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Why should risk managers become more claims-oriented?

Why Should Risk Managers Become More Claims-Oriented?

No matter how complete your coverage, any catastrophic business loss involves intangible costs such as lost or diverted work hours, customer attrition and diminished company prestige which insurance companies cannot always fairly quantify nor compensate claimants for. Therefore, the best chance a claimant has for making itself 100 percent whole again is a quick, equitable settlement followed by rapid reconstruction. It is in this area that risk management can make valuable contributions to the company's bottom line.

In fact, no member of the corporate team is better qualified than the risk manager to help companies get back to business quickly and minimize business interruption losses after catastrophe strikes. Although there are notable exceptions, many corporations limit the role of the risk manager largely to that of an insurance buyer. When a loss occurs, the task of handling claims is assigned to regional operations personnel with little or no claims experience and only a vague idea of how the loss affects the company's overall operations.

After being involved in hundreds of claims covering everything from retail outlets to major manufacturing facilities, I strongly believe risk managers should campaign to change the corporate structure in cases where it does not facilitate their direct involvement in handling claims. In addition, the risk management department should coordinate the activities of other departments during the claims settlement period. Such a holistic role for risk managers would provide three immediate benefits.

First, an expanded role for risk managers would help corporations establish an accurate correlation between downtime and business interruption costs for each loss. This involves documenting the intricate interrelationships and dependencies between the damaged unit and other parts of the company, as well as the marketplace as a whole. The documentation is often voluminous and time-consuming to prepare, but it should be given top priority because a loss cannot be paid unless a dollar value is assigned to it.

Once the time/cost correlation is established, every key player in the corporation should be ready to commit to a rapid claims settlement coordinated by the risk manager. Corporations should also recognize that functions such as personnel, marketing and construction must fully cooperate with risk management during a claims settlement. For instance, many insurance policies contain provisions for dealing with idle personnel, and it is the risk manager who is often able to work out the best arrangement for the company. In addition, risk managers can employ advertising and promotional strategies to help restore business to pre-catastrophe levels, often using coverage proceeds to fund these expenses.

Another benefit of having risk managers play an up-front role in the claims management process is that typically they are the best-qualified people within their companies to negotiate with insurers for the fairest settlement. It has been my experience that, far from being penurious, many insurance companies want to provide claimants with quick, fair settlements. I have also found that claimants need to take the initiative to produce the settlements. In other words, the claimant must ask for everything it is entitled to and must recognize a fair settlement when it is offered.

The most common mistake companies make when settling claims is to immediately fall into the "low bid" mentality for awarding reconstruction contracts. When a regional operations manager or a construction manager is assigned the task of handling the claim, it is usually bidded out like a routine construction project. In this case, there is a natural urge on the part of the person handling the claim to award the contract to the lowest bidder.

Because of their lack of experience with insurance claims, these managers do not realize that insurance companies do not expect claimants to solicit the lowest possible bid. Rather, the insurance company recognizes the claimant's right to select a reputable contractor specializing in catastrophe reconstruction.

Often, selecting a low bidder is not only not required by the insurance company, it can also cost the claimant out-of-pocket money. Once the dollar amount of the settlement is established, insurance companies seldom release additional construction funds if the contractor botches the job or fails to complete the projects. As a rule, submit the fairest and safest estimate, not the lowest.

Last, risk managers who become more involved in claims management can sharpen their ability to buy insurance for their companies. Claims management will provide them with a better idea of what coverages and limits best apply to the operations of their companies.

Fortunately, major claims are not a frequent experience for any company, no matter how large and far-flung its operations. An excellent way for risk managers to prepare for the next major claim is to examine the records of previous claims and draw lessons and observations from them. Once the risk management department shows its bottom-line contributions in managing the next claim, it should be easy for the department to maintain its expanded role within the company.

Nelson R. Bean is president of Evans American Corp., a national catastrophe management firm.
COPYRIGHT 1990 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990 Gale, Cengage Learning. All rights reserved.

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Author:Bean, Nelson R.
Publication:Risk Management
Article Type:column
Date:Mar 1, 1990
Words:832
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