Claims Canada

Know Thy Self

Independent adjusters can find an important market in self-insured retention (SIR) clients. Insurance industry cycles often dictate the appetite for alternative risk transfer, particularly during a prolonged soft commercial market with attractive premiums. For those adjusters who persist in this field, SIR clients present an avenue of opportunity - and challenge.

February 1, 2013   by Craig Harris

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As the property and casualty insurance industry cycle goes, so too does the demand for clients seeking higher self-insured retentions (SIRs) or alternative risk transfer vehicles. Simply put, a soft market means better premiums and relatively good terms for commercial insurance policies. It is when the market hardens that organizations look for alternatives – a higher SIR or more formalized approach such as captives, reciprocals or insurance exchanges.

Along with this ebb and flow, of course, comes the need for adjusters to manage claims beneath that SIR threshold on behalf of clients. For many independents, this area has become a flourishing business representing a significant supplement to their traditional base of insurance companies.

“Whereas before, adjusters were largely an extension of insurers, they are more and more handling risk as an extension of a municipality, manufacturer or professional services firm, for example,” notes George Szypka, vice president, municipal accounts for Granite Claims Solutions. “If an adjuster wants to hone their talents on a particular skill set, there are far more options available these days.”

“The good news for adjusters is that these accounts can represent very stable clients, and a key source of business,” says Greg Merrithew, president of Arctic West Adjusters. “Adjusters should be aware of what is going on in their local communities and with associations and organizations. There is business out there with SIR clients; in some cases, it is just a matter of finding it.”

“This is an attractive alternative market for many adjusters, but it is not for everyone,” comments Craig Walker, director, Maltman Group International. “You need to have contacts in the risk management community, understand the issues and see where the opportunities are. It helps for adjusters if they have a niche in which to specialize.”

Control Adjuster or TPA

Whether an adjusting firm is acting as a “control” adjuster coordinating other services on a national program or a third party administrator (TPA), sources say the SIR market is evolving rapidly.  

Sheri Martinello, vice president, account management global markets for Crawford & Company (Canada) Inc., notes that clients have become more sophisticated in their risk management and requirements for TPAs. Specifically, procurement departments and, in some cases, in-house legal counsel have become more involved in structuring service level agreements with adjusting firms on the outsourcing of claims management processes.

“(We have seen) new attention on privacy clauses and increased expectations around security, data and compliance,” Martinello says. “There also has been increased focus on the TPA’s performance and metrics.“

While this involves added complexity and a more stringent onus on performance for the adjusting firm/TPA, it can also create opportunities, according to Martinello.

“There is an opportunity to build a team to dedicate or specialize in a specific type of industry or claim type,” she observes. “TPAs can administer BPO (business processing outsourcing) services such as FNOL, data management, claims handling, litigation management and trust management.”

Other adjusting firms have also seen a rapid evolution in risk management expertise and breadth throughout public and private corporations, as well as government organizations – of all sizes.

“You are seeing more and more small-to-mid-sized businesses entering the TPA market, armed with a great deal of knowledge around how to encompass the SIR into a full enterprise risk management (ERM) approach,” notes Josie MacKinnon, senior account manager for Granite Claims Solutions. “From the TPA service side, this means we are now working with more internal risk managers who are in constant consultation with and have a great understanding of the various business units of the company.“

Enterprise Risk Management

Heightened expectations from SIR clients pursuing a comprehensive ERM approach may benefit larger national adjusting firms, according to Szypka.

“In the past, a qualified insurance adjuster with a bit of exposure to the risk management function of a corporation could handle a role in a TPA environment,” he says. “However, the market has now shifted to a more complete ERM approach. Corporations have developed complex and extensive approaches to ERM in association with highly professional brokers and often excellent insurer connections.”

The changing face of the SIR sector means that clients could extend to virtually any organization – from a small manufacturing company to large retail or restaurant chains to governmental bodies, such as municipalities, hospitals or school boards. How the actual claims management function operates in an SIR environment is also highly dependent on individual needs. A client may want the adjusting firm to investigate and report back, with claims sent in-house to analysts. Other organizations may prefer the adjuster to handle the claim from first notice to settlement, including financial reporting and trust management.

Clearly, one size does not fit all when it comes to the SIR market.

“The needs of SIR clients can be very different, and adjusters have to adapt their service delivery to those clients, “ says Fred Plant, president of Plant Hope Adjusters. “That means several things – understanding the client’s needs, having the right information reporting systems in place and staying on top of communications with the client.”

While this might seem somewhat daunting to smaller to mid-sized adjusters, Plant argues they are up to the task. He notes that SIR clients represent roughly 6-8% of his business.

“I don’t think smaller adjusters should be intimidated by the (SIR market),” Plant says. “In the past, there may have been some aloofness or lack of understanding of what these kinds of SIR or TPA arrangements were. But more adjusters are developing relationships, understanding the business and adapting to those needs. The SIR area is a good opportunity not just for national adjusting firms, but for regional adjusters as well.”

To reach the SIR clientele, adjusters have to tap into the right networks, including brokers, managing general agencies (MGAs), Lloyd’s coverholders, risk managers, regional trade groups and public associations. Merrithew says that meetings, such as the annual RIMS (Risk and Insurance Management Society) Canada conference, are key ways to keep up-to-date on the SIR market.

“(RIMS Canada) is good as both an opportunity to meet with risk managers and for product development,” notes Merrithew. “There are lots of trends in self-insured risk and . . . and risk managers often have their own language and dialogue. Adjusters have to stay on top of this business.”

Intangibles of Serving SIR clients

In terms of the skill sets required to properly serve SIR clients, many sources say that the fundamentals of claims adjusting don’t change. It’s the intangibles that come to the forefront when dealing with customer needs.  

“The core principles are the same when it comes to adjusting claims,” notes Walker. “The big issue is dealing with claims properly under the SIR so that the situation does not deteriorate. Regardless of the size or type of the claim, it should be reported and handled through proper documentation, interviews and investigation.”

Walker cites the hypothetical example of a client with a $50,000 SIR who experiences a minor claim of $5-10,000 that goes unreported. That claim may end up deteriorating over a period of months, until it starts to approach to SIR limit.

“It is much harder to resol
ve at that point; we don’t have the facts, evidence, interviews, the investigation may not have been done right, “ Walker explains. “So education and awareness are crucial for SIR clients. They have to report claims right from the outset, and conduct due diligence. There also may be a risk or set of circumstances that we need to know about for future losses.”

This communication should also apply to insurance companies, who typically act as the excess layer beyond any SIR.
“When you act as a TPA or control adjuster, both the client and the insurance company have to be comfortable with the structure of the SIR,” notes Walker, whose firm works with roughly 15-20 SIR programs. “Does it apply to each claim? Is there an aggregate per year? If an insurer is acting as the financial backstop, they want to be made aware of certain claims, and whether these could possibly move into the next layer.”

For Merrithew, an adjuster working with an SIR client should be aware of the type of work involved, and exercise discretion and diplomacy accordingly. This is particularly true for large associations or organizations. His firm, Arctic Adjusters, works with three municipal organizations in northern Canada, including the Government of the Northwest Territories, the Nunavut Association of Municipalities (48 communities) and the Northwest Territories Association of Communities (32 communities).
“There could be a political angle involved if you are dealing with a group of municipalities or an association, “ Merrithew observes. “For example, a person may report a claim, such as a slip and fall, and that person may also be a constituent in that situation. As an independent adjuster we can give an impartial, third party assessment of the facts of the case and the coverage issues. However, a risk manager may report to a board of directors, and that board may be made up of public officials. It is something that adjusters have to be cognizant of – you can’t just go in like a bull in a china shop.”

Technical Know-How

In addition to “softer” skills, SIR clients rely on independent adjusters for technical know-how, including professional claims handling, bordereaux reporting, investigation techniques, coverage review and claims information/tracking systems.

Audit functions are often a key requirement for organizations wanting to understand and monitor loss exposures. “For example, a client may want to do a random selection audit of claims or a broad audit of all claims over $25,000,” Merrithew says. “In one case, an SIR client had a huge rash of 1st party auto claims. It was having a significant impact on the plan, so we decided to up the deductible from $1,000 to $5,000.”

Another key area for clients is loss reserves, particularly the need to accurately forecast and set reserves. “SIRs also have to keep a close eye on claims reporting and values, particularly for reserve setting,” notes Merrithew. “For an insurance company, to be off 10-20% on reserves is not as big a deal as an SIR. When you are dealing with a threshold, being off by that much can be a very big deal.”

Martinello agrees that reserve setting is an important function for adjusters.

“The TPA is generally responsible for the reserving of losses and for reporting the losses to the carrier if the claim could breach the SIR reporting threshold,” she says. “Accurate reserving is imperative as late reporting could expose the insured to non-renewal or penalties as well as prejudice the rights of carriers who seek to participate in a negotiation or litigation.”

For comprehensive SIR programs, larger adjusting firms say the issues that come into play could involve litigation, data/financial reporting and trust fund management, to name a few.  

“With most assignments handled by independent adjusters, once the file goes into litigation, the carrier takes the claim in-house,” Martinello notes. “The TPA, (however), is going to require skills to direct legal counsel, and manage legal counsel budget and expenses, along with the direction that the legal process will take.”

The same holds true for tracking accurate data related to financial reporting.  “For an SIR client, the client is looking to the TPA to manage their claims portfolio, which is illustrated by the data that is used for financial reporting,” Martinello notes. “Claims payments and reserves for future exposures are translated to the company’s profit and loss (P&L) and it is imperative that the financial management of the claims be reported accurately to the client.”

Adjusters may also need to offer trust management expertise for larger SIR programs, according to Martinello.

“The TPA typically manages a trust account on behalf of the SIR client and it is necessary to provide trust management ability and regularly scheduled reconciliation reports,” she says.  “In the event that the claim breaches the SIR, payments made to date must be illustrated for the carrier.“

Raising the Bar

An enhanced focus on risk management raises the bar for adjusting firms that want to successfully perform in the role of a TPA. Their skill sets have to meet the increasingly demanding needs of SIR clients, according to Szypka.

“As a TPA service provider, this. . . has provided us a chance to educate and train our adjusters not just in adjusting claims, but risk management skills and various business and management functions,” Szypka notes “This allows them to make more complete and beneficial decisions for a company. As adjusters are increasing their knowledge base to better serve the ERM approach, they better understand the various products, markets, and customers a company has.”

Of course, the opportunities that SIRs present for independent adjusters also arrive with a wide array of challenges. These can vary by size and type of programs, as well as the nature and complexity of the business/public entity at hand.

“The major challenge is now the adjuster now must acquire a broad technical understanding of the company he or she is handling risk for,” MacKinnon notes. “This takes research into the people that make up the company, understanding the company’s involvement in the community, their contractual obligations, and overall risk tolerance, to name a few.”

Adjusters may also have to take an impartial, measured approach to dealing with SIR clients, particularly smaller programs, according to Walker.  

“Sometimes clients may not objectively look at all the facts,” he says.  “We have to go back and say you may not be as lily white in the circumstances as you think you are. What we have to do as TPAs is give them the facts of the case and negotiate the best resolution possible from that independent perspective. For some smaller firms, they can view it as a personalized issue.”

Another potential hurdle  adjusters must clear is negotiating a fair agreement on a fee structure with SIR clients.

Negotiating Fee Structures

“For adjusters, negotiating fees for a TPA should involve some time and planning,” Merrithew says. “It really depends on the request for proposal (RFP) and what is being asked for in terms of the clients’ level of expertise and demands. Adjusters may have to provide ‘back-channel’ expertise, especially if they are dealing with a department of limited resources and budget.”

This level of negotiation can become even more complex and varied if procurement departments and in-house legal counsel are involved in setting a service level agreement (SLA) with independent adjusters on an SIR program.

“TPAs need to understand the nuances of dealing with procurement departments and ensure that there is a c
lear understanding of services and costs of services,” Martinello notes. “Negotiation of the SLA can be challenging for the TPA as the in-house counsel looks to them as a service provider in the same vein as the company that provides their office supplies. Thus, they may not always appreciate the nuances that are required in an SLA, especially around reserving, authority and indemnification.”

For Plant, one of the prime challenges with the SIR client is simple – finding them. “The challenge for the independent adjuster is to adapt to what the marketplace needs from us,” he says.  “For smaller regional adjusters like us, we have to find the people and companies that are looking into this and establish relationships with them, so they come to us.”  

The future evolution of SIR clients and alternative risk transfer vehicles will, as in the past, be closely tied to insurance industry market cycles. Many sources note that harder markets in past years have spawned greater activity in SIRs.

“If the market hardens, you will see more SIRs and alternatives to traditional insurance,” Merrithew observes.  “Where the industry cycle is going is anyone’s guess, but we have seen this movement to SIRs in the past. It takes time, resources and money to set up these alternative structures. But once they are up and running, they rarely go back to the regular market.”

Walker concurs that most SIR clients who have made the investment won’t abandon their efforts – but they may adjust their levels according to market conditions.

“I think the market will have to harden at some point, I am just not sure when,” he notes. “When that does happen, we often see SIR clients start to up their retentions. If it is a smaller operation, insurance companies want to ensure that clients can afford that level of retention.”

The trend of higher self-insured retentions may not be a curse for insurance companies, according to Plant.

“I think we are going to see the SIR trend increase over time,” Plant says. “In some ways, insurance companies are happy to have commercial clients handling smaller claims. An insurer may be charging a client a large premium for commercial coverage but if that premium is eaten up by a lot of smaller claims and administration, it may not be profitable business.”

With more clients embracing enterprise risk management and examining their exposures from a broader perspective, some think the higher SIR – and the consequent need for a control adjuster or TPA – is here to stay.

“Companies that adhere to the SIR model are likely to expand their risk tolerance and spectrum as a better understanding of the more complete ERM approach develops,” concludes Szypka.

“This includes more complex financial risk systems, a better understanding of reputational risk and more complex supply chains that can bear the risk. This will mean that more and more companies will partner with TPAs, brokers, and insurers who closely mirror their values, flexibility, and knowledge set.”

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