By ALLEN MELTON, a partner and the Americas Leader of Ernst & Young LLP's Insurance Claims Services group; and RYAN PRATT, a senior manager in the Insurance Claims team. Together they have more than 30 years of experience assisting companies to measure, prepare and resolve complex claims resulting from catastrophic loss including property damage and business interruption loss.
Catastrophic events over the last decade have highlighted the need for increased disaster planning and a well-thought-out approach to risk management and insurance when facing "the big one." Whether it is widespread devastation, like Hurricane Katrina, or a fire at a single facility, companies handle their response to disaster in different ways.
In an inaugural Catastrophic Claims Survey, conducted in February, Ernst & Young's Insurance Claims Services group and Risk & Insurance® set out to determine the trends and contrasts of how companies prepare for and respond to catastrophe and financial recovery.
Risk & Insurance® readers were surveyed on topics ranging from business continuity planning to property and business interruption claims handling and settlement. The survey covered questions related to disaster preparedness, property insurance coverage and experience with the claims process. The more than 300 survey responses shed light on the interaction between insureds and insurers during the claims process and the impact of this interplay on a company's ability to respond quickly, successfully settle claims and maintain a positive relationship with their insurers. Along with some new discoveries, the survey found that the keys to successful claims resolution lie in planning, communication and, ultimately, how insureds react to catastrophic loss.
BUSINESS CONTINUITY PLANNING
Business continuity planning (commonly known as BCP) has become more prevalent--almost a requirement--as the complexity and global reach of businesses grow. In this survey, 70 percent of respondents indicated that their company had a plan in place. While BCP is certainly not a new concept, it is one that has gained more popularity in recent years after events like September11 and Hurricane Katrina. Nearly 60 percent of business continuity plans have been in place less than five years.
The most effective continuity or disaster recovery plan adapts as your business changes. Test it, tweak it and keep it current, as it could be the difference between operating your business through a disaster and standing wounded on the sideline. The plan shouldn't be left on a shelf to collect dust.
That sounds like a good idea, but is it doable? With resource constraints, a struggling economy and ever-mounting internal and external demands on senior management, do companies have time to review and revise these plans? According to the respondents, the answer is a resounding yes. Nearly 90 percent of business continuity plans in place are reviewed and updated at least annually.
BUSINESS CONTINUITY PLANNING AND THE CLAIMS PROCESS
Q: 70 percent of respondents have a business continuity plan in place, but how well do they know their coverage?
1 in 4 respondents were unsure of the breadth of their business interruption coverage.
Most business continuity plans focus on the business, thus the name. Identifying the effectiveness of a company's plan on the ultimate insurance recovery can be difficult during a crisis, but the survey results can show the impact BCP has on the claims process. (See Figure 1.)
Based on the responses in Figure 1, companies that have a plan in place to respond to disaster believe that they are more successful in resolving their claims--by more than a 20 percentage-point spread. But the best laid plans may not ease the burden of actually going through an insurance claim. Nearly 40 percent of all respondents indicated that the property and business interruption claims process is Difficult to Very Difficult, and this answer did not change significantly between companies with or without a business continuity plan.
These results reveal that the vast majority of business continuity plans do not include a plan for insurance recovery. Typically there are plans for personnel, data, technology, logistics and the like. But laying out a road map for assembling a claims team, gathering and verifying information to support the claim and managing expectations--both internal and external--for the rigors of the claims process is rarely a mainstay in even the most thorough of business continuity plans. And while developing this kind of comprehensive claims plan may be new for most companies, the process is easily started and can begin with a simple conversation.
Insurance is a series of financial transactions. Transaction 1--At the onset, one party puts money in and receives an asset, the insurance policy, in return. In the unfortunate event of catastrophic loss, that same party will now take money out--Transaction 2.
Let's look at the first transaction. During the placement of insurance, there is constant communication between the insured and the insurer. Terms are laid out and discussed, insurable values are shared and pricing is communicated. Meetings are held to initiate the relationship, to discuss options for coverage and plan structure and ultimately to finalize the insurance agreement. And at renewal, the whole process starts again. Some insurers even further enhance communication by offering engineering, safety and risk consulting to strengthen the relationship.
Eventually, the second transaction will happen. A loss event occurs and the payer becomes the payee. Too many times, in a relationship that almost always starts with regular communication and collaboration, the conversation breaks down. In the survey, one in four respondents rarely talked with the adjuster assigned to their claim. Even more telling, one in three respondents stated they met with a representative from their insurance carrier once or never during the claim process.
This lack of communication may explain why nearly two out of five respondents believe that going through the claim process is difficult. In the event of a serious loss, a company is thrown into a tempest as management tries to recover their business, rebuild and restore a sense of normalcy. It is natural to become insular during this time to protect your people, your customers and your market share. But a company's long-term success and financial recovery are tied directly to the financial relationship with its insurer that started with consistent communication.
Figure 2 contrasts those companies that worked with their insurers during the claim process and those that had neutral to combative interactions with the insurers' representatives.
The polarizing effects of communicating (blue) and not communicating (red) on the ease of the claims process can be seen in the large circles in Figure 2. Simply put, the more constructive communication that occurs between the parties, the better the result. While a healthy dose of professional skepticism, on both sides, is inherent in the insurance claim process, this should not translate into a breakdown in communication between the parties.
COMMUNICATION AND EXPEDITING FINANCIAL RECOVERY
40 percent of respondents said they provided regular updates of their claim to insurers, but 1 in 4 never received an advance.
Moral of the story:
The answer is always 'No' to any question you don't ask.
Effective communication will enhance not only the claims experience, but it also may aid in expediting recovery. Surprisingly, two out of five respondents stated that they never received an advance on their claim. Many times this is attributed to a deficiency in the claims process, and the insurer bears the brunt of the blame.
But let's look at how communication affects the flow of insurance proceeds. Figure 3 contrasts those respondents who regularly provided claim updates to their insurers and those who provided the measurement of their loss after the period of indemnity ended. (See Figure 3.)
The insured has a duty to prove its claim. But it's not merely an insurance requirement. It's good business. Regularly updating your claim with properly vetted information, presenting it to insurers and asking for advances along the way offers more than the obvious result of easing the claims process. It also provides greater opportunity to enhance cash flow, to resolve outstanding claims elements and expedite your ultimate recovery on the claim, no matter its size.
SIZING UP YOUR CLAIM
When assessing how the size of a claim affects how it will be viewed by insurers, perception may not always equal reality. Perception: 60 percent of survey respondents stated that they could not tell the difference or that there was no difference in the handling of larger insurance claims by carriers. Reality: Analysis of specific questions related to the claims process tells a different story.
Typically, with larger insurance claims, more analysis, scrutiny and attention are applied by both the insured and the insurers, as there is more riding on its outcome. In most cases, this results in a longer, more drawn-out claims process that requires significant resources from the insured and can prove to be more difficult in the end.
Figure 4 contrasts the respondents' experiences dealing with smaller and larger claims, with the bar set at $10 million.
As Figure 4 shows, larger claims take longer to resolve, and the process is significantly harder to manage. More than two-thirds of respondents with claims larger than $10 million stated that the insurance claim process is Difficult or Very Difficult.
INSURANCE CLAIMS AND DISPUTE RESOLUTION
Q: Does going through litigation on your claim get you more money?
No. About 75 percent of claims that went to litigation did not result in a positive impact to the insured's recovery.
Insured and insurer don't always see eye-to-eye on claims. There may be coverage or measurement issues, frustration with the process or simply personality conflicts. When the parties are unable to find common ground, there are several courses to be followed to resolve these disputes. For purposes of reviewing the survey results, we will consider the appraisal, mediation, arbitration and litigation processes as one--Dispute Resolution.
Claim size once again plays a role when assessing a claim's predisposition to end in dispute. One in five claims greater than $10 million ended in dispute resolution, while smaller claims were only disputed about one in 10 times.
With the information we have, we can observe that what is gained from the dispute resolution process is not much. Only about half of the claims that went through dispute resolution ended in successful or very successful outcomes. In contrast, those claims settled via the normal claims process ended successfully 80 percent of the time.
But there is hope--a light at the end of the proverbial tunnel. While larger claims tend to take longer, are more difficult to manage and are potentially more contentious, this does not mean policyholders are destined for failure. In fact, quite the opposite is true. The survey results show that regardless of claim size--greater or less than $10 million--about three-fourths of respondents in both categories believe their claim was resolved successfully or very successfully.
WHO IS DRIVING THE CLAIM?
From beginning to end, property and business interruption insurance claims have a life of their own. Claims began with a whirlwind of activity as the business strives to regain its footing, sets recovery plans in motion, engages resources to rebuild and restore, and gathers and assimilates information. As the recovery and claim progresses, this life can become mired in the monotony of daily work and responsibilities. It is imperative that a plan is in place to drive the claim toward settlement and that the right people and processes are in place to execute that plan.
Determining how companies navigate the claims process again depends largely on the size of the claim. For smaller claims, respondents were satisfied to handle the details in-house or rely on consultants provided by their insurers. However, as the size and complexity of the claim grew, respondents found it beneficial to hire their own independent experts to assist in the preparation and resolution of their claims.
Ultimately, it is the insured's claim. The insured has a duty and self-interest to prove it. Whether they go it alone or seeks help, one thing remains: they must drive the claim process toward resolution. Through planning and a proven approach to recovery, constructive communication with the insurer and the proper management of the claim, the insured can expedite the claim process. They can realize the full value of the claim while maintaining the positive relationships they have built with their insurers.
Based on the results of this survey, 90 percent of the respondents with a business continuity plan in place, maintained an amicable relationship with their insurers throughout the claim process, met with insurers and their representatives and communicated the status of their claim on a regular basis believe that they resolved their claim successfully.
The key is to take control of the insurance and risk management process. From planning to response--from preparation to documentation--know the business, know the coverage and understand the claim. It will ultimately mean the difference between success and failure in the recovery of the business, the resolution of the claim and the ongoing relationship with the insurer.
The views expressed herein are those of the authors and do not necessarily reflect the views of Ernst & Young LLP.
May 1, 2010
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