Hard to handle

03/07/2009

With accusations of claims farming being bandied about, Leigh Jackson reports on the fraught nature of the relationship between insurers and intermediaries over handling non-fault claims.

The long-standing and well-worn relationship between insurers and intermediaries has, at times, been typified by its fraught nature. The latest bone of contention centres on claims farming" the practice whereby brokers sell on claims to credit hire operators thus boosting referral fee income. This practice has caused consternation among some insurers, which have vowed to rein it in.

Last month, Aviva sales and marketing director John Kitson, told Post that claims farming had seen a recent upswing. He claimed that the rise was a result of brokers drastically cutting commissions to win business in the highly competitive aggregator market (Post, 4 June 2009, p1).

Mr Kitson told Post: “We have become increasingly concerned with some broker models in the personal lines space that are choosing not to take commission from insurers because they can earn more money farming claims to the credit hire industry.”

He added: “In some cases, brokers will take negative commission on an aggregator site because they know they can earn more per policy through claims farming. In the long term this will not benefit the industry and we intend to try and stop it.”

Penalising brokers

His views were endorsed the following week by Mike Keating, managing director of personal lines intermediary at Axa Insurance, who hinted insurers may penalise brokers that profit the most from the practice (Post, 11 June 2009, p1).

“Axa agrees with Aviva’s stance and firmly believes it adds between 3% and 5% on current market loss ratios,” he said.

Unsurprisingly, the views of the insurance giant have not been welcomed across the industry, with brokers particularly unimpressed.

British Insurance Brokers’ Association chief executive Eric Galbraith expresses his surprise at the recent comments and questions the wider involvement of insurers in claims farming.

“To blame it on brokers is not acceptable,” he says. “I was a little surprised at Aviva raising this, based on the fact that they are involved in it as well. I’m not quite sure why they’ve taken this particular tack.”

Mr Galbraith rejects the notion that claims farming is widespread and suggests that some of it could simply be confused with good claims service.

“If you are a broker and you are handling a claim, you have the opportunity to refer the non-fault claim to a supplier in order to assist your insured in processing their claim,” he observes. “I’m not sure that I would call that claims farming; it could, perhaps, be regarded as part of the claims process.”

Central argument

Trevor Cutts, business development director at 1 Answer Network, says the argument centres around providing continued good service for policyholders.

“Brokers don’t hide the fact they earn money from claims and we will certainly see this process as providing a quality claims service for our customers,” he says.

“Ultimately, a customer is buying a motor policy on the basis of needing to claim. We’re supposed to look after them in those circumstances and provide a good service.”

He adds: “A lot of brokers would operate on the fact that they provide good service. We are certainly not here to boost the cost of claims.”

While brokers seem unified in their rejection of the concept of claims farming, insurers seem just as convinced of its negative effect on the industry.

Mr Kitson’s views are backed by Aviva colleague and director of claims Dominic Clayden, who argues that, rather than providing good customer service, claims farming simply raises the price of premiums.

“Frankly, there is significant revenue changing hands and it is pushing up the price of premiums overall,” he says.

“The one thing about insurance is that it is not free, so everything that adds cost into the claims process is going to be paid for by the premium-paying public. They are the group that will ultimately lose out,” he asserts.

Best interest

LV personal lines director of sales Michael Lawrence also denies that claims farming is in the best interest of policyholders.

“The decisions brokers make about the providers they use for their claims service might not always be focused on the best service for their clients, or indeed which manages the best average claims cost for their insurance partners, but perhaps on the maximum earnings they can make out of it.”

But are some insurers failing to spot a definitive link between low or zero aggregator commission and claims farming activity?

“Brokers are not necessarily choosing to forgo commission. They are having to do this to remain competitive particularly in aggregator markets,” says Mr Lawrence. “Having to operate at zero commission, or discounted commissions to get that piece of business they, therefore, need to earn money some other way.”

But the link between the two is firmly backed by Zurich chief claims officer Bill Paton, who argues it is obvious.

“There is clearly an active link,” he says. "Aggregator commission is driving down the price of insurance and the brokers are using the referral fees to become more profitable.

“It’s hard to argue against that but the cure is not to attack the broker but attack the cause of that and the cause is referral fees.”

Indeed, it is Aviva’s assertion that a perceived rise in claims farming is somehow linked to a lowering in aggregator commission that is causing the most rancour among brokers.

“There is no link whatsoever; it is just income on one side and how you spend it on the other,” BGL chief executive Peter Winslow observes. “It’s an important income stream for a broker and you can compare that money to any other income. It’s just one of our streams and doesn’t really represent the truth of the situation.”

Brokers also question the decision of insurers to leave claims handling to intermediaries, arguing that they have failed to realise its potential as an income stream.

Mr Winslow says that insurers have only recently become dissatisfied with brokers handling certain claims because they have begun to recognise it as a lucrative area of business. He comments: “I have always found that insurers have traditionally not been interested in handling non-fault claims. It was just an expense to them and they were happy to have brokers do it.”

While parties on all sides accept that this issue is one that must be tackled, there is little consensus on what should be done to keep both insurers and brokers satisfied. A number of insurers have proposed an overhaul of the structure of referral fees.

Speaking to Post last month, LV technical head of claims Martin Milliner argued that the current referral fee mechanism is partly to blame for claims farming practices.

“Referral fees and legal costs that support those fees lie hand-in-hand with the broker and insurer markets’ behaviour,” he said (Post, 11 June 2009, p1). “Until the issue of referral fees is addressed, there will always be the practice of claims farming.”

Some insurers consider referral fees to be at the very heart of the issue. Mr Paton says a change in the way referral fees operate could be crucial.

“We need to look a bit deeper,” he says. “We are looking at the symptoms but we need to cure these by scrutinising the actual cause. This whole issue is driven by generic referral fees.”

Mr Paton observes a more sophisticated approach to referral fees would be unlikely to be reached by a mutual agreement and urges the government to intervene.

Looking at the wider issue of personal injury claims and the forthcoming Ministry of Justice reforms, he adds: “If [the MoJ] doesn’t take this opportunity to get referral fees under control then it is an opportunity missed. You’ll never get it to happen voluntarily.”

But are referral fees really the crux of the issue? Some intermediaries continue to argue that claims farming arose from the fact customers required an improved service.

John Sims, chief executive officer of Lorega, says referral fees have little to do with claims farming" which was created out of a necessity to provide a better service for policyholders.

“Claims service has to be better,” he says. “We need to show customers that policies are worth the paper they are written on. If claims service was excellent there would be no need for claims farming.”
A more controversial solution touted by insurers, which is already in play, is differentiated pricing. As part of the model, insurers would offer varying rates to broker partners, depending on their arrangements with credit hire operators.

Axa’s Mr Keating has declared his support for such arrangements and admitted that differentiated pricing agreements are already under discussion.

“The current model and practice is not sustainable and we have already begun dialogue with broker partners on how we can jointly address the issue,” he told Post (11 June, 2009, p1).

“We will not rule out further differentiated pricing based around brokers’ claims handling models.”
LV’s Mr Lawrence backs the move explaining that it is often the only way for insurers to claw back losses they would have made through claims farming.

“It will happen and does happen,” he says. "We often say to brokers you can have what you want but it comes at a price, so if we believe that claims farming is detrimental to our result we will have to respond to that with increased prices.

“If brokers’ performance is good then we reward them with competitive rates; if the performance is poor we will have to reflect that and put the rates up,” he adds.

Lucrative income stream

With the referral to credit hire companies providing a viable and somewhat lucrative income stream for brokers, they understandably, find the differentiated pricing unappealing.

BGL’s Mr Winslow claims that the situation would see brokers sacrificing valuable income in return for slightly more preferential rates from insurers.

“I don’t think it is realistic,” he says. "Is it fair that for those people who have more insurer-friendly models they will get rate advantages?

“For us the answer would not be a situation where we sacrifice a whole lot of income for potentially better rates.”

One thing that is certain is that insurers and intermediaries fully appreciate the intricate nature of their symbiotic relationship. And, with that in mind, both sides are seeking an amicable and communicative solution.

“What we don’t want to be in is a position of throwing stones at each other,” Aviva’s Mr Clayden asserts.
“A vibrant independent broker market is a good thing. There is a problem and we need to work through it to find a solution.”

After all, finding a solution would be of great benefit to those who keep the industry alive" the policyholders.

Mr Galbraith adds: "We all need to be doing the same thing. We should be looking at not only the cover but the sort of service customers get from the policy in the event of a claim.

“There is a need for insurers and brokers to bottom out this issue for the sake of the customer.”

Original Article: Post