Wednesday, August 9, 2017

Tiny, But Mighty: How Portfolios of Small Claims Present Claim Handling Challenges in Latin America

While complex, commercial claims are highlighted in many claim handling discussions, small value, large volume claims also present challenges that play an important role in establishing efficiency and infrastructure. Small value, repetitive claims such as those arising from automobile, homeowners or small commercial risks  present claim handling challenges comparable to catastrophic loss claim handling. These small value, repetitive claims do not test the limits of regular claim handling on an individual basis because they seem tiny by comparison to high value losses. However, these tiny claims -when in bulk- prove to be mighty. In bulk, they test the limits of claim handling infrastructure.  
If we consider these claims collectively as a portfolio to be managed intelligently and efficiently, the task becomes more complex. Insurers must establish claim handling infrastructure from intake and registration through resolution to ensure that each claim is timely acknowledged, reserved, investigated, and resolved. The  next time you think of high-volume, low-value claims as “the small stuff”, bear in mind that Lloyds acknowledges that these cases account for 85% of the total claims in the Lloyd’s Market, leading to changes in the context of Lloyd’s Claim Transformation Programme to cope with the challenges.
The importance of these small claims management procedures also accounts for added issues particular to insurance practices in Latin America, namely, the following:
a)  Economic Issues: With few exceptions, local economies tend to be unstable. Inflation, high interest rates and changing monetary policies affect the prices of local goods and services. In turn, this works against proper reserving and payment of claims. Thus, careful valuation procedures and periodic reserve review are a must.

b)  Changing Regulatory Landscape: Local regulations are evolving rapidly and continuously forcing local insurers to meet new standards in areas such as regulatory reporting, service of complaints, claim file maintenance, and monetary reserves and payments.

c)  Lack of Instrumentalities: Access to information necessary for certain claim handling, such as obtaining a police report related to an automobile accident, is not an easy task. Similarly, information sharing and privacy controls are not as commonplace. For example, in some countries sharing data amongst insurers (which is very useful for fraud detection) is resisted. 

d)  Challenging Local Cultures: Claim handling, like any other aspect of life, relies heavily on the interaction among people. In Latin America, there are vast cultural differences with deceivingly similar roots that may create a false sense of commonality. A variety of local cultural aspects will also come into play when disposing of small high-volume business. As a result, an understanding of the local nuisances is particularly helpful in the handling of these claims. 
By comparison, reinsurers appear to have less involvement in these types of claims because their treaties are well-structured. But reinsurers are particularly sensitive to uncommon trends. Part of the reinsurance role is to visit cedants to discuss specific claims and arrange audits. Because of the traditional role that reinsurers play, the existence of infrastructure is already present and therefore better equipped to handle portfolios of small, value claims in a similar manner to handling catastrophic losses. However, despite having the structure, reinsurers cannot take on the front-line obligations of administering claims. Local insurers should look to reinsurers as models, not as substitutes for setting up an efficient claim administration.

While reinsurers certainly offer a template for efficient handling of small value claims, there is a cost-effective analysis that plays a critical role. Local insurers need to be particular in selecting à la carte portions of claim handling practices that provide the necessary attention to these small-value, high volume claims, whilst recognizing the economies of scale in dispatching vendors. It may prove beneficial to have monitoring counsel overseeing these large portfolios of claims and make best practices recommendations to provide local insurers with the infrastructure necessary to handle this challenge. Getting out ahead of the challenge can make a big difference.

Posted by Daniel Baron*
*Not licensed to practice law in Florida

Please join Zelle in Miami on October 11 for the inaugural LatAm Gateway Summit. The Summit will focus on Latin American insurance and reinsurance issues. The economic climate, claims, underwriting, and opportunities unique to Latin America will be explored. Insurers, reinsurers, risk managers, brokers, and vendors based in Miami, Latin America, the U.S., London, and Europe are invited to attend. Please explore the LatAm Gateway Summit website at www.latamgatewaysummit.com