The cost of living crisis will have impacts across insurance. At the forefront will be claims, with increased settlements and concerns around fraud. Many insurers will turn to the digital tools widely used now in claims decisions. Yet in doing so, what ethical risks might they stir up?
The one big ethical risk that sits astride claims is of course the conflict of interest. This is between the insurer, knowing that how claims are settled influences profitability, and the customer, who expects their policy to respond to loss situations in a fair way. In reality, this is often a far from binary situation. The grey area in the middle is full of interpretations, judgements and preconceptions.
How these are managed owes a great deal to how seriously the firm’s leadership pays attention to ethics, whether embodied in regulations, codes or cultures. And as claims functions become more and more digitised, that attention determines how the dials and levers of those decisions systems are configured and set.
This means that the ethics of claims are just as much set into the digital systems becoming widely adopted, as in the behaviours and attitudes of the claims staff using them. Indeed, I would put that former as now the more influential.
So where might a claims manager look then, be they operationally, customer or digitally orientated, for situations in which that conflict of interest is having some form of influence? Where might that influence, in the midst of a cost of living crisis, turn into flashing red warning lights for that insurer? Here are six circumstances where that influence could be fuelling unfair practices for consumers.
Claims optimisation involves a claimant being assessed on their financial status, in order to then be offered a quick but reduced cash settlement. So if the insurer believes that a claimant is hard up, the insurer might try to settle their £1,000 claim for £950 in cash, right now (more here). It’s something I’ve definitely experienced. When I asked why the cash amount was lower, the insurer’s replacement agent made vague references to supplier terms.
The problem lies of course in that assessment of financial status. People whose credit rating is falling or low will be offered lower settlement of their claim just because of their credit rating. Now, some insurance people have said to me that there’s no problem with this, for if the person might accept that lower cash offer, what not offer it to them? What this amounts to though is a leveraging of relative economic power. What it also amounts to is an unfair market practice that compliance people should have challenged, long before now.
Let’s keep with claims optimisation for a minute and think about whether that challenge by compliance is really happening. I don’t think it has been happening. And it’s one of several market practices that have led me to see the three lines of defence as a flawed framework for risk control and compliance (more here). If it was working, then practices like claims optimisation would have been squashed at the design stage.
So the questions that compliance people should be asking themselves are:
- how are we managing our own conflicts of interest, the ones within compliance itself?
- when did someone last check if our approach was working?
- to what extent might conflicts of interests be embedded into control systems and performance management frameworks?
I’ve worked with a few insurers that just weren’t seeing the knots that their three lines of defence had been tied up in. What could often trigger an addressing of this was feedback from frontline claims staff, concerned about being forced into what they felt were unfair decisions.
Claims walking is different to claims optimisation, in that the latter is centred around the assessment of an individual claimant, while the former is centred around the assessment of a batch of similar claims. Claims walking is intrinsically performance based and so only comes about when embedded into operational and systems design. It doesn’t just happen.
What does happen is that a batch of similar claims will be assessed and settled in a similar way, while at the same time being checked against the level of complaints received. The next such batch is then settled at a slightly lower level and if there is no complaints response, that becomes the new settlement norm. This is repeated for further batches until an upturn in complaints is noted. The settlement norm is then raised to remove that rise in complaints (more here).
Some people find it hard to imagine insurers doing this, but the FCA found evidence several years ago that some insurers had been using paper based versions of claims walking. What needs to be remembered is that events like the cost of living crisis will put some claims people under pressure to use or tighten such practices.
Unfortunately, for the market overall, it feeds directly into the oft heard consumer sentiment that insurers always push back on claims. This is one half of a wider preconception that has, on the insurer side, the market sentiment that policyholders inflate their claims. That’s why some insurance executives talk about 50% of claims being fraudulent in some way. Yes, one in two of us.
Remember this earlier article about how the sector’s monitoring of motor application fraud recorded a threefold increase in suspected cases between 2017 and 2019. So what is behind this? Is it down to actual increases in suspected fraud or down to a redefining of what ‘suspected’ meant?
I realise that application fraud is not claims fraud, but my point is that how we see fraud is in large part defined by the lens we choose to look at it through. Clearly, the sector is not using a legal lens to look for suspected application fraud. And the same will be the same for claims fraud.
Do I think that the sector has been turning the dial on how suspected is being defined? Well, yes, largely because…
- I don’t believe fraudulent activity triples in three years (remember this is pre-pandemic and pre-cost of living crisis);
- I can’t think of any other reason for the increase;
- no one seems to be offering any other reason for the increase.
Let’s come back to 2022. What I’ve been hearing recently is the sector preparing for a significant upturn in fraud due to the cost of living crisis. And I suspect that there will be some such cases, but I also suspect that a lot more non-fraudulent people will end up encountering a harder claims experience. Is harder too hard? Might vigorous be better? The experience is in the eye of the claimant, and I’m not sure vigorous would be the word genuine claimants would put to the experience they’ll have.
Risk and Data
On a number of occasions recently, it’s been put to me that lower income people represent a poorer risk, and higher income people represent a better risk. This is one of those simplifications that can take hold in a sector and become accepted thinking. The reality is that the relationship between income and risk is complex and far from linear.
So, for example, those on lower incomes may well look after their possessions with greater care than those on higher incomes. Waste not, want not, so the saying goes. And as the cost of living crisis will be affecting three in four UK adults (as confirmed by the ONS), can insurers really then assert that three quarters of the risks placed in the market will be that degree worse in response? I don’t think so.
What I am leading to here is that an insurer’s response to the implications of the cost of living crisis needs to be integrated into its culture as well as its systems. Claims people need to push back on simplistic notions that label someone becoming worse off thereby becoming a worse risk, a more likely fraudster. They need to push back on data brokers whose categorisation and labelling sustain such impressions.
And they need to remember that a lot of insurance people will be affected by the cost of living crisis as well. Show me the claims director who will stand up in a function wide meeting and tell their people that they’re all now a little more worse a risk, a little more likely to be fraudulent.
Let’s close with consideration of suppliers other than those of data and analytics. So we’re talking in broad terms of replacement agents and repair agents. Such agents have always been involved in claims, but the arrangements have tended to become more complex in recent years.
In a cost of living crisis, what matters in relation to such agents is how they are performance managed. How is performance incentivised and how is it penalised? How are these linked to settlement amounts? What options are open to them to use – are cash offers allowed and are they set at the value of the claim? How is all this being monitored?
Many replacement agents are actually suppliers feeding fridges and the like into a settlement process. After my house was struck by lightening in 2016, I recall being on the phone to one such agent about a replacement printer. They were offering me a better printer (which I didn’t need). During the conversation, I went on the internet and found the exact replacement for my printer for sale at a well known retailer at a lower price than a) the printer they were offering me and b) the cash alternative they were offering. So what motivated this agent was moving the units in their own supply chain, even if this was outside the terms of the policy. A fairly simple conflict of interest.
Thoughts for Claims People
I believe that insurers want to play a supportive role for their customers in the cost of living crisis. There’s a tendency however for them to evidence this by pointing to their corporate responsibility / ESG programmes. And while there will be good things coming out of those programmes, the heart of what a supportive role really means lies in the decision systems being used in underwriting and claims. Particularly the latter.
That’s why claims managers and directors need to think carefully about how the levers and dials are being set on their decision systems. They need to challenge themselves to how they are acknowledging and managing the conflicts of interest embedded into so many of their protocols and partnerships. And, after all the markets’ attention to the fairness of pricing, they need to have a clear narrative on the fairness of settlements, and be making sure that their people are working to it.