Canadian Underwriter


January 1, 1999   by Lowell Conn

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A battle of brawn and wits has begun among service providers to the insurance industry in response to the rapid consolidation taking place at the primary company level.Faced with a changing landscape, service providers are looking for new opportunities and cost-effective means to deliver their wares to insurers. The claims management segment, most notably the role of the independent adjuster, is at the front line of these forces of change. And, as the strain is taken up on the ropes in a push and pull war, claims management service providers are moving in line with the trend toward “big is better” in securing their future market position and bolstering professional expertise.The claims management field is consolidating at an unprecedented rate, seeking the critical mass necessary to reach peak service and cost efficiency. At the same time the industry is seeking new services and distribution modes to fortify its professional presence. And, while the independent adjuster faces up to emerging global players, they are cognizant that waiting in the wings are in-house telephone adjusters employed by the very same insurance clients they service.

Statistics compiled by the Information Centre of Canada (ICC) show that Canadian insurers have reduced their external claims adjustment expenses as a percentage of direct written premiums (DWP) by 15% since 1995. Companies surveyed (representing a $12 billion DWP sample) allocated 5.7% to external claims expenses in 1995, a figure which withered down to 5% in 1996, and then to 4.8% in 1997.

While a 0.9% drop in the percentage of external claims expenses might not sound significant, it represents a drop of $108 million from 1995’s $684 million to 1997’s $576 million. Put in different terms, the independent adjuster received 15% less of the insurance pie in 1997 than in 1995.

This 15% figure represents just the opening salvo in a high-stakes game of tug-of-war being fought over the claims industry. On one side of the rope is the independent adjuster, who is utilizing an array of strategies and techniques to fight the pull of their own clients, the consolidating insurers who, armed with in-house and telephone adjusters, are attempting to rein in expenses. Facing the immense brawn of insurers, independent adjusters have resorted to three main strategies: applying their own bulk, developing new market opportunities, and focusing on niche specialization.

Bulking up

Like reinsurers, insurers, and brokers, adjusters are getting bigger. One need only look at a recent rash of high profile acquisitions topping up a merger manic year — Lindsey Morden’s $153.6 million purchase of UK-based Ellis & Buckle on the heels of its purchase of Hambros Insurance Services Group Plc. and Atlanta-based Crawford & Company acquiring Adjusters Canada Inc., to name a few — to see that the consolidation push has moved into the service providing areas.

According to Rob Gow, Lindsey Morden’s senior vice president of operations, consolidation is being driven by the need to service growing national and international clients. “Our client base is consolidating and merging in order to compete and become more efficient. For us to service the changing needs of our clients we have to do the same thing.” As insurers grow they need adjusting firms that provide a wider reach across the country and the world, says Gow.

Adjusters are consolidating for the same reasons as the rest of the industry, he adds. “The market is simply not growing. For adjusters to increase business and achieve the efficiencies that come with that, they have to purchase new business,” he comments.

Not only the biggest are consolidating. Joining top players Crawford Adjusters Canada, Lindsey Morden and Underwriters Adjustment Bureau, are a wide array of medium players including Shumka Craig & Moore, InterSpect and Kernaghan.

Crawford Adjusters Canada president Skip Sutherland supports the argument that efficiency is achieved through larger, consolidated operations. “There is efficiency in size… benefits like central management, central information technology, central quality control and education, even central marketing. These are benefits that cannot be achieved at the smaller level,” he says.

Still, bulking up can have dangers, Sutherland observes, “there is the threat of inefficiency when you become too big too quickly resulting in fragmentation”.

The obvious advantage of consolidation, the larger corporate-style adjusters say, lies in technology investment, enhanced cost efficiencies and by being able to provide an increased range of services beyond traditional roles.

Canada’s top three adjusters, Crawford Adjusters Canada, Lindsey Morden and Underwriters Adjustment Bureau (UAB), are currently advocating that insurers outsource entire claims departments, a move that would help adjusters provide a more cost-effective service.


UAB president Serge LaPalme says his organization already administers the full claim book of some companies. He believes complete outsourcing to be the future of the insurer-adjuster relationship, “The future will see insurance companies as claims auditors not examiners. Outsourcing claims management allows the insurer to become the auditor. The name of the game for adjusters is to provide good service at a cost better than what the insurer would pay in-house.”

Even if insurers don’t completely outsource operations, Sutherland suggests that greater control over the claims process will ensure greater cost-efficiency. “With greater authority, the adjuster can react quickly and make the service quicker and less costly. Also, the experienced claims examiners can then spend their time on the type of claims that require the claims examiner’s attention.” he notes.

All of these initiatives demonstrate a fundamental shift in the way adjusters and insurers are presently doing business. “This business used to be based on hourly expense costs, now it is more contract and fixed expense based,” says Gow.

Developing skills

Anticipating the creeping advancement of telephone and in-house adjusters, the adjusting profession is at work identifying new products and services to bolster their unique foothold within the marketplace.

Their objectives are twofold — firstly to stake a position in a non-expanding insurance market, and secondly to find new opportunities to “add value” to the services currently on offer to entice insurers away from the in-house option.

As such, Sutherland says Crawford is developing a survey claims information system to assist insurer clients who are developing policies and premium figures. “Using our information technology, we are accumulating data that can be used for underwriting, developing premiums and evaluating claims ratios,” he says.

UAB is also branching out into this burgeoning market. The company acquired Insurers’ Advisory Organization (IAO), an underwriting review organization, in 1997 and added to these services by purchasing Sentinel Underwriting Review Ltd. last fall. LaPalme says the company is also becoming active in the loss prevention field to further diversify its interests.

Lindsey Morden has positioned itself to become a front-runner in handling corporate self-insurance. “Self-insurance is a growing marketplace and claims management services are rapidly growing in demand in this segment of the market in the U.S. Canada is behind on this trend,” notes Gow, “but I predict it will become a big market for claims handlers”.

He points out that the type of services offered by claims service providers surpass the old models, “in the past, we would offer companies a list of services and prices and just have them choose what they want. Today, we offer proactive integrated solutions, more problem solving approaches than just isolated services.”

What stands out among these trends is the parallel between adjusters and other insurance service providers — particularly insurance brokers — who are finding their core business threatened by direct writing. In response, brokers have shored up their own defenses and investiga
ted new growth possibilities. LaPalme stresses that service providers to the insurance industry should not be afraid of the potential market-loss to in-house services, “I’m confident that whatever business might be lost to consolidation will be replaced by the emerging markets such as banks and the large corporations.”

Niche opportunities

At the other end of the spectrum, but caught in the same tug of war, is the small independent adjusters who have been swept aside by the wave of consolidation and are now looking at a future of competing against the national giants.

They too have a strategy, but it is more of a business-as-usual approach. Small independent operators surveyed believe they will compete by ensuring quality service and a niche expertise. According to Max Brugger, president of Toronto-based Miller & Associates, the small independent adjuster is not in competition with the national companies. “We serve one market and [the national companies] serve another. Smaller operators specialize in cargo, property, errors & omissions, bonds . . . we are also in demand by smaller insurance carriers that want more of a personal service for their clients,” he says. Being a smaller operation with just five locations, Brugger says he can ensure quality service throughout his company.

Dave Andrews, an adjuster with Cormier Adjusting Ltd. agrees there is a place for a profitable small independent operator. “Naturally, a lot of small independents have concerns that they might not be able to make it on their own, but there really is a niche for them. Whether they must compete as specialized independents or in locations where the nationals won’t locate or where an insurer won’t put their staff, they can continue to compete.”

Andrews notes that while the solutions and strategies imposed might differ depending on the size and scope of each firm — be it a small operator or national network — he says all adjusters are faced with the same challenges. “Whether you are small or large, we are all facing the same thing. You have to control costs . . . the insurers are giving us less claims to work with.”

Factors driving change

A significant concern of adjusters across the size range includes developments on the legislative front. For instance, Allstate Insurance, Progressive Casualty and General Accident are currently in the throes of a legal battle with the City of Toronto over a new towing bylaw restricting insurers from sending accident victims to preferred service providers. Toronto is the only city to have enacted such legislation and insurers argue that similar developments across the country would result in a regulatory nightmare. However, some adjusters see the move to “preferred service providers” as the beginning of a general move by companies to allocate business only to operations which they either control or significantly influence. Essentially, adjusters would prefer if companies kept a distance from the claims handling process.

Furthermore, a legislative tiff recently broke out in Prince Edward Island where regulators are working to harmonize the Atlantic provinces’ insurance acts. The current draft eliminates PEI’s residency requirement, a move that has drawn sharp criticism from the province’s brokers and adjusters. Jeff Cooke, the Insurance Brokers of Prince Edward Island president, believes this move will result in off-island in-house adjusters stepping into their home turf.

Consumers drive change

Still, the ultimate force that will drive change – and determine the future of industry operators – will be the end-consumer. Gow says, “the industry is going through dramatic changes as it tries to keep up to speed. The public wants its claims process to be in the style of an auto-club . . . it should all be taken care of in one phone call. We are getting increasingly close to this reality.”

LaPalme insists significant change in the industry is still forthcoming. “The competition will soon be so intense that the companies that identify and cope with the changes will be the winners. The winners must be prepared to turn on a dime and be customer-focused.”

Still, George Kalopsis, vice president of claims at PAFCO Insurance Company, suggests the current “cost down-grading” of company claims expenses is due to the diminishing profit on balance sheets. Should the industry move out of the current soft cycle, he believes a more relaxed attitude will be adopted by insurers to claims expenses. “When insurers are profitable they are less concerned with winding down expense ratio components for external adjusters,” he says. In today’s depressing environment, adjusters are experiencing the flip-side to this theory.

Kalopsis adds that current insurance realities — and by extension the adjusting realities — are not consistent with past trends, but not completely revolutionary, “we are not experiencing a sea of change. Independent adjusters, the services and products they provide, are simply a function of their main client, the insurer. As the insurance companies change, as their needs change, so too will the adjusting community.”

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