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JOSEPH AYO BABALOLA UNIVERSITY, IKEJI ARAKEJI, OSUN STATE. TERM PAPER PRESENTATION. DEPARTMENT: ACTUARIAL SCIENCE & INSURANCE. COURSE TITLE: PROPERTY & PECUNIARY INSURANCE II. {INS. 322} LEVEL: 300 LECTURER: ADEYEMO D.L. {MR.} Question: Claims Processing and Administration in General Insurance. Paper Presented by: IBUKUNOLU, Ajibola Adeyinka - C150402009 11 | Page

Claims Processing & Administration in General Insurance

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Page 1: Claims Processing & Administration in General Insurance

JOSEPH AYO BABALOLA UNIVERSITY, IKEJI ARAKEJI,

OSUN STATE.

TERM PAPER PRESENTATION.

DEPARTMENT: ACTUARIAL SCIENCE & INSURANCE.

COURSE TITLE: PROPERTY & PECUNIARY INSURANCE II.

{INS. 322}

LEVEL: 300

LECTURER: ADEYEMO D.L. {MR.}

Question: Claims Processing and Administration in General Insurance.

Paper Presented by:

IBUKUNOLU, Ajibola Adeyinka - C150402009

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Table of Contents 1.0 Introduction 2.0 Terms and Terminologies related to Claims Management under General Insurance 3.0 Claims Procedure and Administration 3.1 Claim Notification

3.1.1. What a Claims handler should do upon receipt of a claim notification

3.1.2. Sympathy Letter and request for substantiating documents

3.2 Post loss inspection of reported claims by an In-house staff 3.3 Appointment of Loss Adjusters 3.3.1. Generation of Interim and Final Reports 3.3.2. In-house reviews of Loss Adjusters report 3.4 Communication of Offer of Settlement or Repudiation action to the Policyholder 3.5 Dispute resolution in claim transactions 3.6 Settlement delivery to the Policyholder 4.0 Salvage retrieval from the Policyholder 5.0 Treatment of Contribution & Subrogation in Claims Management 6.0 Effects of Claims Management on an Insurance Company or Insurance Industry at large 7.0 Conclusion

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1.0 Introduction Insurance as a contract is based on the promise made by the insurer to the policyholder, to restore the policyholder back to financial position he/she enjoyed immediately before loss. This promise will only come to reality when the policyholder suffers a loss in line with what the policy contemplated at the inception of the policy. 2.0. Terms and Terminologies related to Claims Management under General

Insurance

{i} Discharge Voucher or Form of Acceptance: This is a document issued after a claim adjustment has been finalized or parties to the contract have agreed on the terms of settlement. Also, it can be issued when the claim has not been concluded but the insurer need to make payment on account pending the final adjustment. The difference between the two {2} scenarios is that the former will be worded as being “full and final settlement of the claim” while the latter will be worded as being “interim payment on the claim”.

{ii} Payment on Account: This is a situation whereby insurer make an

advance payment to the policyholder on a claim that is yet to be concluded. Before this payment can be effected the appointed adjuster must have came up with a reserve figure and the insurer’s liability is not in doubt.

{iii} Satisfaction Note: This is a document issued by the insurer for the

policyholder’s execution in situation whereby the repairer of the damaged property is recommended by the insurer. Upon delivery of the repaired property to the policyholder, he/she will check same and if satisfied, satisfaction will be executed.

{iv} Claims Reserve: This is an amount of fund set aside to meet future

payment associated with outstanding claims yet to be finalized and claims incurred but not yet reported at the time of a given date.

{v} Constructive Total Loss: This is whereby the damaged property can be

repaired but the estimate of repairs is not economical {i.e. the estimate of repairs is equal to the sum insured, higher than the sum insured or hit a certain

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percentage of the sum insured which the management of the company has stipulated as a limit}. If any of the scenarios occurred the claims handler will have to treat as a constructive total loss basis.

{vi} Partial Loss: This is a property insurance term referring to a loss that

does completely destroy or render useless the insured property. {vii} Arbitration: This is a procedure in which an insurance company and the

policyholder or a broker agree to settle a claim dispute by accepting a decision made by a third party {i.e. an Arbitrator}. Most of the property insurance policy documents have the arbitration clause which will guide the two parties to the contract if there is dispute at the time of claim.

{viii} Alternative Dispute Resolution: In an insurance sense, a number of

disparate processes used by insurance companies to resolve claim and contractual disputes. Insured clients who are denied a claim are offered this course of action as a form of recourse. Alternative dispute resolution is employed to avoid expensive and time-consuming litigation and arbitration.

{ix} Deductible/Excess: Deductible is a certain amount of money or

percentage chosen by the policyholder to be borne at the period of claims. Generally speaking, the larger the deductible, the less the premium payable by the policyholder for an insurance policy. Excess in an insurance policy serves same purpose with the deductible but it is not the policyholder that chooses the figure or percentage applicable to the policy, the insurer does.

{x} “Ex Gratia” Payment: This is Latin phrase meaning “by favour”. It is a

voluntary payment made by the insurer to the policyholder in response to a loss for which it is not technically liable under the terms of the policy.

{xi} Loss Adjusters: These are the independent claims specialists that assist in

the fair and just settlement of claims, including complex or contentious claims on behalf of the insurer. All fees due to loss adjuster are paid by the insurer in addition to the claim settlement.

{xii} Loss Assessors: These are the independent hired and paid the

policyholder to negotiate an insurance claim with the insurer or its

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representative (loss adjuster). The loss assessor receives a fee that is usually a percentage of the claim amount received by the policyholder.

{xiii} Claimant: This in the context of insurance, refers to the policyholder who files a claim or formal request for payment from their insurer to cover a specific loss.

{xiv} Indemnity Period: This is the time period during which benefits are paid

out to replace a portion of lost income under an insurance policy. Such insurance policies have a specified maximum period of indemnity following a covered incident. Payments cease after the indemnity period is up even if the business interruption persists.

{xv} Salvage: This is the remains of a damaged property an insurer takes over

to reduce its loss after paying a claim. Insurers receive salvage rights over property on which they have paid claims.

{xvi} Loss Ratio: This is the difference between the ratios of premiums paid to

an insurance company and the and the claims settled by same company in a given period of time.

Formula: Claims Paid/Reserve X 100 Gross Premium written 1

{xvii} Average: The term “Average” means the sum insured of a subject matter

of insurance at the time of loss is less than the value at risk of the property, the amount claimed under the policy will be reduced in proportion to the under-insurance.

Commonest Formula: Sum Insured X Loss Value at Risk 1 {xix} Substantiating/Supporting Documents: These are the documents claims

handler usually request from the policyholder at the time of claim so as to proof the claim further and to provide accurate information concerning the claim.

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3.0. Claims Procedure and Administration 3.1. Claim Notification:

This is the starting point of claims processing and the duty of bringing the occurrence of a loss to the notice of the insurer fully rest on the policyholder or its representative {i.e. a broker or an agent}. Claim notification can be done in the following ways;

{a} Verbal notification – either in person or phone call {b} Written notification – either by a letter or an electronic mail.

3.1.1. What a Claim Administrator should do upon receipt of a claim

notification {i} The claim handler should verify if there is cover in force;

{ii} he/she should confirm if the affected property is in the schedule attaching to the policy;

{iii} Checking of the premium status, whether it has been paid or not; {iv} To check whether the loss date falls within the period of insurance; {v} To check if the peril at work is covered by the policy 3.1.2. Sympathy Letter and Request for substantiating documents Having satisfied with the above verifications, the claim handler will communicate the company’s sympathy in respect of the loss to the policyholder {either by email or letter}. Also, the same medium should be used to request for supporting/substantiating documents so as to gather information that cannot be deduced from the notification letter/email.

3.2. Post loss inspection of reported claims by in-house personnel

In other for the insurer to know/ascertain the extent or degree of the damage, in-house personnel should be sent to the scene of loss in case of landed property or where the damaged property is kept for inspection. The inspection exercise will aid the company’s decision on whether to appoint a loss adjuster or is what can be handled internally.

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3.3. Appointment of Loss Adjusters

The appointment of loss adjuster is premised on the report given by the in-house personnel having conducted the post loss inspection. If the quantum involved is huge or practically, some insurance company would have set a limit to what can be handled in-house. In this instance, let us agree that the service of loss adjuster is required. In appointing an adjuster, the policyholder or its representative should carried along, in the letter of appointment given to the adjuster or email sent to the adjuster, the policyholder should be copied. In this vein, the policyholder or its representative will have the details of the appointed adjuster. Also, the adjuster would have been furnished with details of who to contact to settle the issue appropriate time to visit the scene of loss. 3.3.1. Generation of Interim and Final Reports Upon the appointment of the adjuster, the will visit the scene of the loss and avail the insurer with the interim report. The interim report will provide the insurer with some information, most importantly the adjuster’s reserve recommendation so as to make provision for the claim pending final report. 3.3.2. In-house reviews of Loss Adjusters Report On the issuance of the final report by the adjuster, the claims handler will have to review the report and form his/her own opinion on whether to go with the adjuster’s recommendation or not.

3.4. Communication of Offer of Settlement or Repudiation action to the

Policyholder After the review of the adjuster’s report the claim handler will have to

communicate to the policyholder “EITHER the basis of settlement if the claim is admissible under the policy that is in force OR repudiation action, the reason for the repudiation must be expressly stated so as to convince the policyholder”.

3.5. Dispute Resolution in Claims transaction

At this point, the claims handler’s communication as stated above can lead to disagreement between the insurer and the policyholder. The dispute can be of two {2} forms, they are as follows;

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{a} Quantum Dispute – this type of disagreement has to do with the amount the insurer is offering for settlement. The policyholder will be demanding for something higher. This dispute can be resolved through the following ways;

{i} meeting between the parties in the contract {i.e. the insurer and

the policyholder} to resolve the disagreement amicably. Most times the parties involved will reach compromise and meet at a point that will form the basis of settlement.

{ii} appointment of an Arbitrator is another form of resolving a dispute, in most of the property insurance policy an Arbitration clause is incorporated. The Arbitrator is an independent party appointed to mediate in between the two parties so as to resolve a claim dispute.

{iii} more often than not policyholders report insurers to their

regulatory body {i.e. NAICOM} in respect of their claim yet to be settled because of disagreement. This regulatory body will look into the matter and invite the insurance company. Most of the time the pendulum of the regulatory body’s judgment swing to the Policyholder’s side, reason been that they believe industry is still struggling and they want paint the image of the industry in the mind of the insuring populace.

{b} Liability Dispute – in this situation the disagreement between the two

{2} parties is whether the policy in force is liable or not. The insurer is not ready to indemnify the policyholder based on the fact that the peril at work is not covered by the policy or the affected property is not on the schedule of items attaching to the policy. More often than not, liability dispute is being settled by litigation.

3.6. Settlement delivery to the Policyholder

The end point of the insurer’s activities on a claim lodged by a policyholder is making good the promise sold to the policyholder at the inception of the policy. Having satisfied with the circumstances surrounding the claim and the adjustment, the insurer will have to place the policyholder back to financial position he/she enjoyed immediately before the loss. This can be done in the following ways;

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{i} Cash Payment;

{ii} Repairs;

{iii} Replacement;

{iv} Reinstatement.

4.0. Salvage retrieval from the Policyholder

Having accepted liability, the insurers have the right to take possession of salvage either the whole subject matter in the case of a total loss or certain part of the subject matter from the policyholder in the case of partial loss. The global believe is that retrieving such object will reduce the insurer’s capital outlay because same will be sold as scrap and generate money for the company no matter how little. Sometimes the insured may show interest in buying the salvage or the insurers will contact their salvage buyers to quote the damaged property.

5.0. Treatment of Contribution and Subrogation in Claims Management

{i} Contribution - any situation there is a dual insurance or more than one insurances on the subject matter the policyholder is lodging claim on, the insurer has the right to settle the claim 100 percent and demand for reimbursement from other insurance companies that are equally liable up to their rateable proportion on the risk.

{ii} Subrogation - insurer has the right to stand in the position of the

policyholder and demand for the amount expended on the claim from the negligent third party.

The essence of contribution and subrogation is for the policyholder not to make profit on his/her claim.

6.0. Importance of good Claims Management in Insurance Sector

{i} Insurance customers expect insurers to settle claims promptly and to their satisfaction. Customer deriving high level of satisfaction will give the insurance company competitive edge in the sector;

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{ii} Good claims management/procedure reduces the company’s cost on advertisement. The best advertisement tool any insurance company should employ is good claim settlement;

{iii} Good claims management change the notion of the insuring about the

industry. This attracts more customers to the sector and this has multiplier effect on the national gross domestic product {GDP}.

7.0. Conclusion

Effective claims management has no alternative, if an insurance company wants to be relevant in the industry and also possess an appreciable share of the market. It is equally advisable for an insurance company to manage claims rather handling them. Claims management includes strategic role, cost monitoring role, service aspect etc.

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