820TB 2023 Reference

Advanced claims
820: 2023 Study text
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2 820/January 2023 Advanced claims
© The Chartered Insurance Institute 2023

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legal position. Specific advice should always be obtained before undertaking any investments.
Print edition ISBN: 978 1 80002 601 8
Electronic edition ISBN: 978 1 80002 602 5
This edition published in 2023
The author
Ed Gooda FCII SIRM Chartered Insurer. Ed is the Managing Director of both Fenchurch Park Limited, a niche
international insurance claims consultancy, and Fenchurch Training Limited, a bespoke global insurance training
corporation in the Lloyd’s and London market. He has worked in the insurance industry since 1988 and held senior
management roles for a number of composite insurers and reinsurers, a managed general agency, a Lloyd’s
managing agency and a firm of chartered loss adjusters. Ed has extensive international underwriting and claims
management experience in the Lloyd’s and London market.
Reviewer
Huw Barker BA (Hons), ACII, Chartered Insurer, is an Associate Director at Alpha Financial Markets Consulting.
He has worked in insurance since 2008 and has held both industry and consulting roles for general insurers, Lloyd's
and London Market carriers, reinsurers and brokers. He has significant experience of both claims management and
claims development, and has extensive understanding of the future of the claims function.
Acknowledgements
The CII would like to thank Samantha James FCII, CPCU, Solicitor, Chartered Insurer and Beverley Lyn MBA FCII
for their assistance with the first edition of this study text.
The CII thanks the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) for their kind
For reference only

permission to draw on material that is available from the FCA website: www.fca.org.uk (FCA Handbook:
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Unless otherwise stated, the author has drawn material attributed to other sources from lectures, conferences, or
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Typesetting, page make-up and editorial services CII Learning Solutions.
Printed and collated in Great Britain.
This paper has been manufactured using raw materials harvested from certified sources or controlled wood
sources.
3
Using this study text

Welcome to the 820: Advanced claims study text which is designed to cover the
820 syllabus, a copy of which is included in the next section.
Please note that in order to create a logical and effective study path, the contents of this
study text do not necessarily mirror the order of the syllabus, which forms the basis of the
assessment. To assist you in your learning we have followed the syllabus with a table that
indicates where each syllabus learning outcome is covered in the study text. These are also
listed on the first page of each chapter.
Each chapter also has stated learning objectives to help you further assess your progress
in understanding the topics covered.
Your Advanced Diploma study material has been designed to help you develop study skills
that you may not be familiar with. The aim is that you should engage actively with the text,
which contains a number of features designed to assist your learning and study.
You will be directed to alternative sources of theory and practice (useful websites/
additional reading), encouraged to learn from your own experiences (research exercises),
to think critically (critical reflections) and provided with opportunities to apply your
knowledge and skills through practical application (scenarios).
Guide to your study text

Additional reading or useful articles: Management decisions: are questions
provide valuable references to books, management may need to address. They
journals and articles on related subjects. encourage you to understand the
mindset of management.
For reference only

Be aware: draws attention to important Refer to: Refer to: extracts from other CII study
points or areas that may need further texts, which provide valuable information
clarification or consideration. on or background to the topic. The
sections referred to are available for you
to view and download on RevisionMate.
Consider this: stimulating thought Reinforce: encourages you to revisit a

around points made in the text for which point previously learned in the course to
there is no absolute right or wrong embed understanding.
answer.
Critical reflections: challenge you to Research exercises: reinforce learning

think beyond the confines of the text. through practical activities.
Examples: provide practical illustrations Sources/quotations: cast further light

of points made in the text. on the subject from industry sources.
Key terms: introduce the key concepts On the Web: introduce you to other
and specialist terms covered in each information sources that help to
chapter. supplement the text.
Study skills
As we have already stated, the Advanced Diploma study material requires you to engage
with the text in a way that makes you capable of applying the knowledge you have gained to
practical work situations. While the text will give you a foundation of facts and viewpoints,
your understanding of the issues raised will be richer through adopting a range of study
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We will focus here on the need for active learning in order for you to get the most out of this
core text. However, the CII’s online learning site, RevisionMate, covers a range of other
study skills that will be helpful to you in more specific areas of your studies, such as using
diagrams and tables, how to approach case study style questions, and how to identify your
own learning style to help you approach studying in a way that best suits you and will get you
the best results possible.
Active learning is experiential, mindful and engaging

• Underline or highlight key words and phrases as you read – many of the key words
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terms arise; boxed text indicates extra or important information that you might want to be
aware of.
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numbers are clearly marked on the margins and key passages have been pulled out for
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that you have read in the context of a working environment and the scenario questions
are designed to make you think about applying the knowledge in the same way.
• Make connections to other CII units – throughout the text you will find ‘refer to’ boxes
that tell you the chapters in other books that provide background to, or further information
on, the area dealt with in that section of the study text.
• Take notice of headings and subheadings.
• Use the clues in the text to engage in some further reading to increase your knowledge
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real life application, not just memorise it.
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Note: website references correct at the time of publication.
5
Examination syllabus
Advanced claims
Purpose
To enable candidates to understand the management of the claims function in an insurance
organisation.
Assumed knowledge
It is assumed that the candidate already has the knowledge gained from a study of the relevant
sections of IF1 Insurance, legal and regulatory and M85 Claims practice or equivalent examinations.
Summary of learning outcomes
1. Evaluate the management of the claims function
2. Evaluate and apply claims service principles and practices
3. Evaluate the application of technical claims principles
4. Analyse the financial aspects of the claims function
Important notes
For reference only

• Method of assessment: Coursework – 3 online assignments (80 marks). Each assignment must be
individually passed.
• The syllabus is examined on the basis of English law and practice unless otherwise stated.
• Candidates should refer to the CII website for the latest information on changes to law and practice
and when they will be examined:
1. Visit www.cii.co.uk/qualifications
2. Select the appropriate qualification
3. Select your unit from the list provided
4. Select qualification update on the right hand side of the page
Published January 2023

©2023 The Chartered Insurance Institute. All rights reserved. 820
1. Evaluate the management of the claims Reading list

function
1.1 Explain the design and implementation of a claims The following list provides details of various
management strategy and philosophy. publications which may assist you with your
1.2 Evaluate organisation designs and structures. studies.
1.3 Explain the internal structure of the claims function Note: The examination will test the
including various roles, responsibilities and syllabus alone. However, it is important
specialisms. to read additional sources as 10% of the
1.4 Assess the impact of regulation and legislation on
exam mark is allocated for evidence of
claims management.
further reading and/or the use of
relevant examples.
1.5 Evaluate claims handling operations.
1.6 Explain how the claims function interacts with other
The reading list is provided for guidance
departments.
only and is not in itself the subject of the
examination.
2. Evaluate and apply claims service The publications listed here provide a wider
principles and practices coverage of syllabus topics.
2.1 Evaluate the customer experience in the firm,
including by use of customer journey mapping. CII study texts
2.2 Examine how customers can be retained. Advanced claims. London: CII.
2.3 Explain how complaints can be managed. Study text 820.
2.4 Assess policyholder dispute options and the Claims practice. London: CII.
consequences of a breach of the contract.
Study text M85.
2.5 Explain the design and implementation of claims
handling procedures for both first and third parties. Insurance, legal and regulatory. London: CII.
2.6 Evaluate supplier and relationship management. Study text IF1.
For reference only

2.7 Explain the use of call centres in the claims Books / eBooks
management function.
APIL guide to MIB claims.: uninsured and
2.8 Examine how claims practices and procedures can
untraced drivers. 4th ed. Andrew Ritchie,
be reviewed, improved and complied with.
Jeremy Ford. Bristol: Jordan, 2016.
3. Evaluate the application of technical Claims handling law and practice. Richard
claims principles West et al. London: Kennedys Law LLP,
3.1 Explain reserving and estimating philosophies and 2018.
techniques.
'Claims process at Lloyd's'. Chapter 13 in
3.2 Apply the Civil Procedure Rules to relevant claims
Lloyd's law and practice. 2nd ed. Julian
scenarios.
Burling. London: Informa, 2017.*
3.3 Evaluate how Information Technology and
management information can support the claims ‘Claims under the policy’. Chapter 14 in
function. Bird’s modern insurance law. 10th ed. John
3.4 Evaluate the impact of fraud on claims management. Birds. London: Sweet & Maxwell, 2016.
3.5 Examine how claims are managed in the Lloyd’s and Contracts for difference. iMinds Pty Limited,
London market. 2009.*
3.6 Explain reinsurance claims procedures.
Drafting insurance contracts: certainty,
3.7 Explain generic claims principles applicable to clarity, law and practice. Christopher Henley.
international claims.
London: Leadenhall press, 2010.
3.8 Evaluate policy wording interpretation in relation to
various claims scenarios. Insurance claims. 4th ed. Alison Padfield.
Bloomsbury Professional, 2016.
4. Analyse the financial aspects of the MacGillivray on insurance law: relating to all
claims function risks other than marine. 13th ed. London:
4.1 Analyse the constituent parts of internal and external
Sweet & Maxwell, 2015.
costs, including leakage.
4.2 Describe the mechanisms for controlling internal and Journals and magazines
external costs, including leakage. The Journal. London: CII. Six issues a year.
4.3 Examine the main problems in controlling claims Continuity insurance & risk. London:
expenditure, including leakage.
Perspective. Six issues a year. Available
online via www.cirmagazine.com
* Also available as an eBook through eLibrary via www.cii.co.uk/elibrary (CII/PFS members only).
Published January 2023 2 of 3

©2023 The Chartered Insurance Institute. All rights reserved.
7
Post magazine. London: Incisive Financial

Publishing. Monthly. Contents searchable
online at www.postonline.co.uk.
Reference materials
Concise encyclopedia of insurance terms.
Laurence S. Silver, et al. New York:
Routledge, 2010.
Insurance: Conduct of Business sourcebook
(ICOBS). Available via
www.handbook.fca.org.uk/handbook/ICOBS.
Specimen guides
Specimen guides are available for all
coursework units.
These are available on the CII website under
the unit description / purchasing page. You
will be able to access this page from the
Qualifications section of the CII website:
www.cii.co.uk/qualifications.
Exam technique/study skills
For reference only

There are many modestly priced guides
available in bookshops. You should choose
one which suits your requirements.
Published January 2023 3 of 3

©2023 The Chartered Insurance Institute. All rights reserved.
For reference only
9
820 syllabus
quick-reference guide
Syllabus learning outcome Study text chapter
and section
1. Evaluate the management of the claims function
1.1 Explain the design and implementation of a claims management 1A, 1B, 1E
strategy and philosophy.
1.2 Evaluate organisation designs and structures. 1A, 1C
1.3 Explain the internal structure of the claims function including 1A, 2A, 2B
various roles, responsibilities and specialisms.
1.4 Assess the impact of regulation and legislation on claims 1A, 2E, 3C
management.
1.5 Evaluate claims handling operations. 1A, 4A, 4C, 4D, 4E, 5B
1.6 Explain how the claims function interacts with other departments. 1A, 1D, 1F, 6D
2. Evaluate and apply claims service principles and practices
2.1 Evaluate the customer experience in the firm, including by use of 3A
customer journey mapping.
2.2 Examine how customers can be retained. 3A
2.3 Explain how complaints can be managed. 3B
2.4 Assess policyholder dispute options and the consequences of a 3C, 3D
For reference only

breach of the contract.
2.5 Explain the design and implementation of claims handling 4B
procedures for both first and third parties.
2.6 Evaluate supplier and relationship management. 4F
2.7 Explain the use of call centres in the claims management 5A
function.
2.8 Examine how claims practices and procedures can be reviewed, 2C
improved and complied with.
3. Evaluate the application of technical claims principles
3.1 Explain reserving and estimating philosophies and techniques. 6A, 6G, 7B
3.2 Apply the Civil Procedure Rules to relevant claims scenarios. 4B, 6A, 6G
3.3 Evaluate how Information Technology and management 6A, 6B, 6C, 6G
information can support the claims function.
3.4 Evaluate the impact of fraud on claims management. 6A, 6G, 6I, 6J
3.5 Examine how claims are managed in the Lloyd’s and London 6A, 6E, 6G
market.
3.6 Explain reinsurance claims procedures. 6A, 6F, 6G
3.7 Explain generic claims principles applicable to international 6A, 6G, 6H
claims.
3.8 Evaluate policy wording interpretation in relation to various 2D, 6A, 6G
claims scenarios.
4. Analyse the financial aspects of the claims function
4.1 Analyse the constituent parts of internal and external costs, 7A, 7C
including leakage.
4.2 Describe the mechanisms for controlling internal and external 7A, 7C, 7D
costs, including leakage.
4.3 Examine the main problems in controlling claims expenditure, 7A, 7C, 7D
including leakage.
For reference only

11
Introduction
820: Advanced claims is an Advanced Diploma unit intended for students who are highly
experienced in providing claims services and who are in, or aspire to, senior claims and
management positions. You should already have a sound grounding in the general principles
of insurance and in the technical aspects of claims handling as provided by IF1 Insurance,
legal and regulatory and M85 Claims practice, or equivalent examinations.
The overall aim of this unit is to provide students with an introduction to the concepts and
processes of claims management.
The text covers the examination syllabus, which is designed to enable the student to
evaluate the following:
• the claims environment;
• the application of claims service management principles;
• the application of claims management practices;
• the application of claims technical management; and
• the cost of management practices.
Success in the 820 assessment will require you to be able to:
• Evaluate key issues and concepts: this means that you must be able to demonstrate
skills in comparing and discriminating, assessing value and making choices.
• Apply knowledge and skills to practical situations using information, methods, concepts
and theories and solving problems.
• Synthesise different aspects of the syllabus: this means you must be able to
demonstrate skills in using old ideas to create new ones and draw conclusions.
For reference only

The syllabus learning outcomes support the principle that understanding how and when to
use knowledge is as important as the knowledge itself. This study text has been designed to
support the achievement of these outcomes, but you should note that success in the 820
assessment will require you to undertake further reading and private research beyond
this core text.
Suggestions for further reading are included in the Reading List at the end of the
Examination syllabus and, occasionally, as additional reading within particular chapters. You
will also find that a number of research activities and other activities are included (see the
Using this study text section for further detail). Taking time to do these extra activities will
not only enhance your chances of success in the assessment, but also increase your
effectiveness in your chosen career.
For reference only
13
Contents
1: Claims environment
A Understanding the claims environment 1/2
B Claims strategy: what is it and why is it necessary? 1/3
C Organisation design and structure 1/5
D Claims department within an insurer 1/9
E Claims philosophies and guidelines 1/10
F Claims is not an isolated function 1/13
G Scenario 1.1: Structure 1/19
2: Role of the claims manager and regulation

A What is the claims manager’s role? 2/2
B Referral points and authorities 2/6
C Quality management 2/8
D Contract of insurance 2/9
E Regulation 2/10
F Scenario 2.1: FCA supervisory visit 2/19
For reference only

G Scenario 2.2: Claims recoveries 2/19
3: Claims service management

A What is 'good' service? 3/2
B Complaints handling and the Financial Ombudsman Service (FOS) 3/12
C Breach of contract and policyholder litigation 3/18
D Bad faith 3/25
E Scenario 3.1: Potentially invalid claims 3/27
F Scenario 3.2: Service quality 3/27
G Scenario 3.3: Bad faith 3/28
H Scenario 3.4: Customer experience 3/28
4: Management of claims handling procedures

A Claims handling operation 4/2
B Claims handling procedures and the Civil Procedure Rules 4/5
C Outsourcing 4/14
D Delegated authority 4/20
E Insourcing 4/21
F Supplier relationship management 4/23
G Scenario 4.1: Outsourcing 4/26
5: Claims centre and catastrophe management

A Claims centre management 5/2
B Catastrophe management 5/7
C Scenario 5.1: Catastrophes 5/17
6: Claims technical management

A What are the key characteristics of claims? 6/2
B Information technology 6/4
C Management information 6/7
D Interaction with actuaries and underwriting 6/11
E Lloyd’s and London markets 6/12
F Reinsurance 6/14
G Subrogation and recoveries 6/16
H International claims 6/17
I Fraudulent claims 6/20
J Data protection 6/27
K Scenario 6.1: Information technology 6/30
L Scenario 6.2: Fraud 6/31
M Scenario 6.3: International claims 6/31
For reference only

7: Cost of claims management
A What is the cost of claims management? 7/2
B Estimating and reserving 7/7
C Leakage 7/12
D Claims transformation 7/15
E Scenario 7.1: Leakage 7/16
F Scenario 7.2: Expense ratio 7/16
G Scenario 7.3: Estimating 7/17
Appendix 1: Airmic Statement of Principles regarding insurers’ reservation A1/1

of rights
Appendix 2: Benchmarking data A2/1
Appendix 3: Cat bond index shows market recovery after selling-pressure A3/1
Self-test answers i
Cases xv
Legislation xvii
Index xix
Chapter 1
Claims environment
1
Contents Syllabus learning
outcomes
Introduction
A Understanding the claims environment 1.1, 1.2, 1.3, 1.4, 1.5, 1.6
B Claims strategy: what is it and why is it necessary? 1.1
C Organisation design and structure 1.2
D Claims department within an insurer 1.6
E Claims philosophies and guidelines 1.1
F Claims is not an isolated function 1.6
G Scenario 1.1: Structure
Self-test questions
For reference only

Learning objectives
On completion of this chapter and private research, you should be able to:
• set claims management within the context of the wider environment;
• design and implement a claims management strategy;
• evaluate the different ways of structuring an organisation;
• explain the claims department’s position within an insurer;
• compose a claims philosophy; and
• evaluate the role of the claims function in relation to other functions within the insurer.
Chapter 1 1/2 820/January 2023 Advanced claims
Introduction
You will be familiar with claims handling from your earlier studies. In this course, we will
move up to the next level and look at claims management: what does a claims manager
need to do their job effectively? Using a combination of this study text and your own
research, you should finish this course with a clear understanding of the tools a claims
manager has to help them face the challenges of their job.
First, however, it is helpful to consider the broad environment in which we handle and
manage claims, and we start with seeing how the claims department sits within the
insurance company and how the decisions of the board about corporate strategy affect the
decisions of the claims manager and how they develop their claims philosophy. Finally, we
examine how the work of the claims department feeds into and interacts with other key
departments within the insurer.
Key terms
Actuaries Annual report and Balance sheet Budgetary control
accounts
Claims environment Claims management Claims philosophy Corporate objectives
strategy
Organisation design Environmental, Reinsurance Sales
social and recoveries
governance (ESG)
Underwriting
A Understanding the claims environment
For reference only

We can broadly categorise the claims environment into:
• internal; and
• external.
Different organisations take different approaches. In this study text, we intend to provide a
framework against which you will be able to analyse your own and other organisations.
A1 Internal claims environment

This relates to the insurer’s own claims department: its claims management strategy,
organisational design and structure and its strategies, processes and systems for handling
claims. Structural plans become quite detailed when translated into specific instructions as to
how to handle technical claims.
Research exercise
Look at your claims manual. How does your organisation instruct your claims handlers?
How do instructions differ with different product lines?
The claims function will have internal ‘customers’, i.e. other departments within the insurance
company, with which it must work and communicate, such as underwriters, sales, actuaries,
compliance, finance and legal. We will look at the internal claims environment in more detail
later in this chapter and the next.
A2 External claims environment

The external claims environment relates to the industry and economy outside the immediate
vicinity of an insurer's own organisation. Clearly the wider macroeconomic situation has an
impact on supply, demand and performance tha the insurer's claims function must be aware
of in order to have an effective claims strategy.
The external environment relates to those corporations and organisations outside of the
insurer that can be used to attract and retain business as well as to help it service claims in
Chapter 1 Claims environment 1/3
Chapter 1
the best possible way. Such corporations include brokers and service suppliers (for example
loss adjusters and solicitors) as well as investors and other stakeholders/shareholders.
One of the key influencing factors outside the insurer's own organisation is clearly the
customer or client – whether it be an individual or a corporate customer. The insurer must
always be attentive to the customers it serves – to their needs and desires and how they
change over time.
Lastly, the regulators have a significant impact on how the insurer can and should operate.
Regulators are continuously updating and iterating their expectations for the industry, and
may take specific intervention at an insurer if they feel there is a material risk that is not
sufficiently mitigated.
B Claims strategy: what is it and why is it

necessary?
Every insurer will have an overarching strategy and vision, usually underpinned by
corporate objectives. These are agreed by the board with the intention of ensuring that
everyone within the company understands what the company is trying to achieve. Every
insurer will also have a claims management strategy. It will need to link these so that the
claims management strategy feeds into the achievement of the corporate objectives.
The corporate objectives will lead to the development of a corporate strategy. This is then
cascaded through the various business strategies.
Research exercise
Use the internet to find details of some large insurers (if you are not employed by an
insurer, pick well-known names). Find details of their corporate objectives. How do they
For reference only

differ? What different priorities and approaches do they demonstrate? How do you think
they will impact the claims function?
A corporate strategy is usually fairly broad with more detail at departmental level, as
demonstrated in example 1.1.
Example 1.1
Corporate strategy
Our objective is to differentiate ourselves through our internal and external communication
to deliver the best possible market service to internal and external customers.
At departmental level, we strive to maintain an induction programme for all new
employees and embrace training solutions to meet the needs of the organisation.
At team level, we strive to ensure that all employees have an up-to-date development plan
so that they grow and develop in a manner which complements departmental strategies
and goals.
As the claims manager, you will be responsible for formulating and executing the claims
management strategy under the authority of the board, which you will either sit on or directly
report to. An insurer’s claims management strategy will take into account regulatory
compliance requirements, type of business written, geographical spread, corporate structure
and best practice (amongst many other things). From this, you will appreciate that each
insurer’s claims management strategy is unique to that company.
Increasingly, with the focus on ESG more broadly across the insurance market, claims
managers need to be clear how their claims strategy positively influences the external
environment – or at least does not negatively impact it. This has manifested so far in
strategies around sourcing, using (and reusing) 'green parts' in repairs (e.g. motor vehicles)
and a number of other initiatives.
Example 1.2
Corporate objectives
• Differentiating ourselves through our communication and execution to deliver service
excellence to those we work with, whether as customers, brokers or colleagues.
• Being recognised as the employer of choice for key talent.
Department level
• To maintain and update an induction programme for all new recruits.
• To have in place a range of internal training courses which meet the specific needs of
the organisation or business areas.
• To develop and implement a modular management development programme.
Team level
• To ensure that all staff have an actively managed personal development plan which
forms part of the annual objectives setting process.
Research exercise
Establish how insurers formulate their own claims management strategy. How do they
align this to their corporate objectives? Find and review evidence of this. Consider
statements published by companies as to how they achieve these goals.
Research exercise
Obtain copies of your company’s corporate strategy and claims management strategy. Are
they clearly linked? Do you know how the claims strategy was formulated? Who was
involved? Can you find out and talk to someone on the team? What approach did they
take? What challenges did they face? Is there anything that you would change? Why?
For reference only

A clearly understood claims management strategy will be of little use to the organisation
unless the approach to implementation is coherent in all aspects of claims management.
This involves and encompasses:
• formulating a corporate claims philosophy which sets out the method by which claims will
be managed and handled;
• a clear claims procedure, including reserving practices;
• efficiently using technology and data;
• using a quality management system; and
• optimising skills inside and outside the organisation (e.g. through outsourcing); and
• ensuring the organisation design of the claims function is most effective.
Be aware
It is essential that the management information you use is correct. For example, if the
management information suggesting that there are cost savings to be made through
outsourcing is incorrect, the business may make a wrong decision.
Consider this…
What are the ramifications for the organisation if the wrong decisions are made? What if
the organisation gets it right?
The company’s senior management, including the claims manager, are responsible for
devising the overall approach. It is the claims manager who is accountable and who is
responsible for the day-to-day implementation of the strategy. Imagine yourself in this
position: what questions would you be asking yourself to ensure that you were able to
perform this task effectively?
Chapter 1
These should include:
• Do I have sufficient financial resources budgeted to the department to enable objectives
to be met?
• Is the department structured in the most effective way?
• Do I have the right staff, trained to the right level, focused on the right things?
• Is the work flow logical and easy to use?
• Do I have technology that allows my team to record each claim notified properly and
accurately so that the company knows its liabilities, and to code the information and
accurately report facts on a regular basis?
• Is there an effective appreciation of the corporate claims philosophy?
• Have I set procedures for initiating claims reviews of third party service suppliers?
• Have I put proper systems and procedures in place to identify all potential recoveries?
• Do I have a good relationship with reinsurers?
• Is my status within the company sufficiently senior for me to exert the influence that the
role demands?
• Does the organisation have an adequate cash management strategy?
If large claims are being paid in full and promptly, but recoveries from reinsurers are
subject to bad debt or late payments, this could have a significant effect on a company’s
cash flow, perhaps forgoing the expected benefit of a long-term return. This issue is
particularly serious in times of high interest rates.
• What internal guidelines do I have in place to aid claims processing and am I effectively
mitigating operational risks?
For reference only

• Are my team and I aware of current underwriting practice and reserving methodology?
• Are my team and I aware of relevant regulatory constraints for all relevant jurisdictions in
which we deal with claims?
C Organisation design and structure

Refer to
Refer to 990, chapter 3, section A
One of the key areas which is influenced by the corporate strategy of a company is its
organisation design and structure. All organisations, from the smallest to the largest, have
some form of structure to them, whether this is by accident or design and whether it is
adhered to in practice. For example, even a group of ten people in a partnership will have an
organisational structure in place so that they can meet their stated business objectives in an
efficient manner.
Most organisations, and certainly larger companies, will have a formal documented structure
in place. Composite insurers tend to be the largest. These, by definition, have the largest
number of employees and are often in many locations (including internationally), which
means they need a well organised and structured organisation.
C1 Organisation design
Business organisations are agreed by the senior leaders of insurance companies. The vast
majority of corporations formulate a corporate vision followed by one or more mission
statements. Larger companies may formulate a different mission statement for each division,
each of which complements and works towards the overall corporate vision. The corporate
organisational design should therefore operate in such a way as to work towards the
corporate vision.
Research exercise
What is the corporate vision and mission statement of your organisation? Do its aims
reflect what is expected of you in your role?
Should you be doing anything different to help your organisation achieve its aims?
C1A Organisation structure

The structure of insurance companies is often complex due to their size and the varied
number of activities they carry out.
Such a structure will define aspects such as:
• the division of work;
• the chain of command and communication;
• the type of tasks performed and the intended outcomes;
• internal groupings that undertake similar work; and
• management hierarchy.
Research exercise
How is your organisation structured? Obtain a copy of your organisational structure chart.
How does this compare to your competitors? Has your organisation undergone structural
change? What have been the key differences? Have they improved the performance of
your organisation or not? What do you think the reasons are for this?
Claims management decision: organisation structure
For reference only

How could I adapt our corporate structure to:
• fulfil a rapid growth strategy involving heavy investment to maximise returns?
• maintain profitability during a period of rapid and unprofitable decline, which involves
downsizing to protect existing profits?
Although there are a number of ways to structure a company, the two main ways are:
• by function (e.g. claims, underwriting, marketing); and
• by division (e.g. product, geographical area, type of customer).
Structure based on function is the traditional form of insurance company organisation and is
best suited to smaller companies offering a limited range of products.
Figure 1.1: Structure by function
Board of Directors
Chief Executive Officer
Human
resources Accounts Marketing Underwriting Claims
Chapter 1
Advantages Disadvantages
• Employees can specialise in the type of work they • The structure can become siloed: for example, the
carry out because all those employed in the same claims personnel tend to see their role not as
or related activity form one department. integrated but purely as claims handling and may
• A larger unit may be more cost effective due to the not recognise their marketing and underwriting
standardisation of the processes used. feedback roles.
• There may be difficulty in coordinating the different
functions and separate functions may operate in
isolation.
Most large multi-product companies are organised by division, with each division being
partially autonomous to the extent of designing, producing and marketing its own products
and services.
Figure 1.2: Structure by division
Head office
Home Country Home Country International

Commercial Division Personal Division Division
Divisional structure is often ‘segmented’. This means that the department is structured by
product. This can be achieved by, for example, categorising the insurer’s products into
‘property’, ‘liability’ and ‘motor’. If the insurer expands, then the method by which the insurer
has chosen a segmented structure may change – for example ‘liability’ may be further split
into ‘employers’ liability’, ‘public liability’ and ‘products liability’. Alternatively, ‘liability’ could
For reference only

be split into ‘property damage’ and ‘injury’.
Figure 1.3: Segmented by product
Head office
Home Country Home Country International

Commercial Division Personal Division Division
Motor Liability Property
employers’ liability public liability products liability
underwriting claims sales
Other things for you to consider

The degree of autonomy that each division is given depends on whether an organisation has
centralised or decentralised its operations. In centralised companies, authority is retained at
the top, with little delegation. In decentralised organisations there is more delegation, so that
divisional managers are allowed to make more of their own decisions.
Similarly, an insurer may employ a centralised or decentralised claims settlement policy as
between head office and the various branch offices. Where a centralised policy is in force,
the head office will wish to oversee the settlement of a particular class (or value) of claims. In
the decentralised system, such authority will be delegated to the branch. The choice will
depend upon the size of the company and the type of business being written.
Even in a decentralised system, very large and/or contentious claims will be referred to
senior management before their payment. This is to make sure those claims with the most
impact on a company's P&L are reviewed prior to settlement, as well as to comply with
internal reporting criteria.
Centralised system
• Ensures that the required level of expertise is • Lack of contact between policyholders and local
applied even for complex losses staff, which may have repercussions for customer
• Ensures that access to records and underwriting retention
staff is easy. This can increase the level of • Lack of understanding and appreciation of local
background information available and co-operation culture and customer by head office – a particular
with the underwriting staff issue with overseas claims
Very large, multi-national insurers may operate a blend of functional and divisional
structures. So, a company could have a divisional structure within a territory and a functional
structure at head office.
C1B Flexible working patterns
Traditionally, employees have worked from offices, sitting together in their teams. As
technology has improved over recent years, many employers have encouraged employees
to work from home from time to time and the concept of 'agile working' has become popular,
where employees do not have their own desk space but book a space to work when they
attend their place of employment.
In 2020 the COVID-19 pandemic and associated lockdown forced employees to work from
home and many businesses have recorded increases in efficiency and a reduction in
operational costs as a result. Whether employees work from their offices, at home or a use
blend of both does not affect the organisation's structure or design.
For reference only

C1C Environmental, social and governance (ESG)
ESG can be described as a type of framework compiled by organisations. This framework
has three features:
Environmental This concentrates on the organisation's efforts to assist in preserving our planet. This
includes carbon emissions of the organisation itself, its customers and clients; efforts
to reduce global warming; recycling policies; pollution management; and energy
efficiency.
Social This concentrates on the human beings within the organisation and their human
stakeholders. These include employees, customers, suppliers of services and
anyone who may interact with the organisation. This feature supports inclusion and
diversity and encourages respect of all individuals regardless of their age, race,
religion, beliefs, sexual orientation, gender reassignment or ethnicity.
Governance This concentrates on corporate governance and challenges historic governance of

the organisation by encouraging and supporting change. This includes challenging
the structure of the board and management, remuneration of senior executives. This
also challenges cyber security policies, anti-money laundering and bribery policies to
ensure that they kept relevant and up to date.
Today, many organisations embed ESG into their corporate strategy as it is seen as correct
ethical behaviour which adds value to the organisation.
While each organisation is different and adopts different approaches to reaching its ESG
goals, many respect 'The Sustainable Development Goals' published by The United Nations
in 2015.
On the Web
Visit https://www.home.kpmg to read about KMPG's ESG commitments.
Chapter 1
D Claims department within an insurer
Wherever it is positioned within the overall corporate structure, the claims department has
many roles, responsibilities and specialisms. Ultimately it is the point at which an insurer
proves itself. People buy insurance on the promise of a claims service, so it is arguably the
most visible part to the customer.
To provide the insurance company

with a high quality of service so
that it is differentiated from its
competitors. Strategy
This operational role supports the
delivery of the strategy.
To ensure that claims payments

are contained within the
parameters of the contractual Cost Monitoring
relationship.
To meet or exceed customers’

expectations regarding the quality
of service, with particular regard to Service
the speed, manner and economic
efficiency of the service.
To meet or exceed the standards

of service set. Management
To operate budgetary control.
For reference only

Research exercise
Find out how these roles, responsibilities and specialisms are translated into objectives in
your organisation.
As we discussed earlier, the claims department’s objectives must complement and align to
the corporate objectives. Thus, by meeting its departmental objectives, the claims
department fulfils its ultimate aim: to achieve to the benefit of the corporate objectives. In
many respects, it is the company’s structure that lends itself to the allocation of roles and
responsibilities.
What specialist skills are required of the department? This question can be answered in a
number of ways, but will usually be dependent on the experience of the members of the
team. As the claims department is client facing, claims staff must work together to ensure
that the department is approachable, able to fulfil its promises and treats its customers fairly.
Technical specialisms depend on the type of business being undertaken: household, motor,
travel, liability and professional indemnity claims all require different skill sets.
Consider this…
What specialisms would you look for within a claims handler of:
1. UK motor business?
2. Global professional indemnity business?
E Claims philosophies and guidelines

One of the tools the claims department uses to ensure it meets the overarching corporate
objectives, is a claims philosophy. The claims philosophy describes what the department
aims to do to achieve those objectives.
Refer to
Claims philosophies introduced in Claims strategy: what is it and why is it necessary? on
page 1/3
E1 What is a claims philosophy?

A claims philosophy can be defined as:
The claims department’s identity, including an explanation as to the goals and
targets to be achieved.
Research exercise
Obtain a copy of your company’s claims philosophy. What impact does it have on the day-
to-day handling of claims?
Those affected by an insurance company’s claims philosophy can be divided into external
and internal.
Internal External
• claims department • customers, i.e. members of the public, members of
For reference only

• underwriting department other organisations
• management • brokers
• internal risk/control • the media
• marketing department • reinsurers
• the Board • suppliers
• industry analysts
• the regulator
E2 So, how do I develop a claims philosophy?

The first step when developing the claims philosophy is to analyse each stage of what the
claims department currently does. The next step is to develop minimum and maximum future
targets and key performance indicators for the quality of service (in terms of its nature, speed
and efficiency) you wish to offer in the future. These must be achievable. Finally, the
philosophy will need to define the key characteristics of valid claims.
Be aware, however, that a claims philosophy is not necessarily static. It will develop and
change over time in line with the direction of the company as a whole.
E2A First, analyse the claims process
You should consider the following when analysing the claims process:
• timelines (bearing in mind internal standards and regulations);
• the role and conduct of the parties; and
• the information to be exchanged between the parties.
The above will require you to make an assessment of:
• the current service offered;
• minimum service;
• maximum service; and
• the ideal service.
In order to assess its current service, the insurer should understand their external customer’s
view of the quality of the service.
Chapter 1
Claims management decision: claims philosophy
How could I improve my company’s claims philosophy?
Any documented claims service should include the following as a minimum, but are likely to
be much more extensive in reality.
Pro-active
Nature Professional
Interpretation of policy terms
Speed Response times

Civil Procedure Rules deadlines
Extent of documentation required

Efficiency Information required by Civil Procedure Rule
Pay valid claims immediately
E2B Second, decide what we are going to put in place for the future
Following this combined assessment, the insurance company is now in a position to decide
upon the standard of service it will offer in the future. The standard of service has
consequences for, and is a part of, the strategic business objectives. The views of each user
of the claims philosophy must be taken into account in its development.
Whereas an internal document may set out the specifics (for example, targets measured by
number of days) the external claims philosophy should be phrased in general terms to
indicate the type of service expected.
For reference only

Research exercise
Obtain examples of external claims philosophies from companies’ websites (many are in
the public domain). What are the differences between them? What do they tell you about
the priorities of the insurer under consideration? How do their client bases differ?
E3 Reminder: what is the claims process?

You will be familiar with claims procedures from your experience and earlier studies. 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 that is insured.
However, all will have the following steps in common.
Research exercise
Draw a process map for the types of claims that you handle; consider all of the stages
during the life of a claim for each product type. Keep it with you as you study this section.
Event giving rise to the claim

This may be an insured loss event. It often provokes discussion between the insured and
insurer as to whether the event is a circumstance worthy of notification, especially where the
policy is written on a ‘claims made’ basis. For personal lines claims, each and every incident
should be reported to the insurer, even if no claim is to be made (though, in practice, this
very rarely happens).
Claim notification
This is when the insured reports the claim to the insurer in the prescribed format (e.g. by
filling in the claim form supplied by the insurer or by telephone). Ideally, the insured will
supply the insurer with enough detail about the claim for the insurer to proceed with advice,
investigation and ultimately settlement. In some lines of business (e.g. large commercial) a
broker will often take responsibility for notifying the insurer of a claim.
The policy terms should make it clear how claims should be notified, when and to whom.
This is usually a condition in the wording. The purpose of the claims condition is to enable
the insurer to take steps to investigate claims (or occurrences that might give rise to claims)
to minimise its exposure under the policy.
Claim review
Reviewing the claim involves analysing the claim in the light of:
• the amounts claimed;
• the incident circumstances;
• the proposal form (including representations made by the insured when the policy was
purchased);
• the exact terms of the policy;
• the involvement of any third parties;
• the legal requirements;
• a cost benefit analysis of pursuing extra documentation;
• market practice; and
• the insurer’s corporate claims philosophy.
Response to claimant
The insurer’s first response to the insured may only be an acknowledgement or a request for
more information. Depending on what this further information reveals, the insurer has one of
three choices:
• payment;
• negotiation;
• rejection, i.e. liability is not accepted by the insurer.
Think back to your studies in M85 Claims practice. Remind yourself of the differences in
handling first and third party claims. As you go through the following sections, think about the
For reference only

different approaches required.
Claim investigation
In order to establish the facts surrounding the claim, it may be necessary to instruct an
internal claims inspector or external loss adjuster to undertake further investigations.
However, in many instances the advent of technology and the capability of smartphones
mean that much of this can now be done at desk, using images and videos provided by the
insured and other sources of information (e.g. Google Maps).
Claim negotiation and settlement
Most insurers look to settle claims as quickly as possible. While some claims may be
disputed, a high majority are settled to the satisfaction of all parties. However, armed with the
full facts of the case, the insurer may decide that a lesser amount should be offered than that
originally claimed. Claim negotiation can be a long drawn-out process in cases of dispute,
particularly where third parties are involved. The resolution of disputes is achieved via
negotiation with the insured, mediation, alternative dispute resolution, arbitration or litigation.
Research exercise
Think of claims that you have handled which were:
• settled immediately; and
• negotiated to conclusion.
Why were these claims concluded in different ways? What approaches does your
organisation take to claims settlement? Do you have triage guidelines in place? How are
decisions made with regard to the level of investigation?
Claim recoveries
Following payment of the claim, the insurer may sometimes be able to recover all, or part, of
the outlay from other sources. Third parties considered liable for the insured event may be
pursued; contribution or subrogation rights may exist; and/or there may be reinsurance
protections in place. Different classes of business have different typical recovery rates:
motor, for example, has a much higher rate of recovery than household.
Chapter 1
Example 1.3
Zebedee insurance, as an average, succeeds in making a full recovery on 20% of all
motor accident claims in a year. The average accidental damage claim is £1,800 and
there are 100,000 claims each year.
This equates to Zebedee making recoveries of:
20,000 claims at an average of £1,800 = £36,000,000.
The speed of making such recoveries is vital. Any delay reduces cash flow, interest on
capital and profitability, which could have an adverse effect on the insurer’s solvency margin.
Research exercise
How much does your organisation recover and what is the average time taken to make
those recoveries? How does this compare with your competitors?
Claim settlement
Ultimately, the claim is fully paid with no outstanding liabilities or recoveries, and the claim
can be settled in systems and archived.
Review of performance
Audits are usually carried out in respect of a sample of closed claims, plus any large or
particularly problematic claims. Carrying out an audit of claims handled can help the claims
manager ensure that:
• standards of service are maintained;
• internal decisions are made correctly; and
• any reserves still attaching to claims reflect their current position and are in line with the
For reference only

corporate reserving policy.
There may also be lessons for the claims manager to learn from how a claim was handled.
They can incorporate these into the corporate claims philosophy to improve future
performance.
Auditors can be internal auditors (senior handlers or specialist audit teams) or specialist
external auditors. Reinsurers also often carry out audits on their cedants.
Refer to
See also Outsourcing on page 4/14
F Claims is not an isolated function

The claims department personnel interact externally with brokers, clients and service
suppliers. They also interact internally with other departments within the insurer, as figure 1.4
illustrates, and it is this internal interaction we focus on here.
Figure 1.4: Interaction of claims personnel
Actuarial Underwriting
Risk and regulatory Technology

and data
Claims
Legal Finance
Sales
F1 Interaction with underwriting

An underwriter has the responsibility for deciding:
• whether or not to accept a proposal of insurance;
• what terms and conditions to set;
• the proportion of risk to underwrite; and
• the price at which to rate the insurance (i.e. the premium).
F1A What impact do claims have on pricing?
When rating the risk, the underwriter needs to take the following into account.
• Break-even: the price must be set at a level that will cover the cost of future claims,
administrative expenses and broker commission.
• Profitability: the price set should achieve the insurance company’s profitability goal.
• Market conditions: these also affect rating.
In a hard market, where there is less competition, insurers may be able to charge higher
rates and/or restrictive terms.
In a soft market, competition drives rates down and insurers have to charge lower rates.
The underwriter may decide to sustain losses on some areas of business to retain market
share, in the hope that they will be well positioned to take advantage of the next hard
market.
As the premium charged to a policyholder should cover the cost of future claims, claims
reserving can be used to assess the adequacy of the premium rate for a particular type of
business.
For reference only

F1B What impact do claims have on underwriting?
By analysing past claims and projecting the future cost of claims, the underwriter can
determine the particular characteristics (the underwriting factors) that gave rise to the annual
claims cost and the claims trend exhibited. In order to be in a position to analyse the impact
of claims on underwriting, the underwriter requires:
• Good lines of communication between the claims department and the underwriting
department. The flow of information will be particularly efficient when the claims
personnel are aligned to the underwriting department, e.g. loss adjusters’ reports and risk
survey reports can be shared. In addition, analysis of claims complaints may highlight
deficiencies in policy wordings and claim trends.
• A suitable technology system, which allows the claims department to record properly and
accurately each claim notified. The system must be able to code claims so that losses of
a particular nature are easily identifiable and can be analysed.
• Policies that carry a claims notification clause that stipulates a time frame for the
notification of losses.
• A set of procedures that lead to potential claims problems being highlighted before
renewal.
• A set of internal review procedures, so that underwriters can anticipate any likely claims
before any policies are issued following amendment of underwriting terms and conditions.
Thereafter the underwriter requires good analytical skills to be able to assess the lines of
business and types of programme the claims will affect.
The underwriter has a number of possible responses to an increase in the frequency or
severity of claims. One response would be to reclassify that particular business (in speciality
lines) or refuse cover altogether (personal and commercial lines).
Chapter 1
Alternatively, they can change particular terms and conditions such as:
• the number and/or the wording of the exclusions;
• increasing the excess (either ranking or non-ranking against any aggregate deductible);
• introducing or increasing an inner aggregate deductible;
• the type of cover offered, e.g. from a losses occurring to a claims made basis;
• the length of period on cover; and/or
• the legal severity imposed. For example, the notification of loss events may be upgraded
from a condition to being a condition precedent.
The company needs to balance the effect of more restrictive terms and conditions with the
need to maintain market share. In this context, it is important to be aware of the terms and
conditions offered by competitors.
F2 Interaction with sales

If an insurer is to sell its products, it needs a sales strategy. If it fails the insurer will fail:
without cash flow or income an insurer will go out of business.
Research exercise
Study how the market is divided. Consider direct sales, the broker market and the Lloyd’s
and London markets. How do these differ? What difference does the market you operate
in make to what you do?
Depending upon the insurance products it offers, the sales function will generally
operate using:
• the media: it will place advertisements, typically on the television and internet,
For reference only

encouraging the purchaser to obtain a quote via the internet or telephone; or
• a sales force: this is more suited to commercial insurance, with the sales force actively
seeking face to face meetings with brokers to secure business, and softer e-mail and
letter exchanges reinforcing the brand and finalising business secured as a result of
previous meetings.
The claims service is directly influenced by, and in turn directly influences, the type of
products offered by the insurer and the target customer it is marketing to. In personal lines
insurance, pricing regulations that came into force in 2022 will potentially reduce renewal
'churn' and as a result claims service may become more important to differentiate an insurer
from the competition.
Claims management decision: interaction with sales

How can my claims department actively assist the sale of insurance products?
Which of its actions or inactions could erode the sales function?
Research exercise
Find from your own experiences, examples where you have seen the claims department
assist the sales function and where you have seen it erode the sales function. If either
behaviour became endemic, how would this affect the organisation ultimately?
F3 Interaction with actuaries

In order to understand how the claims function interacts with the work of actuaries we need
to put it into the context of what a company’s actuaries do. One of their key roles is to
monitor the financial performance of the company. As claims have a key role to play in how
profitable a company is, it should be obvious that a close relationship between the actuaries
and the claims team is essential.
There are many reasons why it is imperative that a company is able to assess its claims
reserves by class of business. One such reason is to ensure that it is solvent and can
continue underwriting.
The other main reasons for monitoring a company’s financial performance are:
• to satisfy the requirements of regulators;
• for the annual report and accounts;
• management control, including budgetary control; and
• determining future underwriting strategy.
Research exercise
Establish the current outstanding reserves for your organisation – what would be the
impact of a 1% or 2% error rate?
F3A Regulatory impact

The regulatory structure is governed by the Financial Services Act 2012 and comprises:
• The Financial Policy Committee (FPC): this is designed to contribute towards the Bank
of England’s objective of protecting financial stability. Through identifying, monitoring and
taking action to remove or reduce systemic risks it seeks to protect and enhance the
resilience of the UK financial system. The FPC has a secondary objective to support the
economic policy of the Government.
• The Financial Conduct Authority (FCA): this aims to enhance confidence in the UK
financial system by facilitating efficiency and choice in services, securing an appropriate
degree of consumer protection and protecting and enhancing the integrity of the UK
financial system. The FCA supervises the conduct of 26,000 financial firms.
• The Prudential Regulation Authority (PRA): this has the role of enhancing financial
stability by promoting the safety and soundness of PRA authorised persons, including
minimising the impact of their failure. It is responsible for the prudential supervision and
regulation of banks, building societies, credit unions and insurers.
For reference only

The PRA is responsible for the prudential regulation of all ‘systemically important firms’,
defined as those firms that pose a risk to the financial system if they were to fail. This
includes general insurers and life insurers. The FCA is responsible for regulating their
conduct of business. The FCA is also responsible for the prudential (and conduct) regulation
of those firms deemed to be of limited systemic importance, which includes insurance
intermediaries.
This arrangement was modified under the Bank of England and Financial Services Act
2016. The status of the FCA remained unchanged (as a subsidiary organisation of the Bank
of England) but the PRA was made part of the Bank, to strengthen the Bank’s ability to
operate as ‘One Bank’. A new Committee, the Prudential Regulation Committee (PRC)
was set up to make the most important decisions regarding prudential regulation.
On the Web
www.fca.org.uk
F3B Annual report and accounts

Under the Companies Act 2006, every company is required to prepare an annual report and
accounts, and insurers are no exception. The annual report and accounts consist of a profit
and loss account for the financial year and a balance sheet as at the end of the
financial year.
Profit and loss account
The profit and loss account shows the transactions carried out by a company during the
financial year. It is split between the technical account (which contains the insurance
transactions) and the general account (which contains non-insurance transactions). The
technical account includes premiums, claims, reinsurance recoveries and the change in
the claims reserve from the previous year. The profit and loss account also shows the profit
or loss for that year, out of which the shareholders of the company are paid their dividend.
Balance sheet
This shows the financial position of the company at a point in time (the financial year-end). It
shows the assets and liabilities of the company. The technical reserves, including premium
Chapter 1
reserves (such as outstanding claims and Incurred But Not Reported), are disclosed in the
liability section. You can find the value of the company by subtracting the liabilities from
the assets.
The claims reserve is usually one of the largest components of a balance sheet for an
insurance or reinsurance company. The Insurance Accounting Regulations 1993 allow for
explicit discounting of claims reserves under certain circumstances (normally where the
average period to settlement of the claims being discovered is at least four years). This is
calculated by estimating the future payment pattern of claims and discounting this for the
time value of money at a prudent discount rate (i.e. an interest rate assumed to be applicable
in the future) having regard to the past investment performance of the company.
F3C Management and budgetary control
The board of the company will agree the budget for running the claims department with the
claims manager. The group actuaries will also be involved, to ensure that the costs agreed
are affordable and that the claims budget is grouped with all other departmental cost and
income related budgets. These figures are used to calculate the future costs of running the
business profitably and within statutory solvency ratios. Once agreed, the budget is regularly
monitored against actual spend.
The operational budget is either agreed with the manager or simply allocated to them. The
strategic budget takes account of the mix of business. Management accounts enable a
company to plan, monitor and control the company’s operations. Therefore, they are
produced more frequently and in more detail than the annual report and accounts.
Budgeting
Budgetary control is a tool used by management to ensure that the company’s objectives
(such as profitability and solvency) are met. It requires management to set standards.
Management will set a minimum contribution level for each contract written and assess the
estimated premiums and claims. They do this to ensure that the company can cover its
For reference only

expenses, such as office expenses and staff costs, and achieve its solvency requirements.
By analysing historical claims, the company can estimate the level and cost of likely
future claims.
Monitoring
Part of the budgetary process is to monitor actual results against budgeted results. The
company should have adequate systems to monitor the actual profitability of each contract or
group of contracts to ensure that the company’s goals are achieved. Management should
investigate variances between budgeted and actual results in terms of premiums, claims and
technical reserves and obtain explanations for those differences.
Research exercise
Find details of an internal budget from your organisation. Consider scenarios where
changes to the budget may be required. How should this be managed?
Control
Once results have been analysed, management can determine appropriate steps to remedy
the situation. They could choose to:
• cease writing a certain class of business; or
• not renew certain contracts; or
• expand in relevant areas.
Conclusion: so how do claims personnel and actuaries interact?
Actuaries need to access certain information from the claims department so they can assess
the adequacy of the claims reserves, the company’s solvency and its profitability. The claims
department will need to ensure that this information is accessible and ready to use.
F4 Reinsurance recoveries
Some organisations automatically process reinsurance collections. In some, the reinsurance
recovery team is part of the claims team. In others, however, it is a stand-alone department.
It will interact with the insurer’s claims team for aspects such as IT systems, technical
guidance and sometimes operations and management control. Reinsurance recoveries that
are recovered late or not at all adversely affect an organisation’s cash flow, profitability and
solvency.
The essential difference between insurance claims handling and reinsurance claims handling
is that reinsurance claims handling involves negotiation between two insurance specialists in
a business environment where a continuing business relationship may exist. Insurance
claims handling, in comparison, often involves an insurance specialist negotiating with a
member of the public or commercial customer where a continued relationship is less likely if
the claims settlement fails to meet the insured’s expectations.
F4A Notification conditions
Under the terms of a reinsurance policy, the reinsured is bound to notify the reinsurer of
claims and/or incidents in certain circumstances. These circumstances vary from contract to
contract, although there are two standard conditions often used by the market.
Claims co-operation clause Claims control clause
Wordings vary, but broadly speaking the reinsurer must The reinsured’s duties under this clause are more
be promptly notified of losses which may involve the onerous. It must notify the reinsurer promptly of losses
reinsurer. The reinsured must then co-operate with the that may involve it and allow the reinsurer to control the
reinsurer in handling the claims claims. If a reinsured fails to notify the reinsurer at the
appropriate time, it may be in breach of this clause. It is
vital that both the reinsured and the reinsurer
understand their respective rights and obligations under
the terms of any claims control clause
Research exercise
Find out about Royal and Sun Alliance Insurance plc v. Dornoch Ltd (2004). What
does this teach you about the handling of reinsurance claims? Talk to your colleagues:
For reference only

what reinsurance contracts does your organisation have in place and what processes are
there in the claims department to ensure that all obligations under the contract are
fulfilled? What impact do these issues have on the systems that you have in place to
handle reinsurance claims?
F4B Accumulations
The term accumulation, or aggregation, refers to the pooling together of losses for collection
under an insurance or reinsurance policy (e.g. weather-related claims over a defined period).
The insurer may take out reinsurance in respect of accumulated losses arising out of one
event. In other words, the insurer will seek to protect itself against the possibility of a single
event resulting in claims being made under different policies underwritten by the insurer. This
type of reinsurance is known as accumulation or aggregate protection and is usually written
under the terms of a reinsurance treaty or facultative protection of aggregated losses in
respect of a certain portfolio of business.
How accumulation/aggregation clauses work has been the subject of a significant case in the
Supreme Court.
AIG Europe v. Woodman (2017)
In early 2017, the UK’s Supreme Court handed down the most important decision to date
regarding aggregation of solicitors’ professional indemnity insurance claims. This case was
an appeal to the Supreme Court of the Court of Appeal’s decision in AIG Europe Limited v.
OC320301 LLP (formerly The International Law Partnership LLP) & The Law Society
(Intervener) (2017).
The judgment concerns the true construction of the aggregation provision contained in
clause 2.5 of the Minimum Terms and Conditions annexed to the Solicitors Indemnity
Insurance Rules 2013, which must be incorporated into all solicitors’ indemnity policies. Until
these proceedings, the aggregation wording had never been considered by the courts. Its
meaning is a matter of importance to solicitors and their clients, to the insurance industry and
to the Law Society.
The policy wording relating to the aggregation of losses was ‘a series of related matters or
transactions’ and the court was asked to consider the meaning and correct interpretation of
this wording. The Court of Appeal had concluded, endorsing the submissions of the Law
Society (but rejecting the submissions of both the appellants and the respondents on the true
Chapter 1
construction of the wording), that the true construction of the words ‘in a series of matters or
transactions’ is that the matters or transactions must have an intrinsic relationship with each
other, not an extrinsic relationship with a third factor.
The Supreme Court held that the Court of Appeal’s formulation was not necessary or
satisfactory, but concluded that there ‘must be some inter-connection between the matters or
transactions, or in other words that they must in some way fit together’.
The judgment concluded that a test should be used to establish whether aggregation applies
or not. The Supreme Court’s approach was to set out a two stage process:
• first identifying the matters or transactions in question; and
• then considering the factual and legal links between them.
What constitutes each matter or transaction should be a question that is addressed broadly
and not just by focusing on the end-point identified as the breach of duty. The broader view
of what constitutes each matter or transaction means that there are more potential elements
to be considered in the second stage of the process: identifying the factual and legal links.
This may in turn mean that aggregation clauses will apply in a broader range of scenarios.
On the assumed facts, the Supreme Court held that the claims brought by one set of
investors in a property development in Turkey aggregated and that the claims brought by
another set of investors in a property development in Marrakech aggregated. However, the
insurers had no right to aggregate the claims of the Turkish investors with those of the
Marrakech investors.
Research exercise
How does the judgment in this case differ from that in Scott v. Copenhagen Re (2003)?
For reference only

Claims management decision: accumulation protection
What aspects do my claims handlers need to consider when dealing with claims
presented under the terms of such an arrangement?
Critical reflection
What would be the consequences of making a major structural change to the business
based on incorrect data?
G Scenario 1.1: Structure

G1 Question
Your board has asked you to prepare a paper commenting on the structure of your
organisation. Prepare the paper and include any recommendations you would make as a
result of your analysis.
G2 How to approach your answer

Aim
This scenario aims to test your understanding of corporate structures, their strengths and
weaknesses as they apply to your own organisation.
Key points of content
Your answer should be in the format of a board report and should aim to include key points
of content such as the division of work, the chain of command, communication, the type of
tasks performed, internal groupings, management hierarchy and ESG. It should conclude
with your recommendations for improvement.
Self-test questions
1. How is the claims environment categorised?
2. Why do businesses require an organisational structure?
3. Which functions of an insurance company are likely to be included within their

organisational structure?
4. How might an insurer benefit from a functional structure of a claims department?
5. What are the main functions of a claims department?
6. What are the roles of a claims department?
7. How might an underwriter react to a change in severity and/or frequency of claims?
8. What is explained within an insurer’s balance sheet and profit and loss account?
9. What are the differences between the notification conditions in a reinsurance policy?
You will find the answers at the back of the book
For reference only

2
Chapter 2
Role of the claims
manager and regulation
outcomes
Introduction
A What is the claims manager’s role? 1.3
B Referral points and authorities 1.3
C Quality management 2.8
D Contract of insurance 3.8
E Regulation 1.4
F Scenario 2.1: FCA supervisory visit
G Scenario 2.2: Claims recoveries
For reference only

Self-test questions
Learning objectives
• analyse the role of the claims manager;
• distinguish between different authorities and referral points and assess which claims need
to be escalated;
• apply the tools of quality management to the claims management role;
• interpret a contract of insurance in relation to claims; and
• interpret the rules of the regulatory environment in relation to claims handling and
management.
2/2 820/January 2023 Advanced claims
Introduction
In the previous chapter, we started to look at claims management within the environment of
Chapter 2
the company. Here we take a step closer to the heart of our topic by looking at the role of the
claims manager in this context. It is the claims manager‘s responsibility to ensure that all
claims are handled effectively, efficiently and in such a way as to achieve the wider corporate
objectives. This involves ensuring that all claims are handled by staff who are appropriately
skilled and so we look at how claims should be escalated, authorities and referral points. We
also consider the quality management tools available to the claims manager to help them
fulfil this responsibility. At this point, we will take some time to remind ourselves of the
contract of insurance and the importance of it for accurate claims handling.
Finally, in this chapter, we look at the regulatory environment within which the claims
manager must operate.
Key terms
Authorities Claims manager Conflicts of interest Contract certainty
Contract of Escalation procedure Firm systematic ICOBS
insurance framework
ISO 9000 Quality management Referral points Regulatory
responsibilities
Technicians
A What is the claims manager’s role?
For reference only

Claims management decision: protecting funds and assets
How can I ensure that my claims department protects the funds paid as premium and the
assets of the corporation’s shareholders while treating our customers fairly?
Since the source of the largest outflow of money from an insurance company is the claims
department, the position of the claims manager is key to providing operational excellence.
The managers of insurers are the stewards of two sets of funds:
• the funds provided by the shareholders; and
• the funds created by the premiums paid by policyholders.
You may think that the easiest way to achieve this is to repudiate all claims! But think about
how that might impact on your company's obligations to pay claims in line with the agreed
policy terms, ensure fair treatment of customers and the reputational risk. How easy would it
be to retain existing business or attract new business if the insurer had such a reputation?
Consider this…
What does the purchaser of an insurance policy actually buy? Who is it that ultimately
pays claims and how does the claims department seek to achieve this? Have you ever
made a claim – what was your experience like?
When it comes to claims, an insurer must endeavour to provide those of its policyholders
who suffer loss with an appropriate indemnity. At the same time, it must ensure that any such
payments are justified. In this context, the functions of the claims department are to:
• deal quickly and fairly with all claims submitted;
• distinguish between valid and invalid claims; and
• operate at the optimum expense base.
Chapter 2 Role of the claims manager and regulation 2/3
To do this successfully, the claims department will require:

• competent and well-trained staff;
• efficient administrative support;
Chapter 2
• efficient claims procedures;
• efficient technology and data systems; and
• a clear corporate claims philosophy.
This requires effective management to ensure that the overall claims strategy is
implemented. Therefore, the claims department is usually headed by a claims manager
(often called the claims director, head of claims or chief claims officer) who is supported by a
number of claims handlers. The claims manager will usually report to the board and in some
organisations will sit on the board.
The role of a claims manager can be analysed under the headings illustrated by figure 2.1.
Figure 2.1: The Claims Manager’s Role
Cost Strategy
Claims
Manager’s
Role
For reference only

Personnel Service
A1 Strategy
The claims manager is responsible for the implementation of the corporate claims strategy.
Often, the claims manager is also responsible for designing the claims strategy and keeping
it up to date. To do this the claims manager needs to fully understand the culture of the
organisation as well as the corporate strategy. The corporate claims strategy should respect
and add value to the corporate strategy, so that all the organisation’s departments are
heading in the same direction. The claims manager should lead by example and promote the
claims strategy, feeding into and complimenting the corporate culture.
A2 Cost
There are two types of cost for the claims manager to consider. The first is the internal cost
of running the claims department which must be monitored and controlled, with deliberation
given to outsourcing certain functions or delegating responsibility to third parties. The biggest
of these costs will be the information technology systems, staff salaries and premise.
Refer to
More on controlling costs in Controlling costs on page 7/5
The second type of cost is the actual settlement of claims. This is the total amount of claims
indemnity payments, the expenses associated with making those payments (e.g. legal or
loss adjuster’s fees), and the speed of payment and recoveries.
A3 Service
The claims department provides a number of services, for which the manager is
accountable. These are:
Chapter 2
• the identification of valid/invalid claims;

• the payment of valid claims in a timely manner;
• making all possible recoveries promptly; and
• the provision of advice to internal customers regarding material developments affecting
claims issues, such as case law, statutory requirements, corporate restructuring and
analysis of significant events, such as law reforms.
However, service is more than simply providing what is required. In many firms the claims
manager has a responsibility to ensure that a claimant is satisfied with their experience of
the insurer, both from an indemnity and an empathy perspective.
You will need to manage your time and staff efficiently by delegating responsibility to less
senior staff. This will free you to concentrate on claims that require:
• a higher level of technical skill;
• a high level of seniority; and/or
• an increased amount of experience.
Often, as claims manager you will have little day-to-day claims handling responsibility,
although in some organisations you will oversee the larger losses. You are the link between
the claims team and senior management: the bulk of your time will be taken up by
considering regulatory responsibilities, reporting and planning strategy, as well as
managing potentially large numbers of staff and overseeing the development of claims
handling systems and processes.
For reference only

It should be noted that some small value claims and complaints may also require the claims
manager’s attention; for example, if they are likely to set some kind of precedent for the
future or have wider implications for the company.
As more insurers are trading globally and competition increases, it is no longer acceptable to
simply handle and manage claims quickly and pay valid claims promptly. Brokers and
policyholders are demanding the highest possible levels of service.
Insurers are responding to this demand with added value services such as:
• legal advice;
• increased digital service offerings;
• uninsured loss recovery services;
• access to dedicated qualified senior claims personnel for risk management advice;
• ancillary services not involving claims handling;
• client/supplier training and development workshops; and
• rehabilitation services.
A4 Personnel
As claims manager you are accountable for:
• recruiting, training and retaining competent staff;
• effectively delegating responsibilities within the department such as claims handling,
reserving and payment authorisation;
• effectively managing and motivating the claims staff by:
– planning work and responsibilities,
– organising work including the setting of individuals’ objectives and priorities, answering
technical queries and clarifying working practices,
– providing leadership through your decision-making ability and proactive method of
working; and
• controlling staff, including monitoring progress made once a task is set with regard to the
organisation’s key performance indicators.
A4A Technicians’ role

As claims manager you are responsible for the technicians in your department. The larger
your department is, the more important it is that you structure it in the most effective way.
Chapter 2
Generally, technicians are grouped into teams. Larger teams may be further sub-divided into
units. The manner in which this is done depends on how the claims department is structured.
Claims technicians handle the claims made against the policies underwritten by the insurer.
At the most basic level, they handle low value, volume claims. More experienced handlers
may be responsible for a number of junior technicians and handle claims that are more
complex.
Example 2.1
Zebedee Insurance is a multinational insurer with a global claims workforce. It has one
team in the UK with units in London, Glasgow and Manchester. Running each unit is a
manager reporting into the team manager. Overseas, the workforce replicates this model
in each territory. All team managers report to someone who can be based anywhere in
the world.
The phrase ‘claims handling’ was the traditional term used to describe an insurer’s actions
during the various stages of the claims process. Critically, it encompasses none of the risk
management issues and instead emphasises the day-to-day functions of claims review,
claims investigation and claims negotiation – arguably the most problematical elements of
claims work.
Claims handling is:
handling the claims process with an emphasis upon claims review, investigation
and negotiation, but excluding risk management issues.
For reference only

Alternatively, we could describe it as
dealing with a claim notification through to settlement on a day-to-day basis.
The process of claims management encompasses that of claims handling.
A4B Middle management
If the organisation is sufficiently large, the claims manager may appoint one or more
deputies and delegate some managerial tasks to them. Generally speaking, each will have a
particular focus – often a type of claim or line of business, or a sub-function within the
department such as review and development activity. Such tasks may include:
• the technical training and development of junior team members;
• the appraisal of junior team members;
• peer review;
• the monitoring of slow moving claims;
• reporting team performance to the claims manager;
• complaints handling; and
• authorising low value reserves and claims payments.
Consider this…
What key activities are delegated by the claims manager to their direct reports in your
organisation? Are there any activities that you feel should not have been delegated? Have
certain roles and responsibilities been retained that should or could be delegated?
A5 Claims management
In addition to all we have discussed so far, the claims manager needs to ensure that they are
able to communicate effectively as illustrated.
Chapter 2
Upwards The Board will require regular progress reports as to performance, in

particular in relation to actual cost compared to budget.
Downwards All immediate reports to the claims manager will need to be set goals aligned
to, and supporting, the claims strategy. Performance against these goals
must be monitored regularly and action taken to improve things where
deviations are found. Regular training should be cascaded down through the
claims manager’s regular reports in relation to issues such as regulation, e.g.
money laundering, bribery, and changes in the law.
Within the business The claims manager should be discussing matters of interest with other key
functions regularly. For example, claims trends should be monitored and
debated regularly with underwriters and the survey team. Equally, other
functions should be calling on the claims manager for relevant input into the
running of their departments in order to compliment the corporate strategy.
Research exercise
Draw the organisational chart for your department. Are the chains of command clear? Is it
logical? Could it be improved?
B Referral points and authorities

We have already referred to the fact that more experienced claims technicians may be
For reference only

responsible for other, less experienced technicians and may take on the handling of more
complex claims. But how is it decided which claims should be passed to these more
experienced people? And what about claims that could be passed higher up the company, to
the claims manager, or even to the board; how is this decided? This all comes under the
scope of referral points and authorities.
B1 Referral points
At the highest level, insurers will need to refer certain claims to their reinsurers. This may be
because the claim exceeds the insurer’s retention, because the claim has significant
potential (many reinsurers ask to be notified of all fatal accident claims, for example), or the
claims condition of the reinsurer requires it.
In addition, the insurer’s board will want to know about single large losses, or an aggregation
of several smaller losses that together may be of interest (e.g. a large explosion in an inner
city or an earthquake destroying many properties) and about certain claim types (e.g.
vehicles impacting bridges). The board will also want to know about a claim that the press is
likely to report on widely.
All such claims need to be escalated to the highest level, so systems need to be put in place
to ensure that this happens. Some issues will need to be discussed with underwriters and
the sales force before further action is taken. Different firms approach this in different ways.
Before claims decisions, information or settlements are referred to the senior levels outlined
above, they may go through a number of smaller, more pragmatic referrals within the claims
department to make sure the claim is being handled appropriately by the right people
throughout its life.
Research exercise
How are claims authorities documented within your organisation? How is this linked to
your internal audit?
Example 2.2
Your team receives a large claim, which appears to fall outside policy cover. Before taking
further action, you should check with the underwriters that your department’s interpretation
Chapter 2
of the policy is correct. If all is in order, you will need to notify the sales team so that they
can manage any potential conflict with the broker at the earliest opportunity.
B2 Authorities
Managers and technicians usually have authority guidelines, controlled by the claims
manager, explaining which claims they can handle and which claims they need to refer to
their immediate manager.
There are a number of reasons why a claim may need to be escalated: for example, to
ensure that complex claims are handled at the appropriate level and in line with the claims
philosophy/strategy. These reasons should be clear to your team. However, when it comes
to the size of claim a team member can handle, not all companies control this purely through
authority documents. Some companies have restrictions built into their technology systems
that prevent staff from issuing claims settlements above a certain amount or require them to
obtain authorisation from a more senior staff member to settle a large loss.
Research exercise
Find copies of all internal claims authority documents.
What are the differences between the authorities given to different members of your team,
from the newest claims trainee to the most senior manager? What are the reasons for
these differences?
Which aspects are the same? Why do some issues need to be escalated to board level?
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B3 Escalation procedures
The manner in which a claim or series of claims is escalated from a technician to their
immediate superior (or nominated referral point, such as a specialist), and from them to the
next level (and so on), is known as the company’s escalation procedure. In many
companies, the authority document acts to formalise this procedure internally, although
procedures can differ from company to company.
Although 'escalation' as a term sounds quite serious, what it really means in practice is that a
claim is moved on to the most appropriate person manage it based on the characteristics of
the loss.
Sometimes this escalation will involve a transfer of the ownership of the whole claim. At
other times it may just be for information and guidance on how best to handle the claim.
Depending on the IT system the insurer uses, escalation may also happen automatically, for
instance, when a claim reaches a certain financial value or has certain characteristics (e.g.
involves a fatality).
Research exercise
How do you know which claims you should escalate?
Think back to a claim that you escalated to your immediate superior. Find out how far
within your organisation it was escalated. Was it escalated outside of your organisation? If
so, to which external companies? Why?
C Quality management
We have already looked at how a claims manager can use the claims philosophy as a tool to
Chapter 2
enable their team to achieve the corporate objectives. Another tool available to the claims
manager is quality management.
To be able to manage quality, it is essential that we define exactly what ‘quality’ means. We
will also analyse how the ISO 9000 standards of certification can help with the quality
management process.
C1 Definition of quality and quality management

Quality management is a mechanism by which insurance companies endeavour to make
their work efficient and their outputs effective. Part of its purpose is to meet customer
expectations.
Quality programmes help the organisation manage the application and effectiveness of its
processes. Many organisations have individuals, or even teams, dedicated to tracking claims
performance at every level. A quality programme allows a department to understand its
performance in key areas such as reserving, claims settlement, leakage, compliance (i.e. fair
treatment of customers/conflicts of interest) and customer experience. The department
head can then feed what it finds into process reviews and development plans, both for the
department and for individuals.
Quality management has implications for aspects of the claims management operation,
such as:
• development of a corporate claims philosophy;
• use of information technology;
• use of outsourcing;
For reference only

• use of intermediaries;
• marketing; and
• customer retention.
Research exercise
With regard to insurance claims, what does quality management mean?
C2 ISO 9000 certification – an explanation

The ISO 9000 series is a family of standards for quality management systems and is
maintained by The International Organisation of Standardisation (ISO).
Research exercise
Find out about ISO 9000 – how does this relate to insurers and specifically to claims
managers?
The Quality Assurance System Standard BS 5750 was introduced in 1979, amended in 1987
and has since been adopted by the ISO as the ISO 9000 series. The standards were also
accepted by the European Committee for Standardisation as the EN 29000 series and,
although amended in 1994 and 2000, are now recognised throughout the world.
Example 2.3
In 2009, Royal Sundaram Alliance Insurance Company Limited in India announced
that they had received an extension of ISO 9000:2000 certification for health and
accident claims.
Example 2.4
In 2011, Aviva Life in India achieved ISO 9001: 2008 certification for quality excellence.
This certification is an internationally recognised quality management system standard. In
Chapter 2
order to achieve this, Aviva Life met rigorous standards in quality management system
documentation review, pre-audit, initial assessment and clearance of all non-conformities.
The quality assurance standard that applies to claims management is ISO 9001: 2015,
which replaced previously independent standards.
On the Web
www.iso.org
D Contract of insurance
As you should recall from your studies in M85 Claims practice, the policy wording issued by
the insurer is evidence of the contract of insurance between insured and insurer.
It is vital that every claims technician has a good understanding of the policy wording so that
decisions can be taken quickly in order to establish which claims:
• are covered and so should be paid; and
• fall outside policy cover and should therefore be declined.
Research exercise
Obtain a copy of your standard policy wordings. Which areas have been challenged? How
did your senior management team respond to these challenges?
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D1 Policy wordings
Some classes of business are compulsory in certain circumstances, such as motor and
employers' liability. Where this is the case, insurers tend to issue the same policy wordings
(or very similar wordings) as the cover under these policies is the same or very similar.
However, there are many classes of insurance which are not compulsory and here policy
wordings (and, therefore, policy cover) can vary considerably. Some insurers offer wide
scope of cover and others offer restrictive terms; some contain more endorsements,
warranties and conditions than others. Policy limits, deductibles and exclusions vary.
It is vital that all claims technicians are familiar with the policy cover offered by their
organisations and trained in relation to policy wording changes so that claim incidents can be
correctly applied to the policy cover.
Research exercise
Source various market policy wordings, endorsements, warranties and conditions. How do
they vary and why? What different claims management procedures are required when
considering these different wordings?
D2 Policy interpretation
Claims technicians don't only need to understand the policy cover in respect of the
insurance products with which they are dealing. They have to apply the policy cover to a
wide set of claims circumstances; in other words they need to interpret the policy cover in
relation to each set of claims circumstances. This is often more complicated than it sounds
because insurers attempt to explain the cover that they intend to give within the policy
wording and sometimes the working used within insurance policies is not perfect.
Research exercise
Think about some claims that you have handled. How were the policies worded? Could
they be improved to make them clearer? Discuss with your underwriters.
Over the years, insurers have on occasion paid claims in circumstances where they had not
intended to grant coverage. Can you think why this may have happened?
Chapter 2
Research exercise
Find instances where a broker or policyholder has misunderstood your underwriter’s
intentions when they came to make a claim.
Research exercise
Look at the cases Doheny and Others v. New India Assurance Co Ltd and Others
(2004) and Paine v. SJO Catlin and Others (2004). Find examples of other,
similar cases.
Which party does the court generally favour where there is a dispute over the policy
wording?
Consider this…
Cyber liability policies are relatively new to the industry. Is it possible that cyber liability
policy wordings could cover circumstances that the underwriters had not intended that
they should cover?
E Regulation
It is the claims manager’s role to ensure that the claims department complies with the
relevant laws and regulations applicable to the organisation.
For reference only

Refer to
Law concerning breach of insurance contract discussed in What is this legislation? on
page 3/18
The regulatory framework for financial services in the UK was established under the
Financial Services Act 2012. It consists of three regulatory bodies: the Financial Conduct
Authority (FCA), the Prudential Regulation Authority (PRA) and the Financial Policy
Committee (FPC).
E1 The regulators: an overview

E1A The Prudential Regulation Authority (PRA)
The PRA has three objectives:
• a general objective to promote the safety and soundness of the firms it regulates;
• an objective specific to insurance firms, to contribute to the securing of an appropriate
degree of protection for those who are or may become insurance policyholders; and
• a secondary objective to facilitate effective competition.
The PRA carries out its objectives through the Risk assessment framework. The framework
operates in a way that reflects the PRA’s objective to protect policyholders, as well as the
financial system. The framework captures three elements:
1. The potential impact on policyholders and the financial system of a firm coming under stress of failing
2. How the macroeconomic and business risk context in which a firm operates might affect the viability of its
business model
3. Mitigating factors, including risk management, governance, financial position including its solvency
position and resolvability
The PRA expects insurers to have a culture that supports their prudent management.
Good prudential management must be pursued by all individuals working in an insurance
company not just senior staff. But the PRA does not have a ‘right culture in mind’ when
making judgments about firms. Instead it focuses on ‘whether boards and management
clearly understand the circumstances in which the insurer’s solvency and viability come into
question, whether accepted orthodoxies are challenged, and whether action is taken to
address risks on a timely basis’.
Chapter 2
In summary, under the PRA:
• firms must have sufficient controls to minimise excessive risk taking;
• insurers and individuals must behave in an open and co-operative manner; and
• an insurer’s board must take responsibility for establishing, embedding and maintaining
the type of culture just described.
Claims management decision: prudent management

How can the claims department, and yourself as claims manager, contribute to your firm
having a culture that supports prudent management?
On the Web
For example, see the PRA’s ‘Approach to Insurance Supervision’ dated March 2016 at:
www.bankofengland.co.uk/pra.
E1B The Financial Conduct Authority (FCA)

The Financial Services Act 2012 states that the FCA has an overarching strategic objective
to 'ensure that the relevant markets function well' and FCA says that it 'exists to make sure
that markets work well so that consumers get a fair deal'.
It also has three operational objectives:
• Consumer protection: securing an appropriate degree of protection for consumers.
For reference only

• Integrity: protecting and enhancing the integrity of the UK financial system.
• Competition: promoting effective competition in the interests of consumers in the
markets for:
– regulated financial services; and
– services provided by a recognised investment exchange.
The FCA is also responsible for the Financial Ombudsman Service and the Financial
Services Compensation Scheme. It also oversees the Money and Pensions Service.
On the Web
The Money and Pensions Service website is moneyandpensionsservice.org.uk/ and you
are encouraged to monitor this for developments.
You can read about the FCA’s approach to regulation on its website by choosing ‘About
us’ and then looking at ‘How we regulate’. Visit: www.fca.org.uk.
E1C Financial Policy Committee (FPC)

The Financial Policy Committee (FPC) is an independent committee of the Bank of England.
Its primary objective is to identify, monitor and take action to remove or reduce systemic
risks, in order to protect and enhance the resilience of the UK financial system. The FPC has
a secondary objective to support the economic policy of the Government. The Committee is
responsible for the Bank’s bi-annual Financial Stability Report.
The FPC publishes a Policy Statement explaining how it uses its powers to set a
‘countercyclical capital buffer’ (CCB) and ‘sectoral capital requirements’ (SCRs). The Policy
Statement describes these tools, when it is likely to use them and the likely impact this will
have on financial stability and growth. The FPC has made it clear that its own judgment will
play a key role in material FPC decisions.
The Policy Statement also describes the core indicators that will influence the FPC’s views
and help it to explain its decisions publicly. It reviews and updates these indicators routinely
to enhance the predictability of the regime and help identify emerging risks to financial
stability, so that early corrective action can be taken.
The FPC meets quarterly and sets policy to meet their financial stability objective. They
publish records of their meetings two weeks after each meeting takes place.
Chapter 2
On the Web
Published records of the FPC’s meetings can be found here:
www.bankofengland.co.uk/financial-stability.
E1D Conclusion
Additional factors that the FCA and PRA have regard to include:
• efficient and economic use of resources;
• proportionality;
• consumer responsibilities; and
• transparency.
Changes to the regulatory structure
The Bank of England and Financial Services Act 2016 modified the Financial Services
Act 2012. The 2016 Act puts the Bank of England at the heart of UK financial stability by
strengthening the Bank’s governance and ability to operate more effectively as ‘One Bank’.
The status of the FCA remained unchanged (as a subsidiary organisation of the Bank of
England) but the PRA was made part of the Bank (ending its status as a subsidiary) and a
new Prudential Regulation Committee (PRC) was established. The PRC operates
alongside the other two Bank committees, namely the Financial Policy Committee (FPC) and
the Monetary Policy Committee (MPC).
E2 FCA supervision
For reference only

The FCA’s supervision aims to be sustainable and market based. It looks at how an
organisation is run and at its business model to make a risk based judgment as to whether
this leads to the fair treatment of customers, whether the organisation upholds market
integrity and whether it is financially sound.
Overall, the FCA’s approach is based on two main features. It:
• is outcome rather than process based; and
• seeks to be proactive, promoting early intervention before consumer interests are put
at risk.
The three main approaches taken by the FCA are:
• the proactive supervision of bigger firms;
• the event driven, reactive supervision of actual or emerging risks according to the risk
appetite of the FCA; and
• thematic work focusing on risks affecting many firms or a whole sector.
The FCA terms this last approach a thematic review. A thematic review looks at a current or
emerging risk relating to an issue or product across a number of firms within a sector or
market. It can both discover what is happening, and be used by the FCA to recommend how
that issue should be handled. Experienced market specialists carry out desk based reviews
and site visits and work with industry practitioners and trade/professional bodies to deliver
the outcomes of these thematic reviews.
Research exercise
Visit: www.fca.org.uk/search-results?search_term=thematic%20reviews.
Investigate some of the more recent thematic reviews undertaken by the FCA. What
issues were investigated, how did the FCA undertake each review and what were the
outputs?
Chapter 2
Stage 1
Are the interests of
customers and market
integrity at the heart of
how the firm is run?
Governance and culture Sales processes –

– to assess how effectively to assess firms’
a firm identifies, systems and controls
manages and reduces
conduct risks
Stage 2
Product design – to Post-sales/services and

determine whether a firm’s transaction handling – to
products or services meet assess how effectively a
customer needs and are firm ensures its customers
targeted accordingly are treated fairly after the
point of sale,
service or transaction,
including
complaints
handling
For reference only

E2A Insurance: Conduct of Business Sourcebook (ICOBS)
The FCA and PRA each publish their own handbooks. Insurance is regulated via ICOBS,
which is part of the FCA Handbook and you should be familiar with its content. ICOBS
chapter 8 is dedicated to claims.
On the Web
The FCA Handbook can be accessed from: www.fca.org.uk.
The PRA Rulebook can be found at www.prarulebook.co.uk.
Research exercise
Find out how the FCA specifically deals with insurance via the Insurance: Conduct of
Business Sourcebook (ICOBS): claims are covered in Chapter 8. Are your procedures
sufficient to ensure compliance?
‘Within a reasonable time’

Consumer Rights Act 2015
Where claims are concerned the key provision is the requirement to provide a service
‘within a reasonable time’. This places greater responsibility on an insurer when paying
consumer claims than that which exists under ICOBS.
Read about how the Consumer Rights Act 2015 affects insurers at: bit.ly/2fgUxkp.
Enterprise Act 2016
This Act inserts into the Insurance Act 2015 a requirement that the payment of claims
within a ‘reasonable time’ be implied into every insurance contract. An insurer that fails to
do this is liable to pay damages to their insured.
We will consider the Enterprise Act 2016 in detail in Enterprise Act 2016 on page 3/20
Claims management decision: paying claims ‘within a reasonable

time’
Are my claims procedures sufficient to ensure that claims are handled ‘within a reasonable
Chapter 2
time’? Is there anything I need to change to ensure that my company complies with this
requirement? Are there any implications for my relationships with suppliers?
Application to outsourcers
We will look at outsourcing in detail in Outsourcing on page 4/14.
Research exercise
If an insurer outsources part of its claims function to another company, who is responsible
for compliance with ICOBS? How should the responsible company ensure compliance?
E2B FCA risk categories

The FCA takes a flexible focus on bigger issues as they emerge, either in individual firms or
across sectors. Consequently, some larger-risk firms may have an assigned supervisor with
intensive contact, while others may be contacted only once every few years. The FCA puts
all firms into risk categories: category C1 applies to firms such as large banking and
insurance groups with a very large number of retail customers, and at the other end, C4
applies to smaller firms, including most intermediaries.
E2C Risk framework
The FCA risk framework is based on the following three pillars:
1. Firm Systematic The purpose of the FSF is to assess whether the firm is being run, currently and
Framework (FSF): prospectively, in a way that results in the fair treatment of customers, minimises
For reference only

risks to market integrity, and does not impede effective competition. The aim is to
identify and mitigate the key drivers of poor conduct behaviours and to ensure that
firms behave in a way that minimises the risk they represent to the FCA’s
objectives both now and in the future. This is carried out through a firm specific
assessment, answering the question ‘does the firm have the interests of its
customers and the integrity of the market at the heart of how the business is
run?’ and may result in a programme of action being required of the firm in certain
circumstances.
2. Event-driven work: Supervisory activity in response to issues that are emerging or have recently
happened. This is the flexible element of how the FCA allocates its supervisory
staff so that resources are devoted to situations and firms of heightened risk to
consumers. For example, whistle blowing, alleged misconduct or a spike in
reported complaints.
3. Issues and The flexible approach allows the FCA to look at reviews of issues and products as
products: they happen.
The Firm Systematic Framework (FSF) is a supervisory system. It is designed so that firms
are encouraged ‘to base their business model, culture and how they run the business on a
foundation of fair treatment of customers’. The system is designed to act quickly and
decisively and be pre-emptive in identifying and addressing issues before they cause harm,
with senior staff involved in decisions at an early stage.
E2D Conduct risk
When the FCA and other regulators talk about conduct risk, they tend to mean the risk to
customers of a regulated firm’s controls and operations failing. It blurs with the more general
concept of financial consumer protection. The FCA refers to conduct risk in the context of
‘consumer detriment arising from the wrong products ending up in the wrong hands, and the
detriment to society of people not being able to get access to the right products’. Thus, it
goes hand-in-hand with its overall approach to supervision.
The FCA states that it expects businesses to:

• have a properly implemented customer centric strategy, which produces good,
sustainable profits;
Chapter 2
• have a board led culture which supports that strategy and good consumer outcomes;
• develop products that operate in the interests of customers and use behavioural
techniques to ensure that those customers also understand them; and
• take a prospective view on the products that are sold, stress testing them and ensuring
their appropriateness for customers.
There is a potential issue for a regulated firm that delegates certain functions to
organisations that are not regulated. For example, an insurer may delegate certain claims to
a firm of loss adjusters or lawyers; alternatively an insurer may delegate a significant amount
of underwriting and claims handling to a managing general agent (MGA).
Research exercise
Identify a portfolio of business within your own organisation where claims are outsourced
to another provider. How are these claims handled and managed? How does the insurer
ensure that the claims authority that is delegated is properly supervised and managed?
Where an insurer delegates claims authority, the insurer retains responsibility for compliance
with relevant regulation. In other words, if a non-regulated claims provider of outsourced
services acts in breach of current regulation, then the insurer, as the principal of their claims
agent, retains responsibility for any regulatory breaches. In all the circumstances it is vital
that the insurer has a robust agreement in place with such a provider to ensure that it
complies with all relevant regulation, including regulation surrounding conduct risk.
Furthermore, the insurer must ensure that their agent complies with this agreement. This is
For reference only

usually done by undertaking an on-site audit, followed up by an agreed plan of action for the
service provider to ensure it remains compliant with the agreement.
E3 Fair treatment of customers

The fair treatment of customers is central to the FCA’s work in ensuring a fair deal for
consumers. It underpins the delivery of their statutory consumer protection objective and
future objectives of the FCA.
Refer to
Think back to M85, chapter 1, section D
The FCA expects customers’ interests to be at the heart of how firms do business.
Customers should be able to expect to get financial services and products that meet their
needs from firms that they can trust. As such, the FCA has published six consumer
outcomes explaining what they want to achieve for consumers.
The six outcomes are:
• Outcome 1: Consumers can be confident they are dealing with firms where the fair
treatment of customers is central to the corporate culture.
• Outcome 2: Products and services marketed and sold in the retail market are designed
to meet the needs of identified consumer groups and are targeted accordingly.
• Outcome 3: Consumers are provided with clear information and are kept appropriately
informed before, during and after the point of sale.
• Outcome 4: Where consumers receive advice, the advice is suitable and takes account
of their circumstances.
• Outcome 5: Consumers are provided with products that perform as firms have led them
to expect, and the associated service is of an acceptable standard and as they have been
led to expect.
• Outcome 6: Consumers do not face unreasonable post-sale barriers imposed by firms to
change product, switch provider, submit a claim or make a complaint.
Consumer Duty
In 2022, the FCA published a new Consumer Duty relating to the fair treatment of retail
customers, specifically in relation to communication with retail customers, fair value and
Chapter 2
customer support.
See www.fca.org.uk/publications/policy-statements/ps22-9-new-consumer-duty.
There are no set rules as to how the required outcomes are achieved and firms can adopt
whatever approach suits their business as long as they can demonstrate that they are
consistently ensuring the fair treatment of customers.
Research exercise
Look again at the six outcomes. What do these require of you as a claims manager with
regard to the fair treatment of customers? When has your organisation handled a claim in
a manner that treated a customer fairly? When has it handled a claim in a manner that
failed to do so? What do you learn from these examples?
Furthermore, the FCA expects firms to make use of suitable management information to
monitor the outcomes that they are achieving for customers.
Claims management decision

What management information do I require if I am to be sure that my team is treating
customers fairly? What do I need to do with this information?
Research exercise
For reference only

Look on the FCA’s website and find a copy of ‘Treating customers fairly – guide to
management information’. How can you improve your gathering and use of management
information?
ICOBS
You must ensure that you are fully familiar with the content of ICOBS chapter 8 and keep
yourself up to date with any amendments to these rules by regularly reviewing the FCA
website and trade press.
The whole of ICOBS 8.1 relates to insurers generally, and ICOBS 8.1.1 states that:
An Insurer must
1. handle claims promptly and fairly;
2. provide reasonable guidance to help a policyholder make a claim and
appropriate information on its progress;
3. not unreasonably reject a claim (including by terminating or avoiding a policy);
and
4. settle claims promptly once settlement terms are agreed.
Claims management decision: fair treatment of customers

What systems do I need to have in place to make sure that my team always meet the
requirement to ensure the fair treatment of customers?
E4 ICOBS: Conflicts of interest
Refer to
Think back to M85, chapter 1, section C
There are many occasions when conflicts of interest have the potential to arise. Sometimes,
acting in your customer’s interest is detrimental to your own best interest.
Research exercise
Look again at ICOBS. What does it require of you as a claims manager with regard to
conflicts of interest? Think of a time when your organisation handled a claim where there
Chapter 2
was a conflict of interest. How did it deal with this in order to keep the respective interests
separate? What other conflicts may arise in handling claims?
Larger composite insurers are likely to experience conflict of interests with their policyholders
more regularly than insurers with a small UK footprint and little gross written premium.
Consider this…
Why do you think this is?
Claims management decision: conflicts of interest

What systems and processes do I need to have in place to ensure that potential conflicts
of interest are quickly identified and dealt with appropriately?
E5 Contract certainty
At its simplest, contract certainty means that the insurer and the policyholder have agreed
the wording of the insurance contract before the inception of cover. Thus, the insurer is
certain about its underwriting exposures and the insured is certain about the cover provided.
To ensure contract certainty it is necessary to:
• use technology to standardise processes;
• use incentives and measurement to standardise behaviour;
For reference only

• record disclosures by the insured; and
• allow customers to drive change.
Research exercise
Research the WTC Silverstein litigation on the internet and find out how much it took in
legal costs to establish what cover was actually in place. What can you learn from this
about the importance of contract certainty for a claims manager?
Research exercise
A number of companies have formulated guides explaining how they are complying with
this requirement. Obtain copies, read and understand them. How has contract certainty
benefitted insurers and policyholders at the claim stage?
Critical reflection
What would be the effect on the company of consistently sloppy claims handling?
How does accreditation to ISO 9001: 2015 benefit an insurer?
What would happen to a company that habitually failed to treat its customers fairly?
E6 Lloyd's Minimum Standards and Supporting

Information
Lloyd's has published a set of Principles and Minimum Standards, which represent the
minimum level of performance required of any organisation within the Lloyd's market. In
2016, Lloyd's published standards specific to claims but this was amended in January 2019.
These standards apply to claims written on Lloyd's paper only.
There are now 15 sets of Minimum Standards consisting of guidance and requirements in
detail. Lloyd's provides managing agents with examples of approaches that they may adopt
to meet these standards.
Before we consider the Minimum Standards relating to claims, it is important to explain that
most business in Lloyd's is co-insured. Occasionally, a syndicate writes business in full – i.e.
a line of 100% is signed. But usually several different syndicates underwrite and therefore
Chapter 2
co-insure a single piece of business. Where this happens, one syndicate is chosen to 'lead',
which involves issuing policy documents and handling and claims by appointing experts and
making claim decisions. The 'lead' is usually but not always the syndicate with the largest
line size. The other co-insurers are known as 'followers'. They may disagree with the way the
lead is handling and managing a claim, although this is unusual. This describes the concept
of 'leaders' and 'followers' in the context of claims in the Lloyd's market.
The Minimum Standard that relates to claims is called Lloyd's Minimum Standards MS9 –
Customer. This single standard incorporates the previous separate standards for claims
management, conduct risk and delegated authority. MS9 incorporates the following six
sections:
• Culture, strategy and the fair treatment of customers.
• Setting standards and managing performance.
• Claims case reserving.
• Product assessment and review.
• Customer experience – sales, claims and complaints management.
• Outsourcing – managing third parties with delegated authority.
You should familiarise yourself with these standards.
On the Web
www.lloyds.com/market-resources/requirements-and-standards/minimum-standards
For reference only

E6A Reserving in Lloyd’s
We have discussed Minimum Standards in Lloyd's and how Lloyd's requires managing
agents to handle claims in accordance with these standards.
Lloyd's also operates a Minimum Standard in relation to reserving called Lloyd's Minimum
Standards MS8 – Reserving. The aim of this standard is to ensure that managing agents are
setting accurate reserves in a timely manner. MS8 is divided into the following six sections:
• Board responsibility for setting reserves.
• Statement of actuarial opinion.
• Actuarial function is in place.
• Sufficient information supplied to the board on reserves.
• Robust reserving procedure.
• Appropriately documented reserving process.
You should familiarise yourself with these standards.
On the Web
Full copies of MS8, MS9 and the other Minimum Standards and Supporting Information
are available at: www.lloyds.com/market-resources/requirements-and-standards/
minimum-standards
E6B Claims practices and procedures in Lloyd’s

In 2018, the ‘Single Claims Agreement Party’ (SCAP) model was introduced by Lloyd’s. It
aims to improve efficiency in the Lloyd’s market.
SCAP operates by permitting lead insurers within Lloyd’s to authorise payments of up to
£250,000 in certain circumstances, binding other co-insurers to the claim. This means that
the claims agreement process is faster as not every underwriter participating in the risk
needs to agree to each claim payment.
SCAP is also available to non-Lloyd’s insurers and reinsurers in the London market.
On the Web
For more information on SCAP, visit: www.lloyds.com/market-resources/claims/single-
claims-agreement-party.
Chapter 2
F Scenario 2.1: FCA supervisory visit
F1 Question
As the claims director of a large insurer you are contacted by the FCA concerning a
supervisory visit to your claims department.
Your board asks you what such a visit entails and what the FCA is likely to be seeking to
identify. Prepare your response
F2 How to approach your answer

Aim
This scenario aims to test your understanding of how the FCA monitors compliance with its
regulations.
You should aim to include the following key points of content in your answer:
• FCA's approach to supervision and monitoring conduct of business.
• FCA's risk framework.
• ICOBS (fair treatment of customers and conflicts of interest).
• How FCA satisfies itself that processes and controls are in place.
• How it satisfies itself that claims handlers are compliant.
For reference only

G Scenario 2.2: Claims recoveries
G1 Question
As the claims manager for an insurance company, your department settles many first party
property claims. Other parties are often responsible for causing the claims your policyholders
make as first party claims. Explain how you would go about managing your department to
maximise claims recoveries.

Aim
This scenario aims to test your understanding of how efficient claims recoveries are made.
• subrogation;
• contribution;
• uninsured and insured recoveries;
• claim negotiation strategies and techniques, including alternative dispute resolution
(mediation, conciliation), negotiation, arbitration and litigation;
• processes in place;
• training;
• authorities; and
• escalation procedures.
Self-test questions
1. What type of claim should a claims manager handle?
Chapter 2
2. Why might a claim be escalated?
3. How does quality management help a claims manager meet the corporate
objectives?
4. Who is responsible for an outsourcer’s compliance with ICOBS?

For reference only

Claims service
3
management
Chapter 3
outcomes
Introduction
A What is 'good' service? 2.1, 2.2
B Complaints handling and the Financial Ombudsman Service (FOS) 2.3
C Breach of contract and policyholder litigation 1.4, 2.4
D Bad faith 2.4
E Scenario 3.1: Potentially invalid claims
F Scenario 3.2: Service quality
G Scenario 3.3: Bad faith
For reference only

H Scenario 3.4: Customer experience
Self-test questions
Learning objectives
• identify your customers’ expectations of the claims service you provide and analyse how
this compares to the service they receive;
• establish the importance of managing your customers’ expectations and create a service
that at least meets them;
• recognise the usefulness of a quality claims service as a marketing tool;
• illustrate how the claims service received motivates a customer to either stay or change
insurer;
• incorporate the principle of the fair treatment of customers into your claims service;
• incorporate a good complaints handling system into the overall service package offered;
• demonstrate the role of the Financial Ombudsman Service and its interaction with the
claims service;
• implement appropriate procedures when the relationship with the insured breaks down
and they threaten litigation;
• avoid being stopped from denying coverage through a reservation of rights and recognise
the challenges of making such a reservation; and
• explain how and where bad faith can be an issue and the implications of acting in
bad faith.
Introduction
The majority of policyholders purchase insurance every year and will not need to make a
claim. However, insurance as a risk transfer mechanism is a promise to pay in certain
circumstances. These circumstances are already stressful, and possibly traumatic, for the
insured – they have suffered a loss. If the insurer then handles their claim slowly and without
sympathy, it will alienate the insured and may lose their business (and, usually, the longer a
claim takes to settle, the more expensive it is for the insurer). Conversely, if the insurer is
empathetic and looks to settle valid claims quickly, it has a greater likelihood of retaining
business through its claims service and, in the longer term, grow its business. Such a ‘vision’
Chapter 3
is simplistic and sounds easy. However, every day insurers receive compliments and
complaints regarding their claims service, depending on how they react to these
circumstances.
Key terms
Alternative dispute Bad faith Bespoke service Breach of contract
resolution (ADR) standards
Complaints handling Customer Customer Customer retention
expectations experience
Financial Policyholder litigation Reservation of rights Threshold quality
Ombudsman
Service (FOS)
A What is 'good' service?
For reference only

Insurance organisations spend a great deal of time, effort and money in marketing their
services. Most policyholders, having paid their premium, hope that they will not need to
make a claim. However, some policyholders do need to claim from time to time. At the time
of making a claim the policyholder may be distressed and almost certainly looking for
support and assistance from their insurer. As such, policyholders expect a good level of
service from their insurer. In this section we examine what is meant by 'good' service, quality
of claims service and customer expectations when making a claim.
A1 Customer experiences of the claims service

When a claim occurs, this is often the first contact a customer has with the company since
inception of the policy. Perceptions gained at this point are difficult to eradicate. Even if a
claim has been paid in full, customers can be dissatisfied if the experience has been
anything less than they were expecting. A quality claims service should, therefore, provide at
least the quality that the customer expects. For example, an insurance company may aim to
respond to a claim advice within a specified time frame, in line with a survey of customer
expectations. This is known as threshold quality. Without knowledge of these customer
expectations, a company may waste its resources. It could spend a lot of money and yet still
fall short of the required service (possibly even causing a negative reaction) or effectively
overspend in providing a quality of service that is unnecessarily high. A company must have
a clear view of these expectations and set its key performance indicators (KPIs) in relation
to them.
Customers’ expectations can be met to four levels, three of which are shown in figure 3.1.
Chapter 3 Claims service management 3/3
Figure 3.1: Threshold quality

Offers an element of quality
which the customer may
not expect, but which, once
Enhanced threshold quality delivered, they will see as
no more than reasonable.
The service meets expectations,

Basic threshold quality but does neither more nor less.
Chapter 3
The service
Below threshold quality
fails to meet
expectations.
The fourth level is to offer incremental quality. This identifies that there are elements of
quality that can be delivered at a reasonable cost compared to revenue, which the customer
would see as exceeding expectations (e.g. following failure to pay a valid claim on time,
payment is made with an apology, plus interest, plus £25 as recognition of inconvenience).
From this, it should be clear that decisions about the level of quality to be offered can only be
made if you have a clear view of customers’ expectations. For personal lines insurance, the
insurance company usually has a standard service offering for all policyholders within a
particular class or line of business, with some limited scope to make it bespoke to meet
individual customer needs. This is also likely to be the case for small commercial
businesses. However, for larger corporate clients there are likely to be bespoke service
standards relating to a tailor-made risk transfer mechanism and these are likely to include a
bespoke claims service. Different categories of client require different things from their
insurer, and large composite carriers must be able to effectively deal with each cohort of
customers that they underwrite.
For reference only

Best practice
Airmic has published a Guide to Best Practice: Delivering Excellence in Insurance Claims
Handling. This is, by definition, aimed at claims submitted by very large clients, usually
multinationals, but it does contain principles that have a wider application.
Claim service required by large clients

Large, complex claims do not arise very often. Therefore, large corporate clients require
objective and detailed reassurance in advance that their claims will be handled in an
efficient, effective and appropriate manner.
The ultimate test or objective is that claims are handled in a consistent, yet flexible and fair
manner that is transparent, accurate and timely, as well as secure and compliant. This
outcome will deliver the necessary features of partnership with clients and (as appropriate)
insurance brokers.
Guide to Best Practice: Delivering Excellence in Insurance Claims Handling, Airmic
January 2009.
The Guide identifies eight components of best practice:

• Component 1: Culture and Philosophy. Culture of excellent client service and a
philosophy of client-focused claims management that represents best practice and is fully
documented.
• Component 2: Communications. Arrangements for effective, efficient and transparent
communication with the insured and all other relevant stakeholders.
• Component 3: People. Suitable and sufficient number and range of skilled, qualified and
experienced personnel, with emphasis on development, training and supervision.
• Component 4: Infrastructure. IT and other non-people resources sufficient to handle the
number, value, nature and complexity of claims and communications with all
stakeholders.
• Component 5: Claims Procedures. Client-focused procedures designed and
implemented to support and enhance the claims handling processes and activities.
• Component 6: Data Management. Structured protocols for the secure management and
analysis of all relevant data in compliance with legal and regulatory requirements.
• Component 7: Operations. Handling of claims in a consistent, yet flexible and fair
manner that is transparent, accurate and timely, as well as secure and compliant.
• Component 8: Monitoring and Review. Arrangements for routine review of claims
performance, capabilities and procedures, including evaluation of client satisfaction.
Research exercise
Find out about Airmic. Who are they and what do they do?
Chapter 3
Go to RevisionMate and read the Guide to Best Practice, which we have provided there
as appendix 3.1. Look at the checklist in the appendix to it. Thinking about the type of
claims you encounter, are there any improvements that could be made to how your
company manages claims handling in the light of what you have learnt?
In 2015, Airmic published a further claims best practice guide called Achieving Best Practice
in Claims: A guide for Risk Managers. This gives particular tips and suggestions on
implementing best practice in claims, providing practical guidance to enable the insured’s
own insurance and claims teams evaluate its overall approach to claims handling in a
structured and objective way. The overall objective is to achieve a claims handling approach,
both internally and through effective partnerships with insurers, brokers and other service
providers, that ensures claims are managed in a consistent yet flexible and fair manner.
We already know that the FCA not only distinguishes between consumers and commercial
customers, but that it requires insurers to treat their customers fairly. These too will have an
influence on the service standards you look to provide.
For reference only

Consider this…
Remind yourself of the different requirements the FCA has depending on whether a client
is a consumer or a commercial client, with specific reference to its requirement that
customers are treated fairly.
Claims management decision: type of client

Are your clients predominantly consumers or commercial clients?
If you had a mixture, how would you design your systems to cope with the differing
expectations for each type of client?
How can you ensure that you meet any bespoke service standards you have agreed with
any particular client?
Best practice is also documented in the Best practice guidelines for the procurement,
management and monitoring of external claims service providers, published by Applicco
Limited and the Managing General Agent’s Association.
Research exercise
A copy of this Best Practice guide is provided for you on RevisionMate (see appendix 3.2).
Take the time to read it now and think about how it could improve how you deal with
external claims service providers.
A2 Customer experiences of the policy

Customer expectations about the extent of their insurance coverage, if mismatched with the
coverage delivered, can lead to dissatisfaction with the claim decision and protracted
disputes. It is, therefore, important to try to ensure that the policyholder understands the
scope of their policy wording and the obligations on both parties to the contract – i.e. the
insurer and the policyholder.
In this regard, it is important that the insurer’s sales and marketing departments liaise with
the claims department. An insurer’s advertising should accurately highlight what the policy
covers, so that customer’s expectations are not raised incorrectly.
A3 Customer expectations
Few issues are as central to an insurer’s survival as winning and retaining customers. To
maintain a competitive edge in an increasingly complex environment, insurers must know
what customers expect and provide services (and products) that meet or exceed those
expectations.
Consider this…
How does the legal requirement to pay consumer claims within a reasonable time affect
Chapter 3
what your consumer customers expect from you?
Customers are more demanding today than they ever have been. They have high
expectations of products and service. Expectations have been enhanced by new, more
flexible digital products that they use every day, e.g. Facebook and Google. Commercial
organisations are more sophisticated in how they buy insurance, as reflected in the shift
towards risk management and self-insurance. In addition, private policyholders can easily
establish the level of service an insurer purports to provide by undertaking basic internet
searches.
It is important to note that customer experience is still a critical consideration for claims
managers irrespective whether their customers are private individuals or commercial entities.
While the response(s) may be different, the core components of customer service are largely
unchanged.
A3A Establishing customer expectations
Insurance buyers have a clear idea of what makes a good insurance company. They seek:
• clear communication;
For reference only

• a fast and efficient claims service;
• access to decision makers;
• financial security;
• the ability to make coverage changes easily and quickly;
• a simplified insurance purchasing process;
• clear policy wordings;
• the elimination of errors; and
• all at a competitive price.
Insurance is a low-touch product that is bought by customers who are used to high-touch
digital interactions with new innovative players in the industry as well as outside insurance.
In today’s world, customer expectation is shaped by their use of digital platforms like
Instagram, TikTok, Samsung and Apple. This has led to a dramatic uplift in the expectations
customers have of all products and services that they receive, including insurance. For
claims, particularly in the large volume areas of personal lines, this means customers want
the ability to interact digitally, from anywhere in the world, at any time, almost as a hygiene
factor. Insurers must be able to first identify and understand these new demands and then
cater their service to them, particularly at FNOL as the key ‘moment of truth’. In reality, very
few insurers in the UK are yet to be able to do this to the extent that they are seen as
trailblazers. Many are on the journey, but it will take focus and investment across the
organisation to succeed.
Research exercise
Research some of the new business models being seen in the InsurTech space. How
does their claims capability differ from an incumbent insurer? What is enabling this?
Customers are knowledgeable and unwilling to accept poor service. Insurers are responding
by asking customers directly what they want, need and expect. Regulation reinforces
customers’ expectations.
Who is responsible for managing customers’ expectations depends on who is involved:

• if a broker is involved, they will have a role in managing customers’ expectations; and
• with direct business, the insurer’s contact with the policyholder, including its advertising
and marketing literature, is responsible for its customers’ expectations.
If the service delivered matches, or exceeds the customer’s expectations, it should equate to
a satisfied customer. Delivering this for every single claim can be a challenge, particularly for
those large insurers dealing with hundreds of thousands or millions of claims each year.
A4 Customer satisfaction
Chapter 3
In 2010, Ernst and Young published a document called 'European motor claims: is customer
satisfaction enough?' Its key findings are just as relevant today as in 2010 and were
as follows:
• good communication is a key driver of customer satisfaction;
• insurers seeking post-claim feedback enjoy higher satisfaction ratings;
• customers value the human touch;
• high levels of customer satisfaction have a strong effect on brand loyalty;
• there are opportunities to boost retention through improved customer service;
• high satisfaction leads to brand promotion;
• making a claim polarises customers to become advocates or critics of their insurers;
• improvements in customer service could deliver significant returns, including an uplift of
customer renewal rates;
• developing and embedding a customer communication culture should be a priority
• more effective supply chain control could yield savings without harming customer
satisfaction;
For reference only

• insurers should be wary of a ‘one size fits all’ approach; and
• great claims management can create real value.
On the Web
Consumerintelligence.com provides useful information about the UK’s best insurers for
customer satisfaction. Visit www.consumerintelligence.com.
In October 2015, TeleTech published a research report 'What really drives customer
satisfaction during the insurance claims process?' In its research, it found that the claims
process is one of the most critical experiences that a policyholder has with their insurer and
can make or break that relationship.
Teletech set out to understand what drives a high customer satisfaction (CSAT) score. It
considered a number of aspects of the claims experience and concluded that the customer’s
belief that the insurance company acted in their best interests was the most significant
predictor or CSAT. However, it also discovered that customer satisfaction alone does not
necessarily drive business results and overall satisfaction did not correlate with an individual
aspect’s impact on CSAT. So, for instance, ‘the insurance company acted in my best
interests’ had an 11.4% impact on CSAT, but its impact on overall satisfaction was less
than 8%.
After analysing the results, TeleTech placed customer satisfaction drivers into quadrants to
help businesses focus on areas where their efforts can maximise overall satisfaction. The
quadrants TeleTech use are as shown in figure 3.2.
Figure 3.2: TeleTech’s customer impact quadrants
Drive Fast Stay The Course

• Strong impact on CSAT • Strong impact on CSAT
% impact on CSAT
• Good opportunity for • Lower opportunity for
improvement in experience improvement in experience
Tune-up Individual Put It In Park
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Experiences
• Low impact on CSAT • Low impact on CSAT
• Good opportunity for • Lower opportunity for
improvement in experience improvement in experience
Experience level satisfaction
The channel used to notify a property and casualty insurance claim was found to be
important to customer satisfaction. The channels that were preferred by respondents were
also the channels where customer satisfaction had a more significant impact on overall
satisfaction.
Having analysed the data, TeleTech recommend these best practices to optimise customer
experience:
• Focus your analysis on specific points in the customer journey to ensure a clear
and actionable set of results, such as the claims process.
• Prioritise the key areas that have a high impact on CSAT and provide a good
For reference only

opportunity for improvement in the customer experience.
• Implement people, process and technology improvements for the key areas
determined.
• Educate the organisation on how each area of the business impacts the
customer experience.
• Continually monitor success and make adjustments where necessary.
On the Web
Find the highlights of the report at: bit.ly/2z3aXrF.
Find the full report at: bit.ly/2lDwQec.
Research exercise
Take the time to read this article and consider how TeleTech’s findings relate to the types
of claims you know about. What specific points in the journey your customers take would
you focus on? What areas would you prioritise?
In the same year, Which? conducted a survey of 5,002 home insurance policyholders, asking
them to rate their insurers in relation to their experiences of making a claim. Those taking
part in the survey were vocal in highlighting areas where they felt insurers needed to improve
their service.
Which? asked the policyholders to rate their insurer on the following criteria:
• speed with which their claim was dealt with;
• regularity of communication on the claim’s progress;
• settlement value; and
• customer service.
Only insurers who had 30 plus respondents were rated and overall satisfaction scores for the
top 14 home insurance brands fell between 94% and 65%, which reveals room for
improvement in many cases.
Poor customer feedback can be damaging for insurers. According to Trustpilot.com, in a

survey of all feedback for MoneySuperMarket in May 2017, less than one third of responses
were found to be complimentary. However, by August 2022, 72% of reviews were 'Excellent'.
Research exercise
Do you know what customers are saying about your company? How does your company
find out? How does it respond?
Once a company has established its customers’ expectations, it must decide how it will fulfil
Chapter 3
them. In this regard, the company must consider its customer base, specifically customer
segmentation and the methods by which the company brands its products; criteria will vary
depending upon whether the company sells direct to the public or via intermediaries.
As we saw at the start of this chapter, a claim is often the first contact a customer has with
the company since the start of their policy. Claims provide companies with the opportunity to
deliver value to their customers. The customer’s experience of the company’s service in this
situation is critical in determining whether they renew or take out future new business.
The claims service can therefore be utilised as a sophisticated marketing tool if handled
correctly. New sources of business emanate from satisfied customers, both in terms of new
policyholders arriving through recommendation and in terms of an organic growth in
business from existing customers and recommendations/reputation.
Research exercise
How do insurers secure market information? How do they collect it? How does your
company use this information? What are the challenges in obtaining reliable information?
What is a ‘net promoter score’?
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A4A Aligning the promised service with that on offer
Managing customers’ expectations is not easy. This is because customers may form their
ideas of the service they expect of their insurer from elsewhere, for instance:
• their awareness of what is available in the insurance marketplace (due to advertising or
recommendation);
• the levels of service that are available to them for all products and services; and
• what they instinctively feel is acceptable (due to their social background or other factors).
However, insurers should intervene where possible to try to bring customer expectations in
line with the service that is actually available.
They can do this through:
• appropriate advertising of the claims service;
• appropriate presentation of the policy documentation;
• providing guidance to the insured at the time of claim notification and throughout the
claims lifecycle/handling process; and
• the way in which a claim is negotiated and settled.
If the level of service provided matches (or exceeds) expectations, this will lead to customer
satisfaction. Conversely, a level of service that falls below that expected will lead to
dissatisfaction.
The adoption of a quality assurance standard, which has assessed customers’ expectations
of services and products and introduced levels of service to match (or exceed) these
expectations, should reduce customer dissatisfaction if properly implemented, monitored and
improved.
There is always a cost to any company in respect of new business acquisition. Often,
retaining clients is far less expensive. Therefore, if customers are satisfied and stay with an
insurer at renewal, this alone brings cost savings to the insurer.
A4B Customer journey mapping (CJM)

Customer journey mapping (CJM) is a relatively new technique that has been adopted by
some of the UK’s largest insurers. It is used to evaluate and improve customer experience
and is designed to:
• grow insurer’s sales by minimising customer dissatisfaction and maximising customer
satisfaction;
• drive customer satisfaction by streamlining customer journeys across touchpoints (i.e.
points of customer interactions) and multiple devices (such as mobile phones or laptops);
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• gain competitive advantage by uncovering new opportunities and ‘quick wins’ to cross
sell; and
• gain an understanding of the customer service offered and identify areas where this can
be improved.
Successful CJM is centred on the needs of an insurer’s customers. The process begins by
creating a framework for the map which is a visual representation of the entire customer
experience. It captures all key interactions between the policyholder and the insurer, and is
most effective when it's done across the insurance value chain, rather than just being
isolated on one interaction or one function.
Once populated with data, each stage of the journey, from policy purchase, mid-term
adjustment, renewal and claims, can be analysed to better understand policyholders’
motivations, behaviours and dissatisfactions. This enables insurers to identify gaps in the
customer experience and look for ways to improve the levels of service they offer.
CJM can highlight quick and efficient ways for insurers to increase customer sales,
satisfaction and loyalty, and drive up net promoter scores.
A5 Customer retention
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A dissatisfied policyholder is more likely to be attracted to a competitor’s advertising. When
there appears to be little difference in the price, a policyholder may switch their insurance in
search of an improved service – including an improved claims service. Policyholders stay
with their companies because:
• they receive the service they expect; and
• it is too burdensome to leave.
Insurers that refine their services in terms of customer expectations are the ones most likely
to attain and sustain competitive advantage. While good processes and procedures are key
tools, there is no substitute for intelligent, experienced and well-qualified people filling senior
roles within the organisation for ensuring customer retention and the success of the
business.
Claims management decision: losing customers

You are the claims manager of a UK insurer; claims complaints are rising and your
company is losing business as a result.
What are the possible reasons for this?
What solutions can you put in place to reverse this trend?
Research exercise
What is your company’s retention rate? How does it compare to target?
Claims management decision: satisfying your customers

Compile a claims service management principles guide, documenting good claims
handling principles and expanding upon them. How would you roll these out to your staff
and ensure that they are compliant, so that the claims service is meeting your and your
customers’ expectations?
Ultimately, insurers naturally want happy customers so that they renew and buy more
services. However, there may well be some customers, possibly because they have not
received the service they expected, who will be unhappy with the insurer. On these
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occasions, the insurer must be able to handle their complaints quickly as they arise.
Insurers know that:
• complaints are inevitable;
• some will be justified and some not; and
• that they arise from a range of issues.
These issues include such things as whether policy cover applies, a delay in settlement,
questions over quantum, the failure of repair/replacement and the apparent absence of
‘goodwill’ on the insurer’s part. Knowledge, expertise, skill and sometimes fine judgment is
needed to tackle these issues – coupled with the authority to settle when appropriate. A
further requirement is the need for speed: it is always desirable to give complaints prompt
attention and this can help defuse a situation, even if the complaint is rejected.
In an ideal world, the more difficult and complex claims would all be dealt with by a senior
manager. However, this is not always practical. Insurers, like other large organisations, are
structured on variations of a pyramid, so the more senior the staff the fewer there are of
them. One solution may be to appoint one or more specialist complaints managers to handle
such complaints with the department’s support. However, customers may see this as a
For reference only

negative – assuming that it implies that there are many complaints and, possibly, that the
insurer has an aggressive rejection policy.
The real skill, therefore, is to have organisational design and handling procedures that
ensure that each complaint reaches exactly the right level in the structure. In other words,
that it escalates just far enough to receive appropriate attention. While true of all complaints,
it is particularly true where the FOS may become involved, bearing in mind the cost of
submissions.
Consider this…
Think about the many issues and constraints involved. Consider the cost, public relations
and technical factors. What solutions does your company offer to claims complaints?
A6 Importance of good service

We have seen how good service can help to retain customers and how poor service can lose
business. An organisation offering a poor claims service is likely to end up in a situation
where customers are leaving the business faster than it can acquire new customers. In
addition, acquiring new customers costs more, which will also be a drain to the business as
figure 3.3 demonstrates.
Figure 3.3: Impact of a poor claims service
Win new
customers
Chapter 3
Marketing to Claims are
attract new made
customers
Customers Poor claims

leave service
Certain insurers pride themselves on having an excellent claims service and this business
model complements an organisational strategy of growing the business with long term
profitable clients. This is likely to benefit the business as demonstrated in figure 3.4.
For reference only

Figure 3.4: Impact of a good claims service
Win new
customers
Customer
retention Claims are
and positive made
recommendations
Customer Excellent claims

satisfaction service
With the FCA taking a more customer-centric stance, the imperative for insurers to improve
their claims service becomes ever greater. The FCA's fair pricing review, which went into
effect in early 2022, makes this even more important as it will potentially reduce the price
sensitivity of insurance renewals. As a result of this, more focus will be on wider aspects of
the insurance offering to attract and retain customers, of which service is clearly a
critical part.
As seen in the previous chapter, 2022 also saw the introduction of the FCA's Consumer
Duty, which whilst still largely in implementation at time of writing, indicates the FCA's
serious focus on customer outcomes and customer fairness.
Also coupled with 'good service' is the imperative for insurers to behave ethically in order to
support driving positive customer outcomes.
The principles set by the FCA reflect the professional and ethical standards that should
guide those who work in insurance as they go about their day-to-day activities. However, it's
vitally important for an industry that relies on trust for customers to have confidence that they
are dealing with people who are putting their interests first; not because they have to, but
Chapter 3
because they believe it's the right thing to do.

Organisations with a record of great customer service, treating every customer fairly and with
respect, build themselves a good reputation; those who don't won't be recommended to
other people. Many such organisations embrace the concept of ESG as discussed in
chapter 1.
The CII Code of Ethics provides members of the insurance and personal finance profession
with a framework in which to apply their role-specific technical knowledge in delivering
positive consumer outcomes. Under the fifth 'Core duty' within the Code, members are
required to: 'treat people fairly regardless of: age, disability, gender reassignment, marriage
and civil partnership, pregnancy and maternity, race, religion and belief, sex and sexual
orientation'.
On the Web
CII Code of Ethics: bit.ly/2UnNlgn.
'Transparency and insurance: a Companion to the Code of Ethics: bit.ly/3mRysid.
For reference only

B Complaints handling and the Financial
Ombudsman Service (FOS)
B1 Complaints procedures
Refer to
Think back to IF1 chapter 10, sections D and E
In recent years, insurers have made efforts to streamline and focus their complaints
procedures. Today the Regulator drives these procedures, although greater awareness of
customer service issues, coupled with the publicity given to insurance disputes, have all
played their part in this area.
When a policyholder makes a complaint against their insurer, the insurer must respond
quickly and substantially. A fast and fair response to complaints can positively impress
policyholders, despite the initial issues and complaint. On the other hand, poor handling of a
complaint can have a compounding detrimental effect, in the same way as a poorly handled
claim can, as we saw earlier.
Research exercise
Obtain a copy of your firm’s complaints handling procedures guide and study this. What
does it tell you? Could it be improved?
Complaints do have a positive side. You can use complaints information to influence and
change processes and to identify training needs.
Research exercise
Look at your employer’s complaints system or register. Analyse it to discover:
• the nature of complaints;
• the key categories into which the complaints fall; and
• the root causes of the complaints.
What recommendations for improvement would you make in the light of what you have
discovered?
Chapter 3
Research exercise
Find out about the value/customer service chain. Establish the importance of complaint
handling and consider the consumer’s view of customer service.
On the Web
www.paulsudnik.com/customersatisfaction-2.htm
www.instituteofcustomerservice.com
Many companies have dedicated teams to deal with complaints.

B1A FCA complaints handling
The FCA has published a set of complaints handling rules within their Handbook. These
rules state that:
• regulated organisations must have effective and transparent procedures for the
reasonable and prompt handling of complaints;
For reference only

• complaints should be capable of being made free of charge;
• telephone calls relating to complaints may only be charged at the basic rate;
• complaints should be capable of being made by any reasonable means;
• complaints should be recognised as requiring resolution;
• lessons learned as a result of FOS decisions should be applied in future complaints
handling;
• management controls should be in place to analyse causes of complaints, consider
whether root causes may affect other products or processes and correct those root
causes where it is reasonable to do so;
• management information should be collected in respect of the causes of complaints, root
causes and the corrective action taken; and
• regulated organisations should be proactive and redress or remediate without a complaint
where identified.
Where complaints are handled and resolved within the next three business days, firms do
not need to provide a formal written response or record the complaint.
B2 Procedures at Lloyd’s
The complaints department at Lloyd’s forms part of customer services. It deals with the
resolution of complaints against or concerning Lloyd’s underwriters, managing agents and
Lloyd’s brokers. Specific areas of the department’s responsibility include the resolution of
complaints from Lloyd’s policyholders or others acting on their behalf from around the world
and dealing with complaints and enquiries relating to relevant UK insurances.
The department is independent of underwriters and available as an independent mediator for
dissatisfied insureds. Cases may involve full access to underwriters’ and brokers’ files,
additional reports and information and interviews with underwriters and others.
The department acts as an interface between the Lloyd’s market and the Financial
Ombudsman Service (FOS) for those cases referred to it for adjudication. The department
must review complaints before they are referred to the FOS.
Lloyd’s has published five guides relating to complaints.
1. Complaints by Lloyd’s how to make complaints to Lloyd’s and details of the procedure for
policyholders handling complaints
2. Corporation complaints guidelines a guide for employees in respect of handling and resolving
complaints from members relating to the Corporation of Lloyd’s
3. Complaints by Lloyd’s members this sets out the requirements of the FCA that complaints should
be handled quickly and fairly
4. Agents complaints guidelines another guide for employees as to how to handle and resolve
complaints from members relating to their members’ agent and/or
managing agent
Chapter 3
5. Complaints handling a guide for managing agents in respect of claims and complaints
handling. This sets out what Lloyd’s expects of managing agents
and their representatives as to the way in which claims and
complaints are dealt with and states that, where the complaints
handling function has been delegated, the managing agent still
has overall responsibility.
The Lloyd’s Complaints Handling Code applies to policies written by coverholders under
delegated authorities, as well as managing agents. Lloyd’s has also published a model
wording for ‘summary resolution communications’ providing information on the policyholder’s
option to escalate their complaint to Lloyd’s or to the FOS.
On the Web
www.lloyds.com
Research exercise
Obtain, read and understand the Lloyd’s complaints code. It can be found by searching for
For reference only

‘Complaints code’ on the Lloyd’s website.
B3 Financial Ombudsman Service (FOS)

The Financial Ombudsman Service (FOS) is a free, independent and impartial service for
consumers ans small businesses that deals with certain disputes between individual
consumers or small businesses and financial organisations. Membership is compulsory for
all authorised firms, including intermediaries.
The FOS only deals with disputes from eligible complainants. The list of eligible
complainants includes:
• consumer;
• micro-enterprise with fewer than ten employees and a turnover or balance sheet total of
no more than €2m*;
• charity with an annual income of less than £6.5m;
• trustee of a trust with a net asset value of less than £5m;
• consumer buy-to-let (CBTL) consumer;
• small business with an annual turnover of less than £6.5m and fewer than 50 employees
or a balance sheet total of less than £5m; or
• guarantor.
(*This value is in euros as 'micro-enterprise' is an EU-defined term.)
The full rules and guidance relating to the handling of complaints, and on the operation of the
FOS, are contained in the FCA Handbook in the Dispute Resolution: Complaints (DISP)
Sourcebook. The FCA requires all firms to have a written complaints procedure. This
procedure must include a notification to an eligible complainant that they have the right to
take the complaint to the FOS if they are not satisfied with the firm’s final answer.
On the Web
www.financial-ombudsman.org.uk
B3A What must the policyholder do?

Before a complainant can take their complaint to the FOS they should have exhausted the
internal complaints procedures within the organisation or intermediary, and still be
dissatisfied with the outcome. Any legal proceedings that are under way must be withdrawn
prior to the complainant approaching the FOS, because the FOS will not become embroiled
in legal proceedings.
The complainant can refer their complaint to the FOS within the earliest of:
• six months of the date on the firm’s letter advising the claimant of its final decision
Chapter 3
regarding the complaint;
• six years after the event complained about; or
• three years after the complainant knew, or should have known, that they had cause for
complaint.
Once these have expired, the complained-about business can object to the FOS taking on
the complaint on the grounds that it is ‘time-barred’. The FOS is able to consider complaints
outside these time limits in exceptional circumstances, such as cases involving pension
transfers and opt-outs. It can also review cases outside the time limits if the organisation
agrees.
B3B What are the insurer’s obligations?
There are certain obligations placed on an insurer.
• If an eligible policyholder disputes the decision an insurer has made about their claim,
and is subsequently unhappy with the response to the resulting complaint, the insurer
must ensure that they inform the policyholder about the service offered by the FOS. The
insurer can do this by issuing FOS explanatory material, or they may include this
information within the policy documents.
For reference only

• The insurer must abide by the FOS' decision up to an award of £355,000, plus any
applicable interest.
• The insurer must provide the FOS with full particulars of the policy on the basis that the
FOS must be in possession of the full facts if it is to advise the parties properly.
For every complaint investigated by the FOS there is a charge to the insurer, which cannot
be passed on to the complainant.
An insured can still resort to legal action after the FOS has dealt with the case if they are
unhappy with the proposed solution. However, the insurer is legally bound by the decision
that the FOS makes. There is often the opportunity to appeal the first decision (largely
because these decisions are often made by more junior staff), but once an official
Ombudsman has made the decision it is legally binding on the insurer.
B3C What can the FOS do?
The FOS must investigate the complaint and has 90 days to answer the complainant. It may
give the parties an opportunity to make representations and then hold a hearing. Most
disputes handled by the FOS are resolved through mediation or informal adjudication by a
caseworker or adjudicator. However, both parties have a right of appeal to the initial
outcome, in which case one of the panel of ombudsmen will make a final decision.
The FOS will reach a decision based on what is fair and reasonable in all the circumstances,
taking into account the law, FCA rules and guidance and good industry practice, including
relevant ABI statements and codes of practice. The FOS is not bound by the law or legal
precedent and will make a judgment on the merits of each case. The aim is to ensure that
customers are treated fairly and that the law is not used as an excuse to avoid paying fair
claims. However, the FOS does aim to be consistent in the way it deals with particular types
of complaints.
Redress can be awarded in two ways:
• A ‘money award’, telling the firm what specific sum of money it should pay the customer
to cover any financial losses they have suffered because of the problem they have
complained about. The maximum award the FOS can require a firm to make to a
complainant is £355,000 for complaints referred to the FOS on or after 1 April 2020 about
acts or omissions by firms on or after 1 April 2019. The FOS may recommend a higher
figure, if appropriate, but this will not be binding on the firm. Lower figures exist for
complaints arising from earlier dates.
• A ‘directions award’, telling the firm what actions it needs to take to put things right for its
customer. This could include, for example, directing the business to:
– pay an insurance claim that had earlier been rejected,
– calculate and pay redress according to an approach or formula set by the regulator,
and/or
– apologise personally to the customer.
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The decision (with reasons) must be notified in writing to the complainant and the
respondent. The complainant must then accept or reject the decision within the time limit
specified by the FOS.
If the complainant accepts the decision it is binding on the respondent. If the complainant
rejects the decision it is not binding and they are free to pursue the matter in court. If the
complainant does not respond to the FOS’s decision letter it is treated as a rejection and the
respondent is not bound by the decision.
B3D Is the FOS' role significant?
Figure 3.5 shows how the number of cases referred to the FOS has increased over the
years. As you will gather, the FOS takes on an increasingly significant number of cases
each year.
Figure 3.5: Complaints resolved

Time scale to 31 March Number of cases resolved
2011 164,899
For reference only

2012 222,333
2013 223,229
2014 518,778
2015 448,387
2016 336,381
2017 400,658
2018 376,352
2019 295,596
2020 204,460
Over the years, there has also been a change in the types of claims the FOS handles.
Household policies have traditionally caused the most problems for the FOS, partly because
some householders assume that their household policies cover all types of loss. There has
also been a significant increase in disputes about warranty insurance, which often cover the
costs of repairs to household products. Often, changes are caused by changes in wider
society. For instance, the economic downturn in 2008/09 increased the number of complaints
about financial institutions, mortgage protection insurance products and payment protection
insurance (PPI). More recently, the FOS has received increased complaints in relation to
personal lines insurance pricing particularly where these products are sold via price
comparison websites.
In 2020 the FOS published its future strategy, 'Contributing to a fairer financial world', which
will run for five years and sets out three strategic priorities, namely:
• enhancing the service;
• preventing complaints and unfairness arising; and
• building an organisation with the capabilities it needs for the future.
B3E How should this influence our approach to claims?

Ultimately, insurers should be looking to avoid complaints: it is quicker and cheaper to design
a quality claim handling process and so subsequently avoid the complaint (whether it goes to
the FOS or not).
An insurer should avoid complaints going to the FOS for a number of reasons:
• it costs money: there is a charge per complaint;
• it costs time: making the claim more expensive; and
• it has the potential to create bad publicity.
Chapter 3
The FOS considers it unhelpful when a complaint handler adopts a binary stance – claims
settlements are not always black and white and a degree of flexibility is both required and
expected. In many cases, the issue is really whether the decision not to pay a claim can be
justified against the insurer’s commitment to fair and reasonable outcomes. The FOS has
shifted a degree of power back to the consumer to enable them to dispute decisions without
the burden of expensive legal action. It ensures that insurers treat their customers fairly,
are consistent in their decision making and interpret their own policies in a fair and
reasonable way.
It is worth noting that the existence of the FOS doesn't mean insurers should pay every claim
and try and appease every customer who shows some form of discontent with the claims
handling process. There will always be occasions where there are two opposing views in
existence and the insurer will be seen by the FOS to be acting reasonably and within the
spirit of the policy. Indeed, the FOS can also be helpful to provide a degree of precedence in
claims handling, although it is not the same as legal precedence set in a court of law. This
can in turn help the insurer modify its processes and procedures for the benefit of all
customers.
For reference only

Complaints handling: the Ombudsman’s view
It might concentrate the minds of complaint handling staff in insurance offices if they were
to write (in cases where they form this view), ‘Given the circumstances, I am satisfied that
our decision in this case represents a fair and reasonable outcome to your complaint’.
Walter Merricks CBE, former Ombudsman
The FOS highlights issues that have arisen in its Ombudsman news and this provide useful
insight into the FOS’s thought processes. Thus it provides a useful resource to help you
improve your claims and complaint handling processes, to ensure that fewer complaints are
escalated to the FOS.
Research exercise
Go to the FOS website and look at previous copies of Ombudsman news. Search for a
type of claim that is of interest to you and think about the types of complaints made and
how the Ombudsman resolved them. What lessons could you learn that could improve the
performance of your team?
B3F Financial Ombudsman Service and fraudulent claims

Many cases referred to the FOS involve disputed claims and a small number involve fraud.
Those where fraud is suspected clearly need careful investigation and experienced handlers
are employed to repudiate the claim, avoid the policy and defend any ensuing litigation as far
as the insurer is concerned. The insurer may even contemplate bringing criminal
proceedings.
Occasionally, insurers provide details of claims to the FOS in which fraud has been
suspected but cannot be satisfactorily proven and where payments have been made against
their better judgment.
Fraudulent claims: the Ombudsman’s approach

It isn’t our role to accuse anyone of fraud. And there’s a difference between fraud and
simply giving the wrong information – whether it’s careless or completely accidental on the
customer’s part.
We’ll weigh up all the evidence we have about what’s happened – including what
questions the insurer asked and the answers their customer gave. Depending on what we
find, we may agree a claim shouldn’t be paid – or that it should be paid in part or in full.
www.fos.org.uk
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For personal lines products, insurers are obliged to ask questions to secure any information
on which they intend to rely and misinformation supplied at the proposal stage will be
regarded as ‘relevant’ if a prudent underwriter would have regarded it as such. Where there
is substantial misrepresentation at the proposal stage, the FOS may or may not uphold
complaints against insurers. Where the misrepresentation is innocent or perhaps negligent,
the FOS will investigate and may ask an insurer to meet a claim on a proportionate basis, i.e.
based on the premium that should have been paid if the true facts had been disclosed.
Research exercise
Consider the case of Pan Atlantic Insurance Co. v. Pine Top Insurance Co. (1994) –
what does this case teach you about how non-disclosure can influence underwriters to
accept a risk and quote terms?
Research exercise
What are the effects on consumers of the insurance contract law reform process?
Consider what effect these proposed changes might have on the FOS workload.
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While on many occasions the FOS has overturned an insurer’s decision to avoid paying a
claim, it does not always do so. Often it will uphold such a decision where the policyholder is
in breach of their contract with the insurer.
C Breach of contract and policyholder

litigation
An insurance policy is evidence of the contract that is in existence between the insurer and
the policyholder. The usual law concerning contracts also applies to insurance policies (if
either party breaks any of the promises made within this contract then this can be
tantamount to a breach of contract). In addition, however, there is legislation pertaining to
disclosure and representations made in insurance contracts.
C1 What is this legislation?

C1A The Consumer Insurance (Disclosure and Representations)
Act 2012
As part of the Law Commission’s review into insurance contract law, the Consumer
Insurance (Disclosure and Representations) Act 2012 (CIDRA) came into effect in April
2013. (Note that this only covers consumer insurance, which it defines as insurance bought
by individuals ‘wholly or mainly for purposes unrelated to their trade, business or
profession’.)
In summary, the Act:
• Abolished the previous duty on consumers to volunteer all material facts and consumers
are instead required to take reasonable care not to make a misrepresentation
before the contract is entered into or varied. (In the case of a variation, the duty
applies only to information relating to the variation.)
Insurers are able to ask general or open-ended questions but the clarity and scope of the
question are taken into account in assessing whether or not the consumer’s response
was reasonable.
• Abolishes basis of the contract clauses which have historically enabled the insurer to
avoid the policy for any breach of the insured’s warranting the truth of the information
provided, however trivial or material the breach might be to the risk.
• Provides different remedies for the insurer when faced with a claim that reveals
misrepresentation on the part of the consumer.
The remedies provided by the Act for misrepresentation by a consumer are as follows:
• If the misrepresentation was honest and reasonable: the insurer must pay the claim.
The consumer is expected to exercise the standard of care of a reasonable consumer,
taking into account a range of factors, including the type of insurance policy and the
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clarity of the insurer’s question(s).
• If the misrepresentation was careless: the insurer has a compensatory remedy based
upon what it would have done had the consumer taken care to answer the question
accurately.
If, for example, the insurer would have applied an exclusion it would not be required to
meet claims that would fall within the exclusion, but must meet other claims falling within
the policy scope.
If the insurer would have applied an increased premium, the proportionality approach
applies whereby the insurer’s liability is reduced in line with the reduction in premium that
the proposer achieved through their misrepresentation or non-disclosure.
If the insurer would not have accepted the risk it is entitled to avoid the contract and
decline all claims, but must refund the premium.
• If the misrepresentation was deliberate or reckless: the insurer is entitled to treat the
policy as void and may decline all claims. It is also entitled to retain the premium, unless
there is a good reason why it should be returned.
This codifies modern practice for consumer insurance, which has featured in the industry
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Statements of Practice over the years. The Act closely reflects current Financial
Ombudsman and market practice, the difference is that it now imposes a statutory duty on
insurers to follow that practice.
C1B Insurance Act 2015
Insurance Act 2015

The Insurance Act 2015 revised UK law in the areas of utmost good faith and disclosure in
non-consumer insurance, warranties and fraudulent claims with effect from August 2016.
There are many sources of information on the changes, including the following source
available to CII members:
www.cii.co.uk/media/6087127/cii_policy_briefing_insurance_act_2015_21apr2015.pdf.
Research exercise
Research the Insurance Act 2015. Ensure you are familiar with its provisions.
How is it changing how your team handles non-consumer claims?
Duty to make a fair presentation of the risk

A policyholder entering into an insurance contract is under a duty to make a fair presentation
of the risk. This duty replaces the duty, set out in the Marine Insurance Act 1906, to
‘disclose every material circumstance which would influence the judgment of a prudent
underwriter in fixing the premium or deciding whether to take the risk’.
Making a fair presentation of the risk entails either:
• disclosing every material circumstance which the insured knows or ought to know
(clause 3(3)(b)); or
• disclosing sufficient information to put a prudent insurer on notice that it needs to make
further enquiries for the purposes of revealing those material circumstances
(clause 3(3)(c)).
The disclosure must be made in a way that is ‘reasonably clear and accessible to a prudent
insurer’ and in which ‘every material representation as to a matter of fact is substantially
correct, and every material representation as to a matter of expectation or belief is made in

good faith’.
An insurer has a remedy for breach of the duty to make a fair presentation if it can show that,
but for the breach, it would not have entered into the insurance contract or would have done
so on different terms (this reflects the existing law common law position, see Pan Atlantic
Insurance Co Ltd v. Pine Top Insurance Co Ltd (1994)). What happens next depends on
whether the breach was deliberate or reckless or not.
The breach of duty was deliberate or reckless:
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• the insurer has the right to avoid the contract and refuse to pay all claims; and
• it need not return the premium.
The breach was neither deliberate nor reckless:
• the insurer can avoid the contract, with a return of premium, where it would not have
entered into the contract in the first place had the information in question been disclosed;
• if the insurer would have entered into the contract but on different terms (i.e. other than
reasons of premium), the contract can be treated as if it had been entered into on those
different terms if the insurer requires; and
• if the insurer would have entered into the contract but charged a higher premium, the
insurer may reduce the amount paid on the claim proportionately.
Warranties
The Act abolishes basis of contract clauses (i.e. clauses that convert all representations,
even if immaterial, into warranties). It is not possible to contract out of this.
Under Clause 10(2), breaches of warranty serve only to suspend insurers’ liability until such
time as the breach is remedied. Insurers have no liability for anything which occurs, or is
attributable to something occurring, during that period of suspension. Insurers’ liability will
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recommence after the breach has been remedied.
Clause 11 applies to any warranty or other term which would tend to reduce the risk of loss:
• of a particular type; or
• at a particular location; or
• at a particular time.
What happens if a loss occurs and a warranty as described in Clause 11 has not been
complied with? If this happens an insurer cannot rely on that non-compliance to avoid, or
limit, its liability for the loss if the insured shows that non-compliance could not have
increased the risk of the loss which actually occurred, in the circumstances in which it
occurred. A direct causal link between the breach and the ultimate loss is not required.
Fraudulent claims
When an insured commits a fraud against an insurer, the insurer is not liable to pay the claim
to which the fraud relates. If the insurer has already paid, it can recover the monies paid out
when it subsequently discovers the fraud.
Insurers can also give notice that the contract is terminated from the time of the fraudulent
act, with no obligation to return the premium. This enables the insurer to refuse all liability in
respect of a relevant event after the fraudulent act (a relevant event is specified as referring
to whatever gives rise to the insurer’s liability under the contract, usually loss or damage).
Contracting out of the Insurance Act 2015

The Act provides that, with one exception, parties are free to agree to contract on terms
which are less favourable to the insured than the provisions of the Act. However, such
terms are only valid if the insurer has complied with the transparency requirements set out
in Clause 17 of the Act. This requires the insurer to take sufficient steps to ensure the
insured is aware of the disadvantageous term and to take account of the characteristics of
the insured persons in question when deciding to contract out of the Act.
C1C Enterprise Act 2016

One proposed reform missing from the Insurance Act 2015 was a remedy for insureds where
an insurer fails to make a timely payment for a valid insurance claim. Such a remedy was
opposed by a number of stakeholders and so was omitted from the Insurance Act 2015 until
an acceptable provision could be agreed.
This has now happened and such a remedy is included in the Enterprise Act 2016 (EA 16),
which took effect from May 2017.
Background
The impetus for the reform arose from what the Law Commission considered an unfair legal
position, i.e. that insurers are not legally obliged to pay claims within any time scale (the
requirement under ICOBS to pay consumer claims promptly is a regulatory, not a legal,
requirement). By comparison, several other jurisdictions (including, e.g. Scotland) require
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payment to be made within a reasonable time.
The Law Commission cited the case of Sprung v. Royal Insurance (UK) Ltd (1999) as an
example of the unfair position. Mr Sprung operated a family factory which he could have sold
profitably. In April 1986, vandals broke into the factory, wrecking machinery and Mr Sprung
claimed under a policy indemnifying against damage to plant. The insurer did not make a
substantive payment under the policy until three and a half years later, by which time Mr
Sprung was unable to continue or sell the business. The Court of Appeal held ‘with
undisguised reluctance’ that Mr Sprung’s claim for £75,000 additional losses arising from the
late payment could not succeed. This was because English law did not allow for ‘a cause of
action in damages for late payment of damages’. An insured could only succeed in a
coverage claim and the interest on it, but not in damages for late payment of the claim.
The Government’s stated aims for the reform are to:
• ensure that the law motivates insurers to pay insurance claims within a reasonable time,
and to promote payments within a reasonable time;
• give policyholders a contractual right to the payment of insurance claims within a
reasonable time; and
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• provide for general damages to be payable by an insurer where a policyholder suffers
additional loss because of the insurer’s unreasonable delay in payment.
Key statutory provisions
Part 5 of the Enterprise Act 2016 (ss.28–30) inserts provisions into the Insurance Act 2015
and the Limitation Act 1980. These provisions include:
• section 13A: imposing an implied term into all insurance contracts;
• section 16A: contracting out of the implied term; and
• section 5A: the limitation period for damages on late payments.
Impact of the reform
Section 13A provides that a term is implied into all contracts of insurance entered into or
varied after 4 May 2017 that requires the insurer to pay sums due in respect of claims within
a ‘reasonable time’. A breach of this implied term gives rise to the usual remedies for breach
of contract, including damages for loss.
What is a ‘reasonable time’ depends on ‘all the relevant circumstances’, but the Enterprise
Act 2016 expressly states examples of relevant factors and the explanatory notes to the
Enterprise Act 2016 provide further commentary on these, as shown in table 3.1
Table 3.1: Relevant factors

Relevant factor Explanatory notes
Type of insurance Business interruption policies could, for example, require longer time to value than
claims for property damage.
Size and complexity of Claims may be complicated by their location if a peril occurs abroad.
the claim
Compliance with any This could include ICOBS 8.

statutory or regulatory
rules or guidance
Factors outside the For example, investigations held up by a third party failing to provide information in a
insurer’s control timely manner or an insurer’s decision being dependent on the actions of another
insurer (or, in the subscription market, where a follower may be dependent on the
lead insurer).
An insured will need to establish its claim for damages by demonstrating causation for the
additional loss arising from the late payment and the quantum of that additional loss.
However, an insurer is entitled to raise a defence to such a claim by establishing that it had
‘reasonable grounds’ for disputing the coverage claim (either as to its validity or its quantum).
Whether the grounds are reasonable or not will depend on an objective, not subjective,
assessment by the courts.
The cause of action for the late payment is entirely separate from the cause of action for the
substantive coverage claim and any claim for interest on that. As such, a claim for damages
arising from late payment must be argued and proven separately from the arguments for the
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substantive coverage claim. Parties should also bear this distinction in mind when
settling claims.
Contracting out of the implied term (s.16A)
Section 16A provides the scope for contracting out of the implied term for non-consumer
insurance contracts. For consumer insurance contracts, any attempt to contract out of the
implied term and thereby ‘put the consumer in a worse position’ is negated entirely, i.e. the
contractual term seeking to contract out is ‘of no effect’.
For non-consumer contracts, any attempt to contract out of the implied term that is either
deliberate (i.e. the insurer knows is a breach) or reckless (i.e. the insurer does not care
whether it is a breach) is of no effect. However, the implied term can be contracted out of,
provided it is done in a manner compliant with the transparency requirements of the
Insurance Act 2015.
Limitation (s.5A)
Section 5A provides that any cause of action arising from the late payment runs for up to one
year following the date on which the insurer eventually paid all the sums due in respect of
the claim. This starts from when the insurer’s liability in respect of the coverage claim is
extinguished – whether the payment is made pursuant to a court or arbitral award, or a
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settlement agreement.
The usual six-year limitation period for causes of action based in contract also applies and a
late payment action is barred by the expiry of whichever limitation period ends sooner.
What does this mean for claims managers?
The main aspects of concern to claims managers are the requirement to pay claims quickly
and the associated remedy for late payment of claims. The claims manager needs to ensure
that the claims department is adequately staffed with employees who have appropriate skills.
If decisions regarding policy cover are not taken quickly, resulting in delays to valid claim
payments, then the organisation is likely to face demands from unhappy policyholders for
additional payments in accordance with the provisions of the Act. Of course, any increase in
claims spend is an unwelcome drain on profit.
C2 Reservation of rights
A claims handler, presented with circumstances that may give rise to a claim, may start to
deal with the loss. If they subsequently find that the matter may not be subject to policy
coverage, then they run the risk that they may waive their position. This means that they
have behaved in such a way as to suggest that the claim is covered and therefore have
waived their right to avoid the claim. This will estop the insurer from declining policy liability
at a later stage, even if there is a breach of a condition precedent.
To avoid being estopped the claims handler needs to reserve their position by clearly
explaining to the insured that they are making enquiries or indeed handling the claim in its
earliest stages under a reservation of rights. This affords insurers protection against
potential arguments of estoppel/waiver.
The leading case in this matter is that of Kosmar Villa Holidays v. The Trustees of
Syndicate 1243 (2008).
Refer back to M85, chapter 3, section E1A to see the impact that this important case has
on the use of waiver and estoppel.
Research exercise
Find examples of claims where your company made a reservation of rights. What
protection did it provide your company? Find an example of a claim where your company
waived its rights under the terms of the policy by not reserving rights.
C2A Airmic Statement of Principles regarding insurers’ reservation of

rights
There is, however, a problem with persistently acting under a reservation of rights. Insurers
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of large multinational corporate clients run the risk of upsetting their clients if they reserve
their rights in the early days of a claim. They need to balance the risks to their business if
they do not take this action, against the possibility of upsetting their client if they do. Airmic
has become involved in this issue and has put forward a solution.
Research exercise
Look at the Airmic Statement of Principles regarding insurers’ reservation of rights in
appendix 1.
What does it mean for subscribing insurers and policyholders?
If you work for a subscribing insurer, what procedures do you need to ensure that you
comply with this Statement of Principles?
If you do not work for a subscribing insurer, are there any best practice principles you can
take from it to improve the way your team deal with these situations?
Airmic has also produced a guide called: Achieving Best Practice in Claims: A guide for Risk
Managers, which was considered in Of the claims service.
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C3 Policyholder litigation
Sometimes it is not possible to settle a claim amicably. On such occasions, the insurer and
the policyholder must look for a form of dispute resolution. There are three basic dispute
solutions available:
• discussion between the parties alone;
• Alternative Dispute Resolution (ADR); and
• litigation.
C3A Alternative Dispute Resolution (ADR)
Refer to
Think back to M85, chapter 7, section C
The term Alternative Dispute Resolution (ADR) is generally recognised as any form of
dispute resolution that is not litigation. It is based upon non-confrontation and a meeting of
minds. Arbitration, for example, is a form of ADR.
Alternative Dispute Resolution can take a number of forms:
• mediation;
• mediation-arbitration;
• early neutral evaluation;
• mini-trial or structured settlement procedure;
• expert appraisal;
• judicial appraisal;
• expert determination.
Research exercise
Investigate the forms of ADR cited above and familiarise yourself with each process. How
do they vary from one another? Which would be most appropriate for disputes you
commonly face?
Some policy wordings contain a disputes clause. This explains the process the parties must
adopt in the event of a dispute. Such processes generally involve an agreement to enter into
a dispute resolution process in order to try to resolve any dispute prior to embarking upon
litigation.
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Claims management decision: ADR

Consider the various types of ADR listed here. How would you facilitate dispute resolution
by these methods?
By far the most popular ADR process is mediation. More often than not, mediation is
successful, as both parties are able to negotiate their differences to reach a conclusion that
they are both able to agree. However, there are occasions where ADR is not successful and
the parties resort to litigation to resolve their differences.
C3B Litigation
Where a policyholder is unable or unwilling to resolve their differences with their insurer via
ADR, they may resort to litigation. Litigation starts when the policyholder instructs a firm of
solicitors to set out their case in writing. An exchange of correspondence between the
policyholder’s solicitors and the insurer (or their solicitors) generally ensues. The
policyholder’s solicitors arrange for proceedings to be served on the insurer and the litigation
process commences.
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Even if ADR has failed, further negotiations are likely to take place and many claims are
settled by negotiation during the litigation process. Occasionally the parties are still unable to
resolve their differences and so the dispute progresses to trial for a decision by a trial judge.
By the time the dispute reaches judgment stage, both parties will have normally spent
considerable sums of money on costs. Consequently, it is not uncommon for the losing party
to seek to appeal the decision of the court of first instance.
Research exercise
Research in detail several cases where a policyholder has litigated against their insurer
and analyse the judgments in these cases. You will find that each case is determined on
its merits, but you will gain an understanding of how and why judges find for one party or
the other in these cases. The following cases will assist you but further research is
required in order to gain a full appreciation of this subject.
• Brit Syndicates Ltd and others v. Italaudit SpA (in liquidation) (GT Italy) and Grant
Thornton International (GTI) (2006)
• Anders and Kern UK Limited v. CGU Insurance plc (2007)
• AC Ward and Sons Limited v. Catlin (Five) Limited and others (2009)
• Flexsys America L.P v. XL Insurance Company Limited (2009)
• Synergy Health (UK) Limited v. CGU Insurance plc (T/A Norwich Union) and Others
(2010)
• Niramax Group Ltd v. Zurich Insurance Plc (2020)
D Bad faith
You will be familiar with the concept of good faith already. However, there is also such a thing
as bad faith in a legal context. Bad faith is also called mala fides.
Consider this…
What might be the definition of bad faith in the context of insurance claims?
If you search the internet, you will find many definitions of bad faith. However, one of the
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most comprehensive is:
Intentionally misleading someone or undertaking an agreement without any
intention of fulfilling its provisions.
Examples of bad faith include concealing important facts from an insurance company on the
filing of a claim, or an insurance company’s failure to pay a legitimate claim.
Although the concept of bad faith did not feature in the UK legal system until recently, it is of
particular significance in US and Canadian insurance litigation. When dealing in these
territories insurers must be aware of the concept and its ramifications. As we shall see later,
where bad faith features within a legal system, the courts can order an insurer to pay
punitive damages in circumstances where it feels the insurer has shown bad faith.
D1 Duty of good faith

As you should be well aware by now, parties to an insurance contract owe each other a duty
of good faith when negotiating the contract. This obligation applies throughout the life of the
contract and stands in addition to the obligations contained in the terms of the contract itself.
In the UK, an insurer is no longer allowed to simply dismiss a claim or repudiate a contract
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purely on the grounds of a breach of good faith (such a breach could be in the form of non-
disclosure, misrepresentation or failure to make a fair presentation). However, it can do both
if it can prove that the breach was deliberate or reckless. This treatment is justified by the
particular nature of insurance, which places the parties in a position of vulnerability to each
other at various times throughout the life of the contract.
It is a breach of good faith for the insurer to lure a potential policyholder into a contract
knowing that the insurer would never have to pay out under the contract owing to non-
disclosure, i.e. this would be tantamount to bad faith on the part of the insurer.
The relevant principle is that each party should be on an equal footing; neither party is
permitted to hide relevant facts from the other. The insurer has this duty when it comes to
dealing with claims. At that stage, the policyholder, having suffered loss or injury, is
economically vulnerable and so the ‘equal footing’ rationale of the duty of good faith is
relevant.
D2 Third parties
The insurer’s contractual right to control the defence of any litigation or settlement
negotiations under liability coverage, gives rise to a relationship involving the third party, the
insurer and the policyholder. This naturally creates tensions that do not arise when
attempting to settle a first party claim.
In its dealings with the third party, the insurer may face decisions that place its own interests
in conflict with those of its policyholder. Where this occurs, the good faith obligation requires
that an insurer gives their policyholder’s interests no more priority than their own. However,
insurers in all classes carry a more general burden of good faith; a policyholder is entitled to
good faith treatment even in matters not directly connected to dealings with a third party.
Research exercise
How did the courts interpret these duties in Snydergeneral v. Century Indemnity
Co (1995) and Delmonte v. State Farm Fire and Casualty (1999)?
D3 Duty to avoid bad faith

The insurer’s duty involves two requirements:
• the insurer must pay a valid claim promptly if there is no valid reason to contest it; and
• it must treat the policyholder fairly throughout the process of investigating and assessing
the claim, both in respect of the manner of investigation and assessment and in the
decision whether or not to pay. The insurer is required to refrain from using its financial
might or the policyholder’s weaker financial stature to extract a settlement favourable
to itself.
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Research exercise
Consider the following cases. How do the principles in these cases compare with the
Regulator’s principles regarding prompt payment of claims and the fair treatment of
customers in the UK?
• Amaprop Canada Inc v. Guardian Insurance Company of Canada (2000);
• Cross v. Canada Life Assurance Co (2002);
• Thornber v. Insurance Corporation of British Columbia (2003); and
• Stegenga v. Economic Mutual Insurance Co (2019).
In certain circumstances, the insurer will be penalised by the court if the court considers that
it has acted in a way tantamount to bad faith. In 2002 the Ontario Court of Appeal held that a
‘breach of an insurer’s obligation to act in good faith is a separate or independent wrong from
the wrong from which compensation is paid’. Conversely, a frivolous claim of bad faith by a
claimant can attract an increased award of costs against the claimant and in favour of the
insurer.
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Research exercise
What were the ramifications for the claimant in Chaplin v. Sun Life Assurance
Company (2004)?
Where the court upholds a valid claim of bad faith against an insurer, it can award punitive
damages of varying amounts. In extreme cases can amount to many millions of dollars. Here
are a number of cases that demonstrate the impact that bad faith in certain circumstances
can have. You will find it useful to research these.
• Whiten v. Pilot Insurance Company (2002): failing to meet the standard of fairness and
timeliness and ignoring or manipulating evidence.
• Adams v. Confederation Life Assurance Company (1994): denial or termination of
disability benefits without proper regard to objective evidence of disability.
• Beninger v. Kingsway General Insurance Company (2000): demanding material in
support of a claim to which the insurer was not entitled.
• Dhami v. Abengoza (2001): high-handed and contemptuous treatment of a policyholder.
Claims management decision: policy disputes in the US courts

How would you train your staff to handle claims in such a way as to avoid being accused
of bad faith, should your policyholder be entitled to take their case to a US court?
D4 So, how can I legitimately decline cover?

Not all refusals to pay claims amount to bad faith just because the insurer ultimately changes
its mind or is required by a court to pay. The test is one of reasonableness. Any time you
deny coverage it must be based upon a reasonable interpretation of your rights and
obligations under the terms of the policy and a genuine issue pertaining to policy cover. Most
insurers will seek guidance from attorneys operating in the jurisdiction in which the claim is
made (the USA and Canada) with a view to avoiding the use of bad faith arguments by the
policyholder.
Example 3.1
In Warren and Maryann Andrews v. Merchants Mutual Insurance Company (2016) it
was held that the insurer had not delayed paying claims as alleged and that there was no
bad faith claim for their insurer to address.
Critical reflection
When might a marketing department’s enthusiasm to sell more products inflate a
policyholder’s expectations? What are the likely consequences of this when a policyholder
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comes to make a claim?
How does the cost of losing and replacing customers compare to the cost of retaining the
customers you already have?
Additional reading
Airmic Guide to Best Practice: Delivering excellence in insurance claims handling
E Scenario 3.1: Potentially invalid claims

E1 Question
You work for an insurer and are presented with a large claim from a policyholder. You think
that the claim may not be covered but you handle the claim to help the policyholder. What
issues do you need to bring to the attention of the policyholder and why?
E2 How to approach your answer
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Aim
This scenario aims to test your understanding of the handling of claims that are potentially
invalid and the issues to be considered in your approach to your claimant.
• The need to reserve your company's rights under the terms of the policy if you believe
that the claim may not be covered. This includes the possible need to tell the policyholder
that you are acting under a full reservation of rights and/or tell them to act as a prudent
uninsured, with an explanation as to why you are doing this.
• Reference should be made to the Airmic Statement of Principles regarding insurers'
reservation of rights, which may affect how you behave – there should be reference to the
size of loss and loss location (territory).
• The dangers of not reserving your rights at the appropriate time mean you may waive
your company's rights to subsequently decline cover – your company may ultimately be
estopped from doing this if your behaviour suggests to the policyholder that you may pay
the claim.
F Scenario 3.2: Service quality

F1 Question
You receive a complaint from your policyholder that you have failed to settle a valid claim on
time. You investigate and discover that they are right. You apologise and make the claim
payment adding interest and £100 as recognition of inconvenience. Discuss the various
types of policyholder experiences. What type of experience has this policyholder
encountered?

Aim
This scenario aims to test your understanding of service quality and the ways of providing a
service that meets expectations.
• A discussion of threshold quality and how this can be met.
• An analysis of the service provided and how it fits into the threshold framework, drawing a
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conclusion as to the type of service offered to this policyholder.
G Scenario 3.3: Bad faith

G1 Question
You have just been appointed claims manager of a Canadian insurer. You are passed an
existing claim file and asked to review it. Upon studying the file, you conclude that:
• the claim is valid under the terms of the policy;
• your firm has declined indemnity only because the claim is potentially in excess of $10m;
and
• your policyholder has complained, with justification, that your firm is no longer replying to
any of its correspondence.
Prepare a paper for your board explaining, with evidence, the ramifications of this action.
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Aim
This scenario aims to test your understanding of the concept of bad faith and its implications.
• The need to affirm policy liability immediately.
• The need to notify reinsurers and the implications the delay in doing this may have had.
• The policyholder's right to claim bad faith, citing relevant case law to support this
statement.
• The need to mitigate the effect of this through prompt action, an apology and the seeking
of legal advice so that the matter can be handled compassionately without incurring
further liability.
H Scenario 3.4: Customer experience

H1 Question
You work for an insurer that is examining its claims service to see how it can be changed to
improve the customer experience. Write a report reviewing the claims process and how this
could be improved. The report should cover some of the challenges that may be faced.
H2 How to approach your answer

Aim
This scenario aims to test your understanding of the interaction between the claims service
and the customer's experience.

• An overview of customer experience, linking this to the fair treatment of customers.
• An analysis of the different elements of the claims process, from first notification,
investigation and validation to negotiation and settlement.
• Comments on each as to what best practice would be to ensure excellent customer
experience.
• A discussion of the challenges, including: the challenge of balancing the need to
investigate potential fraud with genuine claims, the skills that staff require, and the
Chapter 3
number of different people who can become involved with a client and the challenge of
achieving consistency.
For reference only

Self-test questions
1. What is the difference between a ‘consumer’ and a ‘commercial’ client as defined by
the FCA?
2. In which circumstances would the FCA consider the rejection of a consumer

policyholder’s claim to be unreasonable?
3. What do customers want from their insurers in order to keep them satisfied?
Chapter 3
4. Which categories of customer will the Financial Ombudsman Service assist where
they wish to complain about an insurer?
5. To what type of claims does the Airmic Statement of Principles regarding insurers’
reservation of rights apply?
6. When does the Airmic Statement of Principles regarding insurers’ reservation of

rights apply where a potential loss occurs in Russia?
7. What is the difference between expert appraisal and expert determination?
8. How should a US and/or Canadian insurer behave in order to avoid bad faith claims
against it?
9. With reference to relevant timescales, how does Lloyd’s handle complaints?

For reference only

Management of claims
4
handling procedures
outcomes
Chapter 4
Introduction
A Claims handling operation 1.5
B Claims handling procedures and the Civil Procedure Rules 2.5, 3.2
C Outsourcing 1.5
D Delegated authority 1.5
E Insourcing 1.5
F Supplier relationship management 2.6
G Scenario 4.1: Outsourcing
For reference only

Self-test questions
Learning objectives
• design and implement claims handling procedures for both first and third party claims;
• evaluate the impact of the Civil Procedure Rules and the pre-action protocols on claims
handling procedures;
• evaluate the usefulness of outsourcing some or all of the claims function and its effect on
your procedures;
• establish procedures for managing delegated authorities; and
• effectively manage suppliers of services to your department.
Introduction
So far in this study text, we have looked at the importance of the customer and what our
response should be when things go wrong. In chapters 1 and 2, we looked at organisational
design and structure. We saw there how the different ways of structuring a company have an
impact upon the way in which it handles its claims. Within this structure, we saw that the
claims manager has overall responsibility for ensuring that all claims coming into their
department are handled appropriately and efficiently. To do this they will establish
procedures for their team of claims handlers to follow. What these will look like will, of
course, be influenced to a greater or lesser extent by the type of claim under consideration.
In this chapter, however, we look first at claims handling procedures in general, considering
what they should look like and what is required of them. We then look at the Civil Procedure
Rules and see how the importance of complying with them has great significance for the way
third party liability claims are handled.
Some companies may decide to move the claims function, in part or in whole, outside the
Chapter 4
company completely through outsourcing. Outsourcing to whatever level can be less

expensive than recruiting full time staff to the company. However, compared to employing its
own staff, a company which outsources will find that its control of the outsourced function is
inevitably reduced. We will think about this later in this chapter.
Finally, in this chapter, we look at all those other experts and suppliers that help the claims
department do its job effectively. We will see how important it is that these relationships are
managed so that control and quality are not compromised.
Key terms
Civil Procedure Claims handling Delegated authority Disclosure
Rules (CPR) procedures
For reference only

Expert evidence Part 20 proceedings Part 36 offers Pre-action protocols
Outsourcing Segmentation Supplier relationship
management
Consider this…
What are the main features of your company's claims procedures?
Claims management decision: procedures

How can your procedures differentiate between personal lines and commercial lines
insurances?
A Claims handling operation

What is required of claims handling procedures? How does each different type of claim
impact these claims handling procedures?
Claims management decision: segmentation

How would you segment your claims department?
Which would be most effective given the types of claims you handle: segmentation by
volume and complexity or by product?
A1 Design and implementation of claims handling

procedures
Each claims department of an insurance organisation should have a written claims handling
procedure to guide all claims technicians in their decision-making processes when handling
claims. This means that claims technicians should be handling claims and making decisions
Chapter 4 Management of claims handling procedures 4/3
in a uniform way. These procedures should support the claims philosophy which we
discussed in chapter 1.
Consider this…
What do well-designed claims handling procedures look like?
No matter what sort of claim we are considering, there are certain features that every claims
handling operation must incorporate.
It must be able to:
• accept claims notifications;
• verify policy liability;
• record claims details on the insurer’s IT system;
• accurately reserve in respect of claims notifications;
Chapter 4
• pay valid claims quickly; and
• pursue recoveries (including reinsurance recoveries) and manage any third party liability.
At the same time, it must comply with local laws and any relevant regulatory requirements.
Research exercise
Find a claims handling procedure document within your own organisation: which aspects
are well designed and which aspects could be improved upon? Why should any
organisation have a well-designed procedure? How does this add value? How is
compliance with local laws and regulatory requirements ensured?
For reference only

Claims management decision: claims processes
You are reviewing your claims processes – how can you identify improvements?
Beyond these essentials, the type of claim will influence the procedures that you need. The
most complex procedures are needed for third party claims and these, in turn, are influenced
by the Civil Procedure Rules (CPR), which must be followed if a claim is likely to involve
the courts.
A2 Internal procedures
The internal procedures need to reflect the fact that there will be a blend of claims reported
into the claims department: ranging from simple low value claims to complex high value
claims.
Claims are managed by staff with the most appropriate authority – as a claim becomes more
complex, they are escalated to more senior claims handlers. By ensuring that these
authorities are respected, and controlling that process, the claims manager can be sure that
staff members are dealing with the claims most suited to their experience and grade within
the organisation.
Refer to
Internal authorities described in Referral points and authorities on page 2/6
A3 External service standards

Insurers require the services of many specialist companies that support them in settling
claims, for example loss adjusters and solicitors. Insurers usually have an agreement with
these firms to ensure that work undertaken for them is done in such a way as to mirror the
insurer’s philosophies. Such agreements usually incorporate measurable key performance
indicators (KPIs, i.e. service standards) and a fee agreement (usually an agreed fee per
claim handled or an hourly rate). The KPIs scope the authority given to the relevant service
supplier and incorporate trigger referral points.
Consider this…
We have seen how insurers themselves are obliged to deal with claims within certain
regulatory service standards. Can you remember what these are?
A4 Government sanctions
Background
Following the 9/11 terrorist attacks in America, the UN Security Council adopted a far-
reaching resolution charting the way forward in the fight against terrorism. That resolution
requires all UN Member States, separately and collectively, to deny terrorists safe haven and
financial support and to cooperate in bringing them to justice. In the UK this responsibility is
held by HM Treasury, which restricts the making available of funds and financial services to,
or for the benefit of, terrorists, or those suspected of involvement with terrorism. It also has
powers to freeze the accounts of suspected terrorists.
As a result, insurers must implement procedures to ensure that they do not provide financial
Chapter 4
services to suspects detailed on the Asset Freeze Targets List, as published by HM

Treasury.
Sanctions have subsequently become increasingly popular with governments all over the
world and are imposed to a greater or lesser extent by certain countries when disputes arise
with other countries. Recent examples include the US sanctions in relation to Russia and
North Korea.
The problem for insurers is that a risk may have been written in a territory where sanctions
did not exist at the time; however, when a claim arises (perhaps years later), the political
situation may have changed and sanctions may apply.
On the Web
For reference only

The Asset Freeze Targets List is published at:
www.gov.uk/government/publications/financial-sanctions-consolidated-list-of-targets.
The Terrorism (United Nations Measures) Order 2006 defines ‘financial services’ as any
service of a financial nature, including (but not limited to) insurance-related services.
On the Web
The UK Government publishes a regularly updated regime specific list of where sanctions
apply, available at bit.ly/2PfhaMp.
So what do insurers have to do?

The responsibilities of insurers are directly linked to their paying of claims. At the time a
claim is to be paid, insurers should run a check against the Asset Freeze Targets List in a
timely manner. This is so they can be sure that they provide no financial service to anyone
on the list.
Some insurers elect to check the Asset Freeze Targets List when they are first notified of a
loss (FNOL). This approach has certain drawbacks:
• the search against the list is done before providing any financial service (i.e. payment
under the policy) and it is possible that the individuals/businesses on the list will change
by the time a payment is made;
• for a liability claim, the name of the third party claimant may not be known, and so they
cannot be checked against the list; and
• for a first party claim (e.g. a household claim), the policyholder may, during the life of the
claim, assign the benefit of the policy to another person, who may therefore not be
checked against the list.
Running a check against the Asset Freeze Targets List of every appropriate payee is an
appropriate method of complying with the legislation and most UK composite insurers run
checks at payment stage.
So what does the claims handler have to do?

The claims handler must check the Asset Freeze Targets List by running a search based on
the payee’s name. Any exact or potential match should be referred to claims management
for onward referral to HM Treasury.
HM sanctions are most likely to be an issue with claims in the London Market, as these often
involve many international parties in different geographical territories. The same rules still
apply to personal claims (such as travel insurance), but searches are often automated via
specialist software and any matches found are dealt with by the counter-fraud team or
escalated to someone with sufficient claims handling authority.
B Claims handling procedures and the Civil

Procedure Rules
The most complex claims are those made by a third party against your insured – or those
that involve a claim from your insured against a third party. One common example where
Chapter 4
CPR is most likely to be relevant is a motor claim where there is purported personal injury.
Be aware
The Civil Procedure Rules (CPR) 1999 are relevant only to third party liability claims in
England and Wales, as the Rules have not been adopted elsewhere.
B1 Key claims management issues
Refer to
Think back to M85 chapter 10, section A
For reference only

The CPR contain a number of key themes for claims managers to consider and incorporate
into their planning and procedures.
Co-operation
The regime discourages a belligerent and obstructive approach to dispute resolution. The
court expects parties to co-operate. In other words, parties to a dispute must provide
information to one another, help to narrow the issues and take steps to try to resolve the
dispute themselves at the earliest opportunity.
Case management by judges
Judges are proactive and manage the cases in front of them in accordance with the Civil
Procedure Rules. For example, judges can:
• decide what information one party needs to provide to the other;
• decide whether expert evidence is required;
• order case management conferences;
• decide in which order issues will be tried; and
• set how long the trial will last.
This means that the focus is on the real issues of the case and encourages early settlement.
In addition, the court has the power to strike out a Statement of Case (CPR 3.4), i.e. part of a
party’s case, at any stage in the proceedings and to order costs sanctions (CPR 3.7).
Strict timetables
As soon as proceedings are commenced, the case becomes subject to a court-imposed
timetable, which requires procedural steps to be completed within strict time periods. Failure
to comply may lead to a claim or defence being struck out or dismissed in whole or in part
and may result in costs penalties. It is not generally possible for the parties to agree to an
extension of time for the carrying out of a particular procedural step without the agreement of
the court.
Costs
Judges expect to be kept informed on the level of costs being incurred. They seek to level
the ground between litigants to ensure that wealthy parties, such as insurers, are not able to
use greater resources to gain an unfair advantage. Costs are also used to control litigants. A
party who fails to co-operate, or meet a court deadline, may be required to pay a costs
penalty. In addition, the courts expect each party to keep an ongoing estimate of their legal
costs up to and including trial.
Allocation
The court will allocate cases to one of three case management tracks as follows.
Small claims track Fast claims track Multi-track
(CPR 26.8 and 27) (CPR 28) (CPR 29)
The normal track for claims under The normal track for claims over The regular track for claims
£10,000 in respect of property £10,000 and up to £25,000 exceeding £25,000 or which are of a
damage and injury claims under particularly complex nature
£1,000 unless caused by a road
Chapter 4
traffic accident where the limit is

usually £5,000.
A ‘low value personal injury scheme’ exists for most employers’ and public liability claims
valued at between £1,000 and £25,000 and between £5,000 and £25,000 for road traffic
accidents. It was created in response to the large numbers of low value personal injury
claims being submitted after motor vehicle incidents, often for whiplash or other soft-tissue
injuries. The scheme mandates tight timescales for decisions and responses and subjects
these claims to fixed legal costs.
Case management conferences
Where a claim is allocated to the multi-track, one or more case management conferences
may be held. This is where the judge orders the parties to court with the aims of narrowing
For reference only

the issues and exploring the scope for the case to be settled using alternative dispute
resolution (ADR).
Protocols
As part of the CPR, pre-action protocols are issued in respect of specific types of claim,
including personal injury claims. They aim to encourage the parties to exchange early and
full information before proceedings have begun and set out such matters as the contents of
the letter of claim. Although a specific type of claim may not be covered by a protocol, courts
expect parties to act reasonably in the exchanging of information relative to the claim and in
their compliance with the protocol in general. It may impose cost sanctions on what it
regards as unreasonable behaviour by parties.
The CPR forces an admission or denial of liability before the quantum of the claim is
considered. Furthermore, if proceedings are issued unnecessarily, due to a failure to comply
with the protocol timetable, there is a risk of penalty interest on damages and costs for the
claimant.
Consequence: front loading
As we shall see further in the next section, the Civil Procedure Rules mean that as a claims
manager you need to make sure that your department thoroughly investigates claims before
proceedings are commenced, to ensure that it is possible to adhere to the strict timetables
set by the courts. While claimants usually have the advantage of commencing proceedings
at a time convenient to them, defendants are in a more difficult position. Thus, once again, it
is important that your team identifies early problems that may lead to court proceedings and
takes immediate action once proceedings commence to ensure that there is sufficient time to
mount an effective defence.
For personal motor claims, insurers are now far more open in sharing information, including
using web portals to easily share information with each other so decisions can be made on
liability quickly and efficiently.
Research exercise
Find out if your company has ever failed to comply with the aspects of the CPR. Was a
deadline missed? If so, why? What were the consequences?
Claims management decision: compliance with CPR

What systems and procedures do we need in place to ensure that we comply with
the CPR?
B2 How does the CPR influence claims handling

procedures?
B2A Pre-action
As you will have discovered by now, there is a great emphasis in the rules on the conduct of
the parties before they even issue proceedings. For personal injury and professional
indemnity (including medical malpractice) cases, there is a formal pre-action protocol. This
sets out the way in which the parties must behave and the kind of information that must be
exchanged before formal proceedings are commenced.
Chapter 4
Research exercise
Obtain a copy of an up-to-date protocol relevant to claims you have dealt with. How do
these rules apply?
The courts expect parties to all disputes to identify, and where possible narrow, the issues,
before bringing the matter before the courts. They expect the parties to exchange documents
and information in a reasonable manner and do what they can to prevent the matter coming
to court.
Objectives of pre-action conduct and protocols

3. Before commencing proceedings, the court will expect the parties to have exchanged
For reference only

sufficient information to
a. understand each other’s position;
b. make decisions about how to proceed;
c. try to settle the issues without proceedings;
d. consider a form of Alternative Dispute Resolution (ADR) to assist with settlement;
e. support the efficient management of those proceedings; and
f. reduce the costs of resolving the dispute.
Practice Direction – Pre-Action Conduct and Protocols February 2017
It is clear from this quote that the court expects all parties to all disputes to ‘act reasonably in
exchanging information and documents relevant to the claim’ and to do all they can to avoid
proceedings.
A letter of claim issued by the claimant’s solicitors initiates the process. Thereafter, the
protocols set out a strict timetable for investigation and the disclosure of information. The
burden of complying with the protocol falls on the insurer.
Be aware
Failure to comply with a pre-action protocol may be penalised. For example, if the court
considers non-compliance with a protocol has led to the unnecessary issuing of
proceedings, the court can award penalty interest (up to 10% above base rate) on the
claimant’s damages.
As a claims manager, you must develop a fail-safe system to deal with letters of claim. You
must ensure that there is a prompt response (within 21 days in a personal injury claim) and
that immediate steps are taken to obtain the relevant documentation from the insured and
any other parties. This is so that you can make a decision as early as possible about
whether you are going to pay the claim or defend it.
Example 4.1
The personal injury protocol stipulates a 90-day period to investigate the claim and reply.
Evidence must be provided as to why a particular stance has been taken in the event of a
denial of liability.
Prior to issuing proceedings, it is important to carry out a full investigation. This involves
identifying witnesses and establishing the content of their evidence. Insurers must make a
positive exercise of judgment as to whether a claim is likely to settle without proceedings.
The ‘front loading’ of time and costs increases the economic pressure to settle cases early,
in particular low value claims.
The vast majority of motor, public and employers’ liability claims are dealt with under the
terms of the low value personal injury scheme, via a web-based portal system in which
individual customers, claimant lawyers and defendant insurers communicate and interact.
There are strict rules for dealing with claims within this portal system. Claims that are
handled within the portal are done so quickly and claimant lawyers can only recover a
Chapter 4
reduced fixed fee if they are successful. Claims that fall outside the portal (usually for a
breach of the rules, if liability is denied or if contributory negligence is alleged) generally take
longer to deal with. Claimant solicitors are able to charge enhanced fees in these
circumstances.
This process has recently been further updated, allowing injured third party claimants to
litigate directly in-person through a purpose built web portal, without representation of a
solicitor.
B2B What do you do to commence proceedings?
In the opening stages of a civil action, both you and the other party to the dispute must
summarise the nature of the claim or defence in what are known as Statements of Case. To
For reference only

commence proceedings, you need to issue a Claim Form, which must include a statement
of the nature of the claim and specify the remedy sought. If it is a money claim, the form
must state either the amount claimed, if known (e.g. in the case of a debt), or what the
claimant expects to recover (e.g. in the case of damages).
The claim form must be accompanied by Particulars of Claim. This sets out the substance
of the complaint in more detail. If it is not possible to serve the Particulars of Claim with the
Claim Form, it must be served within 14 days of service. The Particulars of Claim should
include:
• the precise terms of the contract, where the claim is based on breach of contract, and the
precise nature of the relationship that gave rise to the duty of care, where the claim is
based on negligence;
• a clear and chronological factual summary;
• details of the alleged wrongdoing (e.g. breach of contract or breach of duty) on the part of
the defendant;
• the consequences of that wrongdoing and a description of the nature and amount of the
loss flowing from it;
• all of the facts and matters upon which the claimant intends to rely in order to prove
liability and quantum to the satisfaction of the court; and
• a Statement of Truth: this is a statement to the effect that there is an honest belief that
the facts set out in the document are true.
B2C What should you do if you receive a Claim Form?
In cases where you are the defendant to a claim, then you will receive the Claim Form from
the claimant and will have to take action whether the timing is good or not. Upon receipt of
the Claim Form, you have 14 days in which to file an acknowledgement of service confirming
that you have received the paperwork and that you intend to defend all or part of the action.
You must then serve your defence within 28 days of service of the Claim Form. You can
agree with the other party to extend the time for serving the defence, but only up to a
maximum of 28 days. If you require a longer period in which to prepare your defence, you
must apply to the court for an extended timetable, giving your reasons.
Claims management decision: assessing a defence

Will you defend all, part or none of the action?
If you are going to defend the claim, what reasons do you have for denying the claimant’s
allegations?
Is the claimant to blame for the loss either in whole or in part?
You cannot serve a defence consisting of a bare denial of the claimant’s allegations: you
must give your reasons. If your version of events differs from that of the claimant, you must
provide that also. Your defence must include a Statement of Truth.
If you believe that the claimant is responsible for their own loss, either in whole or in part,
you may allege contributory negligence in your defence. If such allegations are proved, the
court has discretion to reduce the amount of the claimant’s damages to the extent that it
considers the claimant to be responsible for their own loss.
Chapter 4
Statements of Case may be amended in certain circumstances, but if the substance of the
claim form or the defence is changed because of the amendment, it must be verified by a
further Statement of Truth. The court may also order a party to clarify any matter in dispute
or give additional information, whether or not referred to in their Statement of Case. Before
applying to the court for such an order, a party seeking clarification/information must serve a
written Request for Further Information, asking for it to be provided by a specific date. The
request must be confined to matters reasonably necessary and proportionate to enable the
applying party to prepare their own case and/or to understand the case they have to meet.
B2D What happens next?
After the claimant and the defendant have filed their Statements of Case, the court will ask
the parties to the dispute to fill in an allocation questionnaire. The purpose of the
For reference only

questionnaire is to provide the court with sufficient information to enable it to decide under
which ‘track’ (see Key claims management issues on page 4/5) the claim should be handled.
Small claims track
Generally, this is for claims with a financial value of not more than £10,000, or £1,000 for
non-motor personal injury claims and £5,000 for injury claims caused in a road traffic
accident. Under the small claims track the court may:
• give directions for the exchange of information between the parties (‘disclosure’); and
• fix a date for a preliminary or final hearing; or
• give notice that it proposes to deal with the claim without a hearing.
There is no requirement for either party to be legally represented. Claimants can commence
proceedings and defendants may respond over Her Majesty’s Courts Service website.
On the Web
www.moneyclaim.gov.uk/web/mcol/welcome
Fast track
This track is for claims with a financial value of not more than £25,000, where the trial is
unlikely to last for longer than one day, and where oral expert evidence can be limited. After
allocating a claim to the fast track, the court will set a timetable for the exchange of further
information between the parties and give directions for the management of the case. These
directions will include:
• fixing the trial date for a date not more than 30 weeks ahead;
• possibly limiting the exchange of documentary evidence; and
• in the event that expert evidence is required, appointing a single expert by agreement (as
opposed to each party instructing their own expert), unless there is a good reason why
this should not happen. If the parties to the dispute cannot agree on a single expert, the
court has the power to make the appointment.
Multi-track
This track is for claims worth more than £25,000 and for claims, which, for reasons such as
complexity, are not suited to the small claims track or fast track. After allocating a claim to
the multi-track, the court will give directions for the exchange of further information.
Alternatively, it will set a date for a case management conference. At this the parties are
expected to address the court as to how they believe the case ought to be handled in order
to achieve the overriding objective (i.e. justice).
The parties are required to provide estimates of the cost of the proceedings to the court for
scrutiny and approval at various stages of the action. If a party’s costs significantly exceed
their estimate, they may be prevented from recovering those additional costs at a later date.
It is clear that – generally speaking – small claims will be easier and faster to handle
compared to multi track claims.
Claims management decision: claims handling allocation

How many claims can I expect my claims handlers to deal with at each level?
Chapter 4
B3 Disclosure
This is the process of revealing to the other side documents, including electronic records,
relevant to the case. The claims manager must ensure that their insured does not only
disclose those documents upon which they intend to rely, but also those that could adversely
affect their own case or support another party’s case. The parties must file a disclosure
statement setting out the extent of the search made for documents, explaining why the
search was limited if that was the case.
Research exercise
For reference only

What procedures does your firm have in place to ensure that the disclosure rules are
complied with on a case-by-case basis? How effective are they?
B4 Expert evidence
No party may call an expert or use an expert’s report without the court’s permission. The
court has express powers to restrict the use of expert evidence and often orders the use of a
single joint expert, even where both parties want to submit their own expert evidence. The
expert has a duty to give independent evidence and help the court on matters within their
expertise. Their duty to the court overrides any obligation the expert may have to the party
who instructed them.
Each party may put written questions to an expert instructed on behalf of the other party or to
a joint expert. They can do so only once, and the questions must be put within 28 days of
service of the expert’s report. Outside that time limit, questions may only be put with the
consent of the other party or with leave of the court.
Meetings between experts in order to narrow the issues in dispute are actively encouraged.
In addition, a Statement of Truth must verify experts’ reports.
Claims management decision: use of experts

In what circumstances would you call experts to court?
What questions would you ask your expert if one of your claims went to court?
Research exercise
How does your firm ensure that the most appropriate expert is selected for each claim?
This is difficult enough when operating in just one territory. How can a claims manager
successfully implement this strategy if operating in more than one territory or globally?
B5 Claims settlement: Part 36 offers and payments into

court
As we have seen, the CPR actively encourages the speedy resolution of cases. One way it
does this is through the use of Part 36 offers. Part 36 of the CPR allows either party to
make a written offer to settle a case. They can make the offer either before or after
proceedings have been issued. If the offer is rejected, and the rejecting party fails to beat the
offer at trial, the court has the power to make costs orders against the rejecting party.
Example 4.2
A claimant is seeking damages of £4,000 in their Statement of Case. However, after
issuing proceedings they decide to make a Part 36 offer to settle of £3,000. The defendant
rejects the offer. Subsequently, at trial, the defendant is held liable for more than £3,000.
In this case, the court may order interest on the £3,000 at a rate not exceeding 10%
above the base rate (starting with the latest date on which the defendant could have
accepted the offer without needing the permission of the court).
Chapter 4
A claims manager may wish to use this tactic to tempt a claimant to settle at a figure which,
although reasonable, is below that which the claimant demands in their Statement of Case.
A claimant might use this tactic to encourage the defendant to come to the negotiating table
where they suspect that their denial of liability was not made with much confidence. As
claims manager, you need to be aware of such tactics and ensure that your claims staff are
trained to settle claims without incurring penalty interest awards.
Research exercise
Review claim files from your company where Part 36 offers were made. What were the
consequences of these offers?
For reference only

As a claims manager, you need to ensure that your staff are aware that any party receiving
an offer can request clarification of the offer within seven days of it being made. If
clarification is not forthcoming, the person to whom the offer was made can apply to the
court for an order for clarification. Under normal circumstances, if the claimant wishes to
accept the Part 36 offer or payment into court this must be done within 21 days of it having
been made.
B6 What if someone else shares the blame?

If, as defendant, you believe that another party is responsible for the claimant’s loss, either in
whole or in part, you may issue proceedings against that party. You can do this to ensure
that, in the event that you are found liable to the claimant, you can ask the court to order the
third party to bear all or at least some of the loss. This area is dealt with by Part 20 of the
Civil Procedure Rules.
Part 20 proceedings can be issued as of right by a defendant before they file their defence,
but they must apply to the court for leave to serve Part 20 proceedings after the defence has
been filed.
Be aware
If the main action has already progressed, the court may feel that adding an additional
party would create unnecessary expense and delay. In these circumstances, an
application for leave to issue Part 20 proceedings might be refused. It is therefore
important that your team consider whether there are any other parties that may be
responsible for the alleged loss right at the outset.
When Part 20 proceedings are issued, the defendant must defend the ‘main action’ that has
been commenced by the claimant and also pursue the third party as if they were a claimant.
Claims management decision: Part 20 proceedings

What do I need to ensure my teams are aware of with regard to Part 20 proceedings and
what procedures do I need to have in place to ensure that they are issued whenever they
are practical? Find a practical example of when and how this was done.
B7 Claims settlement by Alternative Dispute Resolution

As part of the process of co-operation, under CPR the courts expect parties to use
Alternative Dispute Resolution (ADR) to try to resolve their disputes, and actively
encourages them to do so. Although ADR is not compulsory, the judge responsible for
making decisions on the progress of a case may decide that it should not be permitted to go
any further along a particular ‘track’ until ADR has been attempted. The courts can impose
costs sanctions if a party has unreasonably refused to use ADR, and, in certain
circumstances, they can order the parties to mediate a dispute.
Chapter 4
Refer to
ADR is described in Alternative Dispute Resolution (ADR) on page 3/23
ADR is a means of resolving disputes by using an independent third party as a mediator.

They may suggest a solution to the parties but cannot impose a solution. ADR is voluntary;
the parties choose the process and either of them can withdraw at any time. If either party
does not like the proposed solution, they do not have to accept it.
Parties to a dispute can always reach an ad hoc agreement to use ADR. Often, however, it
will be a term of a contract between them that, if any dispute does arise, they will resolve it
by ADR.
For reference only

B8 The Legal Aid Sentencing and Punishment of Offenders
Act 2012 (LASPO)
The key element of the Legal Aid, Sentencing and Punishment of Offenders Act 2012
(LASPO) relevant to insurance law is in Part 2, which abolishes the recoverability of
‘success fees’ and associated costs in conditional fee agreements for all cases, save for
those involving the fatal asbestos-related disease mesothelioma.
Prior to the changes a successful claimant could recover from a defendant:
• damages;
• costs; and
• an uplift in relation to costs, known as a ‘success fee’.
This led to the so called ‘no win no fee’ culture where claimant lawyers charged their clients
nothing if the claim was unsuccessful but could charge a losing defendant the usual costs bill
plus a considerable uplift (i.e. a ‘success fee’) should the claim be successful.
From 2013, the following changes were implemented:
• Costs management. Judicial costs management procedures were introduced for multi-
track cases commenced on or after 1 April 2013. The parties must file and exchange
detailed costs budgets before the first case management conference. The court can
make a costs management order recording the extent to which parties’ budgets are
agreed or approved; and when assessing costs, the court should not depart from budget
without good reason. It is essential for all parties to prepare accurate budgets and keep
them up to date, as recoverable costs can be restricted to the budget last approved or
agreed.
• Qualified one-way costs shifting (QOCS) for personal injury claims. Claimants are
normally awarded costs if successful, but do not have to pay the defendant’s costs if they
lose. A key exception is where a claimant has failed to beat a defendant’s Part 36 offer.
This means that defendants to personal injury claims are not normally able to recover
costs, even where the action is successfully defended.
• Damages Based Agreements. This is a private funding arrangement between a
representative and a client whereby the representative’s agreed fee is contingent upon
the success of the case and is determined as a percentage of the compensation received
by the client. Lawyers can conduct litigation in return for a share of the damages, but the
defendant will be liable for costs only on the conventional basis. The claimant will have to
pay any shortfall out of damages, but a claimant lawyer may not recover by way of costs
more than the total amount payable under the Damages Based Agreements fee.
LASPO also banned referral fees and the recovery of After the Event premiums.
Claims management decision: CPR

How could I improve the systems I have in place to ensure that my department complies
with the CPR?
The CPR rules’ drive for speed and cost control have led to claims being resolved earlier and
claims being paid more quickly than the regime prior to 1999 and are an integral part of day-
to-day claims handling planning and procedures for well run, organised insurers.
B9 The discount rate
Chapter 4
Where damages for personal injury are awarded for future losses in the form of a lump sum,
that award is adjusted to reflect the fact that the injured person can invest the money before
the loss or expense for which it is awarded has actually arisen. The aim is to avoid
overcompensation. The factor by which the award is adjusted is determined by the personal
injury discount rate (PIDR), also known as the Ogden rate, which represents the
appropriate rate of return on investing the monetary award. In England and Wales, the PIDR
is set by the Lord Chancellor under s.1 of the Damages Act 1996.
Until 1999, the discount rate was 4.5% as it was assumed that a claimant could achieve an
annual rate of return of between 4% and 5% by investing their damages award in the open
market. This was reduced to 3% by the House of Lords in Wells v. Wells (1999), on the
basis that a claimant should not be expected to invest their damages in ‘risky’ investments.
For reference only

The House of Lords decided that claimants should be assumed to invest their damages in
index-linked Government stocks (ILGS). As the net of tax rate of return on ILGS over a
three-year period was 3% at that time, the discount rate was reduced to this level. The
House of Lords also made it clear that the method actually used by claimants to invest their
damages was irrelevant.
In 2001 the Lord Chancellor exercised his power pursuant to s.1 of the Damages Act 1996
and reduced the discount rate to 2.5%. He did so by calculating the investment return of
ILGS over a three-year period and rounded the discount rate up to 2.5% to reflect what
happened in reality – as claimants did not solely invest in ILGS and a mixed portfolio of
assets.
On 20 March 2017, the rate was reviewed again by the Lord Chancellor and amended to a
PIDR of minus 0.75%, this rate was set by reference to a three-year average of real gross
redemption yields on ILGS.
On 15 July 2019, the Lord Chancellor announced that the personal injury discount rate would
be set at minus 0.25%, following a consultation process and as set out within the Civil
Liability Act 2018.
B9A So why does this matter?
Industry statistics produced at the time suggested that motor premiums would have to
increase to take into account the rise in claim values. This is because the change in discount
rate increased the awards in catastrophic injury claims, as can be seen from table 4.1.
As a direct result of the changes, many insurers significantly increased their reserves to
account for this increased potential exposure, some incurring large P&L losses in the
process.
Table 4.1: Impact of reduced discount rate on catastrophic injury

claims
Age category and injury 2.5% discount rate –0.25% discount rate
Scenario A £9m £18m

Serious Brain Injury Future loss element: Future loss element:
Male, 21 years of age at date of settlement £8m £16.5m
Scenario B £2.3m £3.5m

Less Serious Brain Injury Future loss element: Future loss element:
Male, 51 years of age at date of settlement £2m £3m
Scenario C £5m £6m

Serious Spinal Injury Future loss element: Future loss element:
Female, 52 years of age at date of £4.2m £5m
Chapter 4
settlement
Scenario D £1m £1.8m

Below Knee Amputation Future loss element: Future loss element:
Male, 23 years of age at date of settlement £800,000 £1.3m
Scenario E £700,000 £1m

Fatal Accident Future loss element: Future loss element:
Male, 55 years of age at date of settlement £500,000 £800,000
C Outsourcing
For reference only

Employing claims staff is costly to an insurer, who may consider alternative options to the
direct employment of staff. One option is to outsource the claims function in whole or in part.
Outsourcing is using a skilled resource outside the company to handle work traditionally
performed by in-house staff. In essence, a function is passed to a third party by either
sending the work out or bringing the resource into the company. Outsourcing sees
organisations concentrating on their core activities and using the skilled services of external
companies as needed.
Outsourcing claims
Insurers are also prepared to look beyond obvious outsourcing such as it is and use
services as diverse as claims aggregators and cover holder management. In the future,
78% of survey participants expect to outsource claims.
Capital Commercial Insurance Services, following a market study in 2012
On the Web
Visit: www.open.edu/openlearn/money-management/management and search for
‘outsourcing’.
The following is a quote from this site, which highlights some of the areas to consider when
thinking of outsourcing.
Risks of outsourcing
Most reviews of outsourcing either accept it as a fait accompli or emphasise its economic
advantages. Some reviews, however, have urged caution. For example, it has been
argued that the perceived benefits of outsourcing have hidden the associated costs.
In the move from integrated organisations to networks, there is also a danger of losing the
intangible benefits and capabilities of:
• Information sharing
• Corporate culture
• Communication and co-ordination
• Flexibility and robustness
• Motivation and learning
Source: OpenLearn bit.ly/2Pgalul
Chapter 4
Companies have turned to outsourcing to help them survive the effects of fast-changing
technology, narrow margins and fierce competition. Outsourcing of the claims function has
occurred in both insurance and reinsurance companies, although it is less widespread in the
latter since reinsurers generally prefer to retain complete control.
C1 Who uses outsourcing services and why?

There are broadly three groups of users of claims outsourcing services:
• self-insurers, such as local authorities, utility companies and large corporations;
• insurance companies; and
• reinsurance companies.
For reference only

Self-insurers are those who have either taken a positive decision to self-insure or have found
certain of their risks unattractive to insurers. These rarely possess the necessary staff,
resources and technical skills to handle claims themselves and/or are unwilling to develop
and invest in the maintenance of expensive IT systems. In addition, self-insurers often
employ risk managers who are aware of:
• the likely frequency and severity of many of the self-insured risks;
• the fact that the claims function is not a core activity of the organisation; and
• the possibility of being pressurised into paying claims that are not valid if the claims
function is kept in-house.
On the rare occasions that reinsurers choose to outsource it is the availability of high
technical skills that plays a major role in the decision.
For insurance companies, the main reason to consider outsourcing is the containment of
expenses.
C2 How much of the claims function to outsource

A firm can choose to outsource separate parts of a claims function or the whole claims
process, together with financial reporting and management of the operation, so that no
internal claims department is required at all. In between these two extremes lie the majority
of outsourcing contracts. Even where no internal claims personnel are employed,
management information is still required by the insurance company, which needs to have a
quality review process in place to ensure that acceptable standards of service are being
attained and maintained. In addition, under ICOBS, the insurer retains responsibility for the
claims function. It will require evidence that the outsource claims provider is adhering to
regulatory requirements, as the insurer will be held vicariously liable for any breaches.
Consequently, the insurer needs to dedicate some time and resources to ensuring that the
service provider is doing their job properly.
C2A Claims notification
It is possible to instruct a third party to process claims notifications only. In general, the
outsource provider offers an internet and/or telephone notification system, supported by a
computer-based questionnaire. The insured notifies the administrator and provides the exact
details of the claim in response to a series of questions. Data is commonly then sent
electronically to the insurer’s computer system. This is particularly suited to high frequency,
low severity claims; for example, certain personal lines claims arising from household or
motor policies will often have claims notification taken by the broker or intermediary.
C2B Response to the claimant
Reviewing claims and the formulation of a response to the claimant is a more technical
procedure than processing claims notifications. The outsource provider, on behalf of the
insurer, must either:
• follow the exact procedures (and timetables) laid down in the relevant pre-action protocol
for the particular type of claim; or
• ‘act reasonably’ in respect of first party claims, at all times treating the insurer’s
customers fairly.
When the claimant is not the policyholder, the insurer has a regulatory duty to treat any
unrepresented claimant fairly.
Chapter 4
C2C Claims settlement

Claims can be settled in a number of ways, and claims settlement via the provision of
replacement goods, rather than money, is just one example of this. Outside companies offer
the service of supplying and delivering such goods to the insured. In many cases, this is
combined with claim negotiation, since the external resource is required to determine the
type of product that has been damaged or stolen. Similarly, for motor claims, the use of
externally managed approved repairer networks has given insurers access to a speedy
repair service at a pre-agreed threshold quality and cost.
C2D Conclusion
Claims management decision: suppliers
For reference only

What difference does it make to my procedures whether I am using an expert to supply a
specialist service (for instance a loss adjuster to investigate a claim or a garage to repair a
car) where I maintain control of the claim and the decision making or whether I have
outsourced the whole process (e.g. the notification of all claims)?
Generally, the extent to which the claims function is outsourced will depend upon the classes
of business written and therefore the nature of expected claims.
High volume, low complexity claims
These claims are most commonly outsourced. They are straightforward but often labour-
intensive claims, which do not generally require a site visit, such as:
• medical expenses;
• transit;
• baggage and travel;
• some motor; and
• minor property damage claims.
Low volume, high complexity claims
These lie at the other end of the spectrum. However, they can lend themselves to
outsourcing (due to the high skill levels required to review and negotiate the claims and the
significant impact they can have on the insurer) if the insurer does not have the required in-
house capability. They include:
• pollution;
• liability;
• professional indemnity/errors and omissions;
• business interruption;
• marine;
• workers’ compensation/employers’ liability;
• warranty insurances; and
• niche markets.
C3 Who provides outsourcing claims services?

The providers of outsourcing services can be divided into two groups:
• internal (i.e. a subsidiary company, or a joint venture); and
• external.
In most cases, the service provider is external; that is, not legally or financially connected to
the user. External providers are:
• third party administrators;
• insurance company claims departments (offering services to non-insureds, i.e. self-
insurers);
• brokers;
• lawyers;
• loss adjusters;
• consultants; and
Chapter 4
• suppliers.
C3A Third party administrators (TPAs)
These are independent companies that specialise in claims administration. They operate as
service providers, but carry none of the financial risk of insurance. In many cases their sole
area of expertise, and hence their sole source of income, is the administration of claims. The
use of TPAs is typical of smaller insurers operating in the London Market, particularly on
delegated authority books of business.
The services they offer include:
• claims negotiation and handling;
For reference only

• mediation services;
• on-site claims investigation;
• claims payment;
• IT systems;
• reporting;
• telephone helplines; and
• technical training.
Some legal practices have set up stand alone or linked claims handling units, which operate
much like a TPA.
C3B Insurers’ claims departments
These departments offer their services to clients who are usually self-insurers. This external
service has arisen as a response to the demand for specialist claims handling providers.
C3C Brokers
Brokers have traditionally provided large corporations with insurance arrangement and
placement services. However, many organisations have employed in-house risk managers to
carry out this function. Many insurance brokers offer their services on an unbundled or menu
basis and offer claims handling services for a fee. Often the broker places the business and
then deals with any subsequent claims under a binder or binding authority type arrangement.
In the past decade, some brokers have started their own managed general agencies to
perform the full function of an insurance company, including authority to handle claims.
In personal lines, it is not uncommon for the broker to take first notification of loss,
particularly in motor, before handing the rest of the process over to the insurer.
C3D Loss adjusters
The use of loss adjusters represents an outsourcing of the claims investigation process. It is
only after the receipt of the adjuster’s independent report, where one has been
commissioned, that the claims handler will decide whether to reject or settle a particular
claim. In addition to this service, loss adjusters offer bulk claims administration services,
cradle to grave facilities and desktop claims management services.
On the Web
www.thequestpartnership.co.uk
www.sedgwick.com
www.crawco.co.uk/services/loss-adjusting
C3E Consultants
Consultants offer a variety of services to the insurance and reinsurance world. Principal
among these are:
• inspection of records;
• portfolio analysis;
• claims reviews and audits;
• run-off;
Chapter 4
• reinsurance claim collections; and

• commutations.
As opposed to TPAs, consultants tend to be relatively small companies or sole traders. Their
major asset is the skill of their workforce. They tend to carry out short-term projects of a
problem-solving nature, with fees generally being time based. The services they offer include
claims function outsourcing, but they are most commonly employed for very specialist parts
of the claims lifecycle.
The service from consultants differs from that of other providers, in that they aim to enhance
the abilities and resources of the internal claims department rather than to replace it.
On the Web
For reference only

davies-group.com
C4 How should the claims function be outsourced?

Once the decision has been made to outsource, what needs to be done?
There are six phases involved in any procurement process:
• identify the requirement;
• source the market;
• seek tenders;
• evaluation of tenders;
• contract award; and
• managing and evaluation of delivery.
C4A Assess the potential requirement
You should perform an analysis of strengths and weaknesses in respect of the function 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.
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).
C4B Choose a provider
Consider this…
What would be the impact of choosing a poor provider as opposed to a good provider?
Some larger companies have the support of a procurement department. This selects
service providers based upon their abilities to provide the desired claims services at
competitive rates.
Research exercise
Does your company have a procurement department? If so, find out how it operates. Ask
for details of its service supplier selection criteria. What does this tell you about your
company’s priorities when it comes to choosing suppliers? Do you agree with them?
Claims management decision: supplier selection

Who would you involve in supplier selection?
How many potential suppliers would you review?
How would you complete the process?
Chapter 4
How would you follow up with an audit and review programme?
Some companies set a matrix, both for selection criteria and to ensure objectivity. It usually
incorporates a scoring system.
The most important criteria in the choice of provider are:
Experience Cost Flexibility
As well as reliability, quality, cultural value fit and service levels.

Experience
The experience of the outsource provider can be ascertained from:
For reference only

• references from current and former users;
• market reputation; and
• clearly defined service levels.
Cost
Although cost reduction is one of the main reasons for considering outsourcing, the cost of
the service is not always the most important factor when deciding which provider to choose.
If an incompetent service provider is chosen, this could damage the insurer’s reputation.
Also under ICOBS the insurer remains responsible to the regulator for all claims, whether
outsourced or not.
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 claims, but
rarely on complex claims, such as long-tail liability exposures. Staged fees are also common,
where, for example, dealing with the initial notification will attract a certain fee, but if the
matter proceeds through various key stages a higher fee becomes payable. It may also be
possible to negotiate, on certain books of business, a global fee for the whole book of
business being outsourced. This may provide an incentive for the outsourcer to bring claims
to the most efficient and prompt conclusion. Another variation in fee structure would be to
allow some form of additional or enhanced fee if certain KPIs are reached. The insurer
should consider their target outcome for the aspects of the process being outsourced and
seek to implement a suitable fee structure.
Flexibility
Flexibility in this sense relates to the outsource provider’s willingness to adapt its standard
service, and fee arrangements, to meet the specific requirements of the user. Flexibility can
be demonstrated by:
• the inclusion in the contract of certain additional services, such as regular management
information, as standard with no extra charge;
• willingness to amend the format of management reports to fit the organisation’s
standards; and
• provision of ‘added value’ services, usually at no extra charge, e.g. access to training or
training material.
The insurer should look for the service that meets its specific requirements, covering those
areas of weakness highlighted in the strengths and weaknesses analysis.
C4C Prepare the outsourcing agreement
The outsourcing agreement will:
• cover the scope of the duties to be outsourced;
• detail measurable service protocols;
• provide a clear definition of the fees payable, including agreed timescales in relation to
billing and payment; and
• confirm the date for the commencement of operations and a notice period in the event of
termination.
Usually the insurer enters into a contract with the service provider and appends a Service
Level Agreement to this. There is also a requirement to allow the insurer to undertake audits.
Remember, under ICOBS, the insurer retains responsibility for the outsource provider’s
Chapter 4
compliance with ICOBS.
Claims management decision: outsourcing

Having outsourced certain aspects of your claims function, how will you review
performance and strive for improvement?
D Delegated authority
As we have gathered, outsourcing is usually undertaken in a controlled way, i.e. the
outsource service provider takes regular instructions from the insurer. On many occasions,
particularly in personal lines insurance, the insurer may give the outsource service provider
For reference only

full authority to handle claims within certain criteria, without reference to the insurer
whatsoever. In such circumstances, the insurer essentially delegates all claims handling
authority to the outsource provider.
The loss of control experienced by the insurer is balanced out by reduced administration and
access to expertise; for example, a loss adjuster with 30 years’ experience is better placed to
determine the cost of a replacement wall than a call centre worker with limited experience.
In addition, where the outsource service provider may usually charge VAT for their services –
for example loss adjusters and solicitors – where the insurer delegates full authority it has
been agreed with HM Revenue & Customs that VAT is not chargeable. The usual
arrangement is to have triggers that bring a claim outside the delegated authority (for
example proceedings issued, coverage issues, large losses) and the outsourcer must refer
such claims back into the insurer.
Example 4.3
A loss adjuster has delegated authority to handle claims up to a limit of £5,000 without
reference to the insurer. Claims beyond that amount must be referred to the insurer.
Specific benefits include:
• the adjuster is not required to issue reports;
• no time delays while the adjuster waits for authorisation from the insurer;
• cost savings; and
• a positive effect on customer service due to the time saved.
Delegated authority can also be used as a tool to manage peak workflows where an insurer
is suddenly unable to cope due to a catastrophic event or sudden departure of staff.
D1 Impact of conduct risk on delegated authority

Having now studied outsourcing and delegated authority in depth, it is helpful to understand
the motivation behind the stance taken by the FCA in addressing conduct risk.
Refer to
Conduct risk considered in Conduct risk on page 2/14
Outsourcing in the general insurance market was subject to a thematic review by the FCA in
June 2015.
On the Web
You can find a full copy of the thematic review into outsourcing in the general insurance
market here:
Chapter 4
www.fca.org.uk/publication/thematic-reviews/tr15-07.pdf.
One of the key types of organisation operating under delegated authority agreements are
managing general agents (MGAs). By definition, MGAs operate under such agreements,
usually to attract, underwrite, retain and handle claims on behalf of an insurer. They are
represented in the market by the Managing General Agents’ Association (MGAA), which has
responded to relevant thematic reviews.
On the Web
You will find the MGAA’s response to a number of thematic reviews published by the
FCA on the website: www.mgaa.co.uk.
For reference only

You should ensure that your knowledge of thematic reviews undertaken by the FCA, and
responses by the market, is up to date.
Claims management decision: delegated authority

You have given delegated authority to a service provider. How will you review
performance and strive for improvement?
E Insourcing
Some functions have become expensive to outsource and insurers have found that not all
service providers are able to provide the promised service to an acceptable standard. In
these circumstances, certain insurers have considered bringing business processes back in-
house, which would otherwise have been outsourced. When considering whether to bring
certain functions back in-house it is necessary for insurers to undertake a cost benefit
analysis. Initially, the insurer should consider the costs of insourcing:
• cost of employees at local and central levels who will be involved in the process to be
insourced;
• the cost of keeping local employees current in local knowledge (e.g. training and
development programmes and seeking professional advice);
• the cost of maintaining processes, applications and systems;
• infrastructure and related management costs;
• third party costs;
• opportunity costs of relevant individuals for in-house projects;
• transition costs;
• annual operating costs associated with any new function;
• the likelihood and risk of incurring costs (actual and notional) of non-compliance,
including penalties; and
• the likelihood of and notional cost associated with reputation being damaged due to non-
compliance.
Next, the benefits should be considered, including:

• keeping control of the function in-house;
• contributing to a leaner, more cost effective function globally;
• helping to mitigate the risk of non-compliance;
• low or no third party outsourced costs;
• no cost of auditing the outsourced facility and maintaining the service level agreement;
and
• enhanced customer service.
Arguably, a combination of both insourcing and outsourcing can help a company move
towards an optimal cost base.
Everest Group Healthcare and Life Sciences have published this ‘Sourcing Decision Tree’
which provides a thought matrix. This can be helpful when considering whether to insource
or outsource certain functions. We reproduce this in figure 4.1.
Chapter 4
Figure 4.1: Sourcing decision tree
Shared services vs outsourcing

Criteria Sub-criteria
(typical market practices)
Scale Mixed experience
Outsourced model preferred for processes with

Demand variation
lower demand stability
Unpredictability Shared services preferred where effort is highly

predictable and risks of overruns are limited
Nature of work
For reference only

Data sensitivity Shared services preferred for functions that involve
use of sensitive date
Lifespan Shared services typically not best suited for supporting

sunset products/technologies
Access to core Shared services typically suited for functions involving high
systems/servers levels of access to core/critical systems and servers
Continuity leverage Mixed experience
Alignment with Shared services typically provide better alignment with

organisational firm’s organisation strategy
Strategic strategy
considerations
Integration with Shared services typically provide better alignment
organisation’s with where higher level of integration and understanding
values and culture of organisation values is needed
Operations control Outsourced model reduces management intervention

and monitoring
Economical
Economic provider
Outsourced model typically cheaper than
considerations shared services model
Extent of difference
Technology
Mixed experience
Capability Domain
considerations Shared services typically have better experience,
competence
context and knowledge of domain-centric functions
Staffing flexibility Shared services typically provide better staffing flexibility,

however, not consistent across all functions
Source: Everest Group - Healthcare & Life Sciences

F Supplier relationship management

Insurers use the services of many other external bodies. All these external relationships
need to be managed and the ultimate responsibility for this lies with the claims manager
(although in larger organisations there may be a separate role or department dedicated to
this task, reporting into the claims manager).
Supplier relationship management can be defined as ‘the proactive management of a
business relationship for a competitive advantage to an organisation’. It concentrates on
relationships between the service supplier and the buying organisation rather than a specific
contract. In claims, the purpose is to encourage claims management to develop an
understanding of the nature of relationships that exist between its organisation (i.e. the
insurer) and its service suppliers.
Panel arrangements
Most insurers restrict their use of experts to a nominated panel. Members of the panel are
selected for their ability to perform appropriate services at competitive rates.
Chapter 4
Example 4.4
A third party administrator will normally agree service protocols with the insurer. These set
the standards by which the provider will be judged and 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.
For reference only

The insurer’s claims personnel generally manage the performance of the panel remotely on
a case-by-case basis and by regular audits, usually at the offices of the service provider.
They feed the results back to the claims manager via audit reports, and these can be used
as a starting point at the next audit of that service supplier in the constant battle to improve.
F1 Loss adjusters
Loss adjusters are used to investigate claims that cannot be investigated by the insurer’s
own team. The insurer and loss adjuster will agree minimum standards to which the loss
adjuster must perform.
F2 Solicitors
Solicitors are used to manage litigation and provide legal advice, often in respect of policy
liability. The insurer and solicitor will agree minimum standards to which the solicitor must
perform.
On the Web
www.kennedyslaw.com
www.loneystewartholland.co.uk
www.clydeco.com
www.dwf.law
F2A Insurer’s defence team

Insurers often need to defend claims made against them by their policyholders and to defend
third party claims made against their policyholders. A sound defence team is essential in
dealing with these litigated claims. We are not going to refer to policy coverage issues here,
but instead we will concentrate on the defence of liability claims, where the claims handler
has accepted policy liability.
A lawyer can bring several areas of expertise to bear on the claims process, including:
• an objective expert assessment of the merits of the claim or defence and an assessment
of what evidence needs to be collated to successfully prove or defend the claim;
• an objective assessment of the amount in dispute and what losses, if any, the actions of
the defendant may have caused;
• advice on which is the most appropriate dispute resolution process for the claim;
If litigation is inappropriate, then a lawyer will help the claims handler decide whether the
claim ought to be resolved by alternative means such as arbitration or mediation.
• proofing witnesses and ensuring that they can give oral evidence if necessary;
• giving advice on the legal defences available;
• giving advice on policy issues, e.g. notification, material non-disclosure and
misrepresentation; and
Chapter 4
• providing guidance on practice, procedure and the presentation of the claim or the
defence.
When a claim is litigated, an insurer usually has little option other than to instruct a solicitor if
it is to protect itself from falling foul of court procedure. However, insurers should give
consideration to:
• cost: legal advice can be expensive and many firms charge higher hourly rates than
certain other experts, such as engineers and barristers;
• solicitors may focus on the technical aspects of a claim rather than the economics of an
early settlement;
• insurers and adjusters are just as able to consider policy points and instruct experts
direct; and
For reference only

• for advice (such as policy interpretation) that requires legal input, insurers may find that
approaching counsel direct is quicker and cheaper.
The direction and management of experts is a key claims skill. Most potential obstacles can
be overcome by having effective working relationships with a tightly monitored panel.
In relation to a specific claim, the defence team is likely to comprise the claims manager, the
loss adjuster, one or more experts if necessary and, if the matter requires legal advice, a firm
of solicitors and/or a barrister. It is the responsibility of claims handlers to manage the claim
process by providing strategic case management. They need to retain overall control of
investigations, both before and after experts are appointed. It is vital that the claims handler
managing the claims process develops a partnership with the team to clarify and define their
respective roles and ensure that the claim is handled efficiently, effectively and at
minimum cost.
Barristers are usually the advocates in the team: that is to say, they are responsible for the
presentation of the claim in the actual court room, although there are an increasing number
of solicitor-advocates. Barristers are also likely to be involved in the preparation of the key
documents that will be put before the court, such as the claim form and the defence.
In the most complex cases, Leading Counsel may be instructed. These elite members of the
barristers’ profession have extensive legal experience. They are known as Queen’s Counsel
(QCs) or ‘Silks’. The fees of Leading Counsel are high and therefore they should only be
used in the most complex or high value claims.
Experts may be required where technical issues are in dispute. For instance, an expert
surveyor may be required where the value of a building is in dispute or an expert accountant
may be required to help assess loss of profit or other financial loss.
Research exercise
Obtain a copy of an agreement that your company has with a service supplier. If possible,
obtain agreements from different types of supplier and compare them.
What services are provided?
For what fees?
What added value is offered?
How is the relationship managed?
Could the agreement be improved and the provider add further value in another way?
Consider this…
What suppliers and experts does your company use? What services do they offer?
Chapter 4
F3 Other suppliers
Apart from loss adjusters and solicitors, insurers use a wide range of independent experts to
assist them in their enquiries. Generally, these ‘other suppliers’ can be divided into two
categories: suppliers of goods and suppliers of services.
F3A Goods
Refer to
Think back to IF1, chapter 7, section A
For reference only

You may recall from your earlier studies that insurers have four options when settling first
party claims:
• replacement;
• reinstatement;
• repair; or
• cash.
Many insurers have contracts with wholesalers and retailers to supply goods on demand,
such as white goods. This is beneficial to the insurer as bulk-purchasing contracts allow for
significant discounts. In addition, the insured benefits because their damaged property is
replaced with the latest model, which is of particular benefit when settling claims for
damaged computer equipment. It also reduces the number of steps in the process: for
example, there is no need to obtain estimates and wait for approval. Some suppliers also
offer a validation service.
On the Web
www.catslimited.co.uk
www.glassolutions.co.uk/
F3B Services
Among the key suppliers of services to the insurance industry are loss adjusters and
solicitors, as we have already seen. However, the industry utilises a wealth of other service
suppliers.
Different lines of business require different types of expertise but the following are the most
common:
• surveyors;
• valuers;
• forensic scientists;
• forensic accountants;
• project managers;
• builders;
• dentists;
• doctors;
• rehabilitation providers;
• fraud investigators;
• enquiry agents;
Chapter 4
• surveillance specialists;
• architects;
• engineers; and
• disaster recovery specialists.
On the Web
www.tftconsultants.com
www.brownsword.com
www.proclaim-group.co.uk
For reference only

www.3drehab.co.uk
www.disastercare.co.uk
Critical reflection
Consider the implications for your team structure as to how many incoming claims are fast
track and multi track.
What are the driving forces behind the increase in outsourcing in general?
Is the claims function a core activity of an insurer? If so, should it be outsourced?
Which aspects of claims settlement have been enhanced by outsourcing?
Why outsource the claims function?
G Scenario 4.1: Outsourcing

G1 Question
You are the claims manager of a small insurer. You are advised that your company is about
to expand rapidly into a new area, which will generate thousands of claims. Your board
suggests that you should outsource these claims.
What would be the practical implications of the expansion and what would you need to
consider when assessing outsourcing's viability as a response to the demands of the
new area?

Aim
This scenario aims to test your understanding of the issues surrounding the decision to
outsource some or part of the claims function.
You should aim to include the following key points of content in your answer.
• A definition of outsourcing, evidence of recent industry trends regarding outsourcing and
a practical, topical example.
• Consideration of the strategic thinking behind whether to outsource. This will include
giving thought to the future direction of the company, and the impact outsourcing could
have on the future ability of the company to develop in this area.
• The cost implications of keeping the claims handling in-house and of outsourcing them.
• The impact on the need for, and experience of, claims personnel, their contracts and
sense of job satisfaction and security.
Chapter 4
• The pros and cons of outsourcing for the quality of the service offered to the customer
and your ability to control it.
• You should balance the advantages and disadvantages in the light of the situation
before you.
For reference only

Self-test questions
1. Explain the provisions of the Personal Injury Pre-Action Protocol.
2. Outline the main features of the CPR.
3. What remedy is available to the court where a claimant makes a false Statement of
Truth in their Particulars of Claim?
4. What are the main features of the small claims court track?
5. What are the advantages and disadvantages of ADR?
6. Identify the main reasons for the increase in outsourcing by insurers.

Chapter 4
For reference only

Claims centre and
5
catastrophe management
outcomes
Introduction
A Claims centre management 2.7
B Catastrophe management 1.5
C Scenario 5.1: Catastrophes
Chapter 5
Self-test questions
Learning objectives
For reference only

• evaluate the use of call centres as a tool for claims management; and
• analyse the risk of a catastrophe and prepare for the impact on your department.
Introduction
In this chapter we continue to look at those factors that influence your claims management
practices. In the previous chapter, we looked at procedures in general and considered the
impact the type of claim has on those procedures. We went on to look at responses to these
challenges through the use of outsourcing, suppliers and experts and delegated authorities.
One scenario where it could be crucial to have good suppliers, outsourcing agreements and
delegated authorities in place is where there is a catastrophe affecting many of your
policyholders. Catastrophes can pose a real challenge to your claims team and you will need
to plan to meet that challenge. We begin this chapter with a consideration of this challenge.
Later, we will look at another useful tool in the claims toolbox: the call centre. We will assess
its use and evaluate some of the issues to be faced when establishing a call centre.
Key terms
Call centres Catastrophe Catastrophe Catastrophe
management modelling
Catastrophe risk Claims centres Contingency plan Helplines
financing
A Claims centre management

Chapter 5
One tool available to insurers to assist them in times of claims volume is the use of a call
centre or claims centre to accept the first notification of loss from the policyholder. Such
facilities have become quite sophisticated and are now used widely in the financial services
industry.
For reference only

Many insurers use call centres to help policyholders notify claims and deal with claims
thereafter.
A1 Development of helplines
As claims manager you will need to understand the services that call centres and helplines
provide to policyholders.
A helpline can be defined as: ‘the provision of an advisory and/or assistance service via the
telephone’.
In most cases the person providing the advice at the call centre will have online access to
information relating to the problem in hand, such as a list of trades people for household
claims or repairers for motor claims. The respondents are trained to make immediate
decisions, so that appropriate action can be taken swiftly. This usually involves initial
validation of policy liability and, once affirmed, giving assistance to the policyholder to settle
the claim.
We can infer from this that helplines could be seen as a product of the IT revolution and the
availability of:
• modern telecommunications;
• immediate access to information;
• affordable computer processing power at high speed;
• the willingness of insurers to develop innovative products and service; and
• the expansion of customer expectations for an accessible, efficient and comprehensive
service.
However, helplines have not simply been developed because they are now possible, there
are other reasons for their widespread use. These are as follows.
Chapter 5 Claims centre and catastrophe management 5/3
An attempt to increase customer People move their insurances more readily in response to price
retention volatility, direct marketing and what they perceive as poor claims
handling.
An attempt to copy the success of the These transformed the motor insurance industry in the late
direct insurers twentieth century through the use of telephone or email notification
of claims, recommended repairer networks (managed by the
insurers or owned by them) and roadside assistance.
As a response to customer expectations Customers increasingly look for instant action and comprehensive
service and claims centres are designed to speed up the settlement
of claims and provide a single point of contact for many claims.
The need for insurers to control Helplines are a cost-effective customer contact point and save the
claims costs insurer money by helping it to settle claims faster.
Helplines are used to offer three main services.
Advice and assistance in the notification, For example, for a motor claim the policyholder can call the helpline
processing and settlement of a claim and be supplied with a courtesy car shortly after their accident.
Advice and assistance in respect of This is relevant to legal advice services that are offered in
potential claims conjunction with legal protection insurance.
Advice only Such schemes offer no element of insurance but simply provide 24-
hour legal advice.
Chapter 5
Over time, claims handling for low value, high volume claims has been ‘industrialised’ and
refined to the point that now call centres are more than just a pool of people answering
queries and are full end-to-end service centres. They now deal with most, if not all, aspects
of claims handling, from first notification to settlement.
A2 Structure of claims centres
For reference only

Call centres will often be set up to service policy administration as well as claims
administration, but for the purposes of this text we will focus only on the latter, i.e.
claims centres.
Claims centres are often located in areas with cheaper labour, usually in regional locations
rather than more expensive metropolitan centres such as London, or offshore in places like
India or the Philippines. They are typically set up to deal with all low-to-mid complexity claims
and parts of complex claims across all lines of business. In some cases, particularly in
personal lines, all the claims handlers are sited within the building, from claims
administrators right up to the most senior claims experts handling the biggest and most
complex claims.
Within the centre, processes and people (and sometimes systems, depending on how
developed the insurer is) are usually split on a line of business basis. So, for example, a
claims handler may handle motor claims only and not touch travel or household claims. This
allows processes and procedures to be tailored to the nuances of a specific type of product
and the handler to become an expert in their field and not have a diluted knowledge base.
Within each line of business, the department is often split into direct and indirect customer-
facing environments:
• Direct customer-facing deals with FNOL and most customer and supplier queries; and
• Indirect customer-facing handles more complex parts of the claim, such as third party
dispute resolution.
Some organisations may be set up to have multi-skilled staff dealing with all or many aspects
of a claim, but this is relatively rare.
There will often also be some centralised claims functions, for example:
• complaints handling;
• change, learning and development, and best practice;
• compliance and governance; and
• supplier management and relationships.
Traditionally, claims centres tend to be large operations in one or many sites across the
country and, in the case of large or global insurers, are potentially located worldwide.
However, increasing technological capabilities coupled with wider workforce trends (including
the response to the COVID-19 pandemic) have meant that many insurers are now
considering how to operate with a more flexible workforce, including significant numbers of
people working from home.
Research exercise
If your organisation uses call centres, where are they based? How are they set up? What
is the rationale behind the ‘where’ and the ‘how’?
A3 Processes, technology and systems

To be able to deal with large numbers of claims and queries, the infrastructure of a claims
centre has to be designed appropriately to cope with demand.
A3A Telephony
Underpinning large claims centres is a specialist telephony system that can deal with large
numbers of calls, can route them to the right place via IVR technology and can hold calls in
the queue and then deliver them to an available agent at the right time. Increasingly these
are being integrated with web chat facilities as well, although take-up within the insurance
industry is limited at present. As a claims manager it is important to ensure that these
systems are set up in such a way as to deliver appropriate service for the customer and
good efficiency for the claims department.
Chapter 5
Research exercise
Investigate how calls are handled within your own organisation. How are they routed to
the correct team? How are they managed locally?
For reference only

A3B Technology systems and platforms
Along with telephony systems, the claims department needs an appropriate IT system to
deal with the huge amounts of information and data being stored. These systems are often
integrated with the policy administration system and can either be bought ‘off the shelf’ from
a specialist software company or can be built internally by the insurer’s internal IT team.
Often it is a combination of both, with a system being bought and then modified to suit the
specific insurer’s own needs.
There may be a number of different systems used within a claims department, but it is
important to note that they serve as the platform by which agents deliver service to the
customer. As a result, they need to be capable of providing information quickly and easily, as
well as allowing the agent to perform a number of different tasks such as record claim
details, instruct suppliers, pay customers and process reserves.
A3C Processes
Claims centres can be dealing with hundreds of thousands of claims per year, sometimes
millions, depending on the size of the insurer and the type of business that it underwrites. As
a result, claims centres need to operate like well-oiled machines. Telephony and IT systems
are only part of the story; processes that claims handlers use must be clear, defined and
easily executable. They will often change over time and will be governed by management,
who will do claim file reviews, process reviews and quality reviews to ensure that processes
are optimised, are delivering the claims strategy or philosophy and ultimately settling claims
for customers in the most efficient manner.
A4 Cost of claims centres

Although potentially cost-effective, claims centres do cost to set up and run. In choosing to
use claims centres this must be borne in mind. The costs of operating a claims centre are
illustrated in figure 5.1.
Figure 5.1: Cost of claims centres
The need for a Use of

24-hour expensive
operation technology
Cost
The ability to The need to

deal with a large employ enough
number of calls operators
Chapter 5
The technology required is expensive because it has to permit the real time verification of the
claimant and their policy and permit the use of online checks on the authenticity of the claim.
It needs to be able to route calls to third parties and offer access to the supply chain when
required. How many operators are needed depends on the type and scale of the service you
wish to provide.
For reference only

Some insurers have attempted to reduce costs by relocating claims centres abroad or to
parts of the UK where labour costs are lower. However, they must still manage the service,
and ownership of this function rests with the claims manager. If you decide to manage an
overseas claims centre from the UK, this may bring with it its own associated costs
(e.g. travel, IT support etc.). You need also to bear in mind that some elements of the public
have a negative perception of overseas claims centres.
A4A Operator costs
Claims centres can employ hundreds or thousands of employees. Even if they are paid
relatively modestly, especially when sited off-shore, the salary and benefit costs, as well as
the real estate costs associated with this volume of people, is significant and can often be
one of the major items within the insurer’s cost ratio. A claims manager needs to consider
what is the optimal level of staffing necessary to service anticipated customer demand and
the right level of benefits to offer to attract people with the right skills.
A4B Opening times
With the advent of claims centres and increasing customer expectations of accessibility,
claims centres usually offer 24/7/365 availability for certain parts of the claims process
(e.g. FNOL). Claims managers need to consider how best to fulfil this, usually by:
• employing skeleton staff at quieter times;
• outsourcing out-of-hours services; or
• using other parts of the business to service out of hours.
On the Web
This website provides useful advice on setting up and running an effective call centre to
maximise customer satisfaction: www.callcentrehelper.com.
A5 Advantages and disadvantages of claims centres

When an insurer is selling products in volume, e.g. travel insurance or motor insurance, use
of a call centre to sell insurance products and handle the first notification of losses in a
claims scenario is cost effective. It is also effective for customer satisfaction if this process is
well managed. However, some insurers have located claim centres and helplines overseas,
with associated language and culture differences. This has encouraged a perception in some
members of the UK public that locating call centres overseas detracts from customer service.
Usually situated in areas with less costly overheads. Offshore centres can suffer from poor customer
perception.
Economies of scale of handling a large number
of claims. Size of claims centres can make them hard to manage
collectively.
Improved consistency of service.
Small issues in process can get magnified by the scale
Easier to review, control and modify processes and
of the operation, making much bigger issues.
procedures.
Volume of inbound work can quickly bottleneck and
Can reduce the volume of more straightforward work
cause wider issues – leading to a focus on quantity
flowing to large and complex loss handlers, giving
rather than quality.
them greater capacity to focus on the key issues in a
large claim.
Consider this…
Chapter 5
In 2019 Ageas won ‘Best Operational Excellence Team’ at the UK National Contact Centre
Awards. But what makes for a ‘good’ call centre or a ‘poor’ call centre?
A6 Conclusion
For reference only

The role of a claims manager in a claims centre is complex. They are responsible for large
numbers of people, high expenses and a high proportion of indemnity spend, as well as
being the ‘shop window’ to the customer. As such they are a hugely important part of the
business, with many important decisions to make that will directly impact the profitability and
service levels of the insurer.
Claims management decision: claims centres

How could claims centres assist your company, bearing in mind the types and lines of
business that your company underwrites?
Critical reflection
Why is it useful to claims managers to be able to predict catastrophes and what do they
do with this knowledge?
What impact on insurers and reinsurers is the recent research into climate change likely
to have?
Additional reading
Climate change
Dlugolecki, A (ed) (2009) Coping with Climate Change: Risks and Opportunities for
Insurers CII Think Piece: Climate change series.
(available at: www.thepfs.org/learning-index/articles/coping-with-climate-change/22989).
B Catastrophe management
As we have just stated, having good suppliers, outsourcing agreements and delegated
authorities in place can be crucial when a catastrophe occurs, affecting many of your
policyholders.
Definition: catastrophe
An occurrence which claims more than 20 lives, badly injures more than 50 people, makes
more than 2,000 people homeless or causes insured damage of over $29m or a total loss
of over $457m.
Swiss Re
Definitions: natural disaster

One which costs an economic loss of $50m or an insured loss of $25m or results in 10 or
more fatalities or 50 or more injured or damages 2,000 or more houses or structures.
Aon
Consider this…
What would be the effect on your claims department of a major catastrophe affecting a
Chapter 5
densely populated and highly insured area?
B1 Analysing catastrophe risk

Natural catastrophes are usually caused by the forces of nature. They include such
For reference only

events as:
• floods;
• storms;
• earthquakes;
• droughts;
• bush fires; and
• cold weather.
Such events lead to high volumes of claims. Unless adequate risk control, risk funding and
organisational catastrophe plans have been put in place in advance, insurance and
reinsurance companies may have difficulty in meeting these claims both financially and
operationally.
Apart from the terrorist attack on the World Trade Center in 2001, the most expensive claims
to the insurance market in the past 50 years have been natural disasters. Most of these have
been hurricanes, in fact hurricane Katrina in August 2005, which claimed 1,322 lives, was for
many years easily the biggest single catastrophe to affect insurers. Estimates vary but
suggest that the hurricane cost insurers about US$70bn. The more recent Hurricane Ida in
2021 is estimated to cost insurers about US$40bn.
B1A Predicting catastrophes
Predicting the occurrence, frequency and severity of catastrophes is extremely difficult,
although ongoing developments in computer modelling have assisted in this area.
Example 5.1
It was previously thought that the storms that hit the UK in October 1987, January 1990,
June 2007, December 2009 and December 2013 were likely to happen only once in
300 years.
Over the last few decades, catastrophes have been growing in both frequency and severity
worldwide. The following figures from Aon Benfield illustrate how the incidence of
catastrophe appears to be increasing.
Incidence
2009 222 catastrophes
Cost
1970 to 1988 US$5bn a year

Chapter 5
Currently Over US$300bn a year
In terms of economic losses resulting solely from weather disasters, 2017 was, at the time,
the costliest year ever recorded at $344bn.The predominant driver of damage resulted from
one of the most expensive Atlantic hurricane seasons on record following the landfalls of
For reference only

Hurricanes Harvey, Irma, and Maria (HIM) that left extensive damage across parts of the
USA and the Caribbean islands. These three storms alone caused an estimated $220bn in
damage and represented 62% of 2017's annual economic loss.
The years 2017 and 2018 combined were the costliest back-to-back years for weather
disasters on record, amounting to $653bn. In 2018 there were 42 recorded natural disasters
costing in excess of $1bn each. Notable events of 2018 include Windstorm Friederike in
Europe, costing approximately $2.1bn, and combined insured losses of $15bn in Japan
arising from typhoon, flood and earthquake. The most significant economic loss of 2018 was
Hurricane Michael in the USA, costing approximately $17bn of damage (of which
approximately $10bn was insured). The most significant insured event related to the
California wildfires, which caused economic damage of approximately $15bn –
approximately $12bn of which was insured.
In 2020 economic losses of $268bn were recorded, with insured losses of $97bn. 76% of
global insured losses were incurred in America. There were 1,922 fatalities recorded during
India's monsoon season and in March 2020 Croatia experienced a magnitude 5.3
earthquake.
In 2021 economic losses of $343bn were recorded, which is 27% above the average in the
21st century. 71% of global losses were incurred in America and 50 x billion dollar economic
loss events, including 20 x billion dollar insured loss events were recorded; this is the fourth
highest on record.
Be aware
Whilst size of the natural event is a key factor in the total ultimate cost of the catastrophe,
it is also driven by where the catastrophe occurs. Many of the largest wind storms impact
densely populated parts of the Caribbean and the USA, causing significant damage to
property and therefore insurable losses. Natural events occurring in, say, sparsely
populated parts of Australia or Africa would not have nearly as big an impact on the
insurance industry, even if they were of equivalent strength and force.
Willis Re publishes its 'Summary of Natural Catastrophe Events' and Aon publishes its
'Weather, Climate and Catastrophe Insight' annually. You are encouraged to familiarise
yourself with their contents.
On the Web
Willis Re report: bit.ly/2X1SJqZ.
Aon report: aon.io/3v4NBiC.
Software packages can make accurate predictions of the damage and potential cost of
catastrophes in certain scenarios, and this aids the assessment of the level of reinsurance
protection required. The importance of this whole question is amply illustrated by Lloyd’s
insistence that all managing agencies complete Realistic Disaster Scenarios, which they
must return to Lloyd’s regularly for approval.
Refer to
Realistic Disaster Scenarios discussed in Catastrophe modelling on page 5/15
On the Web
catastropheinsight.aonbenfield.com/Pages/Home.aspx
www.aon.com/reinsurance/analytics-(1)/impact-forecasting.jsp
B1B Impact of climate change
Chapter 5
In 1992, meteorologists and climatologists of the United Nations’ Intergovernmental Panel on
Climate Change (IPCC) concluded that global warming would be inevitable if greenhouse
gas emissions were not cut. Since then matters have deteriorated rapidly.
Impact of global warming
For reference only

In the UK, Expected Annual Damages from flooding are projected to increase by 50% in
the 2080s under the 2º climate change projection, 150% under 4º climate change
projection, and up to 600% under a more extreme projection. The number of residential
properties exposed to flood-risk increases from 860,000 today to 1.2m by the 2080s under
a 2º increase, and to 1.7m with 4º.
The Last Generation? The Paris climate change conference and its implications for
insurance. A CII research report Andrew Dlugolecki FCII Chartered Insurer
27 January 2016
According to the Aon '2021 Weather, Climate and Catastrophe Insight Report', 2021 was
another year of above average global temperatures. New all-time temperature records were
set in the United States (74ºF was recorded as the warmest average summer temperature
on record), Dominica (5.8ºC) and Taiwan (40.6ºC).
Example 5.2
Various ocean oscillations influence the amount of warming or cooling that takes place in
a given year. The El Niño/Southern Oscillation (ENSO) is a warming or cooling cycle of
the waters across the central and eastern Pacific, which leads to drastic changes in the
orientation of the upper atmospheric storm track. Warming periods are noted as El Niño
cycles, while cooling periods are known as La Niña cycles. The Niño-3.4 Index, which
measures the temperature of the ocean waters in the central Pacific, is used to determine
ENSO phases/cycles.
Global warming is costing the industry a considerable amount of money year on year. There
are increasing efforts across the industry to address climate change through product and
underwriting, with Lloyd's in particular having a well publicised climate agenda. Many
insurers, particularly in the commercial and specialty sector, have clear climate strategies in
response to the focus on both ESG and global warming more broadly, with a reduction in the
capacity for 'dirty energy' one of the key first responses.
On the Web
'Global Warming Is Already Costing the Insurance Industry Historic Amounts', featured in
Popular Mechanics, available at bit.ly/3iXIBY0.
Risk to insurance industry

The industry is at great financial peril if it does not understand global and regional climate
impacts, variability and developing scientific assessment of a changing climate.
Franklin Nutter, President of The Reinsurance Association of America
The industry’s need to accurately model and predict catastrophes has never been greater
and insurance companies must take into account long-term climate change risk in their
business decisions.
Research exercise
What are insurers doing about climate change? Read the September 2013 article: ‘How
the insurance industry is dealing with climate change’ in the Smithsonian at:
bit.ly/2oRKNBY.
Chapter 5
On the Web
Union of Concerned Scientists report: bit.ly/2STMa2H.
Research exercise
Consider the UK floods of 2015. How many claims did they generate and what impact did
For reference only

this have on the industry? What additional pressures did claims managers find themselves
under? What lessons could you learn?
According to Swiss Re, $144bn was paid by insurers due to global disaster events in 2017.
An active hurricane season and the catastrophic flooding that followed drove the figure up.
Hurricane Harvey, in particular, demonstrated the danger of storm-related excessive rain and
flooding, reigniting an industry debate on flood protection and prevention. This discussion is
especially robust in the USA where flooding is mostly uninsured and where Hurricanes
Harvey, Irma and Maria (HIM) resulted in economic losses of $220bn. The combined insured
losses were $80bn.
The 2017 North Atlantic hurricane season was the costliest since 2005. The twelve-year
absence of major hurricanes making US landfall led to some complacency in the industry
during the phase of low-level hurricane activity. As with Hurricanes Katrina, Rita and Wilma
in 2005, the HIM experience tested the insurance industry’s ability to absorb accumulated
losses from multiple events. From a risk management perspective, these events emphasise
that the industry needs to consider hurricane frequency as much as it considers severity.
Climate models predict that heavy rain associated with hurricanes is likely to happen more
often in the future. Ongoing urbanisation and human development in exposed coastal
territories only increase this risk further. While large hurricane clusters such as HIM are rare,
they are not unprecedented and may occur more often in the future.
Swiss Re has developed a flood toolkit which is a comprehensive end-to-end solution that
helps with rate-making, underwriting, claims, marketing and addressing regulatory issues.
This enables the insurance and reinsurance markets to accurately underwrite flood risks.
National catastrophe events come in many different forms and can have devastating impacts
on communities all around the world. In 2017, wildfires ravaged regions of several countries
and drought triggered severe forest fires in Portugal, causing the highest insured losses ever
recorded in the country. Increased development in the wildland-urban interface has put more
people and properties at risk.
Projected changes in climate, including warmer temperatures and prolonged periods of
drought, are expected to continue to increase the frequency and severity of such large
wildfire events and associated insurance losses will likely grow, with more assets exposed to
fire risk.
Climate change is one of the biggest dangers facing global communities. The majority of
these climate-related risks remain uninsured while the global protection gap continues
to grow.
One method by which global communities are seeking to reduce global warming is by
supporting the worldwide reduction of greenhouse gas emissions and implementing
measures to support the transition to low-carbon economies. Companies can assist in the
process by integrating environmental social and governance (ESG) considerations into their
decision-making.
In 2017, Swiss Re integrated ESG benchmarks into their investment process. Switching to
benchmarks composed of higher ESG-rated companies for their listed equity and corporate
bond portfolios set a challenge for their external portfolio managers to shift their portfolio
towards higher ESG-rated investments.
As an industry, we can all create resilience by promoting a more transparent and broader
understanding of the risks themselves and how to address them in a proactive way; for
instance, by incorporating ESG criteria and taking a responsible stance on climate change.
In July 2019, the CII's Society of Claims Professionals published a document called 'The
ClimateWise physical and transition risk frameworks' and reported:
Chapter 5
The ClimateWise Insurance Advisory Council recently published two frameworks that
provide practical open-source tools to address the primary risks posed by climate change
to the financial sector: physical and transition risk. These frameworks enable finance
sector firms respond to the expectations of the Bank of England (BoE) and
recommendations of the Financial Stability Board Taskforce for Climate related Financial
For reference only

Disclosure.
In its supervisory Statement SS3/19, the PRA reports that few firms are currently
addressing physical and transitional risk strategically. The PRA now expects firms to
embed climate change issues into governance; integrate climate risk into existing financial
risk management practices; use scenario analysis to inform both of these and disclose
their risks and their approach to mitigation
Source: CII Society of Claims Professionals, July 2019
In September 2021 the CII reported in The Journal that two major insurance market
initiatives had been launched: The Sustainable Markets Initiative Insurance Task Force and
the United Nations Net Zero Insurance Initiative.
In the UK the Prudential Regulatory Authority expects firms to embed climate change issues
into governance; integrate climate risk into existing risk management practices; use scenario
analysis to inform both of these and disclose their approach to mitigation.
On the Web
thejournal.cii.co.uk/features/2021/08/31/climate-change-time-action
Also in 2021, The Chartered Body Alliance developed its first joint qualification, The
Certificate in Climate Risk, to support professionals in finance and risk to develop their
knowledge and understanding of climate risk.
On the Web
thejournal.cii.co.uk/news/2021/08/24/alliance-launches-first-joint-qualification-certificate-
climate-risk
B2 Pre and post catastrophe loss control

Once risks have been identified and analysed they must be controlled. Whereas risk control
measures involve taking preventative or controlling action before the loss can occur, loss
control attempts to minimise the total cost of losses by implementing measures which:
• protect people and property from loss;
• detect and limit the extent of any loss that may occur; and
• maximise the recovery from any loss that has occurred.
It is usually impossible to prevent natural catastrophes from occurring, but preventative
measures such as moving cars and pleasure boats into sheltered areas may prevent certain
losses from occurring.
Example 5.3
A catastrophic event where the whole issue of loss control came under scrutiny is the
Australian bush fires in 2009. The Royal Commission investigating the terrible loss of life
and property damage in those fires considered whether the advice provided by the local
authorities to the general public at the time of the bush fires was adequate. The report can
be found at: bit.ly/2fam3nn.
Insurers have a direct interest in loss control, both for individual policyholders and for their
whole accounts. Rather than dealing with the problem of claims management once claims
Chapter 5
have been notified, it is advisable for insurers to develop, in advance, a strategy for dealing
with a major catastrophe without facing financial ruin. Where a catastrophe falls into the
category of high severity and low frequency, the appropriate response for insurers is loss
reduction and risk transfer.
For reference only

B3 Catastrophe risk financing
Risk financing encompasses the tools and techniques used by insurers to finance the cost of
risks and losses. Although claims managers are not directly involved in this process, an
understanding of these issues is beneficial.
Risk financing methods fall into two classes:
• risk retention; and
• risk transfer.
Risk transfer is an arrangement whereby some other entity bears part, or all, of the financial
consequences. The two main methods of risk transfer for catastrophe risk financing are
reinsurance and the use of financial products supplied by capital markets.
Reinsurance is probably the most effective method, in the form of catastrophe excess of loss
protection. The total amount of cover available (i.e. all the layers of excess of loss in total)
should be set at a level that covers the insurer’s assessment of its retained liabilities, to
protect it against the worst foreseeable loss situation. Insurers must also consider the
financial strength of the reinsurers involved. A minimum capitalisation should be one of the
criteria used in selecting reinsurers and regular consultation with a well-respected rating
agency is vital.
On the Web
www.moodys.com
www.standardandpoors.com
www.fitchratings.com
On the assumption that it is possible to adequately predict catastrophes in terms of their

frequency and severity, reinsurance protection can be put in place to meet the financial
consequences. However, in the event of more than one mega-catastrophe occurring in a
single year, some reinsurers themselves may become vulnerable or even insolvent.
The huge amounts at stake and the suitability of capital markets to provide appropriate
products, means that these markets have begun to play an increasingly important role in
protecting against mega-catastrophes (such as Hurricane Katrina in 2005). Capital markets
have the potential to offer more capacity than is available in the traditional insurance
markets. With capital market solutions, there is no requirement for insurable interest and the
cover provided does not necessarily provide indemnity against loss.
There are several products currently offered by the capital markets. One such product is the
Catastrophe Bond. Such a bond typically covers the occurrence of a defined catastrophe
within the terms of the bond: for example, an earthquake measuring six or over on the
Richter Scale occurring within a twelve-month period. You should note that such bonds might
be related to the simple fact of the earthquake occurring, irrespective of whether the
earthquake causes losses to the insurance company. In basic terms:
• the bonds are issued in the capital markets;
• they are bought and sold by insurers, reinsurers (and other financial institutions);
• the bonds pay a certain rate of interest (a yield) which is set at a level to reflect the risk;
• the price of the bond can increase or decrease; and
• upon the happening of the catastrophe, both the amount originally invested and the
interest is paid.
Example 5.4
In June 2014, the Caribbean Catastrophe Risk Insurance Facility (CCRIF) obtained a
$30m natural hazard protector via one such bond issued by the World Bank. This three
year bond was linked to earthquake and tropical cyclone risks and is designed to limit the
Chapter 5
financial impact of such perils in the sixteen member governments of the CCRIF.
Catastrophe bonds have increased in popularity in recent years. Example 5.5 contains a
table which provides an overview of outstanding catastrophe bonds that Munich Re has
recently arranged on behalf of clients or issued for their own book.
For reference only

Example 5.5
Catastrophe bonds arranged by Munich Re
Transaction Issuance Maturity date Volume Perils covered

date
For clients Azzurro Re II DAC 07/2020 01/2024 EUR 100m Earthquake – Italy
Vitality Re XI 01/2020 01/2024 US$200m US health risks

Limited
World Bank 11/2019 12/2022 Class A – US Earthquake

Catastrophe Bond $75m
for the Republic of
the Philippines
World Bank 11/2019 12/2022 Class B – US Tropical cyclone

Catastrophe Bond $150m
for the Republic of
the Philippines
Vitality Re X Limited 07/2019 01/2023 US$200m US health risks
For Munich Eden Re II Ltd. 12/2020 03/2025 US$235m 'Various perils'

Re* (Series 2021-1)
Eden Re II Ltd. 12/2019 03/2024 US$285m 'Various perils'

(Series 2021-1)
Eden Re II Ltd. 12/2018 03/2023 US$300m 'Various perils'

(Series 2019-1)
* excluding private transactions
In 2018, the first catastrophe bond was issued in the UK. Atlas Capital UK 2018 provided
SCOR with multi-year risk transfer capacity of US$300m, with protection against named
storms in the USA, earthquakes in the USA and Canada, and windstorms in Europe. The
risk period for Atlas Capital UK 2018 is a four-year term. GC Securities acted as sole
structuring agent. SCOR’s previous Insurance Linked Security (ILS) transactions had used
special-purpose vehicles based in Ireland.
The UK regulator aims to make a decision in relation to ILS requests from insurers and
reinsurers within eight weeks. However, this is slower than some other jurisdictions such as
Bermuda where the regulator typically takes a maximum of two weeks to make a decision.
While Atlas Capital UK is the first catastrophe bond to be issued in London, it is not the first
ILS transaction. Lloyd’s insurer Neon undertook a US$72m collateralised quota share
reinsurance transaction, also in 2018. NCM Re underwrote a portion of Neon’s
syndicate 2468’s property treaty reinsurance and direct and facultative portfolios.
The following quote is taken from a press release issued by Swiss Re when they obtained
the bond.
Use of insurance-linked securities

Insurance-linked securities are a cornerstone of Swiss Re’s hedging strategy. It helps us
to manage peak natural catastrophe risk, lowers capital requirements and reduces
earnings volatility. This solution increases our ability to assume risk from a broad spectrum
of individual clients, and transform it to capital markets investors in a simple and standard
format.
Brian Gray, Swiss Re’s Chief Underwriting Officer
Chapter 5
Today, catastrophe bonds are commonly traded financial instruments. See Cat bond index
shows market recovery after selling-pressure on page 3/1.
On the Web
www.artemis.bm is an excellent source of information on this topic. You could start with
For reference only

the following news article: www.artemis.bm/news/hurricane-ida-loss-creep-wipes-out-
another-louisiana-citizens-cat-bond.
B4 Effect of catastrophes on the claims department
Claims handling: insurers need to plan the capacity to handle a mountain of claims in a
short period, as happened in the United States in 2005, following Hurricane Katrina, and
in 2021, following Hurricane Ida. The UK has not faced such a situation since 1990.
Andrew Dlugolecki FCII, Chartered Insurer, in 'The Last Generation? The Paris
climate change conference and its implications for insurance', CII research report,
27 January 2016.
B4A Surge contingency planning

A contingency plan is a course of action designed to help an organisation respond
effectively to a significant future event or a situation that may (or may not) happen. A surge
contingency plan is designed to assist a claims department in the event of a large influx of
claims, i.e. a surge. This is usually brought about by a sudden large volume of claims being
reported to the insurer by policyholders, as is highly probable following an event such as a
catastrophe.
We thought earlier about:
• 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. 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.
The recent coronavirus pandemic is a very real surge example that hit the UK market in
2020, with significant exposure in both personal and commercial lines of business. In
personal lines, travel insurers were particularly hard hit, with significant increase in volumes.
In commercial lines, business interruption was the most high-profile class of business, with
increased volumes of claims as well as court action for non-payment of claims that was
widely reported in the press. For those of you working in insurers, no doubt you all had some
degree of exposure to these challenges.
Research exercise
Obtain a copy of your own company’s contingency plan. What areas does it cover? How
could it be improved?
B4B Response of the claims department

Claims handling in a catastrophe context, requires special efforts on the part of the insurer.
A proactive approach is required: the contingency plan should be immediately put into
operation. This is likely to involve loss adjusters at ground level in areas of concentrated
exposure, who can self-activate within certain levels of pre agreed authority. Failure to
implement this adequately may risk reputational damage to the insurer.
Those involved in handling catastrophe claims should:
• be active in claims handling and delegate in a controlled way to third parties such as
Chapter 5
lawyers, experts and loss adjusters;
• ensure good communication between all parties involved in the claims process;
• investigate immediately after the occurrence of a disaster, which helps with
understanding the scope of the problem and enables an early and appropriate response
to be made; and
For reference only

• concentrate on settling as many claims as possible, as quickly as possible – losses
become more expensive the longer negotiations continue.
In addition, claims handlers should be able to:
• operate additional telephone lines;
• rely on support from suppliers;
• access to sufficient numbers of experienced and qualified staff;
• operate additional training (e.g. engage help from the underwriting team to support the
claims service); and
• implement planned media coverage procedures.
There will be immediate demands from central management for loss exposure details, with a
need to monitor and co-ordinate catastrophe exposures when they happen. Lloyd's allocates
catastrophe claims codes so it can track market exposures. There could be lower-grade
surges that do not constitute a catastrophe but do cause significant demand on a claims
department, particularly in personal lines insurance (e.g. localised flooding).
B5 Catastrophe modelling
Companies, via their claims managers, must ensure that they have adequate claims
management tools to monitor effectively their aggregate exposures to catastrophes. This is
necessary to assess their solvency. Insurers are usually able to aggregate losses arising
from the same event to recover from reinsurers and so claims managers must ensure that
they have systems in place for their teams to monitor these exposures, often on a
geographical basis; for example, all earthquakes that happen in California over a period of
time. Catastrophe models have been in the insurance market since the early 1990s, but
have seen a boost in recent years owing to technological advancements.
The Regulator requires insurers to undertake stress tests and scenario analysis and other
reasonable steps for each risk group. Insurers are also required to hold a minimum level of
capital (regulatory capital) to cover unexpected losses to a 200 year level of confidence.
Economic capital is held to cover unexpected losses to a specified level of confidence.
The capital requirements for insurers and reinsurers have been recently reviewed and,
following an EU Directive called Solvency II, insurers now have a greater capital burden. In
other words, insurers need to keep more money aside to meet claims instead of paying it out
as profit.
Lloyd’s
At Lloyd’s, a regulatory bulletin, first issued in February 1996, required underwriters to
calculate realistic disaster scenarios (RDSs) and thereby calculate the probable maximum
potential losses in the event of a catastrophe. Since 2006, Lloyd’s has required two RDSs
per line of business from each syndicate each year. One RDS must be compiled on a
‘realistic’ basis and the other on a ‘pessimistic’ basis.
Research exercise
According to the Lloyd’s website (www.lloyds.com), what benefits are derived from
compiling RDSs?
B5A How catastrophe modelling is undertaken

The calculation of RDSs starts with assessing the likelihood of different scenarios and then
considering their potential impact, whether direct or indirect. The results of the stress and
scenario tests for each risk group need to be aggregated so that, using a correlation matrix,
the effects of each can be extrapolated to derive an overall picture. This will give a likely
aggregate claims exposure to the insurer.
Chapter 5
On the Web
www.kovrr.com
Catastrophe simulation
Computer-aided catastrophe models incorporate frequency and severity elements. A model
includes thousands of catastrophe loss scenarios that may occur in any one year. These
For reference only

catastrophe loss models are developed using extensive research into actual catastrophes
that have occurred in history, ranging from earthquakes to hurricanes.
Such research includes:
• information about the earth’s atmosphere, including global warming;
• the frequency of catastrophes; and
• seismologists’ analysis of fault lines (in order to predict earthquakes).
The conditions affecting the size and impact of catastrophic losses include:
• the construction of buildings;
• population density; and
• urban growth and economic development.
Models incorporate:
• losses similar to those that have occurred in history;
• variations on those losses; and
• new losses.
These may be analysed by geographical location and weighted according to the probability
of occurrence in any one year. By simulating various combinations of events that may occur
in any one period, and the effect these have on the risks underwritten by the company, the
insurer can plot the annual probability of exceeding a range of loss levels, and then take
appropriate action. Appropriate action may include:
• purchasing reinsurance cover; and/or
• increasing its territorial exposure to less risky classes of business; and/or
• reducing its territorial exposure to certain classes of business in the following year.
Research exercise
Find out how your company’s claims department responded to a recent catastrophe. How
did the press report your company’s activities? How could your company’s response have
been improved?
C Scenario 5.1: Catastrophes

C1 Question
You are the claims manager of a UK insurer. Your board asks for your opinion as to the
impact on your company of a proposed expansion into areas where natural catastrophes are
more common. What type of catastrophes would you report about and what areas of concern
would you highlight?
C2 How to approach your answer

Aim
This scenario aims to test your understanding of the issues surrounding the management of
catastrophe claims.
• The types of event that fall into the category of natural catastrophes (such as floods,
storms, earthquakes, cold weather).
• How catastrophes are predicted, in conjunction with current climate change issues.
• The areas of concern you highlight should include the need for protection and how this
can be provided through reinsurance, catastrophe bonds and alternative risk transfer
Chapter 5
mechanisms.
• A discussion of the impact on the claims team of a large catastrophe involving many
insureds and the need for a contingency plan.
For reference only

Self-test questions
1. What are the effects on insurers, their experts and policyholders of devastating single
loss events?
2. In what ways may a claims department's normal systems and methods of operating
prove to be inadequate following a major insured catastrophe?
3. Which broad areas are covered by an insurer's catastrophe contingency plan?
4. Why do insurance companies use catastrophe modelling tools?
5. According to the Lloyd's toolkit, which three different types of event need to be
quantified by stress and scenario testing?
6. What is the impact of low volume, high complexity claims on:

• the insured; and
• the insurer?
7. What would be the benefits of opening a call centre to service a new helpline facility:
a. for your company; and
Chapter 5
b. for your policyholders?

For reference only

Claims technical
6
management
outcomes
Introduction
A What are the key characteristics of claims? 3.1, 3.2, 3.3, 3.4, 3.5, 3.6,
3.7, 3.8
B Information technology 3.3
C Management information 3.3
D Interaction with actuaries and underwriting 1.6
E Lloyd’s and London markets 3.5
F Reinsurance 3.6
G Subrogation and recoveries 3.1, 3.2, 3.3, 3.4, 3.5, 3.6,
For reference only
Chapter 6
3.7, 3.8
H International claims 3.7
I Fraudulent claims 3.4
J Data protection 3.4
K Scenario 6.1: Information technology
L Scenario 6.2: Fraud
M Scenario 6.3: International claims
Self-test questions
Learning objectives
• devise appropriate systems for complex and volume claims;
• design and use a useful claims management IT system;
• evaluate your management information needs and the usefulness of the management
information available to you;
• explain how your department interacts with actuaries and underwriting;
• illustrate how claims are handled in the Lloyd’s and London markets;
• explain the role of reinsurance in the context of claims;
• decide when subrogation and other recoveries are available and appropriate;
• ensure that the challenges presented by international claims are met; and
• identify potentially fraudulent claims, and assess and utilise appropriately the tools
available to deal with them.
Introduction
In this chapter, we turn to the consideration of some of the more technical aspects of
managing claims. We have the procedures in place to handle claims of all sorts and have
learned how different resources are used to facilitate these. We start by reminding ourselves
of the different challenges presented by volume claims and complex claims, before moving
on to examine the usefulness of information technology. As part of this examination, we
evaluate the management information IT systems can generate and how this needs to be
managed so that it is fit for purpose. We will also see how this information matters to the
insurer itself, not just to its claims manager, when we remind ourselves of how the claims
function interacts with other departments, specifically actuaries and underwriting.
The Lloyd’s and London markets have a particular way of working and this will influence how
a claims manager deals with claims in those arenas. This will lead us on to a discussion of
reinsurance from two points of view: the claims department within the reinsurer and the
particular challenges it faces and that of the claims manager within an insurer who has
claims subject to reinsurance recoveries. Of course, reinsurance is not the only method by
which an insurer can recover the cost of claims paid. There is also the possibility that
subrogation may apply or that other insurers are involved in the risk (contribution).
We conclude this chapter with a look at two particularly challenging types of claim: those that
have an international element and those that are fraudulent. How can you manage such
claims? What issues do you need to bear in mind when faced with them? Of what does your
team need to be aware when faced with these claims?
Key terms
Complexity Contribution Fraudulent claims Home foreign
business
For reference only

Chapter 6
Information International claims Lloyd’s London Market

technology
Management Non-proportional Proportional Recoveries
information
Reinsurance Subrogation Volume
A What are the key characteristics of claims?

The defining characteristics of claims are their volume and their complexity. Each produces
different challenges for the claims manager.
A1 Volume
There are more than 12,000 insurance companies in the world, with most businesses and
individuals having insurance in respect of the financial risks they may encounter. These are
covered by commercial insurances and personal insurances respectively.
Example 6.1
In the personal lines market, one leading large general insurer processes around one
million claims per year. Extrapolate this across a number of other large general insurers
and we could be looking at ten million claims a year, just in the UK.
Claims management decision: Volume claims

What systems do you need to have in place to deal with volume claims day to day?
Chapter 6 Claims technical management 6/3
Claims volumes can arise from two key areas:

• a large multinational insurer with a large book of general and commercial insurance will
have large claim volumes simply because of the sheer scale of their operation,
– in this scenario, the claims operation needs to have the capacity in terms of staff
numbers and skills, along with efficient processes to deal with this volume; and
• certain world events, such as hurricanes and floods, impact a lot of people and
organisations at the same time – we explored this in previous chapters.
On top of this, there will be claims across different lines of business, having different
characteristics and requiring different skills, adding a further layer of complexity. All of these
will directly influence staff numbers and their skills.
Refer to
Impact of catastrophes on claims department discussed in Catastrophe management on
page 5/7
A2 Complexity
Research exercise
Consider the most complex claims that you have been involved with. What made them
complex? What aspects did you find challenging? What did you learn that will help you
manage the handling of complex claims in the future?
There are a number of factors that can contribute to making a claim complex. In commercial
insurance, many claims involve a number of different insurance companies (the subscription
For reference only

market): the greater the number of insurers, the greater the complexity. Some of the
Chapter 6
subscribing insurers may be claims agreement parties – others may not. This can protract
the decision making process.
This is particularly the case in the London Market, which is different to the UK retail sector
in that many insurers can participate in the one risk. The introduction of electronic claims
files (ECF) in 2006 substantially replaced the traditional methods of face to face claims
broking in Lloyd’s.
A claim's characteristics are the most common cause of claim complexity. Take the example
of personal motor claims. Some claims involve just the insured vehicle, with minor damage
and simple circumstances – these are typically straightforward to settle and not considered
overly onerous. However, the same vehicle could be involved in a multi-car, motorway pile-
up with significant injured parties (or fatalities), which makes the claim far more sensitive and
complex to handle.
Almost all of the UK’s insurance companies need reinsurance to reduce their net
commitment to an acceptable level. Claims to which outwards reinsurance applies need
particular consideration during the claims process. In any case, the claims process itself
(essentially, notification, investigation, agreement and settlement) requires considerable
interchange between the insured, the broker and the insurer(s), not to mention loss
adjusters, legal experts and expert witnesses.
A further factor to watch out for is that a certain number of claims will be fraudulent, repeated
or exaggerated. Such claims will therefore require particular attention.
Finally, the type of insurance has a role to play in adding complexity. More specialist lines
such as directors’ and officers’ liability, errors and omissions, financial lines, medical
malpractice and products liability tend to result in more complex losses than household and
other personal lines claims.
The skills needed to handle complex claims come with experience and, while the industry
can go so far with processes and procedures, there is no substitute for well qualified claims
handlers and managers with a wealth of claims experience.
A3 Conclusion
There are different requirements when it comes to managing high volume, low value,
straightforward claims, compared with smaller numbers of high value complex losses.
Claims handling and management skills are linked to geographical location, staff skills and
the value added by claims to the bottom line if they are handled and managed properly.
One area to consider here is information technology, which can be of great use for simple,
volume claims. For example, the handling of simple motor and/or household claims is
possible using paperless files. Some insurers still use traditional paper files for more
complex claims, such as personal injury, although advances in technology are such that
many of these files are becoming paperless also.
B Information technology
Information technology has advanced so rapidly in recent years that insurers require a formal
approach to technological advances. In addition, modern composite insurers are an
amalgamation of a number of previously smaller insurance companies that have merged or
been acquired, bringing their own systems with them. As such, a technology strategy is
required to deal with keeping up to date with modern business practices and ensuring that
the IT platform adequately benefits the business in its day-to-day activities.
Management information is linked to technology with regard to the capture and delivery of
information. We look at management information in the next section.
One definition of information technology (IT) is:
the use or production of a range of technologies (especially computer systems,
digital electronics and telecommunications) to store, process and transmit
information.
For reference only

Chapter 6
Figure 6.1: Key issues
Key issues in claims

handling context
Information Information Information

storage processing transmission
IT already plays an important role in the present insurance and reinsurance marketplace, but
its future role is just as critical. An IT strategy will encompass the whole insurance
organisation (including the claims aspects). The information collected in the underwriting,
accounting and marketing departments will be used in the handling of claims and vice versa.
Therefore, it is essential that a claims management system be properly thought about and
designed before implementation to ensure that information is easily accessible to the right
people at the right time when they are managing claims, regardless of value.
B1 What needs to go into designing a claims management

system?
Refer to
Think back to Claims strategy: what is it and why is it necessary? on page 1/3
The design of the claims management system must permit the recording of information
relevant to the claims management strategy that has been developed in accordance with the
insurer’s overall business objectives. The most important step to take when designing a
claims management system is to first analyse your company’s business to identify your
particular needs.
You need to see the IT system in its context. It is merely one element of a much bigger
network encompassing the whole of the claims management process, including:
• corporate claims philosophy;
• management of the claims operation; and
• quality management.
B1A Role of IT in claims
As a minimum, an information system needs to be capable of:
• processing large amounts of data;
• processing quickly;
• processing accurately;
• handling large numbers of users at any one time; and
• delivering information in a meaningful manner.
Increasingly, technology is playing a more important role in claims handling through provision
of analytics, automation and straight-through processing and integration with other systems
across the insurance organisation.
A modern, efficient claims management system can have a positive impact on claims
processes and improve the profitability of a company. The opposite is likely to have a
negative impact.
Be aware
The application of IT should be accompanied by a review of claims procedures and
practices. It could be that an entirely new method of operation is appropriate and you
should consider this. You must also ensure that the users of the new system receive full
For reference only

training.
Chapter 6
Be aware
A powerful, flexible and adaptable computer system is a valuable tool in the hands of
experienced users who can operate it correctly and interpret the available information; but
it is not a substitute for experienced people.
B1B What are the major components of a claims system?

The major components of a claims system may vary, depending on structure and the type of
business written. Management decisions about the extent to which their computer systems
should be developed will also introduce variations. The key for any IT system is to support all
parts of the claims process, both internally and externally. The system should be designed to
complement the progression of the claim through to settlement.
Consider this…
What are the basic claims elements that need to be recorded on an IT system? For
claims, this would include the policyholder’s name, address and policy number, the claim
number, reserves and payments made. Try to think of some more.
Details recorded at the underwriting stage are also used by the claims department. These
encompass:
• description of risk;
• description of cover;
• supporting risk information;
• documentation provided during the pre-inception period (proposal form, presentation,
prior claims history);
• insurer details (if more than one is involved) – name, share of risk and own reference;
and
• broker details.
In the London Market, companies use an electronic agreement system for claims, called
Electronic Claims Files, Version 2 (ECF2), which also populates their in-house systems.
Currently, Lloyd’s syndicates take data centrally, via messaging from the service provider
(currently Xchanging). Other insurers have standalone bespoke IT systems into which their
personnel enter underwriting and claims data.
B1C Customer expectations
Claims service is one of the factors that customers consider and so is highly relevant to the
insurer’s attraction and retention of business. The insurer’s customer is not only the insured,
in other words the policyholder, but also the potential insured. For example, a potential
customer who asks the insurer for a quote will become a customer if they go on to purchase
a policy, and the insurer’s IT systems must enable it to provide them with any assistance with
the quotation they require at proposal stage. Thus, when designing your systems not only
must you analyse the business needs and expectations of the insurer, you must analyse
those of the policyholder and the potential policyholder who is asking for a quote. This way,
you can ensure that the information recorded and collated is of a nature and quality to satisfy
all relevant parties.
Often customers’ expectations are canvassed before the design process begins. This
establishes the basic level of claims service they expect to receive. Both personal and
commercial customers have considerable knowledge of what they want and what is
available. The insurance industry has been transformed in the past decades by globalisation
(i.e. more insurance products are being sold by one insurer to a policyholder in multiple
geographical locations) and the growth of the alternative risk transfer market (i.e. insurers
are selling more products that are not traditionally sold as insurance products).
Some of the innovative ideas in the claims management area, such as direct chat facilities
with insurers via the internet, the use of apps, self-service systems and online portals are
difficult to evaluate in terms of expectations. It is only possible to note expectations of the
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concept of a new service or improved level of service. Many companies are reluctant to
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introduce new, innovative procedures until the public at large has accepted them and the
insurance industry remains behind many other industries in the use of new technologies.
Despite these issues, certain expectations can be assumed: expectations of a good claims
service with a quick response, quick agreement and quick payment of valid claims.
B1D Choosing the system
You should now be clear that the design of your claims management system must take into
account the expectations of the insurance company. Without knowledge of these
expectations, the system design may fail to achieve the required level of quality. It will then
prove to be a waste of the money the insurance company has spent on it.
The system must be flexible enough to deal with such matters as the:
• notification of claims;
• involvement or non-involvement of loss adjusters and other experts;
• amount of claim detail appropriate for the class of business written and the likely types of
claim expected; and
• authority levels for different grades of staff.
From the insurer’s point of view, traditionally, they have looked inwards and tended to deploy
modern technology to streamline operations and generate economies of scale. Different
insurers have used technology to their advantage in different ways. For example, some
insurers have designed IT programmes that allow brokers access to certain elements of their
claim files via the internet.
B1E InsurTech
InsurTech is a term that describes the use of technology by insurance organisations within
the industry. This includes many features relating to claims, underwriting, sales and
distribution, along with other functions. Sometimes it is also used as a catch-all for startup
insurance organisations that are rooted in data and technology.
InsurTech involves the rapid gathering of data, using digital solutions, consumer behavioural
analytics and big data. This data is then analysed and used to benefit the organisation,
driving and enabling digital changes for insurers. The use of the resulting technological
innovations can potentially generate efficiency improvements and cost savings for insurers,
replacing certain manual operations with technology-based solutions.
C Management information
What else can an IT system do for a claims manager? IT is not only useful for processing,
but for its ability to provide meaningful information for senior claims personnel and for the
other departments with which the claims department interacts.
Claims management decision: management information

What management information do you need to be able to manage your claims function
effectively?
A management information system is the means by which data is captured, processed,

accessed and distributed to inform and facilitate management decision-making. In broad
terms, a manager needs to know:
• what resources are available, for example staff availability and the balance of
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departmental budget remaining;
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• the rate at which resources are being consumed and the level of productivity being
achieved; and
• how well resources are being used and whether the objectives of specific departments
and the overall business objectives are being met.
Once you have used the available management information to decide what should be done,
you then need regular feedback to assess how well it is being done.
C1 How do you use claims management information?

The volume and complexity of claims means that the insurance industry has a particular
dependence on IT. Whereas the goal of management information systems is to consolidate
data into meaningful reports, such reports are sometimes themselves so comprehensive and
unfocused that vital information is hidden from view. Consequently, poorly informed
decisions are still made. Therefore, following an effective initial business analysis of the
insurance company’s needs, the aim is for the claims management IT system to provide the
insurance company (or outsource service provider) with information from the claims process
which is easily accessible and interpreted and fit for the purpose for which it is required.
The management of an insurance company will use the information generated by the claims
management IT system for a number of purposes, including monitoring the claims process.
They monitor the claims process by:

• calculating average claim quantum and the range of quantum in respect of claims
received;
• calculating the internal cost of settling the claim;
• calculating the end-to-end time from notification through to settlement for different types
of business;
• identifying and quantifying processing backlogs to ensure that appropriate corrective
action is taken;
• highlighting movements in claim reserves on particular claims;
• comparing incurred losses with the cost of settling claims;
• reviewing inactive or ‘static’ claims regularly, prompted by the use of a computerised diary
system; and
• identifying large claims, thereby allowing management to be involved from the outset.
They can also use the data for a number of other purposes, such as:
• meeting regulatory requirements such as the need to provide regulatory returns;
• analysing the frequency and cost of the use of outside experts, such as loss adjusters,
lawyers and accountants;
• the modelling of loss reserving;
• monitoring the overall level of settled and outstanding claims and the speed at which
claims are being reported (particularly important are claims that are subject to little or no
reinsurance protection, as identified by the system);
• monitoring the claims statistics by company or territory; and
• producing specific reports on profitability and ledger account balances specific to
reinsurance recoveries.
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Chapter 6
Graphical analysis is effective to highlight key trends and issues. It must be possible to
quickly and accurately extract and analyse relevant data from the computer system,
otherwise its usefulness as a decision-making tool will be limited.
You can benchmark this data and use it in a number of ways. If you turn now to appendix 2
we have provided a theoretical example which demonstrates this. The example shows how
motor third party damage claims in the industry have increased over time compared to the
theoretical costs to your business. We then take further theoretical data to show credit hire
costs to the industry and thus see how your company is performing in comparison to the rest
of the market.
Be aware
Data output is only as good as the data entered into a system. As such, dependence
on information outflow is most appropriate where there is little room for ambiguity at
input stage.
C2 Power of data
Large, bespoke, professional indemnity, financial lines and casualty claims are usually
handled by a team comprising the claims manager and the insurer’s appointed solicitor,
barrister and other experts, such as a loss adjuster. However, high volume, low severity
claims can and often are handled by less experienced claims handlers, reliant on robust
processes and procedures. An example of a simple process flow chart for a high volume, low
severity process would be to consider a typical storm damaged roof claim process. This may
be undertaken in-house or outsourced. An example of a typical process is shown in
figure 6.2.
Figure 6.2: Typical claims process
Claim received
Loss adjuster appointed
Loss adjuster’s report and

other documents received
Claims below £1,000 Claims above £1,000
Review Check for fraud Review
Approve Reject
Pay claim Send rejection letter
Close claim file
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Some motor insurers are able to analyse claim settlements by claim handler. In a team of
injury claim handlers, if claims are correctly coded within the insurer’s computer system and
there are sufficient volumes of losses of, for example, whiplash injuries, then the insurer can
retrieve data to show the average settlement cost of these injuries for the team. Furthermore,
if the data can be analysed by each claims handler then it is likely that there will be some
claim handlers settling claims for lower amounts than other team members. This can be an
opportunity for those team members settling whiplash claims at a lower cost, to train other
team members who are achieving higher settlements to drive down leakage to the benefit of
the organisation.
Some insurers use analytics to provide claims benchmarking for activities such as reserving,
settlement, and loss ratio comparisons with competitors. Analytics can be used to provide
data which can then be analysed in conjunction with modern AI tools to predict future claims
patterns and activity. This can assist underwriters in renewing and writing new business, as
well as in headcounting to ensure that the correct number of claims handlers are employed
who have the appropriate level of experience.
As more AI tools incorporate machine learning, it is anticipated that machines will learn from
claims activity. The combined force of analytics and sophisticated AI should enable insurers
to make more accurate predictions about the future, especially in areas such as natural
catastrophe modelling.
C2A Artificial intelligence and the claims management function
Artificial intelligence (AI) (also known as ‘cognitive computing’) is the development of
computer systems which are able to perform tasks that would normally require human
intelligence. Examples include:
• visual perception;
• speech recognition;
• decision-making;
• language translations;
• telematics; and
• drones.
AI is also changing traditional claims processing, making it faster and smarter than it ever
was before. Insurers are focusing on areas such as claims management to see how the use
of AI can create a more efficient process. Companies that only a few years ago would have
employed staff to perform tasks such as first notification of loss, simple claim investigation or
claims payment are now turning to AI and exploring what role it can play.
From the point of view of the policyholder, making a claim can be stressful and the
experience can be worsened by an inefficient claims process. It is, therefore, vital that an
insurer’s claims process is fast, effective and designed to meet the policyholder’s
expectations. One benefit of AI is that it uses tools which support the claims handler, as it is
able to transact part of the claims process quicker than an employee could. It is also able to
reduce claims leakage through early fraud identification and detection.
Telematics as used by insurers refers to the automated monitoring and collection of data.
Telematics are physical devices that are used to monitor and record data using sensors that
then enable transmission to a data centre. This is particularly prevalent in motor insurance,
where insurers may fit a telematics box to a vehicle. This practice is common both in insuring
motor fleet vehicles and young drivers, where insurers are interested in monitoring the
driving habits of policyholders. Insurers can monitor real-time data received from the
telematics box and this is often shared with the policyholder to educate them about good
driving techniques. Safe driving is often rewarded with discounted premiums at renewal,
whereas poor driving habits can be punished with increased premiums. In extreme cases the
insurer may not wish to offer renewal terms. Telematics technology can also be used to
determine certain facts when dealing with a claim (for example, to determine where the
insured was driving and at what speed).
Another area of insurance which is seeing innovations in technology is that of claims
investigation. Drones (unmanned aerial vehicles) are now being used by insurers to
investigate claims in circumstances where access to the locus of a claim may previously
have been difficult or impossible for human investigation. For example, immediately after a
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Chapter 6
large fire or chemical explosion. In areas of widespread damage, video footage and
photographs taken by drones can interact with claims software to determine the area of
damage and likely repair/rebuild costs.
Claims process efficiency
AI-powered virtual insurance chatbots are also being used to make it easier for policyholders
to view their claims experience, including details of outstanding claims as well as claims
already made by the insurer. Some motor insurers allow policyholders to submit new claims
via a smartphone application after they have answered certain key questions. Once details
of the claim have been submitted this way, the chatbot explains the next step in the process
to the policyholder; this may be a further AI-driven function (i.e. a claim payment) or human
intervention (i.e. a discussion with the claim handler). There is also a facility to allow the
chatbot to nominate local repairers for the policyholder to contact.
Lemonade is a US property and casualty insurance company that uses chatbots. The
policyholder photographs the home loss (or damage or theft) on their smartphone and then
lists the items that have been damaged or stolen as well as their cost. The claim is submitted
through the application with simple claims being approved quickly – sometimes within
minutes. The user is notified when the payment is made and where it is being sent. In this
case, AI has driven every step of the process up to settling the claim.
Cost-effectiveness
Other AI products can help to reduce costs for insurers by automatically calculating claims
reserves. Tractable is a UK-based company that has developed an AI programme for motor
insurers. The collision repairer uploads an estimate and corresponding photographs of
vehicle damage to the claims management system. The AI programme then compares the
photographs and the estimate, accurately calculating the cost of repairs. This saves the
motor insurer time and minimises claims leakage as well as fraud.
Impact on the claims value chain
Other companies have products that have an impact across the claims value chain.
Providers of cognitive automation offer a virtual assistant that can organise, read and review
documents, and then prepare them for secure storage. This technology can accurately
process a high volume of transactions far quicker than humans, resulting in efficiencies and
cost savings.
Some companies provide predictive analytics tools whereby machine-learning algorithms

and predictive analytics analyse claims in real time. AI software can assess the severity of
claims and assign them to claims handlers, depending on their claims handling authority.
Furthermore, this technology can identify areas of claim recovery (such as contribution and
subrogation) within the claims handling process.
Incorporating AI into claims management
Although AI is expensive in the short term, its financial efficiencies are recognisable to
insurers, particularly in relation to staff numbers. While some insurers are focused on
creating AI solutions that complement the work of their existing employees, others are
proactively replacing employees with AI technology. It is critical when considering the
potential application of AI in a claims environment that the insurer's foundational data and
technological capabilities are sufficient to provide accessible, meaningful and robust data
that can be trusted in order to automate decision making.
By embracing AI, insurers may be able to attract new customers, retain existing customers
and better manage the customer experience.
On the Web
This article on Capgemini.com provides more information: bit.ly/2Pka61q.
D Interaction with actuaries and underwriting

Refer to
Think back to Claims is not an isolated function on page 1/13
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You will remember that the claims function has a significant role in providing the information
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that both actuaries and underwriters need to do their jobs successfully.
D1 Actuaries
Actuaries undertake regular reviews to ensure that the company is solvent and to calculate
any profit or loss. In this regard actuaries will liaise closely with you as claims manager. They
not only need to understand what claims are being paid and how claims are reserved, but
also to identify claims trends and how these may affect the financial status of the company
going forwards. Further liaison with underwriters can assist the actuaries to identify areas
that trade profitably and to avoid unprofitable business.
Refer to
Role of actuaries within an insurer described in Interaction with actuaries on page 1/15
Consider this…
Think back to what you learned in chapter one and remind yourself why a company’s
financial performance should be actuarially reviewed. How does management exercise
control?
Consider this…
What kind of claims trends would an actuary be interested to hear about from the claims
manager?
D2 Underwriting
Underwriters wanting to maximise their firm’s profitability will liaise closely with the claims
manager. They will not only look at claims trends, but will use information supplied by the
claims manager to identify profitable and unprofitable areas of business. Underwriters have a
far better chance of writing profitable business where there is regular communication with the
claims department.
E Lloyd’s and London markets

Refer to
Think back to IF1 chapter 2, section C.
There is no variation in the technical claims aspects within the Lloyd’s and London markets
compared to the rest of the UK market. However, the way in which insurance is transacted in
them does differ. Therefore, we will need to consider these factors here.
E1 London Market
The vast majority of insurers underwrite insurance contracts on the basis of a
100% placement (otherwise known as a ‘singleton’). In the London Market, brokers show the
slip to various insurers who will co-insure the risk. One insurer will ‘lead’ the risk, which
involves issuing the policy documentation and handling any claims that arise. However, other
co-insurers may be ‘claims agreement parties’ within the slip. This means that the lead
insurer should seek their approval for any steps taken. The insurers then share any claim
payment in the same proportion as the premium. Other co-insurers may elect to follow the
fortunes of the lead insurer and automatically support any decision made by the lead insurer,
thereby not becoming a claims agreement party.
E2 Lloyd’s market
From your previous studies you will know that Lloyd’s consists of trading syndicates
managed by managing agents. Capital largely comes from corporate sources (although
individuals can become shareholders of some corporate capital providers).
Lloyd’s is the world’s leading insurance market, providing specialist insurance services to
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businesses in over 200 countries and territories. In 2019, 80 active syndicates were
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underwriting insurance at Lloyd’s, managed by 54 managing agencies.

In July 2013, Lloyd’s signed a Memorandum of Understanding with the Financial Conduct
Authority. This is designed to avoid duplication in the regulation of Lloyd’s managing agents.
E2A Lloyd’s and claims
Managing Agents in Lloyd’s are required to manage claims in a manner that is compliant
with the Lloyd’s Claims Scheme. Furthermore, the Lloyd’s claims team monitors the claims
performance of each managing agency against the Lloyd’s Minimum Standards.
Research exercise
Obtain a copy of the most recent Lloyd’s Claims Scheme and consider the content. Would
your firm be compliant with this scheme if you were to trade in Lloyd’s? If you work for a
company trading in Lloyd’s, how do you ensure compliance with the scheme?
On the Web
www.lloyds.com
The Lloyd’s Market Association (LMA) provides support to the Lloyd’s community. This
support has shown itself in projects such as contract certainty, minimum claims standards
and the use of electronic claim files (ECF II).
Role of LMA
The Lloyd’s Market Association (LMA) represents the interests of the Lloyd’s community,
providing professional and technical support to our members. All managing and members’
agents at Lloyd’s are full members, who together manage a gross premium income of
around £30bn per annum.
LMA website: www.lmalloyds.com
The following figure shows the structure of the Lloyd's Market Association Claims
Committee. It will help you to see how the claims function fits into what the LMA does.
Figure 6.3: Précis of LMA Claims Committee structure

KEY
Open invite Reinsurance
Casualty
Claims Group
Invite group
(RCCG)
Election group
Property
Insurance
Claims Group
(PICG)
Lloyd’s Market
Xchanging Claims
Strategic
Review Board Advisory Group Personal
Claims Group
(XRB) (CAG) Lines
(LMSCG)
Household
Claims
Committee
(PLHCC)
Personal
Accident
Claims
Committee
(PACC)
Joint Marine
Claims Marine Claims Claims
Operations Group (MCG) Committee
Managers (JMCC)
Group
(COMG)
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Lloyd’s
Chapter 6
LMA Claims
LMA Board Committee Reinsurance
(LMACC) Claims Group
(LRCG)
Head of
Sector Group Livestock &
(HoSG) Bloodstock
Claims
Committee
(LBCC)
FI/PI Claims
Associations
London Market Committee
Administration
Group (FIPICC)
Committee
(LMG) (AAC)
Third Party
Administration
Energy Forum (TPAF)
ECF User Claims Group
Group (ECG)
(ECFUG)
Binding
Authority Delegated
ECF Best Strategic
Practice Focus Authority
Claims Group Forum (DAF)
Group (BASCG)
(ECFBPFG)
Aviation
Claims Aviation
Group* Claims Forum
(ACG) (ACF)
*The Aviation Claims Group takes a joint Governance from the LMA Aviation Committee
Source: Lloyd's Market Association

F Reinsurance
Traditionally, London Market companies have accepted large or complex risks and
reinsurance business on an international basis. The London Market is one of the largest
centres for trading reinsurance business in the world. Claims made against these policies
are usually handled in London where the business in placed.
F1 Home foreign business

Home foreign business historically concerns the writing of overseas risks in the London
Market. In recent years, this market has declined in absolute terms. The main reason for this
is that nation-states increasingly require insurance risks in their territories to be placed with
an indigenous insurer. However, many of these territories acknowledge that their own
markets have insufficient capacity to service such risks. It is therefore common practice for
the local insurer to carry a relatively small proportion of the risk, reinsuring the bulk of it
through the UK or US markets. This is particularly prevalent in South Africa, for example.
Frequently, insurers will use a panel of reinsurers, which means that the claims procedures
are similar to those for conventional collective policies in the domestic market. Such
contracts will invariably involve major international insurance brokers who will co-ordinate
local and international claims handling.
The claims programme will frequently entail the use of a nominated international loss
adjuster. Usually they will work with a local adjuster instructed by the local insurers, feeding
claims information back to the adjuster’s head office for the consolidation of global claims
data and reporting.
However, the Lloyd’s and London insurance markets remain truly global. According to the
Lloyd’s Annual Report 2020, Lloyd’s capital is sourced geographically as follows:
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US insurance industry 17.3%
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Bermudian insurance industry 14.9%
UK insurance industry 14.6%
Rest of the world insurance industry 10.5%
Japan insurance industry 10.2%
European insurance industry 9.6%
Private capital – limited & unlimited 9.2%
Worldwide non-insurance 8.3%
Middle/Far East insurance industry 5.4%
Lloyd’s writes business globally and the breakdown by region for 2020 was as follows:
USA & Canada 53%
Other Americas 6%
UK 12%
Rest of Europe 15%
Central Asia & Asia Pacific 10%
Rest of the world 4%
The international nature of Lloyd’s and London market business is an important factor when
considering all aspects of claims handling (see International claims on page 6/17).
F2 Reinsurance claims procedures
Claims management decision: reinsurance

What claims procedures do you need to have in place to ensure that your team will
identify all reinsurance contracts?
Any such procedure should include a process incorporating communication with reinsurance
underwriters. It is essential that reinsurance claims are handled efficiently and adequately in
order to:
• restrict claim payments to those that are properly due under the terms and conditions of
the particular reinsurance contract at issue and any relevant legal requirements;
• confine claim payments to those which are correctly presented, such as technical
accuracy, adequate loss detail, and any required supporting evidence;
• maintain accurate and representative statistical records of the losses advised, settled and
reserved in order to meet internal and external reporting requirements; and
• ensure that all possible recoveries are made from the appropriate retrocessional
protections.
A reinsurance company’s claims experience is likely to vary significantly from that of a direct
insurance company. In essence, there are two main methods of placing reinsurance:
proportional and non-proportional (and for each of these, there are two main bases of
cover: facultative and treaty).
Proportional Non-proportional
Under proportional arrangements, reinsurers pay a Under non-proportional arrangements, reinsurers pay a
predetermined proportion of each and every claim in claim only when it exceeds the retention. Therefore, it
respect of the risks ceded under the terms of the is possible that in one twelve-month period the insurer
reinsurance contract. will have a poor year with all its claims falling below the
level of the retention and the reinsurer will have a highly
An example is a 75% quota share treaty.
profitable year, having suffered no losses whatsoever.
An example is an excess of loss treaty.
In addition, the level of loss information provided to a reinsurance company is likely to vary
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significantly from that provided to a direct insurance company. This is particularly true of
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treaty business. Facultative reinsurance is more akin to direct insurance. A facultative
reinsurer generally has an intimate knowledge of the risk covered and of any losses arising,
usually being provided with a copy of any loss adjuster’s report and being involved with loss
control and handling.
Proportional and non-proportional treaties are structured differently, which is reflected in the
quality and level of loss information required when a claim is made under them. In the case
of proportional treaties, such as quota share, the information is limited, whereas a non-
proportional or excess of loss treaty generates loss information that is more specific and
informative.
A proportional treaty provides protection against all losses affecting a ceding company’s
account in respect of a particular class of business. Thus, the provision of specific loss
information would result in an unduly heavy administrative burden on the cedant, particularly
as many of the losses may be relatively small in value. In the case of non-proportional
treaties, a claim must generally exceed a stipulated minimum level before impacting on the
treaty. Consequently, the frequency of losses is reduced and more specific information can
be provided.
F3 Reinsurer’s claims department

F3A Claim notification and conditions
The claims department receives its daily claim advices either from a broker or directly from
the cedant. A bookslip (quarterly account) is generally used to advise of losses arising from
a proportional treaty. As noted above, the nature of a proportional treaty means that if a
reinsurer was to pay its share of every loss at the time of settlement with the original insured,
the administrative burden of the treaty would be too great. However, certain larger losses,
which exceed contractually stipulated amounts, and which reinsurers are generally
requested to settle immediately, are notified to reinsurers outside of normal quarterly
reporting procedures. The minimum value of a cash loss should be set at a level that avoids
the need for reinsurers to make a large number of individual payments, but is not so high as
to cause financial strain for the ceding company. The quarterly account also provides
outstanding loss information.
Non-proportional or excess of loss treaties generally provide for all losses to be payable by
the reinsurers upon receipt of a statement of the settlement of the original loss or within a
specified period thereafter. The information provided is of a more specific nature, including
individual loss information with applicable outstanding losses.
In general terms, the primary responsibility for the handling of losses rests with the ceding
company. Reinsurers need prompt advice of losses that may involve them in a significant
liability. With regard to proportional treaties, they require sufficient information to enable
them to:
• understand the nature of the loss and form a view of liability;
• assess the probable cost; and
• keep their own retrocessionaires informed about large losses – reinsurance companies
will also reinsure their own losses through retrocession.
Reinsurers often audit the claims processes employed by their cedants to ensure good
quality claims handling from the cedant.
Generally, proportional treaties stipulate that the reinsurer be notified of the occurrence of
large losses, usually as soon as reasonably practicable. With regard to non-proportional
treaties, it is generally a requirement for the reinsured to inform the reinsurer immediately of
any loss to which it may be liable to contribute, or which is of a category listed in the
contract, regardless of size.
A further factor to be borne in mind is the treatment of expenses incurred by the ceding
company in commencing or defending any legal proceedings in connection with a claim.
Under non-proportional treaties such costs, plus the costs of a successful claimant, are
included in the calculation of ultimate net loss. Under proportional treaties, the ceding
company and the reinsurer share proportionately the costs and benefits of litigation. There is
not the same mutuality of interest under non-proportional treaties as there is under
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proportional treaties: in the former, the benefit of a successful defence will accrue solely to
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the ceding company if the amount of the disputed claim is within the treaty retention. If the
case is lost, however, the reinsurer may become liable for some of the extra costs incurred.
Some contracts contain a clause enabling a reinsurer to participate in the decision to litigate
and in how the litigation is managed.
Reinsurers writing business on an excess of loss basis may have to wait several years
before large claims, which may be subject to litigation, are settled. Consequently, such
reinsurers wish to be made aware, as quickly as possible, not only of claims estimated to
exceed the retention, but also of those estimated to settle near the retention.
As a general rule, the onus is on the cedant to notify the reinsurer of any claim, incident,
event or circumstance that may give rise to a claim under the terms of the reinsurance policy.
Research exercise
Review the reinsurance obligations of your company and the wording of the claims control
clauses and claims co-operation clauses contained within them. Is there anything you
need to do to ensure that these clauses are complied with? What are the consequences if
you don’t comply?
G Subrogation and recoveries

Refer to
Think back to M85 chapter 5, section D.
Consider this…
Remind yourself of the definition of ‘subrogation’ from your previous studies.
Not only can insurers recover money from reinsurers – as we have just seen – but also from
many other parties. They can recover by contribution (where another insurance policy is in
place) and from third parties that have caused the damage or injury claimed for in the
first place.
We considered recovery from third parties when we looked at the Civil Procedure Rules in
Claims handling procedures and the Civil Procedure Rules on page 4/5.
Research exercise
Research some claim files within your office to find examples of:
1. subrogation;
2. contribution; and
3. third party recovery.
What do the different examples of these recoveries teach you?
H International claims
The handling of international claims is more complicated and costly than dealing with
domestic claims. The evolution of a single market within the European Union has had an
effect upon the extent to which this is so in Europe, but differences in approach and
difficulties generally still abound even here.
Brexit
The UK left the European Union (EU) on 31 January 2020, following the referendum on 23
June 2016. A transition period applied until 31 December 2020, during which the UK
continued to follow all the EU's rules.
From 11pm on 31 December 2020, UK insurers and intermediaries lost their passporting
rights to conduct business in the European Economic Area (EEA). To continue servicing
their EEA clients, many UK insurers and intermediaries decided to operate through new or
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existing subsidiaries in the EEA, while the UK agreed to EEA firms continuing their
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activities for a limited period of time, if they entered the UK's Temporary Permissions
Regime (TPR) at the beginning of 2020.
The EU has expressed its opposition to 'post box' European operations. And, it has
challenged arrangements where a new European operation was set up by the UK insurer
purely to deal with EU business post Brexit, with no or few employees physically present
in the relevant Member State.
Regarding the run-off period for existing insurance contracts, the UK has allowed EEA
insurers a 15-year period to continue servicing such contracts with UK insureds. The
matter is more complex for UK insurers’ contracts with EEA insureds, as every EU State
has implemented different rules which apply to UK insurers in its jurisdiction.
Negotiations about an equivalence regime between UK and EU regulation started in
March 2021 but have since broken down. It is unlikely the EU will grant equivalence to the
UK's regulatory regime, due to the expected divergence by the UK from EU rules in the
future, particularly in respect of Solvency II. Equivalence under EU law occurs where a
third party's regulatory framework is sufficiently similar to EU standards that firms from that
country are given access to the EU market. Equivalence is granted at the discretion of the
EU Commission and can be withdrawn or changed at any time. It is not, therefore, the
same as the passporting status enjoyed by UK firms before Brexit.
From the UK's perspective, the EU Solvency II regime has been criticised because of its
imposition of high-risk margin requirements. In fact, during the Queen's Speech on 10
May 2022, it was announced that the Financial Services and Markets Bill will revoke
retained EU law on financial services, replacing it with an approach to regulation that is
designed for the UK.
Please note: This is the position at the time of publication. Any relevant changes that may
affect CII syllabuses or assessments will be announced as they arise on the qualification
update page for the unit.
Trading conditions and standards, particularly in the USA but also worldwide, have become
more complex. The UK market, and in particular the London Market, has been synonymous
with financial integrity. The slow payment of claims can damage the reputation of the UK
market and the USA is particularly sensitive to such slow payment; powers exist in some
states to compel prompt payment. It is important, therefore, for the UK market to continue to
provide a claims servicing capability that is beyond reproach.
Much EU legislation aims to co-ordinate the conditions of operation throughout the
community and remove the obstacles to trade in insurance between Member States. At the
same time, it ensures that policyholders receive adequate protection. The European
Commission recognises that a degree of co-ordination of national rules on insurance
contracts is necessary if it is to maintain a balance between the interests of the policyholders
and the insurer. It is also necessary to prevent Member States from applying their national
rules in ways that restrict the ability of foreign companies to operate within that particular
jurisdiction.
Research exercise
Does your team handle any international claims? What systems does it have in place to
deal with these? Have you handled any international claims – how useful were the
systems in helping you to do this effectively? How could they be improved? What lessons
did you learn that will help you design systems for your team in the future?
There are a number of particular issues associated with handling international claims.
Cultural differences may mean that the policyholder has different expectations, interprets the
policy differently and has a different set of assumptions as to what terms are implied into the
contract forming the insurance. There are also issues arising out of the applicable law and
where a disputed claim should be litigated. Similarly, the premium may have been received
at a certain rate of exchange and this may have fluctuated by the time a claim has to
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be paid.
Chapter 6
International interpretation
The insurance contract dictates the rights of the parties to the contract and their respective
obligations.
The terms and conditions of the contract describe:
• the subject matter that is insured;
• the limits of cover;
• the premium payable;
• the claims procedure;
• the date of termination of contract; and
• the law under which the policy is to be interpreted and dispute resolutions arbitrated.
Each of the above elements is of specific significance for both insurer and policyholder. For
example, the law applicable to the policy determines how a claim will be interpreted.
Differences in interpretation and different national laws may have a significant impact on the
policyholder’s expectations of the sum they will recover in the event of a claim.
An English policyholder may be reluctant to purchase a policy from a French company, for
example, if a dispute must subsequently be heard in a French court. In such circumstances,
a policyholder might find themselves obliged to instruct two sets of lawyers (one in England
and one in France), with the result that the claim dispute would be very expensive for the
policyholder to resolve.
Implied terms
In addition, contracts do not necessarily set out all of the rights and duties of the parties
since further ones may be implied as a matter of general law. What such implied terms are
may differ from jurisdiction to jurisdiction.
H1 What happens when a foreign claim goes to litigation?

There are difficulties associated with litigating foreign claims. Although the insurance
contract can control where such claims are litigated, through the use of a jurisdiction clause,
it may not always be possible to avoid litigation in a foreign country.
Where it is not possible to avoid litigation in a foreign country, a solicitor will instruct foreign
lawyers as agents, unless the solicitor has an overseas office in the relevant territory.
However, they will still have to bear certain dangers in mind:
• Limitation periods: foreign limitation periods may be shorter or longer than the English
equivalents and may operate differently.
• Causes of action: some countries may not recognise a cause of action allowable under
English law, while others may allow claims that would not be actionable in England.
• Remedies may differ: for example, some countries exercise much tighter control over the
defendant’s property pending trial than the English courts do and give creditors greater
rights to an early judgment.
• The time it takes for an action to come to trial: this can vary widely within European
States and globally. There is a vast difference between, for example, the pace of German
and Italian litigation.
• In most countries, costs follow the event, but this is not always the case, e.g. in the USA.
Even where the winner is awarded costs, they may be based on the value of the claim
rather than the amount of work involved. Contingency fee systems are common.
• In some countries the judges will have considerable commercial expertise, being local
businessmen themselves, or they may be aided by lay assessors.
• Bad faith: this concept is prevalent in the USA and Canada. An insurer may have to pay
an additional sum to its policyholder if the court finds that it has treated them unfairly.
(This concept has now been introduced into English law by the Enterprise Act 2016.)
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Such awards are rarely recoverable under the insurer’s reinsurance treaty, which in turn
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may be subject to further jurisdictional agreements.
• Quantum: in respect of injury claims, different jurisdictions place different values on the
same death or injury. Certain elements of an injury claim may attract a higher value
overseas or, in contrast, be completely irrecoverable.
• There may also be different rules as to whether a claim carries interest or on the
enforcement of judgments.
Internationally, agreements are difficult to apply. Given the difficulties encountered by
Europe, some would argue that international agreements are almost impossible. However,
attempts have been made, and in 1928 the Warsaw Convention was signed, making its
signatories liable for aviation accidents, regardless of negligence. This was amended by the
Hague Protocol of 1955. Despite attempts to standardise payments by airlines in the event
of accidents, many national laws affect these agreements. This becomes a difficulty with
international flights, where different jurisdictions arguably apply at different stages of
the flight.
The uncertainty over jurisdiction can cause much confusion. In Harding v. Wealands
(2006), the House of Lords unanimously held that the quantification of damages for any
claim brought in England and Wales is a matter of English law as the law of forum. This was
to be the case, even if the events giving rise to the claim occurred overseas. In this case, the
claimant (and successful appellant in the House of Lords) was severely injured in a road
accident in New South Wales, Australia, caused by the negligence of the driver of the car in
which he was a passenger. The defendant’s insurers sought to argue that Australian law
should limit his recoverable damages, but the House of Lords rejected these arguments in
favour of English law.
H2 Global impact
The UK does take note of foreign decisions and barristers arguing points of UK law
occasionally cite them, if it assists their cause.
At present, the UK does not permit bad faith awards against insurers and penal damages
have generally not been acceptable in UK law. However, since Lord Woolf introduced the
potential for penalty damages as interest on costs and damages awards in 1999, it could be
argued that the impact of such damages in overseas territories has become, in principle,
acceptable in the UK legal system. Quantum issues vary from territory to territory and it is
likely that the UK system will continue to monitor developments in the rest of the world.
The matter of forum shopping is acceptable to the UK courts. However, this is only as long
as there is a valid argument to either hear an overseas case in the UK or alternatively have a
UK case heard abroad. The territory in question also needs to be receptive and there should
be a good legal reason to have it transferred.
On the Web
www.justice.gov.uk
I Fraudulent claims
Measuring claims performance by virtue of an IT system is good practice if done properly.
But what about claims that should not enter the process in the first place or which are
exaggerated?
I1 Ethical aspects
There is a general awareness of fraud within the insurance industry and insurers are
adopting a level of professional scepticism towards some claims. This does not mean that
the genuine claimant must be subjected to an unnecessarily harsh inquisition at the time of a
claim, although most insureds do expect their claims to be met with a certain level of
investigation.
One way of tackling fraud used by some insurers is to establish independent anti-fraud units.
These contain dedicated and specially trained staff that help identify and deal with potentially
fraudulent claims. Current claims-handling philosophy dictates that honest claims be met
fairly, equitably and promptly, but claims believed to be fraudulent should be subject to
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challenge. Insurers must take care to treat all customers fairly, in particular where they may
Chapter 6
be incorrect in their assumptions about possible fraud that they are unable to prove.
I2 Why does fraud matter?

Fraud matters: the statistics show clearly what an impact fraudulent claims have on the
profitability of the insurance industry – and that is the fraud that is identified. Of course,
someone has to pay for all this and usually it is the honest policyholder who finds that their
premiums rise as the insurer’s costs increase.
I2A Impact on industry
Many different people commit insurance fraud, from sophisticated criminals to ordinary
consumers, and even insurance company employees. It is an increasingly expensive burden
on the UK economy and it diverts vital resources away from businesses, law enforcement,
the civil justice system, regulatory agencies and the emergency services. One type of recent
high profile insurance fraud involves motor fraud rings whose vehicle drivers deliberately
cause motor accidents in order to make fraudulent injury and damage claims. Similarly, in
employers’ liability insurance, employees, usually temporary staff, stage accidents at work
leading to fraudulent injury claims.
On the Web
The Chartered Institute of Loss Adjusters (CILA) ( www.cila.co.uk) published an article
titled ‘Fraud and Property Claims’ on behalf of the CILA Anti-Fraud Special Interest Group
and a copy of the publication can be found at: bit.ly/2z4Q6H2.
There is another useful report from Crowe, developed in conjunction with the Centre for
Counter Fraud Studies at the University of Portsmouth, entitled 'The Financial Cost of
Fraud 2019', accessed here: www.crowe.com/uk/croweuk/insights/financial-cost-of-
fraud-2019.
Finally, the ABI ( www.abi.org.uk) has correlated some statistics regarding detected
insurance fraud, which you can see here: www.abi.org.uk/news/news-articles/2020/09/
detected-insurance-fraud/.
Insurance fraud can take a variety of forms, such as:

• the inflation of a genuine claim, e.g. including items that were not in fact stolen in a
burglary;
• creating an entirely fictitious event, e.g. a theft that never took place; and
• causing deliberate, as opposed to accidental, damage to insured property, e.g. pouring
water into a DVD player.
Fighting fraud is one of the key objectives of modern claims management.
I3 Insurers’ attitude to fraud

In the past, insurers showed a general reluctance to adopt a routine approach. The reasons
for this were partly historical; one of the principal factors was the fear of adverse publicity,
particularly if court proceedings were involved. Today, insurers are showing a harder
approach to fraud and will take legal action in appropriate cases.
Fraud clauses
Many insurance policies contain an express clause stating that all benefits otherwise due
under a claim will be forfeited where fraud is proven. The position under the Insurance
Act 2015 is that if a claim is in any respect fraudulent, the insurer is not liable to pay the
claim. There is then no need to insert a specific fraud condition in insurance policies, but it is
usual to include such a clause to strengthen the insurer’s position and raise awareness.
I3A Change in attitude
Three elements lie at the centre of this change in approach, as follows:
• enhanced understanding of fraud motivators;
• increased co-operation between insurance companies; and
• advances in technology.
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Chapter 6
Enhanced understanding of fraud motivators
There has been a great deal of research recently into exactly what motivates individuals to
commit fraud. This research has identified a number of questions that individuals ask
themselves before embarking upon a fraudulent act:
• What is in it for me?
• What is the chance that the fraud will be discovered?
• What is my punishment likely to be in the event of my being found out?
If the policyholder feels that the chance of discovery is low and the punishment will be light,
they do not need much potential reward to be tempted. Many people simply do not view this
type of crime as serious. Some private individuals would consider modest insurance fraud.
There is evidence that in the case of travel insurance in particular, sometimes the policy is
regarded as an investment and a ‘claim’ used to recoup part of the cost of the holiday.
According to the Insurance Fraud Bureau (IFB), crash for cash motor scams cost insurers
about £336m a year. The IFB is an organisation that leads the insurance industry's collective
fight against insurance fraud. In May 2017 it announced that it had successfully prosecuted
500 cases of fraud against insurance fraudsters. In July 2017, the ABI published information
stating that insurers prevent 2,400 fraudulent insurance claims valued at £25m each week
and in 2018 the ABI reported that £1.3bn of fraudulent claims had been detected in 2017.
Co-operation between insurance companies to re-educate the public
Apart from the moral arguments, the payment of fraudulent claims leads to an increase in
premiums for the insured community at large. The cost of defending a fraudulent claim
through the courts can be high and this can deter insurers from fighting such claims.
However, there is a growing tendency to challenge and question claims believed to be
fraudulent.
Organisations such as the UK’s largest cross -sector fraud sharing organisation, CIFAs, have
been established to change the outdated attitude that fraud is acceptable. CIFAs is an
independent, not for profit organisation working to reduce fraud and related financial crime in
the UK.
On the Web
www.cifas.org.uk
With the coming into existence of the Comité Européen des Assurances (CEA) this spirit
of co-operation has been extended internationally.
On the Web
www.insuranceeurope.eu
Advances in technology
The harnessing of new technology in the fight against insurance fraud includes the use of
pooled claims databases. Through such databases, a variety of different insurers share
information to try to trap repeated claimants by matching their new claims details against
those already held.
There have been technological developments in relational databases. These link
apparently unrelated policies and policyholders, with the intention of filtering out fraudsters
before they are able to arrange cover.
I4 What else has changed?

Other changes within the insurance industry have reduced claims fraud. For example,
completing a claim form over the telephone reduces the chance of making an inflated claim,
as individuals find it more difficult to lie verbally. Similarly, settling a claim by delivering
replacement goods rather than paying cash reduces the incentive to defraud.
While all insurers aim to eliminate fraudulent claims, some are more successful at it than
others. Many insurers are seeking to cut fraud as a means of gaining the advantage over
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Chapter 6
their competitors. This works because ultimately, fraud has an impact on the claims spend.
Thus, it has an adverse effect on the company’s profitability and its ability to be competitive.
Some insurers have sought to educate their policyholders in order to give them a better
understanding of the types of insurance fraud and the consequences of making a
fraudulent claim.
I5 So, how does one spot a fraudulent claim?

Experienced claims handlers are able to identify a large number of fraudulent claims
relatively easily. They do so because of the existence of one or more so-called fraud
indicators.
Research exercise
What are the fraud indicators that your organisation uses? How do you implement them
across your department?
Refer to
Think back to M85 chapter 5, section C.
Some insurers have produced fraud indicator manuals for their staff. These highlight the
fraud indicators relevant to that company, according to whether the insurer’s portfolio is
personal or commercial business. However, more sophisticated fraudulent claims are much
harder to spot and rely on experience and technology to unearth. Even then, there is no
guarantee they will be spotted.
I5A Centralised databases used by claims managers
We mentioned earlier the development of centralised databases as a tool to combat fraud. A
number of these central databases (i.e. electronic records that are accessible by many
companies) operate in the UK. These are designed to track multiple claims fraudsters by
matching claims details.
These databases include the following (this is a non-exhaustive list).
Motor Insurance Anti-Fraud and Theft Register (MIAFTR2)
There was a great deal of debate when this register was started, as to whether it should be
kept secret to increase the number of criminals who would be prosecuted. Eventually, it was
agreed that an alternative stance should be taken and maximum publicity should be given,
not only to the existence of the register, but also to any prosecutions resulting from its use, in
order to deter potential fraudsters. The register is used by virtually all motor insurers to
detect fraudulent motor claims. Insurers enter details of claims onto a central system, which
they can then use to identify the claims history of the policyholder and vehicle in question.
Motor Insurance Database (MID)
This database helps the UK comply with the Fourth EU Motor Directive. It contains details
of all registered vehicles in the UK, together with the related insurance details.
On the Web
www.mib.org.uk
Claims and Underwriting Exchange (CUE)

This series of registers contains claims information from the previous three years. It allows
participating insurers to check information on a proposal form with that held on the register.
This should help to eliminate multiple claims on parallel policies held by a single assured.
The insurer has the option of declining the business or setting a premium that correctly
reflects the applicant's claims history. The register covers motor, home, travel and personal
injury incidents and holds over 32m records, which are available to subscribers.
Research exercise
How many subscribers are there to CUE and into which categories do they fall?
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On the Web
Chapter 6
www.insurancefraudbureau.org
www.brownsword.com
The Art Loss Register

The Art Loss Register is designed to track claims made in respect of valuable items of fine
art and antiques. Its intention is to stamp out multiple claims and recurring losses on the
same pieces.
The Equipment Register
This tracks losses in respect of industrial machinery.
I5B Using the databases
The Data Protection Act 1998 stated that the insurer can only receive information that
matched from the database. This remains the case following the implementation of the Data
Protection Act 2018 and the UK General Data Protection Regulation (GDPR). This
means that the data returned may only be that there have been multiple claims at a
particular address or relating to a particular vehicle. It is up to claims handlers to decide if
this information has an impact on the validity of a claim.
Different insurers apply different business rules to reduce the workload in relation to the
number of cases they investigate. For example, most frauds occur in the first six months of a
new policy so an insurer can opt to focus on matches in policies less than six months old.
Alternatively, they could opt to investigate claims above a certain value.
Many insurers prefer to tackle fraud at the proposal stage by studying a proposer’s claims
history before granting a policy. As the insurance industry moves towards doing more
business through automated call centres, the ability to check claims history online is being
incorporated into call centre agent systems. The company can either establish a policy as to
whether or not it will accept business based on previous claims, or it can set a premium that
incorporates this information into its risk calculation.
In addition, insurers are able to use lie detection software during telephone conversations
with policyholders. The software alerts the insurer if the policyholder shows greater anxiety
when answering certain questions.
I5C Insurer’s own fraud checks

Insurers often have an internal set of guidelines to follow, providing indicators of possible
fraudulent claims. If a fraud check suggests a claim is possibly fraudulent, this will usually
lead to the insurer making further enquiries, often using a specialist inhouse fraud team or an
external specialist company.
Research exercise
Examine the fraud checks your company uses. Undertake a critical analysis of it – how
could it be improved?
The ABI has published a helpful guide for insurers designed to protect insurers against
fraudulent claims. The guide was published in September 2016 and provides a checklist for
insurers to use in ensuring that it can deal with the risk of fraud.
The checklist states that the insurer needs:
• a counter fraud strategy;
• policies and procedures;
• to undertake staff training;
• board level engagement;
• investigative capability;
• enforcement capability;
• to engage with industry bodies;
• to support industry initiatives;
• to comply with regulatory and industry guidance; and
• to consider its customers/policyholders.
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Chapter 6
On the Web
The full publication can be found here: bit.ly/2zoumq6
I6 Legal remedies
I6A Onus of proof
Suspicion of fraud is not sufficient to decline a claim. To discharge the onus of proof
requirement, there must be enough evidence of a quality that is admissible in court. The
burden of proof has historically frequently led insurers to resort to technical pleas of material
non-disclosure, misrepresentation and breach of the duty of good faith rather than attempting
to prove fraud itself. While this largely achieved the effect of avoiding a claim, it is not ideal.
Although the wrongdoer was not reimbursed for their claim, they avoided the taint of fraud
because they were not prosecuted.
Refer to
Think back to M85, chapter 5, section C.
One way of illustrating this is to look at exaggerated claims. Mere exaggeration is not
enough to amount to fraud: the insured may honestly over-estimate a loss. In addition, cases
of over-valuation may be instances of non-disclosure or misrepresentation and will not
therefore necessarily be fraudulent. Many cases on this subject have been put before the
courts, but there is still a remarkable lack of consistency in the resulting decisions. The
following example describes one such case.
Example 6.2
Berger and Light Diffusers Pty Ltd v. Pollock (1973) 2 Lloyd’s Rep. 442
The policyholder made a claim for second-hand machinery under a marine policy. The
declared value was £20,000. However, the insured value at the time should have been
£5,000. The court held that there was no fraud here. The insurers were therefore not
entitled to avoid the policy on the grounds of either non-disclosure and/or
misrepresentation.
It will be interesting to see how the rights afforded to insurers under the Insurance Act 2015
affect the ease with which fraud can be prosecuted. You are advised to monitor the
insurance press for relevant cases coming before the courts.
Research exercise
How do the courts respond when the fraud is only discovered after the claim has been
settled?
Refer to Owens v. Noble (2010).
I6B Moral hazard

When considering remedies for fraud, another area of concern is that of moral hazard.
Consider this…
Can you remember how moral hazard links with good faith?
An example of this could be the situation where an insurer asks if the insured has a criminal
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record. The question is whether the insurer is entitled to avoid the policy where the insured
Chapter 6
withholds such information.
Decided cases conclude that the answer is dependent upon the following:
• Can the insurer prove the existence of the criminal record?
• Can they show satisfactorily that the criminal record was a fact which the insured was
obliged to disclose at the time of completing the insurance proposal (i.e. was it obligatory
and if so was it material)?
The Rehabilitation of Offenders Act 1974 (as amended by the Legal Aid, Sentencing
and Punishment of Offenders Act 2012 (LASPO)) goes some way to providing an answer
to these questions. The policy behind this Act is that individuals who are convicted of less
serious criminal offences are given the opportunity of ultimately rehabilitating themselves.
The Act achieves this by providing that after a specified period, a conviction becomes ‘spent’
(i.e. the offender does not have to declare the conviction). The period of rehabilitation
depends on the severity of the offence.
On the Web
The ABI has updated its Good Practice Guide to Insurers’ Approach to People with
Convictions and Related Offences; Annex A contains a list of the rehabilitation periods
now applicable in England and Wales: www.abi.org.uk.
Research exercise
What remedies are available to an insurer where a policyholder has acted in a fraudulent
way? How would you use these in your work?
I6C Affirming the contract

An insurer may have reasons for choosing not to avoid or terminate a policy, even where the
law will clearly permit them to do so. On these occasions, they may avoid the fraudulent
claim while the policy continues. However, the insurer is prohibited from avoiding the policy
once they have affirmed the contract.
I7 Fraud by agent
A potential act of fraud by an agent is the issuing of policy documents, taking premium from
the policyholder but then not passing the premium to the insurer. Regular, thorough audits by
the insurer, embracing all aspects of the agent’s business, should identify any fraudulent
activity.
When an agent commits fraud, the insurer will usually deny liability to the insured, who will
be left to claim against the agent. There may be cases where the agent/broker appears to
have authority to deal in the way they are doing and an innocent insured is penalised by the
failure of the insurer to meet the claim. In such circumstances, rather than run the risk of
leaving an insured without cover, the insurer may wish to honour the contract, pursuing rights
against the intermediary thereafter.
I8 Fraud is a crime
A statutory definition of fraud as a criminal offence appears in the Fraud Act 2006. The Act
describes three different types of fraud:
• fraud by false representation;
• fraud by failing to disclose information; and
• fraud by abuse of position.
Under the Act, a person found guilty of fraud is liable to a fine or imprisonment. The extent of
the imprisonment depends on the type of conviction. Where:
• there is summary conviction, imprisonment can be for up to twelve months (six months in
Northern Ireland); and
• conviction is on indictment, imprisonment can be for up to ten years.
The Act replaces much of the Theft Act 1978, which has been largely repealed. The Theft
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Act 1978 created offences that related to obtaining property by deception and obtaining a
Chapter 6
pecuniary advantage, which proved complex and difficult to prove. However, the offence of
making off without payment, also introduced by the Theft Act 1978, remains.
Supreme Court decisions
In Haywood v. Zurich Insurance Company plc (2016), following settlement of an
employer’s liability claim, the insurer received evidence from the claimant’s neighbours
indicating that the claimant had significantly exaggerated the extent of his injuries. The
Supreme Court overturned the Court of Appeal’s judgment and allowed the insurer to set
aside the settlement.
However, in Versloot Dredging BV And Another (Appellants) v. HDI Gerling Industrie
Versicherung AG and Others (2016), the Supreme Court dispelled the assumption that the
insured’s use of a fraudulent device in the course of an insurance claim entitled the insurer to
decline the claim. Here, the court distinguished between:
• an entirely fraudulent claim;
• the exaggeration of an otherwise genuine claim; and
• collateral lies in relation to an otherwise genuine claim.
The fraudulent claims rule, i.e. the right of the insurer to forfeit the entire claim was upheld in
respect of an entirely fraudulent claim and the exaggeration of an otherwise genuine claim,
but was held not to apply when collateral lies were made in relation to an otherwise
genuine claim.
Critical reflection
What is the impact of claims on underwriting?
How can you ensure that you identify and deal with fraudulent claims appropriately without
alienating your honest customers?
In what circumstances might a broker or agent act in a fraudulent way? What does a
claims manager need to do in order to be alive to these issues?
J Data protection
J1 UK General Data Protection Regulation (GDPR)
Who does the UK GDPR apply to?
The UK GDPR applies to data controllers and processors in the United Kingdom, including
Northern Ireland. Prior to its introduction, the European Union (EU) GDPR applied.
The UK GDPR places legal obligations on processors. For instance, firms are required to
maintain records of personal data and processing activities, and a firm has significant legal
liability if it is responsible for a breach.
Controllers are not relieved of their obligations where a processor is involved. The UK GDPR
places obligations on controllers to ensure their contracts with processors comply with the
regulations.
What information does the UK GDPR apply to?
It applies to personal data of an identified living individual. However, the definition of
personal data reflects changes in technology and in the way in which information is
collected. It makes it clear that information such as an online identifier – e.g. an IP address –
can be personal data.
It also applies to both automated personal data and to manual filing systems where personal
data is accessible according to specific criteria. This is similar to the EU GDPR but wider
than the definitions in the previous UK data protection legislation. It could include
chronologically ordered sets of manual records containing personal data. Personal data that
has been anonymised – e.g. key-coded – can fall within the scope of the UK GDPR
depending on how difficult it is to attribute such data to a particular individual.
Sensitive personal data
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The UK GDPR refers to sensitive personal data as 'special categories of personal data'.
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These categories include:
• race;
• ethnic origin;
• politics;
• religion;
• trade union membership;
• genetics;
• biometrics (where used for ID purposes);
• health;
• sex life; or
• sexual orientation.
Principles
Under the UK GDPR, the data protection principles set out the main responsibilities for
organisations. The most significant addition is an emphasis on accountability. The UK GDPR
requires firms to show how they comply with the principles – for example, by documenting
the decisions they take about a processing activity.
Consider this…
Data Protection Principles under the UK GDPR
The following principles apply to all personal data:
1. Lawfulness, fairness and transparency: data should be processed lawfully; data should
be handled in ways people would expect giving consideration to the effect of
processing the data on the individuals concerned; and there should be full compliance
with the obligations of the 'right to be informed'.
2. Purpose limitation: data should only be collected for specified, explicit and legitimate
purposes and not further processed in a manner that is incompatible with those
purposes.
3. Data minimisation: data should be adequate, relevant and limited to what is necessary
in relation to the purposes for which it is processed.
4. Accuracy: data should be accurate and, where necessary, kept up to date.
5. Storage limitation: kept in a form which permits identification of data subjects for no
longer than is necessary for the purposes for which the personal data is processed.
6. Integrity and confidentiality: data should be processed in a manner that ensures
appropriate security of the personal data, including protection against unauthorised or
unlawful processing and against accidental loss, destruction or damage, using
appropriate technical or organisational measures.
Lawful processing
For processing to be lawful under the UK GDPR, firms need to identify a lawful basis before
they can process personal data and document it. This is significant because this lawful basis
has an effect on an individual's rights. The six lawful bases for processing data are:
1. Consent
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Chapter 6
Consent must be a freely given, specific, informed, and unambiguous indication of the
individual's wishes. There must be some form of positive opt-in; consent cannot be
inferred from silence, pre-ticked boxes or inactivity, and firms need to make it simple for
people to withdraw consent. Consent must also be separate from other terms and
conditions and be verifiable. Where a firm relies on someone's consent, the individual
generally has stronger rights, for example to have their data deleted.
2. Contract
The processing is necessary for a contract a firm has with the individual, or because they
have asked the firm to take specific steps before entering a contract.
3. Legal obligation
The processing is necessary for a firm to comply with the law (not including contractual
obligations).
4. Vital interests
The processing is necessary to protect an individual's life.
5. Public task
The processing is necessary for a firm to perform a task in the public interest or for its
official functions, and the task or function has a clear basis in law.
6. Legitimate interests
The processing is necessary for a firm's legitimate interests or the legitimate interests of a
third party, unless there is a good reason to protect the individual's personal data which
overrides those legitimate interests.
Rights
The UK GDPR contains similar rights to the EU GDPR, creates some new rights for
individuals and strengthens some of those that existed under previous data protection
legislation.
Right to be informed • Individuals have the right to be informed about the collection and use of
their personal data.
• This must be provided to individuals at the time the personal data is
collected from them.
Right of access • Individuals have the right to find out if an organisation is using or storing
their personal data.
• They can exercise this right by submitting a subject access request
(SAR) to the organisation concerned.
• A company should respond to an SAR within one month; it can take an
additional two months in certain circumstances.
Right to rectification • Individuals have the right to have inaccurate personal data rectified or
completed if it is incomplete.
• An individual can make a request for rectification verbally or in writing.
Right to erasure • Individuals have the right to have their personal data erased, also known as
'the right to be forgotten'.
• The right is not absolute and only applies in certain circumstances.
Right to restrict processing • Individuals have the right to request the restriction or suppression of their
personal data.
• This is not an absolute right and only applies in certain circumstances.
• When processing is restricted, an organisation is permitted to store the
personal data, but not use it.
Right to data portability • This allows individuals to obtain and reuse their personal data for their own
purposes across different services.
Right to object • This gives individuals the right to object to the processing of their personal
data in certain circumstances.
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• Individuals have an absolute right to stop their data being used for direct
Chapter 6
marketing.
Rights in relation to • An individual has the right not to be subject to a decision based solely on
automated decision making automated processing.
and profiling
• Processing is 'automated' where it is carried out without human intervention
and where it produces legal effects or significantly affects the individual.
Accountability and governance

Accountability is one of the data protection principles under the UK GDPR. Firms are
expected to put into place comprehensive but proportionate governance measures. Good
practice tools such as privacy impact assessments and privacy by design are now legally
required in certain circumstances. Practically, this is likely to mean more policies and
procedures for organisations, although many will already have good governance measures
in place.
Breach notification
The UK GDPR introduces a duty on all organisations to report certain types of data breach to
the ICO, and in some cases to the individuals affected.
Transfers of personal data to third countries or international organisations
To ensure that the level of protection of individuals afforded by the UK GDPR is not
undermined, restrictions have been imposed on the transfer of personal data outside the EU,
to third countries or international organisations.
The UK GDPR still applies directly to firms operating in the EEA post-Brexit, and to any
organisations in Europe that send data to firms in the UK. These UK transfer rules broadly
mirror the EU GDPR rules, but the UK has the independence to keep the framework
under review.
J2 Data Protection Act 2018 (DPA 2018)

The DPA 2018 came into effect in the UK in May 2018, to coincide with the implementation
of the EU GDPR. Since Brexit, the key principles, rights and obligations remain the same.
However, there are implications for the rules on transfers of personal data between the UK
and EEA countries.
Be aware
DPA 2018 has been amended to reflect the UK GDPR and remains the legislation
governing data protection in the UK.
Main elements of the DPA 2018:

• Ensuring that sensitive health, social care and education data can continue to be
processed, to ensure confidentiality in health and safeguarding situations.
• Restricting the rights to access and delete data where there are legitimate grounds for
doing so (e.g. for national security purposes).
• Setting the age from which parental consent is not needed to process data online.
• Providing the ICO with enhanced powers to regulate and enforce data protection laws.
– For the most serious data breaches, it can levy fines of up to £17.5 million or 4% of
annual global turnover.
– The ICO can bring criminal proceedings against a data controller or processor if they
have altered records following an SAR with the intent to prevent disclosure.
K Scenario 6.1: Information technology
For reference only

Chapter 6
K1 Question
You are the claims manager for an insurer. Your board has asked you to prepare a report
that discusses the significant aspects of IT in claims handling. Put a report together outlining
the aims of IT in claims handling as well as the benefits and difficulties of IT use.
K2 How to approach your answer

Aim
This scenario aims to test your ability to evaluate the usefulness of IT systems for claims
handling.
• a consideration of the aims of IT in reducing costs and improving service;
• a discussion of the immediate benefits of using IT, including the benefits when more than
one insurer is involved in the risk and when there are reinsurance recoveries to be made;
• incidental benefits, such as availability of information for marketing purposes, increased
customer retention etc;
• a discussion of the difficulties presented by the lack of flexibility inherent in IT systems,
leading to lack of personalisation of claims handling and problems for unusual or
particularly complex claims.
L Scenario 6.2: Fraud

L1 Question
You are about to revise your company's strategy on fraudulent claims. In order to put a
system in place to identify fraud you first need to consider what type of indicators should
arouse your claims handler's suspicions. Identify a comprehensive list of these triggers for
both first party and third party claims.
L2 How to approach your answer

Aim
This scenario aims to encourage your consideration of the indicators that a claim may be
fraudulent.
• For first party claims, your answer should detail indicators relevant to the policyholder/
claimant themselves, their claim (e.g. its timing, nature etc) and the history of the policy.
Other matters, such as those relating to the nature of the claimant's business, will also be
factors.
• For third party claims, again information about the claimant themselves, including their
hobbies and any connection to the first party, will be relevant. Other issues relate to the
documentary and witness evidence. The type of injury claimed for, along with how the
claimant has dealt with their injury, may also be indicators and should be included in your
answer.
M Scenario 6.3: International claims
For reference only
Chapter 6
M1 Question
You are the claims director of a medium sized UK composite insurer. Your organisation is
looking to expand by writing international business. What challenges are you likely to face in
handling claims from all over the world?
M2 How to approach your answer

Aim
This scenario aims to test your assessment of the issues associated with dealing with claims
from overseas and how they affect the actions of your team.
• cultural issues;
• differences in limitation periods;
• differences in causes of action;
• differences in remedies available;
• the time it takes for an action to come to trial;
• whether costs follow the event;
• the expertise of judges;
• whether bad faith is an issue;
• differences in quantum paid for certain injuries and the recoverability of certain elements
of the claim;
• differences in rules; and
• whether any international agreements are relevant and how difficult they are to apply.
Self-test questions
1. What is the difference between 'data' and 'information'?
2. What types of customer need to be considered when building a claims management

IT system?
3. How have claims managers seen IT develop and grow in the past 20 years, with
specific reference to IT within the organisation and externally?
4. What are the basic claims elements that need to be recorded on all insurers' claims
systems?
5. What are the common notification conditions to be written into reinsurance contracts
between a cedant and their reinsurer?
6. What are the main remedies available to insurers where a policyholder has
committed fraud?
7. What are the most common circumstances in which an agent may commit fraud?
For reference only

Chapter 6
Cost of claims
7
management
outcomes
Introduction
A What is the cost of claims management? 4.1, 4.2, 4.3
B Estimating and reserving 3.1
C Leakage 4.1, 4.2, 4.3
D Claims transformation 4.2, 4.3
E Scenario 7.1: Leakage
F Scenario 7.2: Expense ratio
G Scenario 7.3: Estimating
For reference only

Self-test questions
Learning objectives
• evaluate the cost of the claims function and apply a cost control strategy;
Chapter 7
• control indemnity spend and handling spend;
• design a reserving philosophy in accordance with corporate strategy;
• discriminate between the different types of reserve and utilise them as appropriate;
• evaluate and apply the different methods of calculating a reserve; and
• develop a system for identifying and controlling leakage.
Introduction
In this course so far, we have considered how the claims manager operates in the claims
environment and puts philosophies and guidelines together. We looked at how claims links in
with other departments, such as actuaries and underwriters, and the use of information
technology and management information as tools to help the claims manager. We have also
considered service providers and outsourcing as well as the Lloyd’s and London markets,
among many other things. We have linked in with your previous studies to build on your
knowledge and experience.
In this final chapter, we turn our attention to managing the cost of the claims department both
internally, i.e. the cost of running the claims operation, and the cost of settling the claims.
Key terms
Estimating and Expense ratio Fee spend Indemnity spend
reserving
Individual case Leakage Operating costs Overheads
estimates
Reserving Statistical reserving Types of reserve
philosophy
A What is the cost of claims management?

By ‘cost’ in this context, we are firstly referring to the cost of running the claims operation.
Secondly, we mean the cost of settling the claims themselves. Managing the cost means
controlling the amount of money expended over a defined period.
For reference only

The board of the organisation will agree on a budget with the claims manager to run the
claims function and this is usually set annually. However, it is vital for the claims manager to
monitor actual spend against the budget and report any deviation to the board regularly,
usually quarterly. Therefore, in the event of actual spend exceeding the budget, action can
be taken to either reduce spend or increase the budget, depending on the needs of the
business.
Chapter 7
Refer to
Budgeting considered in Management and budgetary control on page 1/17
A1 Cost of the claims department

The operating costs are:
• the cost of running the claims department itself, such as claims staff salaries;
• costs allocated to the department from the wider company, i.e. costs incurred running the
insurance company as a whole, such as IT, cyber security, office space, and other
departmental staff; and
• external costs, i.e. the cost of service suppliers.
The claims manager will report separately in respect of internal and external costs. The
indemnity spend and fee spend describe the external costs to the business. In this section
we will consider the internal costs to the business.
A1A Internal cost
When we looked at outsourcing previously, we said that the cost of outsourcing has to be
balanced against the savings made in respect of internal costs. But what are these costs and
how do they impact the business?
Consider this…
Look around your office – what costs does your company incur in order to run as a
business?
Chapter 7 Cost of claims management 7/3
Every pound taken in premium must meet the cost, not only of claims and of fees, but also of
running the business. These costs include, but are not limited to:
• Staff costs, including:
– salaries;
– pension contributions;
– other taxable benefits (e.g. car allowances);
– employer’s National Insurance contributions; and
– tax.
• Cleaning and sanitation.
• Maintaining the building and machinery (e.g. photocopiers, air conditioning, heating, etc.).
• Gas and electricity.
• Recycling facilities.
• Water.
• Rent.
• Stationery.
• Computer hardware and software.
You can probably think of more.
A1B Share of overheads
Some UK insurers have a branch network. Each branch will need to contribute a proportion
of its income to head office, as the following example illustrates.
Example 7.1
For reference only

A UK insurer has six underwriting branches. Each underwrites £10m gross written
premium (GWP) per annum. Its head office consists of the board, claims, IT, finance and
operations. Obviously, it costs to run the head office, but it does not generate any revenue
of its own to meet these costs. Therefore, each underwriting branch will contribute to
cover the cost of running the head office.
Typically, an insurer will allocate a proportion of its income to the departmental head as a
Chapter 7
budget. The claims manager will need to ensure that they control this aspect of the
department’s expenditure.
Consider this…
Many of these overheads will be the same as the internal costs we have just looked at.
However, there will be others – can you think of some?
These overheads include, but are not limited to:

• travel costs;
• training;
• subsistence;
• entertainment;
• marketing;
• printing;
• legal fees;
• human resources;
• server maintenance;
• hotel costs; and
• IT helpdesk.
You can probably think of more. Find out how much your company budgets and spends on
some of these items.
A2 External costs
External costs can be categorised as either fee spend or indemnity spend.
A2A Fee spend
In chapter 4 we looked at service providers and how they help with the handling of claims.
Service providers have their own stakeholders who are running these commercial
enterprises to maximise profitability. It is therefore essential that the claims manager
receives the services that have been agreed, but at a competitive price.
Traditionally, service providers charged an hourly rate for their services. This is still the case
in respect of complex claims. However, simpler volume claims are more commonly charged
on a fixed fee basis today.
Research exercise
Look at a number of the pricing structures your firm has in place with its service providers.
How does your firm balance value for money with high standards of service? Which of
your service providers charge by the hour and which charge fixed fees? What are the
reasons for the differences?
A2B Indemnity spend

Indemnity spend is the total spent by an insurer making payments to indemnify policyholders
following the submission of valid claims. Insurers are able to benchmark average indemnity
spend for certain types of claims across the market, as well as being able to compare and
contrast it in light of different portfolios of business. This is usually undertaken by adding fee
spend to indemnity spend in order to calculate the loss ratio thus:
Indemnity claims spend + fee spend
= Loss ratio
For reference only

Premium
Decisions based on this calculation are not always clear-cut, which you will discover if you
study and complete the following example.
Example 7.2
An insurer has the following results from two portfolios of business:
Chapter 7
• Public liability with premium of £1,000,000 and claims of £500,000.

• Property with premium of £10,000,000 and claims of £6,500,000.
Calculate the loss ratio for the two portfolios.
Which portfolio of business produces the most favourable loss ratio to insurers?
Which portfolio of business would you prefer to underwrite?
You will have drawn your own conclusions. However, notice that while the public liability loss
ratio of 50% is more attractive than property at a loss ratio of 65%, the property book is
returning a profit of £3,500,000 whereas the public liability book is only producing a profit of
£500,000.
Property claims
Indemnity settlements for property claims, whether for a first party or a third party claim, can
lead to aggrieved claimants. This is because the value of property generally reduces over
time – for example, a car generally depreciates in value unless it is a classic model. To deal
with this, some insurers provide first party cover on a new for old basis, particularly in
household insurance. In these circumstances, insurers can usually settle by providing a
replacement product or a cash sum with which to purchase a new item.
Consider this…
A painter spills paint over a customer’s carpet. It is five years old and cost £1,000 new but
will cost £1,500 to replace today. Think about how much the customer’s insurers would
pay out if the customer had a new for old policy. How much would you pay if you were the
liability insurer of the painter in respect of a third party claim from the customer?
Research exercise
Look into what type of coverage your company gives for property claims (i.e. new for old
and/or indemnity). This is a common source of complaints to the Financial Ombudsman
Service – research relevant cases at:
www.financial-ombudsman.org.uk.
Injury claims
Refer to
Think back to M85, chapters 8 and 9
You will have covered the different heads of damage in your previous studies. For our
purposes, you need to know that claims managers must ensure that claims handlers can
accurately value injuries, usually when dealing with liability claims. This matter is complex as
no two injuries are identical. Claims managers must ensure that claims handlers take into
account all relevant features of the injury in conjunction with the claimant’s age.
Research exercise
For reference only

Obtain a copy of the JSB Guidelines. Insurers, claimant’s solicitors and judges use these
when awarding general damages. Familiarise yourself with the scope and range of
the awards.
On the Web
www.judiciary.uk
Chapter 7
A3 Controlling costs
As claims manager, one of your roles is to manage the cost of your department. In order to
do this you must first identify where costs are currently being incurred:
• unit case costs, i.e. the average operational cost of handling a claim;
• average time spent on one claim; and
• claims expense ratio, i.e. the ratio of internal costs to premiums.
As claims management is specifically interested in operational costs, it is also important to
consider how you can control these, through:
• competent and well-trained staff;
• efficient administrative support;
• efficient claims procedures;
• efficient record-keeping;
• a well-written corporate claims philosophy;
• use of a quality management programme;
• effective management of the claims department;
• effective use of IT, including InsurTech; and
• use of outsourcing.
Operational costs often add up to a significant outlay for the company. In order to keep these
costs to a minimum there should be a constant review to incorporate potential:
• restructuring;
• merging;
• management changes;
• IT system and technology changes;
• processing and procedure changes;
• partial or total outsourcing of the claims function; and
• changes in the make-up of the book or the nature of the risks written.
The above measures can be carried out at varying scales: some may take the form of small
tweaks and updates to the existing state of the company while others may be delivered as
part of larger transformational programmes spanning a number of years.
The geographical structure of the company can also influence costs. A trend in recent years
is to have fewer and larger cost centres, often in low cost, decentralised locations or
offshore. There has been a reduction in salary ranges and salaries in general in real terms,
with a corresponding reduction in the experience of staff.
The claims manager cannot analyse the management of the operational costs of their
department in isolation: any reduction in the operational costs can have an impact on how
well it operates. A reduction may have an impact upon:
• how many claims are overpaid;
• customer satisfaction reflected in:
– reduced customer retention;
– reduced customer enquiries;
For reference only

– damage to brand and reputation;
– Financial Ombudsman Service referral charges as complaints increase; and
• the potential for punitive costs/awards if deadlines are missed.
Such effects may outweigh savings made. Conversely, an increase in operational costs –
provided they are properly targeted and lead to an improvement in areas important to the
customer – is likely to have a positive impact. The claims manager needs to balance the cost
Chapter 7
of the operation against the desired level of service.

A company can gain a competitive advantage by having the most efficient expense ratios.
An efficient expense ratio gets the balance between cost and the loss of expertise right.
Figure 7.1: Balancing the expense ratio

Increasing costs
Driving down costs using m

o
experien re
ced
staff
cheaper
s
less exp taff,
ertise
who are
mo
expensiv re
e
increase
d
leakage
reduced
leakage
Many insurers prefer a lower initial cost base at the outset and then try to control spend by
putting in place strong processes via IT, audit and supervision.
The importance of claims cost in the insurance industry cannot be underestimated. In 2021,
the UK general insurance market paid out £18.6m per day in claims (source:
www.moneymarketing.co.uk).
If the cost of claims at any time (including the estimated future cost) exceeds the available
resources to pay such liabilities, then the insurance company is technically insolvent and
must enter into insolvency procedures. The estimation of future liabilities is, therefore, just as
important as the control of current claim payments.
On the Web
Examples of insurers that have been wound up are Enterprise Insurance Company plc
( www.eigplc.com), Elite Insurance Company (bit.ly/2AQGiAm) and MCE Insurance
Company, based in Gibraltar.
The Financial Service Compensation Scheme has published a question and answer guide
in relation to Enterprise Insurance Company plc which can be found here:
www.fscs.org.uk/what-we-cover/insurance/enterprise-insurance-company.
A4 Statutory penalties
The UK legal system has been reluctant to endorse punitive damages in most sets of civil
dispute circumstances. There are notable exceptions, such as the failure to beat a Part 36
offer in a civil dispute, but the UK had no concept of ‘bad faith’ in law until the Enterprise
Act 2016 (EA 2016).
The EA 2016 introduced an implied term into all contracts of insurance that requires insurers
to pay valid claims within a ‘reasonable time’. It does not explain how damages will be
quantified in the event of late payment, it simply gives policyholders a statutory right to claim
damages in addition to the claim payment if an insurer is late in making a payment. It is
For reference only

anticipated that there will be case law in relation to this issue over the next few months and
years and claims managers will need to monitor how the courts calculate the awards claimed
under EA 2016.
Refer to
Enterprise Act 2016 described in Enterprise Act 2016 on page 3/20
Chapter 7
A5 Improving operational efficiency
According to the article Insurance: Improving claims management published by The Actuary
in 2017, Business Process Management (BPM) is an effective option for insurers looking to
advance transformational or improvement initiatives. BPM considers three themes:
• Focus on best practices by optimising the blend of solution and resource.
• Simple automation of case management.
• Grow through customer experience.
On the Web
Read article in full here: bit.ly/2OuXBdL.
B Estimating and reserving

Having considered the various headings under which insurers spend their income, we need
to take into account future liabilities i.e. payments that it will need to make in future. This is
where estimating and reserving matter.
B1 Why should a claims department reserve?

There are a number of reasons why a claims department needs to reserve. Firstly, reserving
ensures that the insurance company has enough money to pay all future liabilities arising
from claims. Secondly, it needs to do so to meet regulatory requirements. Lastly, claims
reserving is required for internal and external reporting purposes as well as for monitoring
financial performance.
There are a number of statistical claims reserving methodologies. A statistical estimate is a

generic term covering any method that does not rely on an examination of individual claim
files. These estimation techniques may result in a range of reserves, from worst-case
reserves using pessimistic assumptions, to best-case reserves using optimistic assumptions.
The insurance company will have to consider the implications of the claims reserving method
adopted in the light of the various internal and external reporting requirements.
This is documented in the company’s reserving philosophy document.
B1A Reserving philosophies
Claims reserving is the process undertaken by a company to assess the level of funds
required in order to meet current and future claims liabilities. Claims reserving for insurance
companies is vital since it is a key indicator of whether a company is financially solvent.
Each insurer will have a documented reserving philosophy to enable the company to reserve
for claims according to their corporate philosophy and risk appetite. Companies will usually
wish to reserve in a manner that accurately reflects their ultimate liabilities, but given that this
can be problematic, some companies are more pessimistic than others when setting case
reserves initially.
The process may involve various company officials, such as claims managers, underwriters,
accountants and actuaries, with the board agreeing the resulting reserving philosophy.
Research exercise
Obtain a copy of your company’s reserving philosophy. How is it adhered to in practice
and how does your company ensure that the philosophy is complied with? Discuss this
with your manager.
Insurer’s claims philosophies range from the cautious to the optimistic, depending on the
For reference only

insurer’s attitude to risk and its past experience. The higher the reserves, the more stability
the company has going forwards, but this is at the expense of profit. The lower the reserve,
the more profit can be released earlier, but if reserves are too optimistic and insufficient this
may threaten the solvency of the company. Most insurers want to forecast accurately their
liabilities and such a reserving philosophy may be as simple as ‘realistic ultimate
claims spend’.
Chapter 7
The FCA requires insurance companies to submit annual returns so it can assess the
continued solvency of companies subject to its regulations. These returns require a
breakdown of the claims reserve by class of business and year of origin. This is known as
annual accounting.
B1B Annual report and accounts
Like most companies, insurance companies have to produce an annual report and accounts.
For insurers, as part of this, external auditors must consider and report on how adequate the
claims reserves of the company are. This is because the claims reserve affects the profit
available to the company’s shareholders and ultimately the net worth of the company. You
should note, however, that the annual report and accounts may use different reserving bases
from those used for the annual insurance return to the FCA.
Many others will use the information provided by the annual report and accounts, such as:
• competitors;
• brokers; and
• companies looking to grow by merger or acquisition.
B2 The different types of reserves

Now that we know why an insurer reserves in the first place, we need to consider the
different types of reserves that exist for different purposes.
Outstanding claims reserve
This covers claims that have been incurred and reported to the insurer. The outstanding
claims reserve is the insurer’s estimated liability in respect of the claims that they know have
happened and have been reported to them.
Incurred But Not Reported (IBNR) reserve
This covers claims that have been incurred but not yet reported to the insurer. For example,
a building could have caught on fire that will lead to a claim, but the policyholder has not yet
told their insurer that it has happened so there are no formal reserves set aside. This reserve
is calculated by using statistical techniques based upon the insurer’s past experience of
claims as well as other information, for example legislation, market knowledge and legal
developments.
Incurred But Not Enough Reported (IBNER) reserve
This covers any shortfalls in the provision for outstanding claims reserves. These can occur
where the company suffers late notification of the extent of the reserve, where amounts
reported are understated or where the insurer has insufficient information on which to assess
adequate reserves.
Equalisation reserves
The Insurance Companies (Reserves) Regulations 1996 require the establishment of
equalisation reserves. These are provisions designed to smooth fluctuations in loss ratios for
some classes of business. The insurer is required to make an annual contribution to the
equalisation provision by way of a specified percentage of net written premium for certain
business classes.
For reference only

Catastrophe reserves
These are additional reserves that are set up to cover large numbers of related individual
losses arising from one significant event.
Provision for claims handling expenses
This is required to cover the anticipated future costs of settling claims incurred up to the
balance sheet date. It includes both internal and external costs.
Chapter 7
Re-opened claims reserves
This covers claims, which though closed now, will be re-opened subsequently. This can be
either because the insurer has closed the file prematurely or because a third party claimant
has resurrected the claim.
B3 How do I estimate a reserve?

Many volume claims insurers have built into their systems automated reserves that apply an
initial base reserve, particularly for low-value, high-volume lines of business. This can then
be altered when the claim gets to a certain level, reaches a certain age or develops a certain
set of characteristics. This saves claims handlers from having to worry about reserving at the
outset as it is all done behind the scenes. However, even these base reserves have to be
calculated by someone, somewhere (often with significant actuarial input) and the later
alterations have to have a rationale behind them.
So far we have examined the different types of reserve, but what is the methodology behind
these techniques?
B3A Individual case estimates
This type of estimating involves the claims handler making allowances for all the known facts
about the loss and placing a value against each claim. An allowance for direct claims
expenses is then added to the reserve. 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. This method of reserving is primarily down to the
known facts of the claim in question, and the claims handler's experience of managing
similar claims in the past.
Figure 7.2: Building up an individual case estimate
Adjustment for
date of payment
Cost of handling
the claim
Value of the
claim itself
Most companies use case estimates as the basis for their individual claims reserves. This is
the sort of information useful to underwriters. They use it to produce a claims experience,
which they use in turn when considering terms. However, insurers tend to use statistical
reserving methods for their accounts.
A vital part of the claims handler’s role involves setting case reserves and they must
undertake this in accordance with the company’s reserving philosophy. It is crucial that all
within the claims department consistently follow the reserving philosophy. The actuaries and
senior management need to be sure about the basis upon which reserves are set so that
they can draw appropriate conclusions. If a typical large insurer has, say, £5bn in reserves,
you can imagine how difficult it would be to make reliable financial statements if the basis on
For reference only

which those reserves had all been set is not clear. This is a particular challenge for the
claims manager overseeing handlers across the world, or even just across the UK, and so
training and the audit of closed file reserve accuracy both play important roles.
B3B Statistical reserving
This approach to reserving has developed to cater for large volumes of data and the varying
characteristics exhibited by different classes of business. The actual method used will
Chapter 7
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.
There are a number of methods used in statistical reserving and one or more of them will be
used on any one occasion.
Loss development factor (LDF method)
The loss development factor, or LDF method, assumes that future claims costs can be
estimated by extrapolating historical claims information. This method relies on the
assumption that the future development of claims will follow past claims experience. It is
suited to more mature classes of business that have a relatively stable development pattern.
This method can be broken down into the following steps:
• setting out the data in the form of a triangulation;
• analysing the trend; and
• calculating the claims reserve.
Example 7.3
LDF Method
A portfolio of business has performed to a loss ratio of 60% every year for the past ten
years. There have been little or no market or legal changes. It is likely, therefore, that the
loss ratio will be maintained for the subsequent period.
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. Under this method, an
estimated ultimate loss ratio is applied to the total premium for a class of business to
calculate claim reserves.
Example 7.4
Loss ratio method
The estimated ultimate loss ratio = 90%
Then apply 90% to the total premium for the class of business to establish the claims
reserves.
Total premium for class of business = £3m: apply 90% loss ratio = £2.7m claims reserves.
Bornhuetter–Ferguson technique
This method, developed as long ago as 1972 by two US actuaries, is a combination of the
LDF and the loss ratio method. Under this method, 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.
For reference only

The projected ultimate claims figure is arrived at by 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 and the loss ratio is 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 as:
Chapter 7
• liability and other long-tail classes of business;
• recent accident years;
• change in the type of business written; and
• new classes of business.
On the Web
www.actuaries.org/astin/colloquia/manchester/presentations/schmidt.pdf
Exposure based calculation methodology

This 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, which was the 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, it is hard to predict which accident years will be triggered by a loss. By
analysing the insured parties, cover written and sums insured, a reserving specialist can
calculate total exposure. By estimating whether these policies will be affected, using market
knowledge, the insurer can estimate a range of reserves based on likely scenarios.
Average cost per claim
This is similar to the LDF method. By analysing the claims history, the insurer can estimate
the number of claims and the settlement pattern that is likely to arise in future years. By
applying the average cost of claims to the number of anticipated future claims, the insurer
can calculate the likely cost of future claims.
Example 7.5
Average cost per claim
Household – average cost per claim £1,200
Anticipate number of future claims = 10,000
Anticipated future claims costs – £12m.
Benchmarking
When tracking trends, there needs to be some sense of the ultimate outcome, given what
has happened already. The benchmarking method generates a set of expected values for a
given monitoring period. These milestones, if hit, 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.
Benchmarking methods at least ensure that comparisons are made on a consistent basis
and they should be sufficiently sensitive to identify deviations from plan.
A combination of methods
In all likelihood, the company is likely to use a blend of methods in an attempt to produce the
most reliable claims reserve.
B3C Conclusion
The statistical claims reserving process will normally be carried out by qualified actuaries.
Underwriters and the claims manager should be involved in the review, as the reserving
specialist will require their input into the business written and any unusual characteristics
or trends.
The change to the discount rate in 2019 provides a recent example of how changes in
For reference only

legislation or the market can impact on an insurer’s reserves. The change meant that the
reserves of many insurers and their reinsurers suddenly became inadequate. For more on
the effect of the change in the discount rate, see The discount rate on page 4/13.
Consider this…
What are the consequences of an insurer having insufficient reserves?
Chapter 7
Exceptional losses
Certain exceptionally large claims may distort the claims development pattern. When
projecting reserves, any anomalies should be removed from the statistics and analysed
separately. This can arise from one event (for example the 9/11 attack on the World Trade
Center) or from an accumulation (for example the storm losses in the UK in November and
December 2015).
C Leakage
We have seen how important it is to accurately estimate and reserve for claims. It is just as
important, then, to ensure that claims handlers deal with claims properly and do not make
overpayments.
We have seen that there are a number of stages in the claims process where the claims
handler has to make decisions concerning:
• the validity of the claim, i.e. whether it falls within the scope of the contract; and
• the size of the claim payment if it is a valid claim.
Within this process, there is scope for paying more for the claim than is justified by the
details and circumstances of the loss. This potential overpayment is referred to as leakage
and can be defined as ‘avoidable overspend in settlement’.
Although the amount of overpayment is viewed by many as a measure of the competence of
a claims department, it is also subjective, because it requires the actions taken by the claims
handler to be assessed and constructively criticised by a reviewer who will have the benefit
of hindsight. It is also not a complete measure of competence since it does not reveal
anything about the level of skill invested in negotiating the settlement or the quality of service
provided. Despite these issues, a review of overpayment is a useful tool in the development
of a more efficient claims handling process, since it is likely to identify areas for improvement
and is a valuable training aid.
C1 So, how can I spot leakage?

Identifying overpayment requires a review of the handling of a claim through its various
stages. This can be conducted by using an insurer’s internal resources or by employing the
services of external consultants to perform a review on its behalf. Some insurers may not
have specialist staff able to undertake the necessary work without support, or may prefer the
independent view offered by a consultant.
To quantify overpayment, the reviewer has to judge what should have been paid to make an
acceptable payment according to the strict policy terms and then compare that with what
was actually paid.
Example 7.6
XYZ Insurance Company Limited pays a valid claim in the sum of £500. On review, it is
found that only £100 should have been paid. Leakage = £400.
C2 How can I reduce leakage?

Once leakage has been identified, steps should be taken to reduce it. Emphasis must be put
on reducing claim payments in particular, rather than expenses in general. In addition,
management controls should encompass all claims rather than just large losses.
It is important to note that leakage reviews happen after-the-fact, and as a result it is very
unlikely that specific leakages identified can be recovered by the insurer. The process of
doing leakage reviews is to prevent similar instance happening in the future.
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Employee skills
Over the past two decades, research has identified a growing lack of technical knowledge on
the part of claims handlers globally. To rectify this situation, employees must be trained to the
appropriate level and be professionally qualified. Internal and external training courses
should be considered, to include:
• legal training;
Chapter 7
• technical insurance knowledge;
• CII qualifications;
• awareness of market practice; and
• knowledge of best practice.
Supervision of staff
Often, senior staff will review a claims handler’s work as part of the claims review procedure.
This will stop the making of the more obvious mistakes, but it depends, in turn, upon the
supervisors themselves possessing adequate levels of skill.
Technology
Application of better technology and tools with increased, in-built controls can support the
avoidance of leakage.
C2A Quantifying leakage
Quantifying leakage is not an exact science due to the subjective nature of the subject.
Leakage can be categorised as either hard or soft leakage.
Hard Leakage Soft Leakage
Relatively easy to identify Relatively difficult to identify

e.g. failure to apply an excess or deductible e.g. failure to negotiate third-party costs adequately
e.g. failure to make an appropriate adjustment for wear
and tear
Consider this…
Can you think of five practical examples of each type of leakage?
It can be very difficult to calculate soft leakage, as we can see if we think of a scenario where
a recovery has not been pursued. The leakage is the full amount of the anticipated recovery.
However, the claims handler may argue that we do not know if we would have been
successful in the recovery; perhaps the other party would have made counter arguments or
may have been impossible to trace. Insurers generally have a standard approach to such
issues and often record a percentage of possible leakage for such claims to give a likely
leakage amount from a book of business. Soft leakage is more subjective than hard leakage.
Leakage audits are usually only carried out on a sample of files. The sample is usually
selected as a proportion of closed files.
Example 7.7
An insurer has 1,000 closed claim files. A 10% sample of these, i.e. 100, is audited and
leakage of £500 is found. This is applied to the whole account by multiplying the leakage
found by 10. In this case leakage is £5,000. If the total payout in respect of the 1,000 files
is £100,000 then the leakage ratio is:
£ 5, 000
= 5% across the entire account
£ 100, 000
There is a potential for making a real difference to the account through targeting more
specific areas. For example, let us take a simple situation where there is a high incidence of
paying out more than the market value on total losses in a motor account. Options to
improve the situation might be to provide training to the claims handlers, or perhaps motor
For reference only

engineers, to negotiate total loss settlements. Some insurers have started to harness
technology to control claims leakage.
Research exercise
Read the article by IRMI found by using this link: bit.ly/2JKuW3V
Could technology assist your company in identifying, controlling and reducing leakage?
Chapter 7
C3 Industry initiatives to control leakage

There have been a number of industry initiatives looking at the control of leakage. We have
provided a number of key pieces here and you are encouraged to read them.
On the Web
David Tweedy, managing consultant with Albert Risk Management Consultants, has
defined ‘leakage’ and published an article in association with Jack Cuff, owner of Cuff and
Associates, an independent advisory firm that regularly provides claim audit services to
insurers. Their published article showing how the industry is tackling leakage is
available here:
www.claimsjournal.com/news/national/2012/02/15/201087.htm.
On the Web
Robin Reames, business development director at Auto-Rescue Logistics has published an
article in relation to claims involving road damage: Insurance Business: insurers and
brokers wake up – You’re haemorrhaging money with a response from Adam Brown of
TSS, a QuestGates company.
See the full article here: bit.ly/1XQCdCT.
Research exercise
Now you have read these articles, consider the activities discussed that help to quantify
claims leakage. What action can you take within your organisation to reduce leakage as a
result?
D Claims transformation
Many organisations are looking at the transformation of their claims offering. The ability to
offer an excellent service to customers is seen as a key competitive advantage, because the
claims process is the ‘moment of truth’ in the customer’s experience.
EY published a guide in 2014 called Claims Transformation – EY claims capability. This
suggests that claims transformation is a global trend. The report concludes that claims
transformation is likely to be the focus of innovation and investment in coming years.
Investment will be primarily in the field of IT solutions to buy and customise. The potential
complexity of claims will result in more sophisticated management systems and will require
integrated, multi-channel, flexible and rules-based processes.
According to EY's recent Smart Claims white paper, a number of trends are impacting claims
organisations:
• Changes in customer expectations.
• Advances in technology and data.
• Continuing regulation.
• Changing nature of underlying risks.
• Changes to the claims workforce.
• Continued cost and price pressures.
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• Search for genuine competitive advantage.
• Focus on the 'next steps' for insurers' transformation programmes.
If we just look at one of these – technology and data advances – we can see that there is a
great deal of data available, from both new and old sources. If analysed correctly, this data
can provide the insurer with more knowledge about its customers, which can then be used to
improve its offering to them. Unfortunately, the existing systems of many insurers are unable
Chapter 7
to handle all this data in a useful way.
As a result of these challenges, insurers are looking at more sophisticated technology. By
combining it with a re-design of their core processes and a more entrepreneurial approach
they are seeking to offer excellent customer service, providing a competitive advantage and
increasing the success of the organisation.
Research exercise
Read EY’s report here: bit.ly/2OuR6Ic.
Are there ways in which your organisation is changing to meet the global challenges? Are
there ways in which it should be changing?
Critical reflection
What are the benefits and disadvantages of outsourcing compared with handling claims
in house?
Which is more cost effective? Will you use experienced, expensive staff to ensure
efficient, accurate claims handling or use cheaper, less experienced staff, despite the risks
of inefficiency and increased leakage?
E Scenario 7.1: Leakage

E1 Question
XYZ Insurance Company insures 'Blogs' in respect of their motor fleet, which is subject to an
excess of £250 in respect of third party property damage only. A 'Blogs' driver accidentally
damages a third party vehicle, which cost £10,000 new five years ago, but is now only worth
£5,000. The third party chooses to replace the damaged vehicle with a new one costing
£12,000 today and he sends XYZ the invoice in the sum of £12,000, which is paid
immediately in full.
Work out how much XYZ should have paid and calculate the extent of any leakage.
E2 How to approach your answer

Aim
This scenario aims to measure your understanding of how leakage occurs.
• a calculation that takes account of the circumstances of the case.
• the meaning of indemnity and excesses.
F Scenario 7.2: Expense ratio

F1 Question
You are the claims manager of a large composite insurer employing several hundred people
For reference only

in the claims department. Your board has evidence that there is a reducing pool of technical
claims talent in the market and asks you how you will address this. List the areas that you
would cover.

Aim
Chapter 7
This scenario aims to test your understanding of the balance between controlling operating
costs and controlling leakage and the quality of the claims experience for the policyholder.
• staff training and qualifications;
• recruitment;
• use of management information;
• learning from competitors;
• HR policies; and
• geographical location.
G Scenario 7.3: Estimating

G1 Question
XYZ Insurance Company is about to start writing medical malpractice insurance for the first
time and has no experience of this type of business or territory. Your underwriter gives you,
the claims manager, the following data:
U/W Year Policies Sold No of Claims Claims Cost
–3 100 11 £23,221
–2 200 19 £39,949
–1 250 25 £55,322
Current 300 29 £67,142
Your underwriter expects to underwrite 500 policies in the first year and asks for your help in
predicting the number of claims and the claims cost. Explain how you would help him.

Aim
This scenario aims to test your understanding of estimating claims from data.
• a discussion as to the nature of the data provided;
• an evaluation of what that data reveals;
For reference only

• use of an appropriate way of estimating the cost of claims; and
• your conclusions.
Chapter 7
Self-test questions
1. What is likely to be considered by an auditor reviewing a claims handler's caseload
when specifically investigating leakage?
2. Why is there scope for leakage when working to the Civil Procedure Rules?
3. As the claims manager for a motor syndicate, which statistical reserving methods are
you likely to utilise in order to ensure that your company reserves adequately?
Explain your reasoning.
4. What are the operating costs of a claims department?
5. Give ten examples of an insurance company's internal costs.
6. Give ten examples of overheads that are likely to be shared by income generating
branches of an insurer.
7. What is the difference between an IBNR reserve and an IBNER reserve?
8. What type of reserve is established to cater for an aggregation of claims arising from
one major event?
9. What is likely to happen to an insurer whose claims liabilities exceed its assets?
For reference only

Chapter 7
Appendix 1
Appendix 1
Airmic Statement of
Principles regarding
insurers’ reservation
of rights
STATEMENT OF PRINCIPLES REGARDING INSURERS’

RESERVATION OF RIGHTS
Introduction
AIRMIC and various Insurers have reviewed the question of when and how a reservation of rights (“ROR”) should be used.
This review has been undertaken in a spirit of partnership and the aspiration is that all stakeholders can work together to
achieve a pragmatic approach that is fair to all. There are circumstances in which a ROR is necessary in order to protect the
For reference only

parties’ positions, but care needs to be taken to ensure that it is not over-used and that when it is considered necessary a
dialogue takes place so that the parties are fully aware of the reasons.
This Statement of Principles is designed to address those issues in respect of policies issued in England or Wales and which
are subject to English law and the jurisdiction of England and Wales. Generally Insurers will not reserve their rights in the
early days of a claim; will investigate possible common ground with the Insured during that period; and in the event that a
ROR is necessary, will speak to the insured about it. At the same time it is expected that an Insured will continue to respond
positively to requests for information and documentation made by the Insurer should a ROR be raised.
Statement of Principles
This Statement of Principles applies on notification of a potential loss or series of potential losses
under a contract of insurance reasonably anticipated to exceed £2.5m (“the Potential Loss”) from the date of first notification
of the Potential Loss to the Insurer for a period of 90 days (“the Period”).
1) The Insurer will not pre-emptively initiate any formal dispute resolution proceedings, including but not limited to any court
or arbitration proceedings, nor issue any form of ROR under any relevant contract of insurance arising from the Potential
Loss.
2) As soon as is practical following the notification of a Potential Loss, the Insurer and/or its representatives will
communicate with the Insured and the Broker to discuss the following on a without prejudice basis:-
a) How the contract of insurance may respond to the Potential Loss;
b) What information is required to support the Potential Loss;
c) The timetable for resolution of any potential issues regarding coverage.
3) In the event that it is not possible during the Period to agree those matters set out in 2(a), 2(b) and 2(c) above the Insurer
will proceed without reference to the Statement of Principles. However, if the Insurer and Insured agree, the Period may
be extended with regard to a particular Potential Loss.
4) The Statement of Principles will apply only to a policy which is issued in England and Wales and which is subject to both
English law and the jurisdiction of England and Wales.
5) In the event of a Potential Loss arising in any territory outside of England and Wales, the Statement of Principles will
apply only if it does not prejudice the Insurers’ rights under the prevailing local law.
6) It is open to the Insurer to conclude at its absolute discretion that the Statement of Principles is not appropriate for a
particular Potential Loss. In the event that an Insurer does so conclude none of the provisions of this Statement of
Principles will apply to that Potential Loss. In the event that the Insurer does reach such a conclusion in respect of a
particular Potential Loss, it will, however, explain the position to the Insured before imposing a ROR within the Period.
7) Any Insurer which indicates that it intends to commit to the Statement of Principles will do so on its own behalf and that
indication will not affect the interests of follow or co-Insurers of that Insurer in any way.
8) An indication of a commitment to this Statement of Principles by an Insurer is not to be taken in any way as an indication
that any contract of insurance is affirmed by that Insurer.
For reference only
Appendix 2
Appendix 2
Benchmarking data
The CII wishes to thank MPCI Benchmarking for providing this theoretical data. MPCI
Benchmarking runs a confidential benchmarking study of the claims performance of motor
and household insurers using data provided by the participating insurers to pre-agreed
definitions.
4.2. AD ACPC (net) ex nil claims M3138
1,600
1,400
1,200
£
1000
800
600
For reference only

2018H2 2019H1 2019H2 2020H1 2020H2 2021H1 2021H2 2022H1
Avg LQ UQ Low High B_Avg D_Avg
3.7. Theft Frequency M3099
0.5
0.4
%
0.3
0.2
0.1
2018H2 2019H1 2019H2 2020H1 2020H2 2021H1 2021H2 2022H1

A2/2 820/January 2023 Advanced claims
10.1. Ops Staff Productivity – Claims perOps FTE (3000)
600
Appendix 2
500
400
No.
300
200
100
0
2018H2 2019H1 2019H2 2020H1 2020H2 2021H1 2021H2 2022H1
For reference only

Appendix 3
Cat bond index shows
market recovery after
Appendix 3
selling-pressure
A newly developed set of catastrophe bond fund indices from Swiss asset manager
Plenum Investments clearly shows how, in general, cat bond funds and returns have
recovered back to June levels, so gaining back most of the value that had been lost due to
high selling-pressure in the marketplace.
Plenum UCITS Catastrophe Bond Index – Live indices
100.75
100.5
100.25
Index value
100
For reference only

99.75
99.5
99.25
.0 21
.0 22
.0 22
.0 22
22
22
.0 22
2
22
2
22
22
2
11 202
20 202
17 202
15 202
29 202
12 202
25 202
14 .20
28 .20
20
20
20
20
20
20
2
1.
2.
3.
4.
4.
5.
5.
6.
6.
7.
7.
7.
8.
2.
3.
2
1
.1
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
31
25
08
22
06
03
01
11
Master Average USD High Risk Average USD

Low Risk Average USD Master Capital USD
The Plenum CAT Bond UCITS Fund Indices are a set of indices designed to reflect the
returns of all catastrophe bond funds available in the market in UCITS format.
Source: ARTEMIS, www.Artemis.bm, September 2022.
For reference only
i
Chapter 1
self-test answers
1 The claims environment can be categorised as:
• Internal: the insurer's own claims department, including the claims management
strategy, organisational design and structure and communication with internal
departments such as underwriting, sales and actuaries.
• External: this is made up of businesses outside the insurer which attract and retain
business and help in servicing claims, e.g. brokers, surveyors, loss adjusters and
lawyers. It also includes the insurer's customers and their changing needs and
desires.
2 Businesses require an organisational structure for them to meet their stated corporate
objectives efficiently.
3 The following departments are likely to be included:
• underwriting;
• claim investigation and payment;
• sales and marketing; and
• investment.
4 A functional structure benefits an insurer because:
• employees can specialise in the type of work they carry out because all those
employed in the same or related activity form one department;
For reference only

• a larger unit may be more cost effective due to the standardisation of the
processes used;
• it ensures that the required level of expertise is applied even for complex losses;
and
• it ensures that access to records and underwriting staff is easy, which can increase
the level of background information available and co-operation with the
underwriting staff.
5 The main functions of the claims department are to:
• deal quickly and fairly with all claims submitted;
• be able to distinguish between valid and invalid claims; and
• to operate at minimum expense.
6 The claims department has the following roles:
• Strategic: to provide the insurer with a high quality of service so that it can
differentiate itself from its competitors.
• Cost-monitoring: to ensure that claim payments are contained within the
parameters of the policy.
• Service: to meet or exceed customers' expectations regarding the quality of
service, with particular regard to the speed, manner and economic efficiency of
service.
• Management: to meet or exceed the standards of service set and to operate within
budget.
The claims department must operate in a way which complements the corporate
objectives at all times.
7 The underwriter could:
• Change the class of business;
• Change certain terms and conditions such as:
– the number and/or the wording of the exclusions;
– the excess;
– introducing an inner aggregate deductible;
ii 820/January 2023 Advanced claims
– the type of cover offered, e.g. from a losses-occurring to a claims-made basis or

vice versa;
– the length of period on cover; and/or
• Increase the legal severity imposed, e.g. the notification of loss condition may be
changed to ‘condition precedent’.
8 Balance sheet
This shows the financial position of the company at a point in time, normally the
financial year end. It shows the assets and liabilities of the company. The technical
reserves, including premium reserves (outstanding claims and IBNR), are in the
liability section.
Profit and loss account
This shows the transactions in the financial year. It is split between the technical
account (insurance transactions) and the general account (non-insurance
transactions). The technical account includes premiums, claims, reinsurance
recoveries and changes in the claims reserve. This also shows the profit or loss for the
year from which the shareholders are paid their dividend.
9 Claims co-operation clause
Reinsurers must be promptly notified of losses that may involve the reinsurer. The
reinsured must then co-operate with the reinsurer in handling the claim.
Claims control clause
The reinsured must notify the reinsurer promptly of losses that may involve them and
allow the reinsurer to control the claim.
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iii
Chapter 2
self-test answers
1 A claims manager should handle those claims that require:
• a higher level of technical skill;
• a high level of seniority; and
• an increased amount of experience.
2 A claim might be escalated because:
• the amount involved exceeds the authority of the claims handler;
• the complexity involved exceeds the authority of the claims handler;
• it may be particularly large or be one of an aggregate of claims that the board will
want to know about; and
• it exceeds the insurer's retention or has some aspect that means it must be
reported to reinsurers.
3 It helps the claims manager to manage the application and effectiveness of the claims
process and to understand their department's performance in key areas. They can use
this information to improve the effectiveness of their department in meeting the
corporate objectives.
4 The company that outsourced the function retains responsibility for the outsourcer's
compliance with ICOBS.
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iv 820/January 2023 Advanced claims
Chapter 3
self-test answers
1 A consumer is any natural person who is acting for purposes that are outside their
trade or profession, whereas a commercial customer is a customer who is not a
consumer.
2 A rejection of a consumer policyholder’s claim is unreasonable, except where there is
evidence of fraud, if it is for:
• non-disclosure of a fact material to the risk which the policyholder could not
reasonably be expected to have disclosed; or
• non-negligent misrepresentation of a fact material to the risk; or
• breach of warranty or condition unless the circumstances of the claim are
connected to the breach and unless (for a pure protection contract):
– under a ‘life of another’ contract, the warranty relates to a statement of fact
concerning the life to be assured and, if the statement had been made by the
life to be assured under an ‘own life’ contract, the insurer could have rejected
the claim under this rule; or
– the warranty is material to the risk and was drawn to the customer’s attention
before the conclusion of the contract.
3 Customers desire:
• a simplified insurance purchasing process;
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• clear policy wordings;
• an elimination of errors;
• clear explanations of the required action in the event of a claim, i.e. good
communication;
• assurance that a fair settlement will occur;
• to know that a fast claims service exists;
• an insurance representative they can trust;
• an insurance representative who can return phone calls quickly; and
• an insurance representative who can convey what options are available and make
coverage changes easily as required.
4 The FOS handles complaints from:
• consumers;
• micro enterprises with fewer than ten employees and having a turnover or balance
sheet total of no more than €2m;
• charities with an annual income of less than £6.5m;
• trustees of trusts with a net asset value of less than £5m;
• consumer buy-to-let (CBTL) consumers;
• small businesses with an annual turnover of less than £6.5m and fewer than 50
employees or a balance sheet total of less than £5m; or
• guarantors.
5 This Statement of Principles applies upon notification of a potential loss or series of
potential losses under a contract of insurance that is reasonably anticipated to exceed
£2.5m, from the date of first notification of the potential loss to the insurer for a period
of 90 days.
6 In the event of a potential loss arising in any territory outside of England and Wales,
including Russia, the Statement of Principles will apply only if it does not prejudice the
insurers' rights under the prevailing local law.
v
7 • Expert appraisal: an expert in the field in question provides an opinion, which the
parties may or may not accept in whole or in part. The opinion may assist the
parties in resolving the dispute but it is not binding.
• Expert determination: the process is similar but the expert's opinion is binding on
both parties.
8 It should pay valid claims promptly if there is no valid reason to contest. The insurer
should also ensure that they treat all policyholders fairly throughout the process of
investigating and assessing claims, both in respect of the manner of investigation and
assessment and in the decision as to whether or not to pay. The insurer is required to
refrain from using its financial might or the policyholder's weaker financial stature to
extract a settlement favourable to itself. At all times it must act reasonably.
9 When Lloyd's receives details of the complaint it passes it to the Lloyd's syndicate
involved for its response. Lloyd's allows the syndicate 14 days in which to review the
matter and reply. Most of the complaints handled are resolved in this way.
If the complaint remains unresolved, Lloyd's asks to be kept advised so that they can
consider what steps they can take next to help. Usually, this involves Lloyd's obtaining
files from the Lloyd's syndicate and conducting an independent investigation.
Once the investigation is complete, Lloyd's provides its conclusions in a final response
letter, which they aim to do within eight weeks, in accordance with FCA rules. If they
are unable to complete the investigation within this timescale, Lloyd's should write to
the complainant setting out why and advising when they expect to finalise matters.
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vi 820/January 2023 Advanced claims
Chapter 4
self-test answers
1 The provisions of the Personal Injury Pre-Action Protocol are as follows.
• Immediately the claimant has sufficient information available to sustain a realistic
claim, they must send two letters of claim to the potential defendant (this claim
does not need to address the quantum issues in detail).
• The defendant must acknowledge this within 21 days of posting, identifying any
relevant insurer.
• Three months from the date of acknowledgement, the defendant or insurers
must either:
– admit liability; or
– deny liability, giving reasons; and
– give standard disclosure of relevant documents that substantiate their reasons
for denying the claim.
2 The CPR is underpinned by the 'overriding objective' to deal with the case 'justly' so
that both the court, and court users, ensure that:
• the parties are on equal footing;
• expense is kept to a minimum;
• the case is dealt with in a way which is 'proportionate';
For reference only

• the claim is dealt with expeditiously and fairly; and
• the claim receives its fair share of the court's resources.
The court is also given wide-ranging powers of active case management, which
allow it to:
• encourage co-operation between the parties;
• identify the issues at an early stage and decide which need full investigation and
which can be disposed of quickly;
• encourage the use of alternative dispute resolution methods if appropriate; and
• fix timetables, controlling the progress of the case and giving directions to ensure
that the claim proceeds quickly and efficiently.
The court may make orders on its own initiative either with or without the parties being
present.
3 If a false statement is made without an honest belief in its truth, proceedings for
contempt of court may be brought against the person who signed the document.
4 The main features are:
• no oral or written expert evidence without permission of the court;
• an informal hearing;
• generally only fixed costs will be allowed on issuing the claim but the court may
order further costs if a party has behaved unreasonably;
• fixed amounts are payable for witness expenses and expert's fees; and
• there is a limited right of appeal.
5 The advantages of ADR are that it can be quicker and cheaper than litigation. It is very
flexible and is likely to be less destructive than court proceedings on the relationship
between the parties, who may have to continue a business relationship after the
dispute is resolved.
The disadvantages of ADR are that either party may withdraw at any stage and the
awards are not enforceable in the same way as a court judgment. There is a risk that
the parties may resolve the dispute without showing all the facts and it is not
appropriate in certain cases, for example if the client needs an injunction or a ruling on
a point of law.
vii
6 The main reasons for the increase in outsourcing are:

• the perceived cost benefits; and
• the access it offers to a wider skills base.
For reference only

viii 820/January 2023 Advanced claims
Chapter 5
self-test answers
1 The effect of such a devastating single loss event is wide-ranging and includes the:
• huge cost of the claims to each of the insurance companies involved;
• short-term and long-term workload on the staff involved in the claims process, both
loss adjusters and insurers' claims personnel; and
• large number of individual properties and victims involved.
2 The claims department's normal systems and methods of operating may prove
inadequate in the:
• claims personnel required;
• speed of settlement expected;
• computer system's capability;
• managerial organisational requirements; and
• number of loss adjusters required.
3 An insurer's catastrophe contingency plan should cover the following broad areas:
• pre-assigned duties and claims teams;
• claims personnel from other areas to be asked to assist;
• work on a rotating basis from a predetermined list; and
• independent adjusters to be called in, possibly with pre-agreed delegated
For reference only

authority limits.
4 Insurers use catastrophe modelling tools to determine:
• the level of catastrophe they should prudently underwrite, based on their capital
base; and
• the level of reinsurance required to protect companies from excessive catastrophe
exposures and maintain solvency.
5 The three types of event are:
• Expected losses: events that could reasonably be expected to occur within the
next twelve months, for which a budget should be held.
• Unexpected losses: events that are unlikely and so are not budgeted for and for
which economic capital is held. Stress tests and scenario analysis focus on the
measurement and quantification of unexpected losses and look at related
reputational damage that may arise.
• Extreme losses: events that are very remote in likelihood (e.g. one in a 1,000 year
events) for which capital requirements cannot be meaningfully calculated and
capital is therefore not held. In the case of these events the state of preparedness
to respond, rather than the amount of capital buffer, is more important, for example,
by means of business continuity planning.
6 • Impact on the insurer: reputation, high reserves.
• Impact on the insured: distress, financial impact.
• Impact on both: relationship/renewal terms.
7 a. Benefits for your company:
• Customer loyalty increases due to the efficiency and quality of the claims service.
• There are marketing advantages in being able to offer a 24-hour service providing
advice and assistance to policyholders.
• Increased control over the cost of claims. The claim will be notified sooner, often
within 24 hours, allowing the insurer to dictate:
– who should do the repair work (the recommended tradesperson who is trusted
by the insurer);
ix
– how much the repairs will cost (the tradesperson will have a formal contract with
the insurer and carry out the work to a good standard at a reasonable cost);
– whether the goods should be replaced by the insurer's replacement goods
supplier (again, discounts to the insurer will be available since a large volume of
goods is bought each year); and
– whether the insured property damage needs replacement or could, in fact, be
repaired (which is often cheaper).
• Fewer exaggerated claims. People find it harder to embellish a claim when talking
directly to the claims handler and do not have so much time to invent additional
damaged or stolen items.
b. Benefits for your policyholders:
• Every policyholder has immediate access to the service, whatever time of day,
whatever day of the year and wherever they are located.
• The inconvenience is taken out of the process whether it is a claim, potential claim
or notification, making it easy for the policyholder. Helpline staff are trained to
advise customers on what to do next.
• The quality of repair and replacement work is of a high standard as the
recommended tradespersons are vetted for their skills before selection by the
insurer and enter into formal agreements regarding availability and turnout times.
• Claims are generally settled quickly.
For reference only

x 820/January 2023 Advanced claims
Chapter 6
self-test answers
1 • Data is the 'raw material', which is processed and turned into information. In other
words, data is collected but unprocessed information.
• Information is data, processed in such a way as to be of some meaning to its
recipient.
2 By using the word 'system' here we are referring to IT systems used in the claims
management process. We can identify two types of customer:
• the insurance company itself is a customer of the supplier of the IT system
(whether an internal department or not); and
• the general public and other businesses/organisations that are customers of the
insurance company.
3 Developments include things such as:
• the introduction of digital telephone exchanges;
• the development in computing power of the personal computer (PC), the laptop,
smartphones and tablets;
• the growth in use of the internet, with some service providers making copies of
their claim files available to their clients online and insurers promoting their
own apps;
• development in communications facilitating the growth of huge online systems;
For reference only

• increased capabilities of computer systems;
• increased use of electronic communications, both internally and externally;
• greatly increased transmission speeds;
• general reduction in the price of computer technology;
• increased use and application of computers and their paraphernalia;
• telematics;
• blockchain; and
• the use of ECF II in the Lloyd's and London markets.
You may have thought of others.
4 The basic elements recorded on all claims include:
• policy number and claim reference;
• claim event details and dates;
• claim estimates;
• claim payments; and
• outstanding loss reserves.
This list is not exhaustive; you may have thought of others.
5 These conditions can be tailor-made to the reinsurance contract in question, or
standard clauses can be used. Two of the most common clauses used are:
• the claims control clause; and
• the claims co-operation clause.
These explain in detail the claims notification and handling arrangements. They place
various duties upon the cedant to involve the reinsurer at different stages of the claim
and within certain pre-agreed periods. A claims control clause allows the reinsurer to
take over the handling and control of the claim in question. On the other hand, a
claims co-operation clause leaves the handling of the claim to the cedant who agrees
to co-operate with the reinsurer in accordance with their wishes.
xi
6 The Insurance Act 2015 states that the remedies available to insurers where a
policyholder has committed fraud are:
• they are not liable to pay the fraudulent claim;
• they may recover any sums paid to the insured in respect of the fraudulent claim;
and
• may, by notice, treat the policy as terminated with effect from the fraudulent act and
retain all premiums paid by the policyholder (previous valid claims are not
affected).
7 The following examples are the most common circumstances in which the broker or
agent may be fraudulent:
• the agent fraudulently claims a binding authority that does not exist;
• fraudulent issue of policies or certificates; and
• failure to issue a cover note at the commencement of a risk and the subsequent
'back-dating' of cover. This may occur in innocent circumstances where the broker
forgets to issue a continuation cover note. Upon discovery, the broker may attempt
to back-date cover to the date when it should have been effected, to avoid
discovery.
For reference only

xii 820/January 2023 Advanced claims
Chapter 7
self-test answers
1 • Does the cause of loss fall within the scope of the policy?
• Does the date of loss fall within the policy effective dates?
• Was the claim notified within the time limit stipulated in the policy wording?
• Is there sufficient proof of the extent of the loss?
• Has the policy excess been properly applied?
• Has the effect of under-insurance been calculated and applied?
• Have all recoveries been made?
• Has subrogation taken place?
• Has all contribution been taken into account?
• Has depreciation been taken into account?
• Is it a repeat claim?
• Has the damage been inspected?
• Was the settlement appropriate?
• Has the HM Sanctions check been made?
2 • The deadlines may cause the proper examination of complex claims issues to be
overlooked.
• The pre-action protocols encourage the settlement of claims as the main priority.
For reference only

• The procedures reduce the possibility of correction of errors/oversights before final
settlement. Departing from the rules may result in penalties being imposed by
the courts.
3 The methods chosen could be the:
• loss development factor method (LDF method) – because there is plenty of
historical data;
• loss ratio method – because estimation of ultimate losses is easier where there is
claims volume; and
• Bornhuetter–Ferguson technique (B–F method) – for a combination of the two
reasons above.
4 The operating costs of a claims department are:
• claims department costs: such as claims staff salaries;
• allocated company costs: costs incurred running the insurance company as a
whole such as IT, office space, and other departmental staff; and
• external costs: i.e. service suppliers' costs.
xiii
5 Internal costs include:

• staff;
• salaries;
• expenses and entertainment;
• employer's National Insurance contributions;
• taxes;
• cleaning and sanitation;
• maintaining the building and machinery (photocopiers, air conditioning,
heating, etc.);
• gas and electricity;
• recycling facilities;
• water;
• rent;
• stationery;
• computer hardware;
• computer software; and
• telecommunications.
6 Many cross over with the above but the additional are plausible:
• travel costs;
• training;
• subsistence;
• entertainment;
• marketing;
For reference only

• printing;
• legal fees;
• human resources;
• server maintenance;
• hotel costs; and
• IT helpdesk.
7 An IBNR reserve covers claims that have been incurred but not yet reported to the
insurer. This reserve is calculated by using statistical techniques based upon the
insurer's past experience of claims, as well as other information.
Conversely, an IBNER reserve covers any shortfalls in the provision for outstanding
claims reserves. These can occur where the company suffers late notification of
reserves, where amounts reported are understated or where the insurer has
insufficient information on which to assess adequate reserves.
8 A catastrophe reserve.
9 The insurer is technically insolvent and should enter into administration.
For reference only
xv
Cases
A O
AC Ward and Sons Limited v. Catlin (Five) Owens v. Noble (2010), 6I6A
Limited and Others (2009), 3C3B
Adams v. Confederation Life Assurance
Company (1994), 3D3
P
AIG Europe Limited v. OC320301 LLP Paine v. SJO Catlin and Others (2004), 2D2
(formerly The International Law Pan Atlantic Insurance Co. v. Pine Top
Partnership LLP) & The Law Society Insurance Co. (1994), 3B3F, 3C1B
(Intervener) (2017), 1F4B
AIG Europe v. Woodman (2017), 1F4B
Amaprop Canada Inc v. Guardian Insurance R
Company of Canada (2000), 3D3
Royal and Sun Alliance Insurance Plc v.
Anders and Kern UK Limited v. CGU
Dornoch Ltd (2004), 1F4A
Insurance Plc (2007), 3C3B
B S
Scott v. Copenhagen Re (2003), 1F4B
Beninger v. Kingsway General Insurance
Snydergeneral v. Century Indemnity Co
Company (2000), 3D3
(1995), 3D2
Berger and Light Diffusers Pty Ltd v. Pollock
Sprung v. Royal Insurance (UK) Ltd (1999),
(1973), 6I6A
3C1C
Brit Syndicates Ltd and Others v. Italaudit
Stegenga v. Economic Mutual Insurance
SpA (in liquidation) (GT Italy) and Grant
Company (2019), 3D3
Thornton International (GTI) (2006), 3C3B
Synergy Health (UK) Limited v. CGU
Insurance Plc (T/A Norwich Union) and
C
For reference only

Others (2010), 3C3B
Chaplin v. Sun Life Assurance Company

(2004), 3D3 T
Cross v. Canada Life Assurance Co (2002),
Thornber v. Insurance Corporation of British
3D3
Columbia (2003), 3D3
D
V
Delmonte v. State Farm Fire and Casualty
Versloot Dredging BV And Another
(1999), 3D2
(Appellants) v. HDI Gerling Industrie
Dhami v. Abengoza (2001), 3D3
Versicherung AG and Others (2016), 6I8
Doheny and Others v. New India Assurance
Co Ltd and Others (2004), 2D2
W
F Warren and Maryann Andrews v. Merchants
Mutual Insurance Company (2016), 3D4
Flexsys America L.P v. XL Insurance
Wells v. Wells (1999), 4B9
Company Limited (2009), 3C3B
Whiten v. Pilot Insurance Company (2002),
3D3
H
Harding v. Wealands (2006), 6H1
Haywood v. Zurich Insurance Company Plc
(2016), 6I8
K
Kosmar Villa Holidays v. The Trustees of
Syndicate 1243 (2008), 3C2
N
Niramax Group Ltd v. Zurich Insurance Plc
(2020), 3C3B
xvi 820/January 2023 Advanced claims
For reference only

xvii
Legislation
B U
Bank of England and Financial Services Act UK General Data Protection Regulation (UK
2016, 1F3A, 2E1D GDPR), 6I5B, 6J1
C
Civil Liability Act 2018, 4B9
Companies Act 2006, 1F3B
Consumer Insurance (Disclosure and
Representations) Act 2012 (CIDRA), 3C1A
Consumer Rights Act 2015, 2E2A
D
Damages Act 1996, 4B9, 7B3C
Data Protection Act 1998 (DPA 1998), 6I5B
Data Protection Act 2018 (DPA 2018), 6I5B
E
Enterprise Act 2016, 2E2A, 3C1C, 6H1, 7A4
EU General Data Protection Regulation (EU
GDPR), 6J2
For reference only

Financial Services Act 2012, 1F3A, 2E
Fourth EU Motor Directive, 6I5A
Fraud Act 2006, 6I8
I
Insurance Accounting Regulations 1993,
1F3B
Insurance Act 2015 (IA 2015), 2E2A, 3C1B,
3C1C, 6I3
Insurance Companies (Reserves)
Regulations 1996, 7B2
L
Legal Aid, Sentencing and Punishment of
Offenders Act 2012 (LASPO), 4B8, 6I6B
Limitation Act 1980, 3C1C
M
Marine Insurance Act 1906, 3C1B
R
Rehabilitation of Offenders Act 1974, 6I6B
T
Terrorism (United Nations Measures) Order
2006, 4A4
Theft Act 1978, 6I8
xviii 820/January 2023 Advanced claims
For reference only

xix
Index
A claims centres (continued)
cost of, 5A4
accumulations, 1F4B opening times, 5A4B
actuaries, 1F3, 6D1 processes, 5A3C
interaction with, 6D structure of, 5A2
affirming the contract, 6I6C technology systems, 5A3B
agile working, 1C1B telephony, 5A3A
Airmic Statement of Principles regarding claims co-operation clause, 1F4A
insurers’ reservation of rights, 3C2A claims conditions, 6F3A
aligning promised service to that on offer, claims control clause, 1F4A
3A4A claims department
allocation, 4B1 cost of, 7A1
Alternative Dispute Resolution (ADR), 3C3A, effect of catastrophe on, 5B4
4B7 reinsurer’s, 6F3
analysing catastrophe risk, 5B1 response to catastrophe, 5B4B
annual accounting, 7B1A why should it reserve, 7B1
annual report and accounts, 1F3B, 7B1B within an insurer, 1D
Art Loss Register, 6I5A claims environment, 1A
artificial intelligence, 6C2A claims function
authorities, 2B, 2B2 how much to outsource, 4C2
average cost per claim, 7B3B outsourcing, 4C4
claims handling expenses, provision for, 7B2
claims handling operation, 4A
B claims handling procedures
bad faith, 3D and CPR, 4B, 4B2
duty to avoid, 3D3 design and implementation, 4A1
balance sheet, 1F3B claims management, 2A5
For reference only

basis of the contract clause, 3C1A cost of, 7A
benchmarking, 7B3B key issues, 4B1
bookslip, 6F3A claims manager’s role, 2A
Bornhuetter-Ferguson technique, 7B3B claims not an isolated function, 1F
breach of contract, 3C claims notification, 4C2A, 6F3A
brokers, 4C3C claims philosophy, 1E, 1E1
budgeting, 1F3C developing a, 1E2
claims process, 1E2A, 1E3
claims service, 3A1
C claims settlement, 4B5, 4C2C
alternative dispute resolution, 4B7
case management by judges, 4B1
claims strategy, 1B
case management conferences, 4B1
claims system
catastrophe
choosing, 6B1D
analysing risk, 5B1
designing a, 6B1
effect on claims department, 5B4
major components of, 6B1B
pre and post lost control, 5B2
claims transformation, 7D
predicting, 5B1A
claims, characteristics of, 6A
response of claims department, 5B4B
climate change, 5B1B
risk financing, 5B3
co-operation, 4B1
catastrophe bond, 5B3
Comité Européen des Assurances (CEA), 6I3A
catastrophe management, 5B
competitive benchmarking, 7A3
catastrophe modelling, 5B5, 5B5A
complaint handling, 3B
catastrophe reserves, 7B2
FOS, 3B3
catastrophe simulation, 5B5A
Lloyd’s, 3B2
centralised databases, 6I5A
procedures, 3B1
using, 6I5B
complaints handling
centralised system, 1C1A
FCA, 3B1A
characteristics of claims, 6A
complexity, 6A2
CIFAs, 6I3A
conduct risk, 2E2D
Civil Procedure Rules (CPR), 4B
delegated authority, 4D1
and claims handling procedures, 4B2
conflicts of interest, 2E4
Claim Form, 4B2B, 4B2C
consultants, 4C3E
claimant, response to, 1E3, 4C2B
contingency plan, 5B4A
Claims and Underwriting Exchange (CUE),
contract of insurance, 2D
6I5A
control, 1F3C
claims centre management, 5A
controlling costs, 7A3
claims centres
corporate objectives, 1B
advantages and disadvantages, 5A5
corporate strategy, 1B
xx 820/January 2023 Advanced claims
cost, 2A2, 4B1 FOS (continued)

controlling, 7A3 significance of, 3B3D
management, 4B8 what it can do, 3B3C
of claims centres, 5A4 fraud
of claims department, 7A1 a crime, 6I8
of claims management, 7A by agent, 6I7
customer insurer’s own checks, 6I5C
establishing expectations, 3A3A insurers’ attitude to, 6I3
expectations, 3A3, 6B1C motivators, 6I3A
experiences, 3A1 Supreme Court decisions, 6I8
journey mapping (CJM), 3A4B why does it matter?, 6I2
retention, 3A5 fraud clauses, 6I3
satisfaction, 3A4 fraud indicators, 6I5
fraudulent claims, 3C1B, 6I
how to spot, 6I5
D impact on industry, 6I2A
Damages Based Agreements, 4B8 front loading, 4B1
data, power of, 6C2
declining cover legitimately, 3D4 G
delegated authority, 4D
conduct risk, 4D1 global impact, 6H2
directions award, 3B3C good faith, 3D1
disclosure, 4B3 goods, 4F3A
discount rate, 4B9 Government sanctions, 4A4
Dispute Resolution - Complaints (DISP)
Sourcebook, 3B3
H
E Hague Protocol, 6H1
hard leakage, 7C2A
employee skills, 7C2 helplines, development of, 5A1
environmental, social and governance (ESG), high volume, low complexity claims, 4C2D
For reference only

1C1C home foreign business, 6F1
equalisation reserves, 7B2
Equipment Register, 6I5A
escalation procedures, 2B3
I
estimating, 7B ICOBS, 2E2A
ethical aspects, 6I1 chapter 8, 2E3
event giving rise to the claim, 1E3 conflicts of interest, 2E4
event-driven work, 2E2C outsourcers and, 2E2A
exceptional losses, 7B3C implied terms, 6H
expense ratio, 7A3 incremental quality, 3A1
expert evidence, 4B4 Incurred But Not Enough Reported (IBNER)
exposure based calculation methodology, reserve, 7B2
7B3B Incurred But Not Reported (IBNR) reserve,
external claims environment, 1A2 7B2
external costs, 7A2 indemnity spend, 7A2B
external service standards, 4A3 individual case estimates, 7B3A
industry initiatives to control leakage, 7C3
F information technology, 6B
injury claims, 7A2B
fair presentation, 3C1B insourcing, 4E
fair treatment of customers, 2E3 Insurance - Conduct of Business Sourcebook,
fast claims track, 4B1, 4B2D See ICOBS
FCA, 1F3A, 2E1B insurer’s defence team, 4F2A
complaints handling, 3B1A insurer’s own fraud checks, 6I5C
risk categories, 2E2B insurers’ claims departments, 4C3B
supervision, 2E2 internal claims environment, 1A1
fee spend, 7A2A internal cost, 7A1A
Financial Conduct Authority, See FCA internal procedures, 4A2
Financial Ombudsman Service, See FOS international claims, 6H
Financial Policy Committee (FPC), 1F3A, 2E1C international interpretation, 6H
Firm Systematic Framework (FSF), 2E2C investigation, 1E3
flexible working patterns, 1C1B ISO 9000, 2C2
foreign claim and litigation, 6H1 ISO 9001 2015, 2C2
FOS, 3B, 3B3 issues and products, 2E2C
fraudulent claims, 3B3F IT, role in claims, 6B1A
influence on approach to claims, 3B3E
insurer, 3B3B
policyholder, 3B3A
xxi
L P
leakage, 7C panel arrangements, 4F
how to reduce, 7C2 Part 20 proceedings, 4B6
how to spot, 7C1 Part 36 offers, 4B5
industry initiatives to control, 7C3 Particulars of Claim, 4B2B
quantifying, 7C2A payments into court, 4B5
legal remedies, 6I6 personal injury discount rate (PIDR), 4B9
legislation, 3C1 personnel, 2A4
letter of claim, 4B2A policy, 3A2
litigation policy interpretation, 2D2
foreign claim, 6H1 policy wordings, 2D1
Litigation, 3C3B policyholder litigation, 3C, 3C3
Lloyd’s positive customer outcomes, 3A6
and claims, 6E2A pre and post catastrophe loss control, 5B2
claims practices and procedures, 2E6B pre-action, 4B2A
complaint procedures at, 3B2 pre-action protocols, 4B1, 4B2A
market, 6E, 6E2 predicting catastrophes, 5B1A
Minimum Standards, 2E6 pricing, 1F1A
reserving, 2E6A procedures at Lloyd’s, 3B2
Lloyd’s Market Association (LMA), 6E2A proceedings, how to commence, 4B2B
London Market, 6E, 6E1 profit and loss account, 1F3B
loss adjusters, 4C3D, 4F1 property claims, 7A2B
loss development factor (LDF method), 7B3B proportional reinsurance, 6F2
loss ratio method, 7B3B protocols, 4B1
low volume, high complexity claims, 4C2D provision for claims handling expenses, 7B2
Prudential Regulation Authority (PRA), 1F3A,
2E1A
M Prudential Regulation Committee (PRC), 1F3A,
management and budgetary control, 1F3C 2E1D
management information, 6C
For reference only

how to use, 6C1 Q
middle management, 2A4B
misrepresentation, 3C1A qualified one-way costs shifting (QOCS), 4B8
money award, 3B3C quality management, 2C
monitoring, 1F3C quantifying leakage, 7C2A
moral hazard, 6I6B
Motor Insurance Anti Fraud and Theft Register
(MIAFTR2), 6I5A
R
Motor Insurance Database (MID), 6I5A re-opened claims reserves, 7B2
multi-track, 4B1, 4B2D realistic disaster scenarios (RDSs), 5B5
recoveries, 1E3, 6G
N reinsurance, 1F4
reducing leakage, 7C2
negotiation and settlement, 1E3 referral points, 2B, 2B1
non-proportional reinsurance, 6F2 regulation, 2E
notification, 1E3 regulators, 2E1
conditions, 1F4A regulatory impact, 1F3A
reinsurance, 6F
claims department, 6F3
O claims procedures, 6F2
Ogden rate, 4B9 recoveries, 1F4
onus of proof, 6I6A relational databases, 6I3A
operational efficiency, improving, 7A5 reservation of rights, 3C2
organisation design, 1C, 1C1 reserve
organisation structure, 1C, 1C1A how to estimate, 7B3
outsource, why, 4C1 types of, 7B2
outsourcers, and ICOBS, 2E2A why?, 7B1
outsourcing, 4C reserving, 7B
agreement, 4C4C combination of methods, 7B3B
claims function, 4C2, 4C4 philosophies, 7B1A
service users, 4C1 statistical, 7B3B
services, 4C1, 4C3 response to claimant, 1E3, 4C2B
outstanding review, 1E3
claims reserve, 7B2 risk framework, 2E2C
overheads, 7A1B
S
sales, 1F2
xxii 820/January 2023 Advanced claims
segmented by product, 1C1A

service, 2A3
importance of good, 3A6
what is good, 3A
services, 4F3B
small claims track, 4B1, 4B2D
soft leakage, 7C2A
solicitors, 4F2
spotting leakage, 7C1
Statement of Truth, 4B2B
Statements of Case, 4B2B
statistical reserving, 7B3B
statutory penalties, 7A4
strategy, 2A1
strict timetables, 4B1
structure by division, 1C1A
structure by function, 1C1A
subrogation, 6G
supervision of staff, 7C2
supplier relationship management, 4F
suppliers, 4F3
surge contingency planning, 5B4A
T
technicians’ role, 2A4A
technology, and fraud, 6I3A
thematic review, 2E2
third parties, 3D2
third party administrators (TPAs), 4C3A
threshold quality, 3A1
For reference only

U
underwriting, 1F1, 1F1B, 6D2
interaction with, 6D
V
volume, 6A1
W
warranties, 3C1B
Warsaw Convention, 6H1

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Advanced claims

820: 2023 Study text

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© The Chartered Insurance Institute 2023

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Using this study text

Guide to your study text

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Consider this: stimulating thought Reinforce: encourages you to revisit a

Critical reflections: challenge you to Research exercises: reinforce learning

Examples: provide practical illustrations Sources/quotations: cast further light

Active learning is experiential, mindful and engaging

For reference only

Summary of learning outcomes

1. Evaluate the management of the claims function

2. Evaluate and apply claims service principles and practices

3. Evaluate the application of technical claims principles

4. Analyse the financial aspects of the claims function

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Published January 2023

1. Evaluate the management of the claims Reading list

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Published January 2023 2 of 3

Post magazine. London: Incisive Financial

Exam technique/study skills

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Published January 2023 3 of 3

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2: Role of the claims manager and regulation

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3: Claims service management

4: Management of claims handling procedures

5: Claims centre and catastrophe management

6: Claims technical management

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Appendix 1: Airmic Statement of Principles regarding insurers’ reservation A1/1

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A Understanding the claims environment

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A1 Internal claims environment

A2 External claims environment

B Claims strategy: what is it and why is it

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C Organisation design and structure

C1A Organisation structure

Claims management decision: organisation structure

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Figure 1.1: Structure by function

Chief Executive Officer

Figure 1.2: Structure by division

Home Country Home Country International

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Figure 1.3: Segmented by product

Home Country Home Country International

Motor Liability Property

employers’ liability public liability products liability

underwriting claims sales

Other things for you to consider

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