42 | OCTOBER 2018 | Claims Magazine | PropertyCasualty360.com
This month I will be a panelist at a National Conference of Insurance Guaranty Funds Workshop in Ft.
Lauderdale, Fla. I spoke once about guaranty funds about 25 years ago, but other
than a brief mention in my textbooks, I’m
In television advertisements insurers,
describe the wonderful things customers
receive if they switch to another insurer
— wonderful rates, excellent coverage,
great service. Why, you’ll even get a new
car for your old one if you wreck it, and
they will forgive you for the accident (at
least this time). It’s simply dazzling!
Every year a number of insurers go
into receivership. State guaranty funds
take over those insurers and “run off” the
claims, sometimes for pennies on a dollar. They may keep the insurer’s staff to do
this, retain an independent adjusting firm
to handle remaining claims, or have some
other insurer take over the remnants of
the failed insurer and handle the claims.
It depends on assets the failed insurer still
has, if any.
Cause and remedy
AON reports that $1.54 billion in claims
resulted from last year’s storms. How
many more billions in loss will 2018 produce, and how many insurers will fail?
The National Association of Insurance
Commissioners (NAIC) has an “Insurer
Receivership Model Act” that requires
state regulators who have entered into the
rehabilitation phase of a receivership proceeding to coordinate with the guaranty
association that is triggered by an order
of liquidation. According to NAIC, all
states have such an association, funded
by “assessments on solvent insurers.” In
most circumstances, solvency means that
real assets exceed liabilities.
AON’s $1.54 billion in storm claims is
peanuts compared with the Insurance In-
formation Institute’s estimate of $34 bil-
lion in property and casualty insurance
fraud loss annually. This is about 10%
of all claims costs; auto claim fraud and
“buildup” only accounted for $5.6 to $7.7
billion. Fraud is at least one major cause
of insurer bankruptcy. The Iconoclast
would suggest that unnecessary insur-
ance litigation costs for disputed claims
In 2016, the U.S. Department of Labor Statistics says there were 328,700
claims adjusters, appraisers, examiners
and investigators, down 3,600 from 2015,
or about 1%, with 2017 median pay at
$64,690 each. Considering there are hundreds of insurers in the U.S., the actual
number of adjusters per insurer is relatively low; a trend for a decade or more.
Consider how an insurance premium
is calculated: first, all the claim costs (
including reserves) and allocated expenses
— outside services, defense costs, etc. —
are actuarially projected out to their probable maximum cost and divided by the
number of units. This is called the “pure
premium” and is usually somewhere between 60% and 75% of the total premium.
“Loading” is added, which includes
expenses such as marketing, taxes, investments to surplus, administrative
costs and even a percentage for profit.
Hence, the higher the “pure premium,”
the higher the profit as a percentage of the
total. It makes fraud loss quite profitable!
What if the cost of the claims department was transferred from the “
unal-located” cost column to the “allocated
expense” column, becoming part of the
pure premium? This would increase the
“pure premium” unless spending more
adjusting claims reduced the fraud loss
and the number of lawsuits against the
insurer. Carrier profit would not change,
but the “pure premium” loss due to fraud
and litigation would decrease as better
trained adjusters were hired.
Ken Brownlee, CPCU, (kenbrownlee@
msn.com) is a former adjuster and risk
manager based in Atlanta, Ga. He now
authors and edits claims-adjusting
textbooks. Opinions expressed are the
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