Giving good service

The debate over the service standards brokers receive from their insurers has been raging for many years. There have been signs of improvement recently but there have also been developments in the industry that have put further pressure on the issue. The question is, have pressures such as an increasingly competitive market and moves by some insurers to offshore certain services had a negative impact on standards?

As competition for business continues in increasingly difficult market conditions, savvy insurers and brokers recognise that the key to success is attracting new customers while retaining existing ones. Without doubt, the way to achieve this is by delivering outstanding service. Claims are of course at the centre of this service. Yet are brokers happy to hand valued customers over to insurers whose business model can be shown to act in ways counter to a customer's wishes?

In a post-Treating-Customers-Fairly world business efficiency can, and should, be seen as a proxy measure for satisfaction. An efficient operation providing swift and responsive service not only satisfies current customers but it also helps brokers feel confident in recommending an insurer to their hard won customers. That brokers obtain knowledge of insurer processes is key to a sound risk-based assessment of their own business prospects.

However, in such a highly commoditised market, which has undergone a great deal of change as a result of consolidation, advancing technology and regulatory and consumer pressure, how can we help the broker decide who to use?

Claims can be a differentiator - it makes sense that a highly effective and efficient claims process eradicates waste, rework, cost and, ultimately, dissatisfaction.

There is symmetry between a claims department's business process and that of successful modern manufacturers. Typically, production starts with an order, such as a first notification of loss. The majority of products will follow a similar process route that can, to a high degree, be anticipated and proactively managed. Like modern manufacturers, claims departments must have the flexibility to respond to the needs of individual customers. In order to do this effectively, insurers must appreciate the process that each claim pursues from a customer viewpoint.

Though symmetry exists between the manufacturing and service models, there are differences that must be taken into account. Service businesses must take the time to absorb and understand the higher levels of variation in the process they are managing.

Taking the time to fully understand customers' predicaments and taking a pragmatic approach to claims can eliminate costly and dissatisfying rework, dramatically and positively impacting the customer experience.

Claims departments must understand demand from a customer's point of view and establish the type of demand as well as its frequency. If all customer contact is considered as demand, it is clear that there are two types: value demand and failure demand.

Value demand occurs when a customer requires a service or wants to 'pull value', for example, making a claim. Failure demand, in contrast, is created by a failure to do something or do something right, for the customer. If, for instance, claims details are incorrectly recorded at FNOL, the customer will need to ring again to correct a process making actions based on the wrong data - a call that could have been avoided. Call centres in financial services companies are dealing with as much as 40% failure demand, according to research by Vanguard Consulting - which also defined the term failure demand.

Positive results

By tackling the problem of failure demand head on, Fortis Insurance has seen immediate and positive results in its claims handling. Household claims received 16% less mail in May 2006, compared with the corresponding date last year, even though the department was dealing with a greater number of claims. It has also witnessed a 26% reduction in the number of telephone calls into household claims, moving from 3.5 calls per claim to 2.6. This has had a massive impact on the quality and cost of delivery, given that Fortis takes approximately one million calls a year. Failure demand creates rework and cost - eliminate this and time is created to understand customer needs, which will reduce waste for all involved; insurer, broker and policyholder alike.

Along with understanding the type of demand, insurers also need to be able to appreciate frequency and predictability of demand.

In terms of frequency, departments must consider how many types of a specific demand they have. Knowing the frequency for each type is crucial in terms of being able to predict the level and variation of demand, in order that the department can respond in an appropriate and timely way. There is no point in trying to dictate the level of demand and variation. As the American 'quality management guru' William Edwards Deming stated in his '14 points for successful business': "Eliminate quotas on the factory floor and eliminate management by numbers and substitute with leadership".

We must accept that things will always vary. Understanding variation can tell us what to expect. 'Management thinker' and author of The Vanguard Guide to Transforming Call Centre Operations, John Seddon, believes that understanding and "using the principles of variation in call centres often leads to more than 100% improvement in sales, efficiency and/or service".

It is not only the speed with which claims are dealt that matters but also the manner. A core principle for Fortis' claims department is to seek different solutions to claims, with a view to improving overall customer experience - a principle that seems to be working well as it was named the most efficient motor claims unit of the top 20 insurers in the UK, according to Datamonitor's report Claims Management in the UK General Insurance 2005. Fortis does not always get it right but it is making a determined effort to learn from its mistakes to ensure it does not repeat them. There is one guiding principle, which is for it to manage directly its own claims delivery and not, as a principle, outsource it.

In many industries, outsourcing is seen as an attractive way of achieving cost savings and, as a result, organisations have contracted out various business functions, from HR to cleaning and IT to finance. If non-core, outsourcing these functions has delivered cost savings but many companies have struggled to fully realise the projected benefits.

A trend that is increasingly worrying is the move to outsource what all insurers should deem a core function, claims handling, as a means of cost cutting. This is a bold move considering that achieving efficiencies by outsourcing non-core functions still proves a challenge to many. There are two inherent dangers in any type of outsourcing, whether a core function or not. First is the risk that an organisation may simply be exporting a broken and inefficient process rather than driving out what can be similar savings by improving their current in-house processes. Second, is the introduction of 'hand-offs' into the claims process, resulting in greater room for mistakes, leading to increased inefficiency - failure demand - and hidden cost.

A personal link

By outsourcing claims, insurers lose their personal link with customers and risk relinquishing total ownership and control of a core business function. The ramifications are often greater if insurers opt to offshore - a practice that has been highlighted as potentially having a negative impact on long-term customer service (GIMRA Household Customer Research 2006). Losing this link risks not only dissatisfaction but also cuts a vital link back to underwriters.

In another one of Deming's 14 points for business success he highlights training as key: "Institute a vigorous program of education and self-improvement", often tricky to implement when using third-party providers. In the same vein, it is also more difficult - although not impossible - to get outsourced staff to understand and completely buy into the insurer's brand. As a result, communicating and upholding the insurers and or the intermediaries' brand values becomes a more complex and failure prone exercise. Outsourced employees are one step removed from the insurer's company culture.

Insurers can only manage claims. The ultimate delivery is often done by the insurer's supply chain. As in outsourcing and offshoring many insurers' search for cost savings by using supply chain techniques are not always in the best interests of the customer.

By investing in strong and proactive supplier relationships, processes - such as those in claims handling - can be streamlined. Insurers need to replace their old ways of 'screwing' suppliers by tying them to unrealistically low prices, eventually leading to quality problems, with a more collaborative approach. Again, referring to Deming, business should not be awarded "solely on the price tag" but on innovation and a willingness to achieve a joint goal.

At present, many aspects of repair and delivery are handed off and many insurers have no way of proactively managing the providers - they can only manage historic breaches of a service level agreement. By actively seeking to 'connect' to supplier systems, insurers will know when certain activities have been carried out or are still waiting to be carried out. For example, Sunderland-based car manufacturer Nissan developed a close partnership with a local seat provider, Tacle Seating UK. The motor manufacturer works with its supplier to know when the seats are due to arrive. Because Nissan is intrinsically involved in the process, it does not get into a situation where cars are held up on the line waiting for seats.

In the same way, over the past year, Fortis has undertaken a major reorganisation of its approved network for the repair of damaged vehicles in a bid to secure an improved level of customer service for policyholders. The objective was to transform insurer/supplier relationships, by adopting a more co-operative approach based on objective measurement of supplier performance in order to deliver extraordinary customer service at a competitive cost. The initiative was about making improvements to processes, dispensing with many of the cumbersome and expensive controls and cutting out unnecessary costs for repairers, Fortis and its customers. So far, it has gone well and it has had very positive feedback from the industry and from customers.

This principle is also applied to household claims where it is encouraging suppliers to link to its system and provide it with information relating to the successful or unsuccessful achievement of milestones within the claims process.

Risk-based approach

At a time when the Financial Services Authority has been urging the market to take a risk-based approach to managing the business, brokers should be encouraged to take greater interest in how their insurer partners handle claims. Brokers should engage in a review from a customer's perspective of the insurers structure, culture and processes. By doing so, brokers will be better managing their business risk by assessing which insurer partners would help them mitigate the risk of losing customers through delivery of a poor service.

With poor processes causing 95% of complaint and rework, the key to excellent customer service and sustainably low costs is process efficiency leading to superior customer service. At the end of the day, no company has the objective of dissatisfying customers. We all should have, as Deming says, "a constancy of purpose toward improvement of product and service, with the aim of becoming competitive and staying in business".

- Rob Smale is Insurance claims director, Fortis.