In this first part of his article Mike introduces the public loss adjuster and expands on the value of public loss adjusters in the second part.
There is no governing body representing public loss adjusters in South Africa and so I don’t profess to talk on behalf of the industry as a whole; however, our company introduced the concept of public loss adjusting to South Africa about 20 years ago. Looking back, we now realise that the timing coincided with the shrinking insurance company market and a resultant increase in pressure on claims personnel to consider claims more closely. These changing times brought about the introduction of the forensic accountants and forensic chemists who brought a greater professionalism to the way claims were investigated. I suppose the reduced competition between the shrinking number of insurance companies and the shift in the balance of power from insurance brokers back to underwriters manifested itself in this harder approach. Prior to this transition period, insurers were very sympathetic to claimants and indeed “looked for ways to pay claims”
It was rare to find a claimant who could legitimately complain about unfair treatment, particularly if they were represented by one of the larger broking companies. I suppose this benign attitude led to abuse of the concept of insurance and, in turn, probably encouraged a higher level of claimant fraud. The role of the loss adjuster during this period was only very occasionally challenged by the odd broker and, since claims expertise was not a high priority in the broking companies, they never really had sufficient technical ability to seriously influence the loss adjuster’s policy interpretations. Insurers, too, virtually left the loss adjusters to their own devices in so far as the adjustment of claim quantum and policy interpretations were concerned.
This is a far cry from the claims environment today, where a large fire claim automatically invites very close scrutiny by forensic accountants, forensic chemists, forensic investigators and specialist insurance company claims personnel who are often legal graduates themselves.
It was clear to us 20 years ago that the claims environment was changing and that the claimant was facing an increasingly hostile interrogation and some form of claimant representation was called for. The broking market had not encouraged technical claim expertise during the good years, as the claims department was not revenue-earning and didn’t attract the highest level of executive attention. The loss adjusters were the most able claims technicians, but were prevented from representing claimants by the insurers. The insured had limited choices as to professional representation; there were very few insurance specialist attorneys and certainly, other than the forensic accountants engaged by the insurers, few, if any, in the accounting professionals were able to interpret the consequential loss policy wording.
It was these circumstances that created the environment for the introduction of public loss adjusting in South Africa. It’s hard to understate the difficulties we faced in creating this role because insurers at that time truly believed that they were the sole arbiters of policy interpretation and that their loss adjusters were impartial; and, thus, any claimant seeking independent representation must be trying to propagate a fraudulent claim. Initially, insurers were very dismissive when we approached them as the insured’s representative and, regrettably, the only way that we could cause them and the loss adjusters to take us seriously was to adopt an aggressive and litigious character. Unfortunately, in the long term, this decision has done us more harm than good. It’s taken nearly 20 years for insurers to accept our role in the market and I’m sure if we would have been more patient with a less aggressive approach in the early days, we would have achieved this position much sooner.
Currently, our company is still the largest independent public loss adjusting company in Southern Africa and people trained in our company have started in-house public loss adjusting divisions with Marsh and Alexander Forbes, thereby substantially adding to these companies’ technical skills and opening a new source of revenue. These ventures have proved very successful and it is reasonable to expect that other large brokers will follow suit in due course.
Why use a public loss adjuster?
The public loss adjuster has been a part of the international insurance market for decades, probably only just slightly younger than the loss adjusting profession itself. The fact that public loss adjusting is an international occupation and has been around for many decades proves its place in the insurance market. Particularly in Europe, but also in the United States, it is rare to find a large claim where the insured is not represented by a public loss adjuster. Here at home, this is currently not the position, but with public loss adjusting having now become part of the services offered by the larger broking companies, we are finding ourselves dealing with very large losses more often.
Brokers initially saw our role as a last resort option and we were generally only brought into the claim when liability had been rejected or an impasse had arisen on quantum. In these circumstances, it was difficult to be constructive in the negotiating process because policy interpretations or quantum calculations had already been flogged to death and any new approach would mean one or both of the negotiating parties having to alter their stance. Claims people are not generally known for their flexible attitudes and very often progress could only be achieved by aggression or moving the negotiation over the head of the original participants. As you can imagine, this did not endear us to insurers’ claims personnel.
As public loss adjusters, we realised that our technical skills would best serve the insured if we were engaged at the outset of the claim and were able to properly manage the insured’s expectations and also ensure that the loss adjusters advised insurers of a realistic estimate of the loss from the outset. Brokers, of course, were very reluctant to allow us access to their clients before a problem had arisen and these different views often brought us into conflict. Initially, it was very difficult for us to convince an insured who had just suffered a large loss that he would be better off using our services, even though his brokers and the loss adjuster were warning him of dire consequences if he followed this course of action. Fortunately for us, there were enlightened brokers and insureds who engaged our services and today, our client reference list includes thousands of clients, ranging from publicly listed multinational corporations to local traders who are able to recommend our services. It is no longer difficult for us to approach an insured directly because of the quality of our references and the changing attitude of the professional insurance brokers.
Currently, the majority of the work on our desks is for claims where we have been engaged very early on in the claim process and, on most occasions, by recommendation of the insurance broker. In order to appreciate why an insured and their insurance broker would engage our services, you need to understand the impact of a large claim on the insured.
- Prior to the fire, the insured operated a business in a field in which they had expertise and all their future plans involved the expansion of the business and its profitability. In most cases, the business had been built over many years and valuable relationships had developed with suppliers, customers, bankers and staff. The financial records of a business never reflect the factual value of the enterprise. There are no financial entries reflecting the value of the relationship with suppliers who, over time, have come to trust the insured to the extent that the insured can rely on future preferential pricing, timeous delivery and even recommendation by the supplier to customers for future work. Similarly, there is no accounting value placed on the relationship with customers who have come to rely on the insured, in many cases, almost exclusively for the supply of their product. Long-standing customer relationships often create pricing to the insured’s benefit and in every factory there is accumulated stock which has been written off in the accounting records, but is often used to create a price advantage with new customers.
- Credit arrangements with financiers and customers have been established by reputation over a long period of time and are critical aspects of any insured’s business. Loss of an overdraft facility or the withdrawal of Credit Guaranteed facilities for a customer can irreversibly cripple a business.
- It is not the steel, plastic and mortar of the insured’s business that determines its ability to survive profitably, but rather the relationships and the insured’s ability to manage these relationships around the physical assets of the business.
- I am not aware of any insured who purchases an insurance policy with any great delight and consequently, the primary concern when placing this cover is to achieve the cheapest possible premium. It goes without saying that people who either own or manage businesses are by nature ‘risk takers’ and not prone to pessimism regarding the future, and have great difficulty believing that their business could ever suffer a catastrophe envisaged by an insurance policy. As a consequence, the achievement of adequate insurance at the time of a large loss is more luck than good judgement.
It is our experience that it is the above factors which are uppermost in an insured’s mind immediately after suffering a catastrophic loss. On the other hand, insurers’ primary concern is issues relating to the cost of replacing the steel, plastic and mortar of the business. Whilst the consequential loss policy is theoretically designed to cover the insured’s gross profit loss following an interruption to the business caused by the insured event, the policy will only provide this indemnity for a predetermined period of time, normally six months to one year. Considering it has taken the insured a very time to establish the relationships that are critical to the business, it is unlikely that they can be rebuilt to pre-fire levels within the short period of the cover provided by the consequential loss policy.