International Claims Convention 2012:
AThe insurance industry had dealt with a string of disasters in 2011. It was hit by Japan and New Zealand earthquakes as well as Australia and Thailand’s devastating floods which have significantly impacted the P&C and Life segments.
ccording to a report by the Asia Insurance Review, 2011 recorded the highest ever total economic losses to both the insured and uninsured, which is estimated at about US$350 billion, an increase of about 55% from the 2010 record. Insurers are very anxious about 2012 which they anticipate could be far more disastrous. These catastrophic events raised the pertinent questions as to whether insurers are ready to confront the challenges that await them? Climate changes, technology, regulations, litigations, economic uncertainty, frauds and supply chain are among a slew of concerns in claims management. Other concerns include how best to deal with these challenges, risks and changes? Against this backdrop, this year’s International Claims Convention, organised by the Malaysian Insurance Institute was themed “Claims Challenges” to address the challenges and strategies the industry has in responding to such issues and to ensure that the insurance industry remains robust and resilient.
Stage Accidents on the Rise
The Australasian Branch President of the International Association of Auto Theft Investigators (IAATI), Mark Bennedick, highlighted that staged accidents are on the rise in the United States (US), United Kingdom (UK) and Australia. According to the estimates by the Insurance Fraud Bureau in the UK, the insurance industry looses $20 billion a year from staged accidents. Apparently, this is a 70% increase in the last three years. The motivation for such acts is driven by financial benefit from insurers and the perpetrators have been identified as organised crime groups, individuals working alone, individuals recruiting T/P, and medical and legal providers, repairers and recovery agents.
The IAATI suggests that the insurance industry apply both short-and long-term strategies to mitigate these crimes. The short-term strategies are to provide high quality training for staff who will be able to identify genuine cases from staged cases, for specialist investigators to collect quality data, to use forensic specialists and to create strategic partnerships with law enforcement. While the long-term strategies include insurers to share information, intelligence-led investigations, create public awareness and educate the public about staged accidents and lobby for legislative changes for the benefit of citizens. David Picking, Technical Director – Motor (Asia Pacific) Management Services Pte Ltd, Singapore, shared case studies of fraudulent motor claims. He highlighted some red flags that insurers should watch out for in motor insurance claims such as the time of accident, single vehicle accidents, damage that is not consistent with the accident description, driver’s age, unusual accident description, serious vehicle damage, the vehicle type, policy restrictions, injury to the insured or third-party claimants, conflicting third-party versions with the insured version, drink-driving and previous claims history. Picking advocated some solutions to these red flags, which can be divided into three categories:
(1) Own Damage Claims Insurers are encouraged to conduct random visits to workshop panels before a vehicle is released to the customer to ensure that repairs match the invoice charged. Use software such as Audatex or Estimage to track charges by workshop or vehicle type.
(2) Third-Party Property Claims Again to use software to track charges by workshop or vehicle type or claimants.
(3) Third-Party Body Injury Claims Set up a shared database so claims history can be tracked
Track claims by clinics or doctors or workshops
Dealing with Natural Catastrophes
According to Claude Seigne, insured claims from natural catastrophes are increasing yearly and this can be attributed to economic growth and climate change which have introduced new challenges for insurers. Seigne then shared the advantage of using Catastrophe Modelling as an approach to assess losses. Seigne also shared AXA findings from the recent Bangkok flood that took place late July 2011. According to AXA statistics, macro estimates on damaged residential houses were 1 million while 1,000 large factories in seven major industrial estates and 15,000 smaller plants were affected. The worst affected industries were car and electronic manufacturers. Non-life insurance premiums were US$3.4 billion as a result of limited public awareness of the need for insurance, 1% of Thai residences are covered for flood. The industrial and commercial business sectors represent over 85% of the property premium. Less than one out of two insured took up a business interruption insurance policy. Seigne said, “Hazards can be considered as Acts of God but disasters are always man-made. The majority of disasters are predictable and can either be avoided or properly planned for. The Thailand catastrophe appears to be an example of poor site selection and poor disaster planning and preparation.” Developing economies such as Thailand and Indonesia are very vulnerable to the effects of climate change.
That is why he advocates adopting modelling techniques to help mitigate and better plan for such disasters although they may not be completely avoidable. Additionally, reinsurance also plays an important role in aiding those affected by natural disasters, advising on preparedness, prevention and risk analysis. The nitty-gritty details of insurance claims in the after math of a catastrophe can be gruelling in terms of the way the policy clauses are derived. Rebecca Hopkirk, Partner of Holman Frenwick Willan LLP, Singapore, discussed the impact of natural catastrophes on the supply chain and business interruption exposures. Linda Sim, Manager of RGL Forensics Singapore, talked about contingent business interruptions and mining losses.
Mitigating & Combating Insurance Fraud
Aruno Rajaratnam, Head, Financial Lines Practice Asia, Ince & Co Singapore LLP, highlighted some emerging claims battles in the D&O liability arena. She said, “The D&O policy has evolved over the past 20 years in Asia from a virtually unknown and rare insurance product to an essential and highly visible policy. It is a dynamic insurance product and has become an essential insurance requirement in a company’s portfolio.” The D&O liability policy is impacted by a myriad of issues involving corporate governance, mergers and acquisitions, company law and indemnification, bankruptcy, fiduciary, employment practices, securities, regulatory actions and criminal law. According to Aruno, “Today is a ‘buyers’ market with many D&O players.” She added that the fight against corruption has gone global. Out of the 10 largest Foreign Corrupt Practices Act (FCPA) related settlements, eight were with multinational companies based outside the US. The OECD and Transparency International are the main push-and-pressure for countries to legislate and put in place enforcements. The UK and China are two recent countries with similar legislation while India and Indonesia are in the draft stage. Aruno said, “There is also other impetus that supports such legislations like the new Dodd-Frank Act, which encourages a whilstleblower to come forward on Securities Law violations. Another impetus is the UK Bribery Act 2010 (which took effect from 1 July 2011) that has broad extra territorial reach. Regardless of where the activity took place, the Act has strict liability for failure to prevent a bribe. In fact, this Act is also broader than the FCPA.” Other salient points that Aruno highlighted are: (1) the nature of the D&O liability policy is such that it is not a commodity and it is considered to be a multi-million dollar asset. It protects the personal assets of the directors and officers and the company’s revenue; (2) there is a severity issue in D&O claims and not necessarily a frequency; and (3) most D&O claims have been acrimonious as a result of wording issues.
Fraud: Korean Case Studies & Lessons Jae Hoon Kim, managing director of Korea Life Insurance Association, shared some interesting case studies about insurance fraud in Korea. The cases varied from family homicide, reporting forged deaths overseas, self-injury to fraud committed by medical providers. Insurance fraud totalled 3.4 trillion KRW a year (US$2.7 billion). As of 2011, 72,333 people were involved with insurance fraud amounting to 423.7 billion KRW (US$353 million). Only 12.5% of the yearly total insurance fraud were uncovered. Annually, Korean households are burdened with additional premiums of 200,000 KRW (US$167) by insurance fraud. The Korean government and insurance industry have pulled their resources together to prevent insurance fraud. The government has set up a joint task force to tackle the increasing insurance fraud and coordinates efforts made by individual organisations. The team also represents the government’s strong will to wipe out insurance crimes. The task force members include the prosecutor’s office, the police, the Financial Supervisory Service (FSS), the Health Insurance Review & Assessment Service (HIRA), the Korea Life Insurance Association (KLIA) and the General Insurance Association of Korea (GIAK). So far, the task force has detected 264 frauds, which have been referred to the police for investigation. A total of 1,317 persons were involved in frauds that totalled 51.3 billion KRW (US$42 million).
The Korean insurance industry has also set up various preventive measures to fight such crimes. A force called the Special Investigation Unit (SIU) that has 16 life insurer participants operates a cooperative body named Insurance Crime Investigation Council through which they exchange information on insurance crimes and discuss cases for joint investigation. The industry associations also provide courses on insurance fraud prevention and campaigns on crime prevention to educate the public and industry professionals in mitigating insurance fraud. Hyunmi Park, Underwriting and Claims Manager, and Simon Pepper, Head of Underwriting and Claims, from Pacific Life Re Limited Singapore addressed the question of why people commit fraud. Park shared some technical analysis on fraudulent claims based on hospitalisation claims from both sickness and accidents in South West Korea. The analysis was prepared by a special task force set up in 2012 by Pacific Life and other insurers to investigate the “hard” fraud in this region. The task force found that some hospitals were abetting fraud for commercial motives by allowing claimants unnecessary longer duration of hospitalisation. There were instances of claimants purchasing multiple policies through lower income status; claimant profiles were typically unemployed or housewives, desk workers and the aged. The task force also uncovered fraudulent claimants who visited various hospitals every one to two weeks – some hospitals co-worked to switch patients; families or friends aiding each other for collective frauds. There was a strong link between repetitive and long-stay hospitalisation claims and moral hazardous sales forces or brokers. Pepper pointed out that “fraud is always easy to spot on hindsight” and offered a holistic approach to mitigating fraud. He said the Pacific Life Re approach comprises five components in its Fraud Risk Strategy: assessment, i.e control, monitoring, detection and deterrence in dealing with fraud.
Ways to Combating Insurance Fraud Patricia Mack, vice president of the Claims, Accounting & Liability Management Division, Swiss Reinsurance Company Ltd Singapore, reinforced the idea of combating fraud through collaboration. Collaboration yields enormous aggregate benefits to the industry. The key techniques for detecting and preventing fraud are:
• Identify specific patterns and highlight activities that look suspicious Pool data with other databases to broaden claims investigations Social networking analysis is becoming more popular for insurance investigations
Identify stress levels in claimant interviews. Mack encouraged the insurance community to explore the feasibility of a unified approach that looks at internal systems and processes and for the insurance community as a whole.
She said, “The first line of defence is the resilience of the individual company, its systems, processes, checks and vigilance of its staff in scrutinising policies and claims. There should be a zero tolerance approach to fraud versus reducing fraud to zero.” She stressed the significance of staff training and adopting positive attitudes, which are essential to equip claims personnel with the proper skills to spot fraudulent claims and raise red flags as early as possible. The staff should be prepared to go all the way in eliminating fraud while management support is also critical. She urged the insurance community to develop a collaborative cross-sector approach through common alliances where insurers can share data in forums, common quality database for analyses and data mining to combat insurance fraud. Giving an overview of the impact of population growth on the insurance industry, Professor Allan Manning of the LMI Group and president of the International Institute of Claims Preparers, discussed the technical details in his presentation on General Area Damage – What Should be Brought into Account? He said that over the years, given the increased population and resulting increase in density, city councils and developers have allowed or encouraged higher density usage of land, both commercial and residential. Professor Manning made a comparison of Australian flooding incidences in 1974 and 2011. What would have been the outcome had the 1974 flood gone to the same level as 2011? Then, 7,900 buildings would have been affected. In the 2011 Brisbane flood, 14,790 buildings were affected, which accounts for a 89.5% increase over 37 years. As a result, Zurich (commercial) and Suncorp (domestic) Flood cover was much more readily available at the beginning of 2011 than back in 1974. Professor Manning said that any severe storm can cause localised flooding. As such, it is important to understand flood business pack and domestic covers as there are three places where exclusions can appear, namely, General Exclusion across the entire policy, Policy Section Exclusion and Perils Exclusion. Originally, under a Fire and Perils Policy, flood was considered under Perils Exclusion. Flood is considered a trigger for interruption claims. The affected components such as high rise commercial tenants, customers and suppliers from other states, and public utilities will make such claims. The community, therefore, also needs to understand the ISR Policy, which provides a Standard that the Limit of Liability or SubLimit is available for any one loss at any one location. Professor Manning shared the lessons learnt from the Brisbane Flooding incident:
• Each and every Sub-Limit must be adequate to cover the risk facing the insured subject always to their risk appetite A broker, risk manager or insured who takes away cover from the Policy does so at his peril Underwriters, development managers, brokers or claims officers need to document ALL discussions in detail.
Climate Change Affecting Maritime Insurance
The international regulation regimes – Safety Of Life At Sea (SOLAS) Convention and Marine Pollution Convention (MARPOL 73/78) – for operating of vessels under the IMO has been highly concerned about protecting the environment since the 1960s. They are the two solid pillars that support the maritime industry in protecting the most important issues, i.e. safety of human life and maritime pollution prevention. The affects of water, wind, current/tidal system, wave, daylight/darkness and visibility in the seas are matters that greatly concern seafarers as these impact their livelihood. Captain Khoo Boo Hock, CEO of MaphilindoInsight Sdn Bhd., explained the effect of global warming or climate change on the maritime sector. Bad weather will affect most small vessels at sea, such as causing delays, extra bunker being consumed, structural damage/defects, cargo damage/loss, uncomfortable environment to the seamen, fatigue to crew members and it will expose lives, property and cargos to additional risk.
He expressed that insurers should be aware that the claim amount on H/M damage/loss has increased compared to the past. He attributed this to inflation, high material cost, variance of exchange rate for parts, high labour cost due to a more affluent society in tandem with a nation’s development, high transport cost due to fuel price hike, changing trends where shipyards prefer to build new vessels rather than undertake repair work, limited shipyards, high capital investment for shipyard/repair, and stringent rules imposed by various authorities.
Loss Adjusting Challenges & Relevance
Thev Kandasamy, Asia Operations Claims, FM Global Singapore, defined a loss adjuster as “one who reports the circumstances and extent of the loss to the insurer, assists to mitigate the loss for insurer and insured, explains the expressed terms and conditions of the policy to the insured, and evaluates the loss for both insured and insurer to reach a fair and reasonable settlement in an expedited manner.”
He further expanded his definition as follows:
• Reports the circumstances and extent of loss – eyes and ears of the insurer Assists to mitigate the loss – putting the insured back in operation as soon as possible and optimising the cost incurred Explains the expressed terms and conditions – making the insured understand what they are covered for
Evaluates the loss – measure the loss. Kandasamy explained that a loss adjuster is like a referee between the insurer and the insured. Broadly, there are two types of loss adjusters: in-house loss adjuster and public loss adjuster. Regardless of whether a loss adjuster is an in-house incumbent or an independent public loss adjuster, both operate at the highest level of professional ethics. Based on the results of a survey by FM Global, it seems an inhouse loss adjuster is the preferred choice for insured and insurer when assessing damages or losses. However, regulatory and resource constraints may change this preference. There are instances where insurers may need assistance from independent loss adjusters in certain circumstances. Joash Tan, managing director of Mestari Adjusters Sdn Bhd, provides a loss adjuster’s perspective on the changes and challenges of the profession. The Malaysian insurance landscape has recently seen a slew of mergers and acquisitions that has increased the size of insurers coupled with a new spring of takaful licences, which resulted in a reduction in the client base for some insurers. Against this backdrop, loss adjustors face changing panelship and nomination arrangements, centralisation of claims handling by insurers, emphasis on cost control, fast tracking of reporting and desktopping, introduction of agreed feed structure, emphasis on performance of service delivery, emphasis of claims leakage and various consumerism rights. Currently, there are 35 adjusting companies in the industry. In 2000, the number of cases handled by Malaysian licensed adjusters amounted to 224,403 cases, out of which 83% were motor and 17% were non-motor related cases. In 2011, adjusters handled 371,995 cases comprising 85% motor and 15% nonmotor related cases. Their operating results increased from RM123 million in 1999 to RM202.6 million in 2011. As loss adjusters are independent professionals who are appointed by the insurers, they employ their own resources and their contribution to the industry is in catastrophic events. An oft-asked question is whether the loss adjusting profession is a sunset career? In Joash Tan’s opinion, this profession is evolving in its role. The value-add that the profession offers is in continuous education and training of its people. What remains unchanged for this profession is staying relevant. i
Prof Allan Manning
Jae Hoon Kim
Aruno Rajaratnam (Left)
Mark Bennedick (Left)