the relevant information
including all coverage documentation. In addition, the claim will be logged on the computer system.
Thereafter the progress of the claim will be monitored through to claim settlement. The intermediary should
be able to identify and review any claims which are not being progressed within expected timeframes.
Action should then be taken to ensure that the settlement of the claim is progressed without unreasonable
delay. This is especially important in light of the tight deadlines and sanctions by virtue of the Civil Procedure
Rules.

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The monitoring process can be assisted by the use of computer reports which highlight those claims which
are progressing too slowly.

Claims negotiation/broking

If the claim is of a type that requires the intermediary to meet with the insurer's claims handler, the
intermediary is undertaking a claims broking role. Whilst this function is rare in relation to personal insurances,
which are often submitted direct to the insurer, many commercial risks and most marine and aviation claims
are 'broked* by face-to-face contact or electronically.
Broking a claim involves:

making arrangements to present the claim to the insurer;

discussing the claim (and any related matters) with the insurer;
answering any technical questions regarding the claim presentation;
noting any queries which have been raised by the insurer. Such queries may require clarification,
confirmation or the provision of additional documentation by the insured.

The intermediary uses the following knowledge and skills in the claim broking process:

familiarity with the insurer's policy wording;

understanding of technical insurance issues;
negotiation skills, including the ability to present facts in the best light; and
awareness of arguments that have been successfully utilised against insurers in the past.

The insured may not possess the same experience and knowledge, unless it is a company with a dedicated
risk manager handling its insurance requirements.

Communication of insurer's and insured's position

Where an intermediary is involved in the claims process, they will play an important role in ensuring that
proper lines of communication are maintained.
By assisting both sides to communicate openly with each other, intermediaries undertake a valuable role in
ensuring the efficient and proper handling of the claim.
For example, if the insurer is not completely satisfied with the claim presented, it may raise questions or even
deny liability for the claim. An intermediary's ability to understand these concerns, convey them to the
insured and obtain satisfactory responses may go a long way to resolving the insurer's concerns.
Similarly, in the event that an insured is unhappy that a full recovery cannot be made, the broker may be
able to explain the technical reasons why such recovery is not possible in the circumstances. The Civil
Procedure Rules emphasise the need for co-operation between the parties and regard litigation as a last
resort.

Claim settlement

Once the insurer has admitted liability for the claim and quantum has been negotiated between the
parties, it will often convey through the intermediary its intention to settle the claim. In many cases, and
depending upon the type of business involved, the intermediary is involved at every step of the way,
continually acting as a go-between for the two parties.
The insurer may agree to settle the claim on an 'ex gratia' basis - literally payments 'out of grace', which are
not based on any contractual obligation. Such payments are made where:
hardship may be created for the insured or a third party claimant;

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 the insurer wishes to avoid the possibility of souring good business relationships; and/or
the insurer wants to avoid possible adverse publicity.
Ex gratia payments are made 'without prejudice' to the insurer's position (i.e. they cannot be cited in court
in subsequent court cases in similar circumstances). In other words, they do not create a precedent.
In effect, the insurer is not satisfied that the claim is covered under the terms of the insurance policy but is,
nevertheless, prepared to make an offer of settlement. The intermediary's role is to inform the insured that
the insurer is making a settlement offer on this basis and to explain the reasons for the insurer's actions.

Recommendations to insured in event of a claim dispute

The vast majority of claims are settled to the satisfaction of both the insured and the insurer. In the main,
disputes tend to concern:

the liability of an insurer to pay a claim;

the amount which should be paid (quantum).

In either of the above circumstances, it is the intermediary's role to:

inform the insured and seek instructions; and

advise the insured on an appropriate response or course of action.

Such advice may include one or several of the following courses of action:

drafting a suitable response to the insurer explaining the insured's position;

meeting with the claims handler or senior personnel at the insurer's office to explain the insured's
position;
recommendation of an expert witness to form part of the insured's short-list of candidates;
negotiation of a compromise or ex gratia payment;
helping the insured to follow the insurer's grievance procedure;
helping the insured submit a claim to the Financial Ombudsman Service;
recommending that the insured take legal action against the insurer and suggesting a suitably
qualified solicitor, if not already appointed. In this event, the requirements of the civil procedure rules
need to be followed.
Funding of the claim

In the event of:

a claim being presented by a major client of the intermediary; or

delay in settlement of the claim by the insurer; or
the intermediary believing that settlement of the claim will take place in due course;

the intermediary may be prepared to make payment in settlement of the claim from its own funds, prior to
having received settlement from the insurer. This practice is known as 'funding'.
Whilst this action will no doubt maintain the goodwill of the insured towards the intermediary, there is a
danger that funds will not in fact be received from insurers. This practice is therefore only undertaken in
exceptional circumstances - usually when the insurers have confirmed that they have agreed the claim and
will be making payment by a stated future date.

Remuneration of intermediary for roles performed in the claims process

Even though insurance intermediaries are usually agents of the policyholder, they are paid commission by
the insurer. This payment is usually calculated as a percentage of the premiums and is usually between 5%

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and 30%, depending upon the class of business. It should be noted that there is no separate payment for
the intermediary's role in the claims process.
The fact remains that assistance in the claims process is viewed as one of the constituent parts of the
services provided by the intermediary in handling the insurance requirements of the insured. Unsatisfied
customers are likely to take their business elsewhere or insure direct (i.e. without the involvement of a
broker).

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