NEWS & VIEWS
STANDARDS MAY CURB FAILURE
Supplier failure has been an all-too-common occurrence in the insurance sector recently. This may stem from a loss of experienced workers and the failure to develop vital forensic skills. Chris Wylde believes stricter standards could be the answer.
The recent revelations of major fraud at RAC Auto Windscreens (Post magazine, 8 May, p15) are a wake-up call to anyone who might consider outsourcing to be the 'quick win' solution to their business needs.
I wish I were surprised to discover that the management teams of both RACAWL and its insurers allowed this fraud to go unnoticed. Sadly, though, this scandal comes on the heels of other major supplier failures - for example, Hunters, Miller Fishers and Charsleys - and worryingly, it may increasingly point to the fact that management information and expertise is being lost, vital forensic and analysis skills are not being developed and that as an industry we are at risk of losing any ability to see what is going on right under our own noses.
Strategy review
Of course hindsight is a wonderful thing. But the RACAWL fraud should make all insurers stop for a moment and review their business strategies. Before we dash headlong into decisions to outsource (or insource) claims handling and audit services, have we really considered fully all the implications? Or have we unwittingly allowed ourselves to be seduced by the belief that, by relying on others, we relinquish our responsibility?
What is the true cost of our failure to select our business partners correctly, and forge meaningful service level agreements, pricing structures and monitoring arrangements? £40 million? £100 million? Does anyone know?
More fundamentally in this business climate, why do we appear to spend so much time and money on acquiring new business and so little on developing the management skills, systems and procedures to protect that investment?
Currently insurers are responsible for ensuring that suppliers comply with the Association of British Insurers' Claims Code, the General Insurance Standards Council and Financial Services Authority requirements. The guidelines stipulate that insurers must ensure the integrity and capability of the supplier and that a monitoring programme is in place for each, with full details of this built into the supplier's contract.
Step in the right direction
However, the FSA is currently consulting on further monitoring requirements and, if we cannot take steps to get things right now, this will send a poor message back to the regulator as it finalises its position for January 2005.
I'm definitely not saying that outsourcing is a bad idea. It may be the best solution for some - it depends where the expertise lies - and for many things there is no choice. But I am saying that, when we do work in partnership with external suppliers, we must create the right business structure, culture and attitudes to make it work as well as it should. Contracts should also reflect the true value of the service - this way, we will provide no encouragement to those who might cut corners or look for other ways to enhance income.
Leading the way
The way forward is not going to be easy for some insurers - particularly those that have long since lost the experienced staff who really understand how claims systems should work and who should be leading the way in initial selection and contract negotiations. And there will inevitably be some companies that have worked with their suppliers for years, trust them implicitly and just know that what happened to RACAWL could never happen here.
However, as a small specialist management consultancy working with several major clients to tackle these issues, we are helping insurers to put in place robust monitoring programmes that also provide 'added value' by identifying improvement opportunities. These improvements in many cases can provide such good returns that they cover the cost of the review programme in the first place.
We are helping our clients to develop helpful early warning systems and to create dedicated individuals and teams with the right mix of experience, skills and authority to select, manage and monitor valuable supplier relationships in a pragmatic and sensible way.
Our experience shows us that it's not that difficult, but based on what we have seen so far my fear for the insurance industry is that it will not be long before we see another RACAWL scenario - and we are not going to be ready for January 2005 unless action is taken now.
Chris Wylde is MD of specialist insurance consultancy CWMC.
