Cleaning & Restoration Association News

Insurers and the Contractor: What Happened?

October 12, 2004
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Once upon a time, adjusters and contractors had relationships. Job referrals came from agents and adjusters who lived or worked in your town and surrounding areas. You worked out the details with the adjuster, satisfied the customer, submitted your bill and usually were paid within 30 days. You called on the agents and adjusters, went to the local adjuster meetings and events, and everyone knew you and your reputation, good or bad. Your market share grew or shrank based on the value of your word, the quality of your work, and your effectiveness as a businessperson. All the while, adjusters seemed to be getting busier and busier and their experience level seemed to be dropping, but they were there, reachable and able to sustain a relationship. Work was steady, subject to the vagaries of weather, and the future seemed predictable. Now nearly all those things are gone. What happened?

Simply put, the property and casualty industry changed. Insurers got bigger as thousands of small mutuals and even some large stock companies closed their doors, either through bankruptcy or acquisition. The major focus was on operating cost reduction across the board, particularly loss adjustment expense, or LAE. Ironically, despite the incredible rise in adjuster workloads, LAE is about the same as it was 20 years ago. Adjustment expense continues to be the most difficult expense for insurers to control because it is the most unpredictable and varied. In a nutshell, this is why your local market is changing and why the contractor-adjuster disconnect occurred.

How is it that LAE stayed nearly flat while adjuster ranks went through repeated decimation? Information management expenses went up as adjuster expense decreased, essentially breaking even. Like your business, the need to improve information retention and management increased dramatically with the technology that made it possible. Unlike your business, the amount of information to be gathered, retained, and managed was monumental, even for the small and mid-sized insurers. In the good old days, adjuster file documentation varied from very little to volumes of rambling notes and reports with copies of every imaginable form and piece of documentation. Real number-worthy information, the kind accountants and actuaries wanted and needed, was sparse. Detailed throughput analysis of the cost of product and delivery was often murky and lumped into nearly all-inclusive bottom line measurements. It's the difference between being able to tell what parts of your jobs are most or least profitable with a detailed breakdown on collective material and service costs, and just summing it all up on the bottom line.

Other costs were added to the equation. Litigation expenses have been steadily rising for the last 20 years. The cost associated with on-the-scene adjusting is almost prohibitive, and reserved for the largest and most complex claims. Regulations like the Fair Claims Practices Act and tighter fraud reporting laws have added significantly to the costs of handling claims. The business of claims is a tough one. So how does this affect you?

Here's reality. The adjusters are not coming back. Local agents will continue to lose influence over who gets the referral. Insurers will do everything they can to reduce their LAE and have every right and reason to do so. This is what is behind the rise in networks and the boom of national brand providers.

That is the new landscape, and it begs some important questions:
How do you make up for this loss in revenue? The more reasonable question is "Why walk away from a market in which you are the best?" Trying to make up for lost revenue is hardly as profitable as getting it back. Suggestions that you chase after plumbers, property managers and other sources for water-loss jobs overlook the fact that insurers are tightening up that leak, pardon the pun, and soon such sources will not be available. Those sources frequently involve costly "incentives" that insurers find onerous. Often the adjusters bristle, making your job adversarial and problematic.

You could jump on the mold bandwagon, but that ship has sailed. To insurers, mold went from gold to old, and vendors who got too cozy with fungi fell from grace with their adjusters. Who can afford to walk away from over $3 billion annually worth of water loss? It works out to more than 2.2 million losses each year in the United States. It's good work if you can get it.

How can you remain competitive? You need to have a better understanding about your customers' needs, pressures, operations, processes, and corporate goals and objectives. Your competitive edge now comes from having a better understanding of what insurers want and need. Like it or not, your customer is the insurer. That is where more than 80 percent of the work comes from. So you need to ask yourself...

What do insurers want? They want to reduce their LAE, subject to meeting some very important conditions. If LAE goes down while indemnity costs skyrocket, the solution fails. If customer satisfaction declines, then underwriting costs climb as consumers become more mobile and price sensitive.

However, quality at a fair price isn't enough to get you in the game any longer. You have to belong to something bigger; that is why networks and national brands are taking off. Insurers need networks to simplify and streamline their claims processes. The future will be dominated by contractors who belong to a network or a national brand that delivers true reductions in LAE without depriving insurers of the ability to control the claim. Claim control is needed to manage scope and indemnity as well as customer satisfaction. At the same time, the network has to provide profitable (you need that!), quality work at a competitive cost (based on its value).

The challenge is to educate the insurance industry on the services and quality of work you provide. In the good old days we did it one-on-one through our direct relationships with the adjusters. That's gone. Today's answer lies in working with associations and networks that make a point to involve large numbers of claims leaders in their educational programs. If the claims leaders are not there, how can they be educated?

That said, the education has to present the quality of your work in a way that truly responds to the insurers' needs and concerns. No one will sign up for "I'm Great, and That's Why I Cost More 101," but they will want to attend "How Quality Reduces Loss Adjustment Expense AND Indemnity." Teach that class every chance you get.

Success is not about the tools. If it were, wouldn't insurers be asking what extractor, dehumidifier, hand tools, or brand of truck you use when making a potential referral? However, it is possible to make a good case for the differences in equipment. The answer goes back to quality and cost. Every insurer knows that faster drying is possibly the best defense against developing a mold problem. And time is money. However, speed can't be sacrificed for efficiency when it should be promoting efficiency. Efficiency means doing more without it costing more. The only justifications to an insurer for increased cost are obvious indemnity savings, improved customer retention, or reduced future risk of loss. It's that simple. You should be able to explain how your tools and equipment make that happen.

How can you prevent adjusters from second-guessing how you handle a particular situation? That's easy: take them out to the loss while you are there and explain everything when that explanation has the greatest value and impact. The trick is in how you take them there. The future of claims will be found in technology, and it is crucial to keep abreast of it.

Once the work is done, it's time to get paid. Issuing a claim check is about a five-minute process in an automated claims operation. Nearly all insurers are automated in terms of claim payments. So why does it take so long to get paid sometimes? Again, knowing the how and why of insurance claims operations has a lot to do with the answer.

Claim payments are, after all a process. In fact, that's the answer. The change in insurer operations and their related needs, the process, has everything to do with the time it takes to get paid. Your bill and its supporting documentation have to be processed into the adjuster's file before a check can be issued. That takes time and time is short as claims pile up with documentation and new losses continue to come in. The pressure is on the front end for the adjusters as they try to respond to the immediate needs of their policyholders following a loss. The paperwork needed to pay your claim is, frankly, a lower priority, and the more difficult it is to reconcile your documentation to the needs of the claim file, the longer it will take to get paid.

The business of claims, like everything else, has changed. Are you changing with it and, more importantly, are your changes an effective response?

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