TWO MINDS ARE BETTER THAN ONE

Rob Bickerton, B.Comm (Hons), CFE, CIM, CRM, FCIP, FCSI, FMA, LPCS, RPLU Senior Underwriter, Corporate Risk Division The Guarantee Company of North America

Prelude

All successful people, men and women, are big dreamers. They imagine what their future could be, ideal in every respect, and then they work every day toward their distant vision, that goal or purpose....Brian Tracy

This paper seeks to outline an admittedly idealistic situation - an insurer's own claims adjusters and underwriters coordinating and sharing information to achieve the best results for all parties concerned. For the majority of insurance companies, claims adjusting and underwriting functions are kept strictly isolated from each other to support both independence in-appearance and in-fact. However, there are some insurers, albeit a minority, that have achieved benefits by encouraging coordination and interaction between the claims and underwriting functions.

Introduction

By virtue of their direct interaction with insureds, claims adjusters are positioned to learn from insureds' loss situations and to share these lessons with underwriters. Underwriters also bring a unique perspective worthy of sharing with claims adjusters. Good coordination and information sharing between claims and underwriting personnel can lead to benefits for all those with an interest in the insurance transaction (for the purposes of this article: insurer, insured and the broker).

The Premise

Valuable information can be shared as a result of good coordination and information sharing. This can occur before a claim, during investigation of a claim and after settlement of a claim. Consider the following situations (not meant to be an exhaustive list):

• Underwriters and claims adjusters meet regularly to discuss emerging trends in claims situations.
• Claims Department notifies underwriters upon receiving a new notice of loss, updates on current claims cases and/or any relevant judicial rulings, and older claims as they reach resolution.
• Underwriters fulfill their end of the coordination by, among other things: providing the claims adjuster with file information; explaining the underwriter's thought process when considering the risk and preparing the terms of insurance; forwarding loss issues reported by brokers or insureds to the Claims Department for appropriate follow-up.
• Underwriters and claims adjusters meet to discuss policy wording implications on an ad hoc basis.

It is important that this information sharing be non-judgmental. Finger-pointing will only serve to hinder future information sharing.

The Impact

Information-sharing leads to tangible benefits. When the coordination and information exchange is efficient and timely: risk selection, pricing, retentions/deductibles and wordings can all be positively impacted. Indeed, without benefit it is difficult to convince the parties involved of the need for sharing information.

Risk Selection

Business practices focused on rapid sales growth without due regard for good business practices and strong internal controls can make for greater general insurance risks. Companies experiencing rapid growth may let internal controls become lax and therefore be more prone to insurance losses. By virtue of their experience in adjusting claims and direct interaction with insureds, claims adjusters can accurately identify these and other business practices and internal controls that should raise a red flag for underwriters. With the added insight of claims adjusters, underwriters are better able to assess the risk they are being asked to take on.

Pricing

In theory, a more appropriate premium can result from the exchange of information between underwriters and claims adjusters. Loss ratios, frequency and severity are an important reflection of risk. If a pattern of losses occurs with an unexpectedly high quantum or frequency, underwriters may need to look at adjusting the premiums to reflect insurability and increased loss expectations. On the other hand, if losses are infrequent and/or smaller in quantum, consideration can be given to offering premium reductions.

Consistency is key and good coordination between underwriting and claims personnel can help to achieve consistent pricing.

Policy Terms and Conditions

New wordings and new insurance products can result from shared information. For example, the underwriter may discover that a particular coverage is no longer what the market is requesting. In consultation with the claims adjuster, preliminary information can be gleaned as to the potential for claims under the newly desired coverage and, from there; Product Management can consider devising a more appropriate insurance product. Terms and conditions may also be changed in light of claims development and litigation. Consider a situation in which underwriters are facing strong resistance from brokers to particular exclusionary language in a policy. After consulting with claims adjusters to understand the actual and updated claims experience on that exposure, underwriters may realize that the exclusionary language is no longer needed.

Deductible and Retention

Deductibles and retention levels may be amended in light of new information from the claims department. For instance, a specific risk incurring many small frivolous claims can cost the insurance company a large amount in defense, administration and other related costs. While this may impact the pricing of insurance coverage (i.e. premiums increasing in light of higher claims frequency and/or severity), it is not the intention to have premium dollars equal claims expenses. Hence, pricing is not the only modification possible. The underwriter may also wish to consider imposing restrictions for exposures (inherent or otherwise) causing the claims and/or increasing the deductible to insulate the insurer from those costs.

Risk Management

Underwriters and claims adjusters, through the broker, can provide a value-added service and maintain the loyalty and trust of the insured. This can be accomplished by drawing from previous and current claims situations and conveying the lessons learned to insureds in the form of risk management advice. In pre-loss risk management, practical experience can be brought in to reinforce the auditor's advices on good accounting, internal controls and business practice. With enhanced controls, the risk of the insured suffering a loss can be minimized. As a result, the insured's company is inherently stronger and earns the respect and confidence of business partners. The insurer and broker also benefit from having an inherently better insurance risk in their portfolio.

Underwriters and Adjusters - two unique perspectives

Broker-oriented insurance company underwriters rarely come into contact with their insureds by virtue of contractual obligations with the broker and their own license restrictions. However, claims adjusters have no such restrictions and can learn directly from insureds' loss experiences. In short, the claims department is often in the best position to see what has gone wrong in a particular claim situation and how it might be prevented from happening again. Good coordination between underwriters and adjusters is perhaps best fostered at insurers with in-house adjusters (such as the Guarantee Company of North America). Insurance provided by these companies becomes a more accurate reflection of the insured's risk. It empowers the insured to pursue more effective means of managing risk by enhancing internal controls rather than simply relying on insurance.

Conclusion

Benefits accrue to all those with an interest in the insurance transaction as a result of good coordination and information sharing between claims and underwriting. These benefits are both financial and non-financial. In the end, premiums and coverage more accurately reflect the risk to the benefit of both the Insurer and the Insured. Accuracy enhances the image of insurance. The insurance-buying public gains a higher level of respect and trust for their insurance company and the quality of the coverage. Idealistic - yes, but not impractical. Idealism can help us envision the benefits of close collaboration between claims and underwriting and with that vision, these benefits can become reality.