Claims management fees - achieving the right balance

In the second part of his article on claims management fees, Col Fullagar considers fee-based remuneration models and their impact on claims management.

In part one of this article, Steering away from the rocks, Money Management, 2 June, 2011, it was identified that:

• Involvement in claims management can have a material financial impact on an adviser’s business;
• The impact does not appear to be appropriately remunerated by commission payments; and
• While there are compelling client-related reasons for the adviser to be involved in claims management, there are pros and cons when it comes to adviser-related reasons.

A further question was posed, the answering of which will form the basis of the conclusion of this article: is there a fee-based remuneration model that will appropriately reward adviser involvement in claims management?

Any fee should be:

• Logical – compensating the adviser to the extent of the financial impact on their business; 
• Transparent – enabling the client to understand the basis of the fee and the services they will receive so that value-for-money can be assessed; and
• Equitable – ensuring that all clients have reasonable and equal access to claims management assistance.

The simplest way to levy a claims management fee is for the adviser to establish a business charge-out rate and bill the client on an hourly basis, in the same manner as a solicitor or an accountant.

Unfortunately, while some clients may be able to afford (and be willing to pay) a fee on this basis, others will not do so until the claim has been paid – which puts both them and the adviser in an invidious position, and even more so if the claim is denied.

The simple hourly billing method will be set aside. While it may be logical and transparent, it fails the ‘equitable’ test.

A fundamental purpose of insurance is to create money such that financial problems arising from the occurrence of an insured event can be resolved.

If a breadwinner dies, insurance creates the funds to replace the lost income.

In a buy/sell situation, insurance creates the funds to enable business succession to occur.

The same principle can be utilised to overcome the issues associated with adviser involvement in claims management.

Initial assessment

If the average time required to assist a client with an uncomplicated initial claim assessment is around five business hours, the business impact is relatively small.

An adviser may take a view that the time involved in assisting a client with a relatively straightforward initial assessment should be absorbed by the business as part of the services provided for, and funded by, renewal commission.

As part of their service offering, the adviser may indicate to a client that the ongoing renewal commission received covers the first five hours of adviser assistance with a claim.

Alternatively, the adviser may see merit in charging an annual retainer fee of, say, $250, on the basis that this would similarly cover the first five hours of claims assistance.

Whatever model is chosen, the advantage is that the client will have clarity as to the position in regards to adviser assistance should a claim arise (ie, the first five hours are covered, but anything in excess of that would be billed at an hourly rate).

The issue then becomes, what happens if complications are encountered and the number of business hours exceeds five?

It is estimated that the business hours required for complicated initial assessments is, on average, around 35. 

Assuming the first five hours are absorbed by way of renewal commission or a retainer fee, 30 hours remain. At a business charge-out rate of $250 an hour, this equals $7,500.

In respect of term, total and permanent disablement (TPD) and trauma insurance, provision for the fee could be facilitated by the adviser recommending to the client that the insured benefit under their policies be increased by the amount of the average fee net of the first five hours (ie, $7,500).

If the client otherwise required $500,000 of term, TPD and trauma insurance, the benefit amount for each would simply be increased to $507,500.

The fee provision would be added to the insured benefit in the above way rather than being absorbed into it, as this better highlights the reasons for the additional cover.

A necessary enhancement would be to recognise that while not all claims are paid, all claims will need to be managed.

Therefore, the additional benefit amount should be conservatively grossed up as shown in figure 1.

The $9,375 is indexed each year along with the rest of the insured benefit amount so increasing adviser costs are automatically catered for.

The client is utilising another long-standing insurance adage by literally setting up the claims management provision for cents in the dollar. 

Having created a fee provision within the insured benefit, the basis of charging a fee can be considered. Possible models include:

Flat fee

The adviser may choose to simply charge a flat fee equivalent to the fee provision within the policy, irrespective of the amount of work involved in assisting with the actual claim.

The rationale would be that while one claim may require fewer business hours than provided for by the average fee, other claims may require more than the average. 

Hourly rate

The increased benefit amount can be viewed as a claims management funding pool.

Records of the business hours spent in managing the claim are kept and a fee levied against the fee provision within the insured benefit amount.

There is an appropriate mark-up in the hourly rate to cover the fact that not all claims are paid (ie, the hourly rate would be $250/0.80 = $312.50).

If all the fee provision is not used, the balance is refunded to the client after the claim is paid.

If there is an excess of hours over that provided for by the claims funding pool, this can be invoiced direct to the client at the standard business charge-out rate, or alternatively, it may be agreed that it will be recouped from the overall claim proceeds.

Flat fee and hourly rate mix

A mix of the above can be the adviser charging a fixed flat fee of, say 50 per cent of the fee provision for all claims, irrespective of the amount of time involved.

Any excess hours over, for example, 20 being the five retainer-funded hours plus 50 per cent of the remaining 30 hours, would then be charged against the balance of the lump sum at the adviser’s marked-up hourly rate.

Outsourcing

If the adviser does not wish to be directly involved in managing a particular claim or even any claims, the fee provision can be used by the client to pay an external resource that specialises in the area of claims management.

Ongoing management

Creating an identical claims funding provision is not as easy for income protection and business expenses insurances; neither is it practical, since claim payments and therefore the need for support can extend over many months and even years.

Therefore, claims management funding would need to be provided for on a drip-feed basis.

Fortunately, a suitable alternative exists that once again uses the insurance policy as the funding vehicle.

Case study

Jim earns $80,000. He accepts the recommendation of his adviser and insures for the full 75 per cent of his salary (ie, $80,000 x 0.75/12 = $5,000 a month).

Jim’s adviser, however, suggests that Jim increases the insured benefit amount by $250 a month, explaining that this amount would be paid to the adviser to enable him to assist Jim for up to an average of one hour per month if Jim claimed under his policy.

The payments to Jim’s adviser would start after his claim was accepted and would continue whilst total or partial disability benefits were paid. 

The obvious problem is that Jim is already covered for the maximum of 75 per cent of his salary; however, as the additional funds will be paid to the adviser, the 75 per cent maximum in respect of what Jim receives is not breached.

Once again, indexation of the full insured benefit ensures that the claims management fee keeps pace with inflation.

The arrangement is noted on the insurer’s records so there will be no concerns in the future. 

Formal agreement

Any arrangements made need to be formalised within signed agreements, which would include details about:

• The fee and how it would be charged;
• The services to be provided by the adviser in exchange for the fee;
• What would occur if the client wished to change servicing advisers or simply terminate their servicing adviser.

By entering into a formal claims management agreement:

• The client knows there will be support at the time of claim and this support is locked in – a heightened feeling of peace of mind;
• The client will be less inclined to change advisers, particularly if any new adviser did not have or was not able to provide an equivalent support service;
• The adviser will have a clear and contracted reason to devote business resources to becoming increasingly proficient in claims management. This could involve the adviser and/or a support person within the business; 
• The adviser will be better able to manage the financial impact of being involved in claims management; and
• The adviser will have greater certainty that when the claim proceeds are paid they, rather than the accountant or solicitor, will be assisting with the management of the funds.

The existence of a formal agreement will also ensure that the appropriate remuneration payment is passed back to the adviser when the claim is paid. Alternatively, the client could provide an authority to the insurer directing that the appropriate amount be paid direct to the adviser from any claim proceeds.

Client review

Once the necessary business arrangements are in place to incorporate a claims management protocol either in line with the above or on some other appropriate basis, implementation could be immediate with new clients or clients taking part in a regular review.

In addition, a letter could be sent to other clients advising them of the change to (or formalising of the services being provided) by the adviser’s business and the basis upon which these services are to be provided.

Clients could be advised that as this change represents a material improvement in the advice model being offered it will be necessary or highly recommended that they attend for their next regular client review.

In addition, the offer could be made for clients to arrange an immediate review if they wish to have the new claims management facility added prior to their next scheduled review.

The above reviews may well identify other insurance needs that should be addressed but if nothing else, additional insurance cover sufficient for the claims management funding could be implemented.

By setting the facility up on a fee basis, the question of fees in other areas of financial advice can begin to be discussed.

Other considerations

There are a number of other issues that would need to be considered before a formal claims management arrangement could be finalised. These would include:

• The tax position in regards to premiums and benefit payments – the position has been investigated and does not appear complex. However, advisers should seek their own advice in this regard;
• How to reposition the expectation of clients who may already believe they will receive unlimited claims management assistance – action taken will be largely dependent on the nature of what has been said and written in the past, but various practical solutions do exist;
• How to handle partial disability benefit payments and payments under indemnity policies – this could in part be dictated by the insurer’s systems capabilities. However, ideally the adviser claims management fee should be a fixed dollar amount, irrespective of the benefit being paid to the client;
• What advice documentation would need to be provide to the client – again, this has been investigated and the solution does not appear complex. However, individual advice should be sought; and
• How to handle a situation where the initial assessment of an income protection or business expenses claim is protracted – various solutions exist, including a cross-subsidy, if possible, between the fee provision within the lump sum policies and the income protection and business expenses policies.

Summary

Establishing an appropriate fee-based model to remunerate an adviser for being involved in the claims management process is not without its challenges. 

It will take time and no doubt complications will occur along the way.

Success, however, brings with it many advantages, including ways to:

• Introduce the subject of risk insurance fees with clients;
• Overcome the dilemma of whether or not an adviser should be involved in claims management; 
• Help the adviser validly differentiate their business;
• Help the adviser expand the services provided by their business, but in so doing gain greater control over their own financial destiny; and most importantly
• Help the adviser provide a most essential service for clients when they claim and thus ensure the client’s true peace of mind.

Col Fullagar is national manager, risk insurance at RI Advice Group.