AMM 101 CLAIMS MANAGEMENT

Assignment 2
Short Question
1. "Large Loss" require the use of Loss Adjusters and other Professionals.
1. Explain the services which are offered by Loss Adjusters ? (5 marks)
In certain classes of business (such as fire), claims departments retain independent loss adjusters
for large or detailed claims. Loss adjusters are expert in dealing with claims from the early stages
to settlement. The services which they offer include:

ensuring that all the interests of the insured are preserved;

checking that the cover was in force and was adequate;
acting to minimise the extent of the loss; and
attempting to bring about a swift settlement.

2. Types of reports furnished by a Loss Adjusters '? (5 marks)

A loss adjuster will supply:
a preliminary report on the claim, perhaps including photographs covering basic facts
about the insured and the loss. This is very similar to the answers which might be
expected for the general questions on a claim form. In addition, the preliminary report
suggests the amount which the insurer should reserve as the possible settlement figure,
comments on the adequacy of the cover, gives a full description of the insured property
and tells the insurer what steps are now being taken in the handling of the claim;
interim reports as the claim progresses; and
a final report providing full details of what has taken place and detailing the final
adjustment of the actual loss.
These reports would be checked by claims officials in the insurer's claims department and then
settlement would be arranged.
2. Briefly explain the Role of a Claims Manager. (10 marks)
Since the source of the largest outflow of money within an insurance or reinsurance company is the
claims department, the position of the claims manager is a key to developing operational
excellence.
The managers of insurers and reinsurers are the stewards of two sets of funds:

the funds provided by the shareholders; and

the funds created by the premiums paid by policyholders.

In relation to claims, insurers and reinsurers must endeavour to provide policyholders who suffer loss
with an appropriate indemnity, whilst ensuring that any such payments are justified. In this context,
the functions of the claims department are the following:

to deal quickly and fairly with all claims submitted;

to be able to distinguish between valid and invalid claims; and
to operate at minimum expense.

This requires:

competent and well-trained staff;

efficient administrative support;
efficient claims procedures;
efficient record-keeping; and
a clear corporate claims philosophy.

All of the above require effective management to ensure that the overall claims strategy is
implemented. The claims department is usually headed by a claims manager who is supported by
a number of claims examiners or handlers (terms vary throughout the industry). The claims manager
will usually report to the board. In some organisations, however, the claims department has been
dismantled and the staff have been assigned to the respective underwriting departments. The staff
retain their authority to handle and settle claims but just report to a different manager: the
respective senior underwriter. The advantage of this approach is seen to be increased
communication and co-operation between underwriters and claims specialists who can easily
consult each other. However, such a system is not practicable for all companies and removes an
element of the sense of teamwork created by a dedicated claims department.
In short the role of the claims manager encompasses the following:

strategy;
cost;
service; and
personnel.

3. Catastrophic Loss.
a) How does it effects the Claims Department (5 marks)
In the event of a major catastrophe, such as a hurricane, affecting a densely populated, wealthy
and highly insured area the effect upon the claims department of an insurance company is as
follows:
o
o

a sudden and unprecedented increase in the number of claims being made;

a sudden increase in the number of enquiries being made by brokers, loss adjusters, the
press and the media in general.

This increase in both short- and long-term workload will inevitably mean that the claims
department's normal systems and methods of operating may be inadequate in terms of:
o
o
o
o
o

claims personnel required;

speed of settlement expected;
computer systems capability;
managerial organisational requirements; and
the number of loss adjusters required.

It is therefore essential that a contingency plan is developed and put into place before a
catastrophe occurs. This plan will identify and assess the effect of the catastrophe on the claims
department and set out the predetermined response, for example:
o
o

pre-assigned duties and claims teams;

claims personnel from other areas to be called in;

o
o

work on a rotating basis (from a predetermined list); and

independent adjusters to be called in, possibly with pre-agreed delegated authority limits.

The insurer is likely to be contacted by the following parties after a major catastrophe:
o
o
o
o

the insured: who wants to know the level and speed of compensation;
the broker: who wants to ensure the best service from the company recommended to
clients;
loss adjusters: who are looking for business; and
the press and other media: who are looking for headlines.
Each must be dealt with in an appropriate manner.
b) Respond anticipated from the Claims Department. (5 marks)

Claims handling in a catastrophe context requires special efforts on the part of the insurer. An
active, aggressive approach is required. If an effective contingency plan exists then this should
immediately be put into operation.
Those involved in handling catastrophe claims should:

be active in claims handling and not delegate unless this is properly documented and
controlled. Then it should be work rather than responsibility that is delegated to third parties
such as lawyers, experts and loss adjusters;
ensure good communication between all parties involved in the claims process;
investigate immediately after the occurrence of a disaster. This aids understanding of the
scope of the problem and enables an early and appropriate response to be made;
concentrate on settling as many claims as possible, as quickly as possible - losses become
more expensive the longer negotiations continue; and
prepare for the worst: catastrophe plans are necessary before the catastrophe takes
place.

In the state of shock and disorganisation which follows any disaster, problems can seem
insurmountable: with a plan, they can be overcome.
4. Explain,
a) the procedures for Third Party Claims. (5 marks)
Insurers invariably insert conditions on policies in respect of claims against the insured arising from a
loss or injury to a third party, that:

require prompt notification of any accident or incident likely to give rise to a claim;
require any communication whatever relating to the loss event from a third party or their
agent (e.g. a claim, notice, letter or summons etc.) to be forwarded, unacknowledged, to
the insurers immediately on receipt by the insured. This is because the insured may lack the
necessary expertise to deal with the correspondence without prejudicing their position
unknowingly; and
give them full powers to control all proceedings involving the insured.

To illustrate how a third party claim proceeds, let us take the specific example of motor insurance.
Cover under a motor policy will include personal injury/property damage to third parties arising out
of the use of a motor vehicle. In the event of an accident in which a third party is involved, insurers
require the insured not to accept blame. To do so may well invalidate a claim. The insurers do not

wish to have their case prejudiced by an insured admitting responsibility and dealing direct with
the other party involved.
In respect of the insured, they are required by the terms of the policy to report a possible claim and
subsequent developments to the insurer within specified time limits and in the prescribed format
(for example, initially by telephone followed by filling in the claim form supplied by the insurer). The
purpose of this condition is to enable the insurer to take steps to investigate claims in order to
minimise its exposure under the policy. In respect of third party claims, the timeframe specified in
the contract Is more crucial since any lack of notification may affect the insurer's rights.
As noted above, following the loss event, a claim may subsequently be received by the insured
from the third party by letter, requesting compensation for the loss suffered. As for the first party
claimants, the insurer's first step will be to establish whether the loss is covered by the terms of the
policy.
b) the differences between an own clients and third party claimants (5 marks)
We should first explain the meaning of the terms 'own clients' and 'third party'. Own clients are
people/ companies insured by the particular insurance company in question, i.e. its policyholders.
When policyholders make a claim they are 'first party' claimants. Regarding the term 'third party',
the first two parties are:

the insured;
the insurer

The third party refers to anyone else who is involved in a loss event, which may or may not result in
a claim. For example, in motor insurance a third party may be another vehicle owner, property
owner, or persons (such as passengers or pedestrians) who have sustained personal injuries and/or
property damage. Here we are concerned with third party claimants, being the person/company
who may claim against the insured for their liability arising from the loss event. We are not
concerned in this section with subrogation against third parties which occurs when third parties
have caused the loss event.

5. What are the consequences of Late Notification in a claim. (10 marks)

The classes of businesses differ in the way in which policies respond to claims; some wordings are
'losses occurring' and some are 'claims made'. One fundamental rule is standard throughout all
classes of business - the insured must notify their insurers as soon as possible. This poses an important
question: What should the insured notify? Most policy wordings stipulate that the insured must notify
all 'events' and this word is usually defined within the policy wording. Although policy wordings
differ, the definition of 'event' is commonly as follows:
An event or series of events likely to give rise to a claim under the terms of the policy.
The onus is on the insured to notify all events as quickly as reasonably possible to insurers. If an
insurer believes that events have not been reported within a reasonable period of time, they are
entitled to reserve their rights under the terms of the policy and investigate the reasons for any
delay. If an insured has not notified events at inception or renewal, the insurers may be entitled to
deny the claim on the basis of late notification and non-disclosure. Despite the obvious need for
the policyholder to notify insurers promptly, this issue still causes insurers and policyholders alike
many difficulties as the nature of the event in question may be unclear for a period of time. This is
best illustrated by considering the different types of claims events.

6. Loss surveyors are required during an aviation claim, explains why '? (10 marks)
Once a claim has been notified a firm of specialist loss adjusters will be appointed. This is chosen by
the leading underwriter and represents ail others on the slip. In the case of aircraft hull losses a
surveyor is sent to investigate the claim and to try to discover the circumstances which have given
rise to the accident. Surveyors are required because an insurer does not usually have the expertise
in-house to conduct an accident survey.
Liability claims are less straightforward than hull losses. It depends on the type of loss and the
underwriter as to whether a loss adjuster is appointed.
Whilst a serious accident may be a unique event for the insured, specialist aviation loss surveyors,
adjusters and lawyers are welt accustomed to dealing with such incidents.
The loss surveyor will advise on the most efficient method of repair and in the case of total loss will
advise where a replacement aircraft can be obtained. Where there has been death or serious
injury to passengers or members of the public, the insurers' adjusters will be armed with immediate
authority to arrange repatriation of bodies, burials or the transport of relatives to the scene.
The surveyors, adjusters and lawyers employed by the insurer thoroughly check that the insured has
complied with all policy conditions and warranties before any payment is made.

Long Question
1. Explain the differences between Contract of Indemnity and Contract of Reinstatement with
example ? (20 marks)
The size of a claim payment under a contract of indemnity should be just sufficient to place the
insured in the same financial position after the loss as they were in before. As a value cannot be
placed on a person's life or limbs, life assurance and personal accident policies are not contracts
of indemnity; however, property and liability policies are.
Property claims
Take the case of a fire at a factory: this can present problems in ascertaining the value of the loss.
A machine bought five years ago for 50,000, which has been used for all of those five years, is
clearly not worth 50,000 today and this would not be the value of the loss. Trying to place the
insured in the same financial position after the machine has been damaged, as was enjoyed
before any damage, will be difficult (for large claims this is done by a specialist adjuster, engineer
or surveyor). Where the machine is completely destroyed the measure of indemnity would be the
replacement cost less an amount for wear and tear. In the case of partial damage, indemnity
would be the repair cost (ess wear and tear.
Let us assume that the machine has a life expectancy of ten years. It has been in use for half its life
and this is a measure of the wear and tear. The cost of replacing the machine today is 90,000.
Indemnity would then be half of the cost of replacement, that is 45,000, and this would have to
be the sum insured. Notice that this figure depends on the level of wear and tear and the
replacement cost. As replacement costs will rise each year, it is likely that the final sum insured will
have to rise.

Clearly this can cause a great deal of work and, potentially, problems for both the insured and the
insurer.
Contract of reinstatement
The size of a claim payment under a contract of reinstatement depends on the cost of
reinstatement. This is a form of'new for old' and many household insurers use that phrase in their
marketing. Offering reinstatement avoids much of the difficulty in ascertaining the value of a loss
under an indemnity contract. In the case of the machine we used in the earlier example, the
insured would have to fix the sum insured at the cost of reinstatement. We know this to be 90,000,
but the loss may not happen until the last day of the insurance year. What the insured needs to
calculate is the cost of reinstatement, at the time of reinstatement, and this may be higher than
the cost of replacing the machine today. It may even be that there is a time delay in ordering new
machines of this type and all of these factors have to be taken into account.
Liability claims
With liability claims it is a little easier to decide on indemnity. A liability policy provides indemnity to
the insured in respect of their legal liability to pay damages. The policy does not define the amount
- this is left in many cases to the court (or is negotiated between the parties in the case of an outof-court settlement) -but it does lay down how indemnity is to be calculated. In liability claims, the
claim payment itself is settled by the insurer directly with the injured third party and is meant to
compensate them for property damage, loss of earnings, pain and suffering, disability and legal
costs.
2. As a result of recent global economic crisis, AAA Insurance Companys operational cost has
been reviewed, in order to minimize cost.
You are the Claims Senior Manager and your department has been effectively in operation.
Draft a report for the Board explaining the following:
a) The various claims operational (handling) costs (4 marks)
'Cost' in this context are referring to the cost of running the claims operation. 'Managing the cost"
means controlling the amount of money expended over a defined period such as one, three or
five years.
The operating costs can be analysed as:

claims department costs, i.e. those internal costs which can be directly attributed solely to
the claims department such as claims staff salaries;
allocated company costs, i.e. costs which are incurred as part of running the insurance
company as a whole such as IT, lighting, office space, accounting staff etc. A proportion of
these costs will also be allocated to the claims department as internal costs; and
external costs, i.e. the charges of service suppliers such as any outsourced functions, use of
loss adjusters etc.
b) How you measure these costs (4 marks)

In order to manage the operational cost it is first necessary to identify where costs are currently
being incurred. Some traditional measures are the following:

unit case costs, i.e. the average operational cost of handling a claim;
average time spent on one claim; and

claims expenses ratio, i.e. the ratio of internal costs (as above) to premiums.

Such figures will then often be compared to those of competitors writing the same or similar classes
of business. This process is known as competitive benchmarking.
c) How you manage these costs (4 marks)
'Management' in this context may become synonymous with 'reducing' in certain circumstances. In
this event, more radical solutions may be sought to attack operational costs:

restructuring;
merging;
new or reduced management;
new IT systems; or
partial or total outsourcing of the claims function

d) What do you believe to the potentials risk if operation cost is reduced to the company.
(8 marks)
It is obvious that the issue of managing the operational costs of the claims department cannot be
analysed in isolation. Any reduction in the operational costs may have an impact upon:

the levels of overpayment of claims (referred to as 'leakage' - see section F);

the level of customer dissatisfaction as reflected in:
- the reduction of customer retention;
- the reduction in customer referrals;
- Financial Ombudsman Service referral charges; and
- possible punitive costs and awards.

These effects may outweigh any notional savings made. Conversely, an increase in operational
costs is likely to have a positive impact on these things.