Expert Commentary

Claims—Do You Recognize Your Policy?

This Insurance Rx column takes a look at the insurance industry's approach to claims handling from both the insurer's and the risk manager's perspective—and the many areas where these perspectives can differ.

March 2004

How often is there a meeting of the minds between buyer and seller? An insurance contract surely qualifies as a product or service that can have a degree of ambiguity attached to it. It is a contingent promise to perform if a claim occurs. It is difficult to foresee all circumstances that might apply in a claim situation. However, certain aspects should be anticipated and considered.

Insurers—Be Direct with Customers

In the case of a claim, there may be some "gray" area; however, the parties involved need to promptly proceed to a meaningful resolution. Too often, the rhetoric from the insurer at the time of a claim is likely to be that the risk managers do not understand the policy’s intent. Or, they might take the position that there are exclusions that apply. The insurance company may even state that it did not really mean the wording contained in the policy! It is important for insurers to focus on how they handle claim matters. In baseball, as in insurance, if there is a lack of clarity, a tie goes to the runner, and in the case of insurance, it should go to the customer or insured.

It seems as though insurance companies have outsourced their claim departments and, as a result, their own claim departments have deteriorated in terms of their talent. Frequently, the claims are outsourced to legal firms. The legal firm’s interest is in any particular claim and not necessarily in the insurance company’s goodwill with its customers. From the customer’s perspective, insurers should remain behind the "wheel" and not allow the "navigator" to take over customer communications.

On the other hand, some claims should and can be denied with a clear statement of the facts surrounding the claim and the specific pertinent policy language. Anything else is simply flirting with disaster because an insurance company is affecting its own credibility. An insurer’s success is tied to the portfolio, not merely a few claims. However, a few claims that get mishandled can cast a dark shadow on an insurance company’s reputation. If the overall claims experience has an unexpected negative trend, the real problem could be risk selection and/or pricing deficiencies. Insurers’ short-term swings in cash flow on a few claims matters are merely noise. At the end of the day, what matters are positive customer experiences. It all comes down to corporate credibility—what else do insurance companies have to sell?

Expectations—Risk versus Reward

There is no business that can predict its performance nor guarantee smooth earnings trends, "up and to the right" with "no bumps in the road." If earnings were that predictable, there would be no risk, nor any real opportunity. If low risk fits your profile, then send all the employees home, invest in U.S. Treasury securities, and pray that inflation is low. Without risk, there are no investments that support a yield of 10-15 percent, which most business’s annual reports state as a specific objective.

Insurers—Control What You Sell and Deliver

What are insurance companies selling? They are selling their word and a (written) promise to respond to insured claims. If a claim occurs that is ambiguous, proceed with a positive customer’s perspective, examine it closely, clarify policy wording, and if in doubt, pay the claim. After paying the claim, where ambiguity existed, exclude the exposure from all future policies, and move on seeking better opportunities.

From an insured’s perspective, if all they see is a knock-down drag-out battle when a notable claim occurs, the reaction is likely to be that what they thought they bought must be something different from what the insurance company thought it sold. The insured’s only path points toward litigation where only the attorneys win.

Insurers attempt to balance between being innovative and fiscally prudent. Innovative product offerings favor numerous "bells and whistles" in terms of policy enhancements and, in a "soft" market, can lead to the sale of an insurance transaction but it can also add to a policy’s vagueness. In a marketing sense, insurers can easily get sucked into broadening their policies to outshine their competitors, but at what cost? The cost can impact a firm’s creditability which far exceeds the claim’s ultimate liability, including expenses.

Being prudent in some cases suggests technical underwriting, in a "hard" market, where premiums fully support ultimate claims, a rare event—even when investment income is considered. Of course, insurers have concerns that claims can ultimately outstrip premiums.

Insurers are also concerned with the pressure coming from rating agencies, regulators, and shareholders/policyholders. They are generally experiencing conflict between the short-term interests of shareholders and policyholders, especially in a stock insurance company. However, in the midterm, these interests should be moderated, as both parties need a balanced approach for success to be achieved.

Remember, the only thing that supports strong business performance is satisfied customers.

Risk Managers—Value Proposition, Don’t Oversell Your Management

Policyholders have a responsibility to act with consideration, demanding what they clearly are entitled to but not asking for things they believe are unlikely to be insurable. This includes creative claim theories, acting with a sense of fairness on valuation issues, and being transparent. Remember, insurance is a vehicle for financing fortuitous risk and not a means of becoming an occasional profit center. In order for insurance to work, a pooling of losses and premiums is required, so in most years, an insurer is using your premium to pay for losses of others.

The risk managers should focus on identifying the real risks that their business needs to insure. The wonderful fringe covers, which are "thrown-in" for no or little extra premium, are being provided at what value? The coverage might have some sizzle on the front-end but could prove very costly to prove. If this coverage feature was communicated as an accomplishment that enhanced functional value to the enterprise, the risk manager’s credibility with management may be damaged given a claim. Do not be tempted to chase the "bells and whistles" especially if the market (insurers and reinsurers) cannot support these policy nuances.

As an insured, when is the last time you approached an insurance company and requested that an endorsement be added to your policy excluding a certain existing coverage? You may be reducing the cost of insurance even if there is no real short-term change in the premium. This can also prove to be a beneficial position for future policy negotiations.

Insurance is way of pooling risks and premiums for generally homogeneous exposure units. It is not a means for a risk manager and his or her company to win the lottery. The value proposition can be enhanced by converting the insurance risk assessment process into a broader risk analysis capability to assist general management in identifying and determining how other risks should be managed.


The biggest challenge of insurance—an intangible product—is that the only time it is really tested is if there is a claim. Claims that occur around the deductible are expected based on financial forecasting and are somewhat routine. The majority of insureds never experience a claim of $50 million or more. The odds of a business incurring a material claim, 3-5 percent of assets or expected earnings, are rare. However, it is nevertheless of great importance, if it happens on your watch.

Insurers and risk managers have one important thing in common: both deal with an intangible product, which points to individual and organizational credibility. If you individually deliver what you represent, then the greater organization should provide added support. In a macro sense, any organization has three simple components: owners with capital, customers with demand, and employees that "build" quality products and see to it that there is timely delivery. Insurers and risk managers that understand how they contribute to this value chain will be successful.

As a final point: if a deal is too good to be true, it probably is!

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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