Steering a steady course through claims management fees

Claims management fees can span an ocean of contentious, sometimes confusing issues. In this first of a two-part article, Col Fullagar examines some common case scenarios and reveals how financial advisers have become valuable conduits for information.

The question of fees versus commission within the confines of financial advice is increasingly being debated. In regards to the provision of investment advice, fees appear a ‘done deal’.

However, in the absence of anything approaching a workable fee-based model for risk insurance, many advisers involved – in full or in part – with the provision of risk insurance advice are holding out hope there will be no need to change.

While it is not the purpose of this article to debate the overall issue of risk insurance fees it is the purpose to look at one component of risk insurance advice and explore whether the charging of a fee not only benefits all parties – the adviser, the client and the insurer – but does so in a way that commission does not.

Traditionally when people speak about risk insurance advice, they are referring to the provision of initial advice, review of previous advice and administrative assistance along the way.

These are the services about which there is a general consensus that they are remunerated by commission.

The area that dispels consensus is the adviser’s active involvement in the claims management process. Is the provision of this service appropriately and equitably remunerated by the commission received?

The issue is a large one and this article will be published in two parts.

The first part will consider three questions.

Does adviser involvement in claims management have a material financial impact on the adviser’s business?

There is a popular perception that the financial impact of an adviser being involved in claims is linked to one or each of the following:

• The insurance type; for example, Total Permanent Disablement (TPD) claims have a greater financial impact on an adviser’s business than term insurance claims;
• The benefit amount; claims for larger benefit amounts have a greater financial impact than those for smaller amounts; and
• The number of claims; claims for multiple benefits have a greater financial impact than those for a single benefit.

In fact, the direct driver of financial impact on an adviser’s business is none of the above. It is simply the number of business hours spent managing the claims process, with business hours being the total of adviser- and support-staff time.

To illustrate, if a large TPD claim required the same number of business hours to manage as a small-term insurance claim, the financial impact on the adviser’s business would be the same in each instance.

The popular perception that the business impact is caused by the type of claim, etc, is a result of the frequency of claim complications (ie, a large TPD claim is more likely to encounter time-consuming complications than would a small-term insurance claim).

To better understand the extent of time spent evaluating claims, it is necessary to divide the claims process into:

• Initial assessments; and
• Ongoing management.

Initial assessments only occur once but they occur for all policy types and ancillary benefits included under them. The initial assessment leads to a decision, ie, accept, deny, defer, etc.

Ongoing management does not occur for term, TPD and trauma insurance claims, nor does it generally occur for ancillary benefits. It does, however, occur for total and partial disability claims under income protection and business expenses, if the initial assessment is acceptance.

If a reasonable estimate can be made of the number of business hours expended in initial assessments and ongoing management, a business financial impact can be calculated.

Naturally, the amount of time spent managing claims will vary considerably, so averages must be used.

To obtain these averages advisers were asked, from their experience, the number of business hours they would spend assisting clients in the initial assessment and ongoing management process.

In the majority of cases the claims management process moved ahead in a relatively smooth fashion.

Initial assessments might be made on the basis of a claim form and a single batch of subsequent claim requirements, with payment following soon after. Alternatively, the claim denial was straightforward and was accepted by the client without dispute.

Similarly, ongoing management might require a small amount of adviser time each month to follow-up progress claim forms and occasionally to collect financial evidence.

The average number of hours was approximately:

• Five hours for initial assessments; and
• One hour per month for ongoing management.

Advisers who only experienced this type of claim were inclined to view the claims management process as simply an extension of the services they believed they should provide to clients.

While the majority of claims fell into the above categories, there was also a significant number of ‘problem’ claims involving one or more of the following:

• The client was a personal friend;
• The client was crucial in a centre of influence, or influential in a specifically sensitive area (such as the media), or generally influential in the community;
• The claim scenario was complex and emotive;
• The claim requirements were numerous, onerous and were drip-fed over an extended period of time;
• Communication from the insurer was considered insensitive and insurer errors were made;
• The assessment of the claim took what appeared to be an inordinate period of time;

and then either:

• The claim was accepted and paid but the client was totally disillusioned by the process;

or, alternatively:

• The claim was denied and the reasons for denial were not made clear;
• The client was unhappy with the decision and a dispute ensued; and
• The adviser became embroiled in the dispute.
• The average number of business hours required to assist with these claims was approximately:
• Thirty-five hours for initial assessments; and
• Ten hours per month for ongoing management.

Advisers involved in these types of claims were far less likely to feel that the assistance they provided formed part of the general administrative support for which they were remunerated by way of commission.

Next, it is necessary to convert business hours into financial impact. To do this, the number of business hours is simply multiplied by the business charge-out rate (ie, the average of adviser, plus support staff).

If the charge-out rate is $250 an hour, the gross financial impact in the aforementioned ‘average’ situations would be:

Initial assessments – between $1,250 (5 x $250) and $8,750 (35 x $250);

Ongoing management – between $250 a month (1 x $250) and $2,500 a month (10 x $250).

Of course, the above figures are a single, per-claim appraisal. If an adviser has a large or mature portfolio it may well be that multiple claims are occurring concurrently.

Does adviser involvement in claims management have a material impact on the adviser’s business? The answer is ‘yes’ – and the impact could be considerable.

Is the financial impact on the adviser’s business appropriately remunerated by commission payments?

The driver of financial impact is the number of business hours expended which is not in any way related to the driver of commission, ie, the amount of premium.

It could therefore be reasonably assumed that commission, at best, is a crude and inaccurate basis for remunerating adviser involvement in claims management.

The response from some is to quote “swings and roundabouts” (ie, if the commission from an adviser’s portfolio of clients is pooled, the financial impact can be compensated by drawing from the pool).

While this response may appear sound, the reality can be different:

• An adviser who provides investment and risk insurance advice may have a relatively small risk insurance renewal income. A complicated claim could impact the business well in excess of what is proportionately appropriate;
• An adviser who, for genuine business reasons took a low renewal commission option, may be involved in numerous claims that cannot be supported by the commission received. Judgemental arguments that a different commission type should have been taken may be ill-informed and do not alter the reality of the position;
• An adviser who purchased a low-renewal commission portfolio of business would have a similar issue.
• The average policy duration of approximately seven years is unlikely to be sufficient time to enable recovery of claims management costs in addition to new business and ongoing administration costs; and
• The argument that renewal commission is designed, in part, to remunerate for claims management costs is somewhat thwarted in that most insurers, when they waive premiums, also waive commission.

When it comes to claims management, commission creates winners and losers rather than an equitable business outcome for all parties.

Is the impact on the adviser’s business appropriately remunerated by commission payments? The answer is, arguably, ‘no’.

Should advisers be involved in the claims management process?

If the financial impact is not appropriately remunerated by commission, should advisers, in fact, be involved in claims management?

From the adviser’s perspective, there are pros and cons, including:

(i) Service compromised

An adviser may find themselves drawn into various complex, protracted discussions and debates with clients, insurers, dispute resolution bodies and even lawyers. This may compromise their ability to assist other clients.

(ii) Business compromised

If time pressures continue or escalate as a result of multiple claims, business profitability may be impacted. This is bad enough if the adviser is a sole trader but it can become totally unacceptable if there are partner advisers or corporate owners who are also affected.

(iii) Reactive assistance

An adviser may take a pragmatic view, helping the client complete and submit the claim form and then leave them to their own devices or provide subsequent assistance on a reactive basis only. This may, however, prove an unsatisfactory service model.

(iv) Lack of remuneration model

Some advisers may wish to charge a fee but remain unaware of a basis for this. Would they charge an hourly rate or a flat fee, and how would it be calculated?

And what about clients who are unable to pay until the claim itself is paid, and what occurs if the claim is denied?

(v) Reputation

If something goes awry with the claims management process this could damage the adviser’s reputation and also lead to legal issues.

(vi) Appropriate skills

Some advisers may not feel sufficiently skilled and, fearing making a mistake, they distance themselves, preferring instead to allow the insurer to run things. They are often encouraged by the life office to “leave it to the experts”.

(vii) Lack of training

While considerable training is available for other components of the advice process there is little training currently in place for claims management.

(viii) Lack of client relationship

Many advisers have strong long-term relationships with clients but this is not universally the case. If an adviser is not familiar with a client it is difficult and not without risk to become involved in a claim, particularly if the claim is in dispute.

The reasons against adviser involvement are not without merit; however, there are also compelling reasons for adviser involvement, including:

(i) Moral obligation

Many advisers feel morally obliged to provide claims assistance; to not provide this assistance feels wrong. Surely, this is why they have received renewal commission all these years.

(ii) Service offering

A claim is when the original recommendation comes to fruition and it is unthinkable that the adviser would walk away. Assistance at the time of a claim is a valuable component of the adviser’s service offering.

(iii) Networking

A claim is when the client and those associated with the client see the benefits of insurance. To not be involved would be to waste a networking opportunity or, alternatively, if the adviser did not assist the client this might have a negative networking impact.

(iv) Management of claim proceeds

By being involved in the claims process, the adviser improves the chances they will also become involved in the subsequent investment of the claim proceeds.

(v) Adviser value-add

The adviser may believe they can make a valuable contribution to the claims process.

(vi) Consistency of service

There is currently little consistency in the claims management services provided in the market, with involvement being dictated by the individual adviser’s:

• Attitude to involvement;
• Personal expertise or business capacity; and
• Client relationship (ie, is the adviser more likely to assist an ‘A’ client, rather than a ‘B’ or ‘C’ client).

The facts surrounding each particular claim are also material, ie, whether it is complicated or not.

This inconsistency cannot reflect well on the financial services industry and it makes client comparisons and informed choice more difficult.

If the position is not made clear, a client’s expectation is unlikely to be matched by the adviser’s reality. A more consistent approach would bring some contingent advantage.

The most compelling reasons for adviser involvement are, however, client-related. These include:

(i) Initial support

Someone who has recently suffered a sickness or injury or the loss of a loved one may need – more than at any other time – professional, impartial and informed financial advice.

Is the situation one that is potentially covered by the insurances in place? Which policy benefits should be claimed under? What payments might be forthcoming and what needs to be done in order to claim? If a claim cannot be made, why not?

The adviser will be better suited to assist and in so doing provide that which was the client’s original motivation for setting insurances in place – peace of mind.

(ii) Interim advice of claim

The adviser is also the ideal person to contact the insurer and provide interim advice of a claim. They will know the insurer and, most likely, who to contact.

Dealing with the adviser has advantages for the insurer as well. The adviser is unlikely to be personally involved and while representing the client, they can do so on an impartial basis.

Initial claim requirements can be assessed for “reasonableness” by the adviser. If the reason for a requirement is unclear, questions can be asked that either clarify the reason or identify the requirement as unnecessary.

The adviser may be able to suggest alternative, more relevant requirements.

The adviser can explain the requirements to the client and assist with obtaining them.

(iii) Point of contact

The client may wish the adviser to be the ongoing point of contact with the insurer, in which case the adviser becomes a valuable conduit of communication.

(iv) Calming influence

A client may regard certain claim requirements as intrusive or unnecessary. The adviser can calm things with an appropriate explanation and, if necessary, go back to the insurer and explain the client’s concerns.

If delays occur the adviser can explore alternative ways forward with both the client and the insurer.

(v) Client pre-conditioning

The adviser can pre-warn the client about any likely claim problems. They may recommend the client includes additional information in order to minimise the chance of misunderstandings adversely affecting the assessment.

In this way problems can be avoided or issues can be discussed ahead of time, reducing the chances of an acrimonious dispute.

(vi) Dispute resolution

If the claim is unexpectedly denied, the adviser can identify the reasons and then explain the position to the client.

The adviser may provide advice in regards to seeking a review of the decision.

If matters escalate, the adviser can inform the client of the various avenues of dispute resolution, including internal and external bodies, legal or even media.

The adviser can assist with the preparation of the client’s formal complaint.

If the client seeks a legal solution it may be necessary for the adviser to assist with the briefing of the client’s solicitor.

By staying involved the adviser is better positioned to represent their own position in the dispute.

(vii) Claims reports

The adviser may send periodic reports to the insurer, and may include:

• Feedback from the client about how the claims management process is impacting them;
• Progress the client feels they are making in getting back to full-time work; and
• The client’s attitude to utilising rehabilitation services, either privately or through the insurer.

Regular feedback in this form would reduce the chance of complications arising and assist insurers to adjust their claims management processes, both for individual claimants and also generally for all claimants.

(viii) Claim’s costs

The insurer’s infrastructure, systems and claims administration costs can constitute as much as 5 per cent to 10 per cent of the total premium. In addition, the cost of claim payments can be as high as 40 per cent to 60 per cent of the total premium.

Anything that reduces costs by improving workflow, communication and dispute resolution is good for all parties. Adviser involvement in the claims management process could financially benefit other clients.

Involvement in claims management has a potential material impact on an adviser’s business.

The impact does not appear to be appropriately remunerated by commission payments.

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.

The final question, to be considered in the second part of this article, is therefore:

Is there an equitable, fee-based remuneration model that will negate any reasons against adviser involvement?

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