WCE

Insurance
claims
handling
(non–UK)
WCE
2023-24
STUDY
TEXT
Insurance
claims handling
(non-UK)
WCE: 2023–24 Study text
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Updates and amendments

The examination syllabus on which this edition is based will be examined from 1 May 2023
to 30 April 2024.
Any changes to the exam or syllabus, and any updates to the content of this course, will be
posted online so that you have access to the latest information. You will be notified via
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2 WCE/March 2023 Insurance claims handling (non-UK)
© The Chartered Insurance Institute 2023

All rights reserved. Material included in this publication is copyright and may not be reproduced in whole or in part
including photocopying or recording, for any purpose without the written permission of the copyright holder. Such
written permission must also be obtained before any part of this publication is stored in a retrieval system of any
nature. This publication is supplied for study by the original purchaser only and must not be sold, lent, hired or given
to anyone else.
Every attempt has been made to ensure the accuracy of this publication. However, no liability can be accepted for
any loss incurred in any way whatsoever by any person relying solely on the information contained within it. The
publication has been produced solely for the purpose of examination and should not be taken as definitive of the
legal position. Specific advice should always be obtained before undertaking any investments.
Print edition ISBN: 978 1 80002 635 3
Electronic edition ISBN: 978 1 80002 636 0
This edition published in 2023
The author
Antony Greensweig, ACII. Antony has had a career in Claims for over 30 years. Antony is also a ‘ProSci’
accredited change management practitioner. Antony took on the role of main author in 2017.
The reviewers
Samir Awarkeh
Patrick Hayward, ACII
Salma Rayani Khan, FALU, FLMI, PGD (Insurance Administration), LLB, BHMS
Wen Peng Li, ACII, CPCU
Leonard Liu, Dip CII, MSc
Issam Mouslimani, ACII, Chartered Insurer, BBA
Kalpana Sampat, ACII, FIII, AICWA, LLB (Gen)
Acknowledgements
The CII would like to thank Edward Gooda FCII for his contribution to earlier editions of this study text.
The CII thanks the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) for their kind
permission to draw on material that is available from the FCA website: www.fca.org.uk (FCA Handbook:
www.handbook.fca.org.uk/handbook) and the PRA Rulebook site: www.prarulebook.co.uk and to include extracts
where appropriate. Where extracts appear, they do so without amendment. The FCA and PRA hold the copyright for
all such material. Use of FCA or PRA material does not indicate any endorsement by the FCA or PRA of this
publication, or the material or views contained within it.
While every effort has been made to trace the owners of copyright material, we regret that this may not have been
possible in every instance and welcome any information that would enable us to do so.
Unless otherwise stated, the author has drawn material attributed to other sources from lectures, conferences, or
private communications.
Typesetting, page make-up and editorial services CII Learning Solutions.
Printed and collated in Great Britain.
This paper has been manufactured using raw materials harvested from certified sources or controlled wood
sources.
3
Using this study text

Welcome to the WCE: Insurance claims handling (non-UK) study text which is designed
to support the WCE syllabus, a copy of which is included in the next section.
Please note that in order to create a logical and effective study path, the contents of this
study text do not necessarily mirror the order of the syllabus, which forms the basis of the
assessment. To assist you in your learning we have followed the syllabus with a table that
indicates where each syllabus learning outcome is covered in the study text. These are also
listed on the first page of each chapter.
Each chapter also has stated learning objectives to help you further assess your progress
in understanding the topics covered.
Contained within the study text are a number of features which we hope will enhance
your study:
Activities: reinforce learning through Key points: act as a memory jogger at

practical exercises. the end of each chapter.
Be aware: draws attention to important Key terms: introduce the key concepts
points or areas that may need further and specialist terms covered in each
clarification or consideration. chapter.
Case studies: short scenarios that will Refer to: Refer to: extracts from other CII study
test your understanding of what you texts, which provide valuable information
have read in a real life context. on or background to the topic. The
sections referred to are available for you
to view and download on RevisionMate.
Consider this: stimulating thought Reinforce: encourages you to revisit a

around points made in the text for which point previously learned in the course to
there is no absolute right or wrong embed understanding.
answer.
Examples: provide practical illustrations Sources/quotations: cast further light

of points made in the text. on the subject from industry sources.
In-text questions: to test your recall of On the Web: introduce you to other
topics. information sources that help to
supplement the text.
At the end of every chapter there is also a set of self-test questions that you should use to
check your knowledge and understanding of what you have just studied. Compare your
answers with those given at the back of the book.
By referring back to the learning outcomes after you have completed your study of each
chapter and attempting the end of chapter self-test questions, you will be able to assess your
progress and identify any areas that you may need to revisit.
Not all features appear in every study text.
Note
Website references correct at the time of publication.
5
Examination syllabus
Insurance claims handling

(non-UK)
Objective
To provide knowledge and understanding of the claims handling process including notification,
assessment, settlement and associated financial factors.
Summary of learning outcomes Number of questions

in the examination*
1. Understand the general principles in the claims handling process. 12
2. Understand insurance products and associated services. 13
3. Understand claims considerations and administration. 13
4. Understand claims-handling procedures and related claims services. 13
5. Understand the claims function and how it may be structured. 6
6. Understand claims settlement. 10
7. Understand how expenses are managed. 8
* The test specification has an in-built element of flexibility. It is designed to be used as a guide for study and is not a statement of actual
number of questions that will appear in every exam. However, the number of questions testing each learning outcome will generally be within
the range plus or minus 2 of the number indicated.
Important notes
• Method of assessment: 75 multiple choice questions (MCQs). 2 hours are allowed for this
examination.
• This syllabus will be examined from 1 May 2023 until 30 April 2024.
• This PDF document is accessible through screen reader attachments to your web browser and has
been designed to be read via the speechify extension available on Chrome. Speechify is an
extension that is available from https://speechify.com/. If for accessibility reasons you require this
document in an alternative format, please contact us on online.exams@cii.co.uk to discuss your
needs.
• Candidates should refer to the CII website for the latest information on changes to law and practice
and when they will be examined:
1. Visit www.cii.co.uk/qualifications
2. Select the appropriate qualification
3. Select your unit from the list provided
4. Select qualification update on the right hand side of the page
Published February 2023

©2023 The Chartered Insurance Institute. All rights reserved. WCE
1. Understand the general principles in the 5.2 Describe the claims function as it appears in
claims handling process. functional and divisional structures.
1.1 Describe the legal requirements for a valid claim.
6. Understand claims settlement.
1.2 Describe the different types of policy conditions 6.1 Describe the way that claims can be settled.
relating to claims.
6.2 Describe why a full indemnity may not always be
1.3 Describe what documentary and supporting paid.
evidence are typically required when notifying a
claim. 6.3 Explain how insurers can recover the cost of claims.
1.4 Explain what is meant by proximate cause and how 6.4 Describe the methods used to mitigate the risk of
it is applied. untraced and uninsured drivers.
2. Understand insurance products and 7. Understand how expenses are managed.

associated services. 7.1 Describe the role of the claims manager.
2.1 Describe features, extensions and exclusions of 7.2 Explain what claims leakage is and how to identify
motor policies. and reduce it.
2.2 Describe features, extensions and exclusions of 7.3 Explain the types of financial monitoring and how
household policies, gadget policies, travel policies this can impact an insurance company results.
and extended warranties. 7.4 Explain the basis and significance of reserving
2.3 Describe features, extensions and exclusions of practice.
commercial property and pecuniary policies.
2.4 Describe features, extensions and exclusions of
commercial liability policies.
2.5 Describe features, extensions and exclusions of
health policies.
3. Understand claims considerations and

administration.
3.1 Describe the role of the claims department.
3.2 Explain the importance of service standards and
managing customer expectations.
3.3 Explain the different parties to an insurance claim.
3.4 Explain the importance of claims estimating and how
reserving operates.
3.5 Explain how fraud affects insurance claims.
3.6 Describe the ways in which a claims department may
ensure that customers are treated fairly.
3.7 Describe how disputes and complaints could be
resolved or escalated.
4. Understand claims-handling procedures

and related claims services.
4.1 Describe claims-handling procedures for motor
policies.
4.2 Describe claims-handling procedures for household
policies, gadget policies, travel policies and
extended warranties.
4.3 Describe claims-handling procedures for commercial
property and pecuniary policies.
4.4 Describe claims-handling procedures for commercial
liability policies.
4.5 Describe claims-handling procedures for health
policies.
4.6 Explain the roles of external support services used in
the claims process.
5. Understand the claims function and how

it may be structured.
5.1 Describe the key features, structure and objectives
of different claims systems.
Published February 2023 2 of 3

©2023 The Chartered Insurance Institute. All rights reserved.
7
Reading list Examination guide

If you have a current study text enrolment,
The following list provides details of further
reading which may assist you with your the current examination guide is included
studies. and is accessible via Revisionmate
(ciigroup.org/login). Details of how to access
Note: The examination will test the
syllabus alone. Revisionmate are on the first page of your
study text. It is recommended that you only
The reading list is provided for guidance study from the most recent version of the
only and is not in itself the subject of the
examination. examination guide.
The resources listed here will help you
keep up-to-date with developments and Exam technique/study skills
provide a wider coverage of syllabus topics.
There are many modestly priced guides
available in bookshops. You should choose
CII study texts
one which suits your requirements.
Insurance claims handling (non-UK).
London: CII. Study text WCE.
Books (and ebooks)
‘Claims handling’. Chapter – Insurance
theory and practice. Rob Thoyts. New York:
Routledge, 2010.*
Claims handling law and practice. Richard
West et al. London: Kennedys Law LLP,
2018.
‘Claims handling’. Chapter – Insurance
theory and practice. Rob Thoyts. New York:
Routledge, 2010.*
‘Claims procedure’. Chapter – The law of
insurance contracts. 6th ed. Malcolm A
Clarke et al. London: Informa, 2009.
‘Claims under the policy’. Chapter 14 in
Bird’s modern insurance law. 12th ed. John
Birds. London: Sweet & Maxwell, 2022.
Insurance claims. 5th ed. Alison Padfield.
Bloomsbury Professional, 2021.
Insurance disputes. Jonathan Mance, Iain
Goldrein, Robert Merkin. 3rd ed. London:
Informa, 2011.
Insurance theory and practice. Rob Thoyts.
Routledge, 2010.*
Periodicals
The Journal. London: CII. Six issues a year.
Post magazine. London: Incisive Financial
Publishing. Monthly. Contents searchable
online at www.postonline.co.uk.
Reference materials
Concise encyclopedia of insurance terms.
Laurence S. Silver, et al. New York:
Routledge, 2010.*
Dictionary of insurance. C Bennett. 2nd ed.
London: Pearson Education, 2004.
* Also available as an eBook through eLibrary via www.cii.co.uk/elibrary (CII/PFS members only).
Published February 2023 3 of 3

©2023 The Chartered Insurance Institute. All rights reserved.
9
WCE syllabus
quick-reference guide
Syllabus learning outcome Study text chapter
and section
1. Understand the general principles in the claims handling process.
1.1 Describe the legal requirements for a valid claim. 1A
1.2 Describe the different types of policy conditions relating to 1B, 1C
claims.
1.3 Describe what documentary and supporting evidence are 1D
typically required when notifying a claim.
1.4 Explain what is meant by proximate cause and how it is applied. 1E
2. Understand insurance products and associated services.
2.1 Describe features, extensions and exclusions of motor policies. 2A
2.2 Describe features, extensions and exclusions of household 2B, 2C, 2D, 2E
policies, gadget policies, travel policies and extended warranties.
2.3 Describe features, extensions and exclusions of commercial 2F, 2G, 2H
property and pecuniary policies.
2.4 Describe features, extensions and exclusions of commercial 2I
liability policies.
2.5 Describe features, extensions and exclusions of health policies. 2J
3. Understand claims considerations and administration.
3.1 Describe the role of the claims department. 3A
3.2 Explain the importance of service standards and managing 3B
customer expectations.
3.3 Explain the different parties to an insurance claim. 3C
3.4 Explain the importance of claims estimating and how reserving 3D, 6B
operates.
3.5 Explain how fraud affects insurance claims. 3E
3.6 Describe the ways in which a claims department may ensure that 3G
customers are treated fairly.
3.7 Describe how disputes and complaints could be resolved or 3F
escalated.
4. Understand claims-handling procedures and related claims services.
4.1 Describe claims-handling procedures for motor policies. 4A, 4C
4.2 Describe claims-handling procedures for household policies, 4A
gadget policies, travel policies and extended warranties.
4.3 Describe claims-handling procedures for commercial property 4B
and pecuniary policies.
4.4 Describe claims-handling procedures for commercial liability 4B
policies.
4.5 Describe claims-handling procedures for health policies. 4A
4.6 Explain the roles of external support services used in the claims 4C, 5C
process.
5. Understand the claims function and how it may be structured.
5.1 Describe the key features, structure and objectives of different 5A
claims systems.
5.2 Describe the claims function as it appears in functional and 5B
divisional structures.
Syllabus learning outcome Study text chapter

and section
6. Understand claims settlement.
6.1 Describe the way that claims can be settled. 6A
6.2 Describe why a full indemnity may not always be paid. 6C, 6F, 6H
6.3 Explain how insurers can recover the cost of claims. 6D, 6E, 6G
6.4 Describe the methods used to mitigate the risk of untraced and 6I
uninsured drivers.
7. Understand how expenses are managed.
7.1 Describe the role of the claims manager. 7A
7.2 Explain what claims leakage is and how to identify and reduce it. 7B
7.3 Explain the types of financial monitoring and how this can impact 7C
an insurance company results.
7.4 Explain the basis and significance of reserving practice. 7D
11
Study skills and

exam guidance
Before you begin the study text, we would encourage you to read the next couple of pages to
learn more about study skills and tips on how to approach the MCQ exam.
Study skills
While the text will give you a foundation of facts and viewpoints, your understanding of the
issues raised will be richer through adopting a range of study skills. They will also make
studying more interesting! We will focus here on the need for active learning in order for you
to get the most out of this core text.
Active learning is experiential, mindful and engaging
• Underline or highlight key words and phrases as you read – many of the key words
have been highlighted in the text for you, so you can easily spot the sections where key
terms arise; boxed text indicates extra or important information that you might want to be
aware of.
• Make notes in the text, attach notes to the pages that you want to go back to – chapter
numbers are clearly marked on the margins.
• Make connections to other CII units – throughout the text you may find ‘refer to’ boxes
that tell you the chapters in other books that provide background to, or further information
on, the area dealt with in that section of the study text.
• Take notice of headings and subheadings.
• Use the clues in the text to engage in some further reading (refer to the syllabus
reading list) to increase your knowledge of a particular area and add to your notes – be
proactive!
• Relate what you’re learning to your own work and organisation.
• Be critical – question what you’re reading and your understanding of it.
Five steps to better reading
• Scan: look at the text quickly – notice the headings (they correlate with the syllabus
learning outcomes), pictures, images and key words to get an overall impression.
• Question: read any questions related to the section you are reading to get a feel for the
subjects tackled.
• Read: in a relaxed way – don’t worry about taking notes first time round, just get a feel for
the topics and the style the book is written in.
• Remember: test your memory by jotting down some notes without looking at the text.
• Review: read the text again, this time in more depth by taking brief notes and
paraphrasing.
On the Web
Visit here for more detail on study skills: www.open.ac.uk/skillsforstudy.
Note: website reference correct at the time of publication.
Exam guidance
Answering multiple-choice questions
When preparing for the examination, candidates should ensure that they are aware of what
typically constitutes each type of product listed in the syllabus and ascertain whether the
products with which they come into contact during the normal course of their work deviate
from the norm, since questions in the examination test generic product knowledge.
Some questions are simply questions of fact, whereas others may be more progressive in
nature, requiring reasoning to determine the correct option or, perhaps, being answerable by
a process of elimination. Whatever the question, read it carefully to identify what it is really
asking. Do not assume that you 'know' what it is asking, even if the question is on a topic
about which you feel very confident; answer the question exactly as it is asked. Also, look
out for the occasional negative question (Which of the following is not …?).
Try to answer all of the questions. While there is no substitute for a good grasp of the subject
matter, and you cannot expect to pass the examination purely on guesswork, you do not lose
marks for giving a wrong answer!
You can find more information on the specific unit in the exam guide (available on the unit
page on the CII website and on RevisionMate).
On the Web
You can find more on preparing for your exam by visiting: https://www.cii.co.uk/learning/
qualifications/assessment-information/before-the-exam/.
Accessibility
The CII has produced a policy and guidance document on accessibility and reasonable/
special adjustments. The purpose of this is to ensure that you have fair access to CII
qualifications and assessments.
On the Web
The ‘Qualifications accessibility and special circumstances policy and guidance’ document
can be found here: https://www.cii.co.uk/media/10129005/cii-qualifications-accessibility-
and-special-circumstances-policy-and-guidance.pdf.
13
Introduction
Insurance is a truly international industry, with thriving and innovative markets across
the globe.
Some markets are well-established – others just emerging – all with their own ways of
working that reflect the characteristics and cultures of the region. There are, however,
activities common to all markets that are fundamental to the business of insurance no matter
where in the world they take place: those of underwriting and paying claims.
This unit aims to provide you with an understanding of the basic principles of the claims
handling process which you can then apply to the specifics of your own region.
Please note that although regional examples are given in the text to help bring topics
to life, they are for illustrative purposes only and will not be tested.
Insurance can be defined as ‘an arrangement by which a company…undertakes to provide a
guarantee of compensation for specified loss, damage, illness, or death in return for payment
of a specified premium’. From this, it will be apparent that the key role of insurance is the
provision of compensation. In other words, we could say that insurance exists to pay claims.
A person or company pays their premium in the expectation that, should the worst happen
and the insured against event occurs, they will be financially protected.
Someone may pay premiums for many years to the same insurance company and in all that
time, apart from considerations of what the policy covers and the cost of the premium, they
will have little idea of how good their insurer really is. When an insured event occurs,
however, and a claim is made, the insurer has an opportunity to impress or disappoint. Poor
handling of a claim can bring an abrupt end to a relationship of many years standing.
Consistent poor handling of claims will multiply this loss of customer, bringing into jeopardy
the continued success of the insurance company.
However, not all claims will be paid – and it will be just as damaging to the success of the
insurer if all claims were settled as presented, regardless of policy cover, sums insured or
even fraud. It is not simply a case of receiving a claim and paying it. The individual handling
the claim must check its validity first. If the claim should not be paid, the task then is to break
this news to the policyholder in such a way that they agree with the decision and their
custom is not lost. Hence, claims function has a huge responsibility and is often referred to
as the backbone of an insurance company.
So, if you are someone who has been tasked with handling claims you have a key role in
presenting your insurer to the world and also to its continued success. In this study text we
will look at the knowledge and skills you will need to handle claims in a professional,
consistent and accurate manner. And because claims handling is of such importance to the
insurance company, we will place claims handling within the wider context of the systems,
processes and functions that surround it.
15
Contents
1: General principles
A Legal requirements for a claim 1/2
B Policy conditions 1/3
C Duties of the insured after a loss 1/5
D Documentary evidence 1/6
E Proximate cause 1/9
2: Insurance products
A Motor insurance 2/2
B Household insurance 2/7
C Gadget insurance 2/9
D Travel insurance 2/10
E Extended warranties (and breakdown insurance) 2/10
F Commercial property insurance 2/11
G Pecuniary insurance 2/13
H Creditor insurance 2/15
I Liability insurance 2/15
J Health insurance 2/19
3: Claims considerations and administration

A Claims staff 3/2
B Service standards and managing customer expectations 3/2
C Third party claimants 3/4
D Estimating and reserving 3/5
E Fraud 3/5
F Disputes and complaints 3/7
G Fair treatment of customers 3/9
4: Claims handling procedures and related claims services

A Personal insurance 4/2
B Commercial insurances 4/5
C Related claims services 4/8
5: Claims handling systems

A Analysis of claims systems 5/2
B Organisational structure 5/6
C Support services 5/8
6: Claims settlement
A Claims settlement 6/2
B Reserving: the process 6/4
C Invalid and partially met claims 6/5
D Recovery 6/6
E Salvage 6/7
F Average 6/7
G Market agreements 6/8
H Excesses, deductibles and franchises 6/9
I Uninsured motorists 6/11
7: Management of expenses
A Role of the claims manager 7/2
B Leakage (or overpayment of claims) 7/4
C Monitoring financial performance 7/6
D Reserving practice 7/7
Self-test answers i
Legislation ix
Index xi
Chapter 1
General principles
1
Contents Syllabus learning
outcomes
Introduction
A Legal requirements for a claim 1.1
B Policy conditions 1.2
C Duties of the insured after a loss 1.2
D Documentary evidence 1.3
E Proximate cause 1.4
Conclusion
Key points
Question answers
Self-test questions
Learning objectives
After studying this chapter, you should be able to:
• identify the legal requirements for a valid claim;
• explain the working of the policy conditions that are applicable in respect of claims;
• describe the duties of an insured in relation to claims;
• detail the documentary evidence that is needed in respect of claims; and
• apply the principles in relation to proximate cause.
Chapter 1 1/2 WCE/March 2023 Insurance claims handling (non-UK)
Introduction
The claims department can be seen as the ‘shop window’ of the insurance company. It does
not matter how competitive an insurance company’s premiums are, or how efficiently they
conduct their underwriting administration, if a claim is not properly and fairly dealt with this is
where an insurer will be judged.
However, an insurer has obligations to every policyholder, all of whom have contributed to
the common pool from which claims are paid. There are more interests than those of the
individual claimant to be considered and, as we will see later, insurers must always treat all
their policyholders fairly. For this reason, the claimant has certain obligations that they have
to meet before any settlement will be paid.
The party wanting to take out insurance is known as the proposer. Once the insurance
comes into force, the buyer is known as the policyholder or insured. If they make a claim
against the policy, we refer to that person as the claimant, although they will still be the
policyholder/insured.
In this chapter, we will be considering the subjects of valid claims and the duties of the
various parties.
Key terms
This chapter features explanations of the following ideas:
Claim Claimant Duties of the insured Notification

Onus of proof Policy conditions Proximate cause
A Legal requirements for a claim

When someone takes out an insurance policy, a legally binding contract is formed between
the insurer and the insured. The policy document issued by the insurer is proof of this. Most
policies provide indemnity to the insured.
Question 1.1
What do we mean by the term 'indemnity'?
a. Putting the insured in a better financial position after a loss as they were in before □
the loss occurred.
b. Putting the insured in the same financial position after a loss as they were in □
before the loss occurred.
c. Putting the insured in a worse financial position after a loss as they were in before □
the loss occurred.
When an insured makes a claim, it is their responsibility to prove that they have a valid claim.
This is known as onus of proof. The insured will need to prove two things:
• That an insured peril arose: the insured must prove that they have suffered a loss that
was directly caused by a peril that is covered by the policy. This may start with the
completion of a claim form or telephone notification, but other supporting evidence could
also be required.
• The amount of the loss: where the policy is one of indemnity, the insured must also
prove that they have suffered a financial loss and its size. The insured cannot simply
claim for a lost or damaged item without proving the value of the item. Proof would
include a purchase receipt, repair account or a valuation. The important issue is that it is
not the insurer’s duty to prove the value of the loss.
There will be exceptions to the above, for example, with liability claims. In these cases, the
insured would still need to prove a valid claim, but the insurer would then generally handle
the negotiation and claims settlement aspects. The amount payable could be a court award
or a negotiated settlement, so the insured would not be involved in proving the amount of the
claim (referred to as the quantum). In any event, the insured would not be the one receiving
the settlement as in most regions this is typically paid directly by the insurer to the third party.
Chapter 1 General principles 1/3
Chapter 1
The policyholder would only be indemnified by not having to pay the settlement amount to
the third party from their own pocket.
Should an insurer refuse to pay a claim because of, for example, the operation of an
exclusion, then the onus of proof moves to the insurer, which must prove that such an
exclusion applies.
Be aware
The exact legal requirements for claims will vary from country to country.
The insurer has its own duties and responsibilities in respect of a claim. It will need to
ensure that:
• cover was in force at the time of the loss (or when the claim was made, under certain
policies);
• the insured is the same as that named in the policy (or is the person entitled to
indemnity);
• the peril (or event) is covered by the policy (or not specifically excluded under an all risks
policy);
• the insured has taken reasonable steps to minimise the loss (mitigation);
• all conditions and warranties have been complied with;
• the duty of disclosure has been complied with;
• no exceptions apply; and
• the value of the loss is reasonable.
The insurer has a duty to its other policyholders (and shareholders, if appropriate) to ensure
that all claims decisions and payments are fair and are made on time.
B Policy conditions
All insurance policies contain a list of conditions. Conditions can be express or implied. An
express condition is stated in the policy but an implied condition is one that everyone
accepts as applying to the policy, but is not actually stated in it. Examples of these types of
conditions are as follows:
Express condition A motorbike must be stored in a locked garage for theft cover to be valid, as
stated in the policy
Implied condition The insured cannot use the existence of the insurance as an excuse to act
recklessly without care
The effect of a breach of a condition varies depending upon which of the following three
groups it falls into.
Conditions precedent to the Conditions subsequent to the Conditions precedent to liability

contract contract (or recovery)
If a condition precedent to liability (or recovery) is not observed, insurers may avoid
liability for a particular loss, but they need not repudiate the contract as a whole. If a
later valid claim is made, the insurers must pay, provided that the insured complies with the
condition in this instance.
Many countries have a business code of conduct regulation that is developed and
enforced by local market regulators. In the UK, the Insurance: Conduct of Business
Sourcebook (ICOBS) states that, unless fraud is involved, the insurer should not refuse to
pay a claim from a consumer on the grounds that a condition was not met, where that
condition was not connected with the circumstances of the loss.
Example 1.1
Shan Lau takes out a household policy, one of the conditions of which is that he fits
window locks as a precaution against burglary. He fails to do this. Later, a poorly
maintained chimney flue leads to a fire which spreads to the timber frame of the building.
Will his insurers pay for the damage despite the fact that he has breached a condition of
the policy?
Because the condition that Shan breached was not connected to the circumstances of his
loss, business codes of conduct will usually state that it would be unreasonable for the
insurer to avoid payment. Shan would have been in a more serious position though if he
had been burgled, as fitting window locks was a condition of the policy.
There are also policy conditions which mean that a claim may be only partially met:
• The sum insured (in respect of property insurance) or a limit of liability (in respect of
liability insurance): this forms part of the policy and limits the maximum amount
recoverable. Claims for losses above this amount will not be met in full.
• The average clause, in the case of under-insurance for property insurances: this states
that the amount paid will be reduced in proportion to the amount of under-insurance.
• Voluntary or compulsory excesses or deductibles.
Question 1.2
What is an excess or deductible?
a. It is the amount that is deducted from each claim and is paid by the insured. □
b. It is the amount that is deducted from each claim and is paid by the insurer. □
B1 Unfair or hidden terms and conditions
The core terms and conditions of insurance contracts, such as exclusions, typically cannot
be challenged on the grounds of fairness. However, if a term of a contract is not transparent
or prominent, it can be assessed for unfairness. A term is:
• transparent, if it is expressed in clear and intelligible language; and
• prominent, if it is brought to the consumer’s attention in such a way that an average
consumer would be aware of it.
An average consumer can be defined as one who is ‘reasonably well informed, observant
and circumspect’.
To avoid challenges for unfairness, insurers will need to ensure that the significant terms
included in their insurance contracts are communicated transparently and prominently. If a
contract term is deemed unfair it will not be binding, although consumers are still within their
rights to rely on a term if they wish to do so.
These rules cover both the consumer contract (the policy itself) and notices, such as renewal
invitations and customer promotions.
Chapter 1
Example 1.2
India
The Indian Consumer Protection Act 2019 protects the interests of consumers and
stresses the right of the customer for fair trade practices and consumer education.
China
Chinese insurance law does not specify what constitutes unfair or hidden terms and
conditions. However, according to Article 17 of the Insurance Law of the People’s
Republic of China 2009, underwriters have the duty to highlight the policy exclusions to
the insured. Failure to do so can render exclusions null and void.
United Arab Emirates
In the UAE, insurers must comply with the Insurance Authority’s Instructions Concerning
the Code of Conduct and Ethics to be Observed by Insurance Companies Operating in the
UAE. This stipulates that all insurance policies should be provided in Arabic and provide
an accurate translation if necessary. In instances of disputed interpretation, the Arabic
version will prevail.
C Duties of the insured after a loss

The duties of the insured after a loss can be divided in to two different categories.
C1 Implied duties
These are imposed by law, whether or not they are actually found in the policy wording. For
example, the law may require that the insured should:
• act as though they are uninsured, and take all reasonable steps to minimise or avoid
the loss;
• advise the appropriate authorities as necessary in the event of loss or damage, e.g.
advising the fire service in the event of a fire or advising the police in the event of a theft;
• take all steps to prevent a loss from spreading, e.g. attempt to contain a fire; and
• not hinder the insurer in the claims investigation process and must assist the insurer
where possible with all aspects of dealing with the loss, including helping it to recover its
outlay where recovery opportunities exist.
Failure to comply with these conditions could render the claim invalid.
C2 Express duties
These are always written into the contract, and are usually found as conditions in the policy.
A breach of these conditions allows the insurer to reject a particular claim, if the breach of
the condition is connected to the circumstances of that claim.
There is always a condition setting out the insured’s duties in the event of an insured event
occurring. It is often entitled ‘claims procedure’ or ‘action by the insured’.
Although the condition may vary in length and detail from policy to policy, the action required
by the insured will be to:
• notify the insurer promptly;
• involve the emergency services, if appropriate;
• take reasonable steps to prevent further damage; and
• give proof and details of the loss in writing within a certain timescale.
C2A Notification
Most policies state that the insured should notify their insurer of a claim ‘promptly’. In the
absence of an express condition to the contrary, verbal notice is sufficient, i.e. a
telephone call.
In most instances, further information is obtained by the completion of a claim form, usually
issued by the insurer after the initial notification has been made. However, in some lines of
business, particularly personal lines, the information is taken over the telephone at point of
notification. In respect of motor or liability claims, there is usually a requirement that all
notifications of fatal injury inquiries, coroner’s inquests, proceedings or prosecutions are
forwarded to the insurer as soon as possible. This is to enable the insurer to arrange a
suitable defence, if necessary.
Notification conventions can vary depending on the region.
Example 1.3
In India, notification is mainly used for health insurance and, in certain circumstances,
motor insurance policies. In other lines of insurance, the insured submitting a standardised
claim form (with documentary evidence) is considered sufficient notification, although this
is not mandatory. However, it is encouraged by the insurer for the insured to notify the
claim as soon as possible, so that insurer can take appropriate steps on needed.
In the UAE, the Insurance Association’s Unified Motor Insurance Policy wording (which
also applies to other personal insurance policies) states:
‘Any notice or notification of an accident that is required by this Policy shall be
served to the Company in writing by e-mail, facsimile or by hand delivery to the
address designated in the Policy as soon as practically possible.’
D Documentary evidence
Refer to
Refer to Legal requirements for a claim on page 1/2
It is the insured’s duty to prove that a loss has occurred and to demonstrate its size. The
precise nature of the proof needed will depend on the policy wording. We will now consider
the way that a consumer can report their claim and examples of the supporting evidence
needed for different types of claim.
D1 First notification of loss (FNOL)

Most insurers operate a first notification of loss process (FNOL) in order to quickly gather
details about the claim. This is usually a telephone process whereby the customer calls a
hotline to report the claim to a dedicated claims team. In some instances, this can be done
online or via a smart phone app and, as technology expands, we can expect to see more
notifications via non-traditional ways. For example, an alert from a telematics device
automatically triggering the FNOL process, following a motor accident.
For some claims, especially low value motor and property claims, the telephone or internet
notification is sufficient to validate the claim and for the insurer to make arrangements for
adjustment or settlement without a signature on a form. In more complex claims, such as
large commercial property or liability claims, a claim form may be issued to supplement the
details provided over the phone.
D1A Benefits of telephone FNOL
Consider this…
What are the benefits of a telephone notification process to:
• the insurer; and
• the insured?
The benefits to the insurer are:

• control over cost: claims are notified quicker and insurers have more opportunities to use
their approved repairers and goods suppliers, with whom they will negotiate discounts;
and
• fewer exaggerated claims: the insured is talking directly to the claims handler so will find it
more difficult to embellish their claim and the quick notification gives them less time to
‘invent’ items.
Chapter 1
The benefits to the insured are:
• immediate access to the service;
• the claims process is simplified;
• claims are settled more quickly; and
• the quality of repair and replacement work is generally of a high and consistent standard
(because approved repairers or service providers are vetted and monitored).
D2 Claim form
If a claim form is required, it will either be issued on the conclusion of the FNOL call or
directly by the broker that sold the policy to the insured (either as physical copies in the
policy issuing office, or e-copy via email or online). The purpose of the claim form can be
summarised as to:
• establish whether the insured is entitled to indemnity under the policy. The insurer must
satisfy itself that:
– the loss (actual or potential) is covered under the terms of the policy, and
– the information given on the claim form is consistent with that given on the
proposal form;
• provide sufficient information to permit the insurer to begin processing the claim (if
appropriate);
• enable the insurer to make an assessment of the potential severity of the claim;
• enable the insurer to assess whether there may be a potential third party claim (in respect
of motor and liability insurance); and
• enable the insurer to consider whether any potential recovery rights exist.
All these issues have an important impact on the claim liability and therefore the reserves.
Refer to
Reserves are covered in Estimating and reserving on page 3/5
D2A Contents of a claim form/notification

The claim form/notification consists of a number of questions. The questions vary according
to the class of insurance concerned, although the basic purpose is the same.
An illustration of the type of information required can be seen by looking at the various
classes of insurance.
Consider this…
Choose a class of insurance that you are familiar with and consider what kind of
information you would need to be able to process a claim. How much of this information
could be obtained in a telephone call or via the internet, rather than by completing a
traditional claim form?
A hospitalisation notification may require the following:

• details of the insured;
• date of admission/expected date of admission in case of planned hospitalisation;
• details of symptoms and their duration;
• diagnosis with supporting investigation reports;
• details of treatment with supporting bills/invoices/receipts; and
• whether there is any other insurance in force and whether a claim has been lodged at the
respective insurance company.
A property claim notification may require the following information, apart from the basic
personal details:
• description of the property damaged, e.g. stock, fixtures and fittings;
• date, cause, circumstances and the monetary amount of the loss or damage;
• situation and occupancy of the premises;
• capacity in which the insured is claiming (e.g. as owner, custodian etc.);
• whether any other person has an interest in the lost or damaged property; and
• whether there is any other insurance in force.
A motor accident notification may require the following information:
• details of the insured;
• the vehicle involved in the accident, and its use (i.e. domestic or business);
• the specific detail of the accident: date, time, road conditions, lighting etc.;
• sketch plan of the accident scene, showing positions of vehicle(s) before and after the
accident;
• details of any independent witnesses to the accident; and
• a police report.
With other classes of insurance (for example, theft insurance) there may be questions
relating to informing the police and whether steps have been taken to prevent a recurrence.
In many countries, a police report may also be required, especially in case of major
accidents and/or bodily injury.
Once the claim form or notification is received, the insurer’s claims department will carry out
certain tasks, for example checking with its underwriting records to make sure:
• if there is a specific exclusion/special terms and conditions in the policy;
• that the policy is in force; and
• that the peril that has caused the loss or damage is covered in the terms of the policy.
In most cases this information is added to the claims system and only discrepancies
between what is held and being advised at claim stage would be referred to underwriters.
The condition of utmost good faith also has to be considered. The insurer will compare
the answers on the claim form with those on the proposal form. This is to check that all
material information was notified to the underwriters at the start of the policy, and that there
has not been a breach of the duty of disclosure.
The claims handler next needs to check that the value of the loss is reasonable. This is
usually done by looking at relevant internet sites, reference books, the handler’s experience
and validating it with experts in the applicable field of insurance.
Most small domestic claims can be dealt with quickly and efficiently once the claim is
validated and everything is in order. However, for larger claims or suspected fraudulent
claims, a loss adjuster may visit the claimant and location of the incident to assess the
damage.
D3 Supporting evidence
In addition to the notification information, additional evidence and/or enquiries could be
made. These will be different depending on the type of claim, as the following examples
show. This list is not exhaustive.
Theft claims The details given at notification can often be compared with the list given to the
police by the insured
Motor liability claims Images/dashboard camera footage of the incident and satellite images of the
location may be reviewed as necessary, as well as engineering reports
Personal injury and sickness First Information Report (FIR), medical report and/or doctors’ certificates,
claims discharge summary, final police investigation report, death certificate and
coroners’ inquest judgments will be examined, as applicable
Motor damage claims Vehicle registration documents in respect of total loss motor claims or vehicle
theft would be appropriate
Chapter 1
Different types of experts may also be used in the investigation process, for example:
Solicitors to give legal opinions, or to commence or defend legal proceedings
Surveyors to estimate rebuilding costs
Doctors to verify or assess the severity of injuries and assist in rehabilitation
Motor engineers to verify the damage caused and agree repair costs with the garage
Loss adjusters to investigate the cause of loss and adjust claim settlement amount
Supply chains records are often used in place of experts to help validate a loss. For
example, most large household insurers will have a delegated authority agreement with their
building repair suppliers, so that the suppliers can validate the loss on the insurer’s behalf
without the use of an expert.
Where an insurer wishes to involve other parties, it should always give an explanation to the
insured as to why the other parties are involved and the extent of their role. However, this
can vary from region to region.
E Proximate cause
‘Proximate cause’ was defined in the UK case Pawsey v. Scottish Union and National
(1907) as:
the active, efficient cause that sets in motion a train of events which brings about a result,
without the intervention of any force started and working actively from a new and
independent source.
It is one of the basic principles of insurance and is the last link in a chain of cause and effect.
Insurers will, therefore, look first at the relationship between the peril and the loss to
establish the proximate cause of the loss. The proximate cause of an incident is always the
dominant cause and there is a direct link between it and the resulting loss.
Picture a row of dominoes, all standing. If the first domino is pushed over and knocks over
the second, and so on, the proximate cause of the last domino falling would be the push of
the first domino. However, if an onlooker pushed over another domino, the train of events
stops, and the intervention of a new force becomes the cause of the fall of the last domino
and is, therefore, the new proximate cause.
The following image shows a train of events:
Events Loss
Jo rides a horse
Jo is thrown from the horse
Jo lands in a ditch, and

breaks both legs Jo dies of pneumonia
Jo cannot move and spends

the night in the ditch
Jo catches pneumonia
Question 1.3
Using the above image, test the rule of proximate cause by drawing lines from each
event to the loss. Establish whether any individual event on its own could have
directly caused the ultimate loss.
In most cases, common sense can be used to decide the proximate cause of a loss by
looking at cause and effect, but sometimes expert opinion is required. Once the insurer has
established the proximate cause of the loss, it must check that the peril is covered by the
policy. Perils can be categorised as follows.
Insured perils those named in the policy as covered
Excepted or excluded perils those named as specifically not covered
Uninsured or unnamed perils those perils not referred to in the policy and therefore not insured
If an excepted or uninsured peril is the proximate cause, the insurer will not be liable. There
may be circumstances where the ultimate cause of the loss appears to be an uninsured peril,
e.g. water damage resulting from putting out a fire, but insurers will nevertheless be liable if
the proximate cause was an insured peril. The effect of an excepted peril being involved in a
chain of events will depend on the wording of the exception. It is very important for the
insurer to draft the exclusions in such a way that whatever is excluded is clearly mentioned
in the policy. In the case of any ambiguity in the policy wording, the benefit of doubt will
always go to the insured. This is because the insurance company drafts the policy terms,
conditions and exclusions.
Conclusion
This concludes our overview on the general principles of insurance and how they link to the
claims handling process. The next important aspect we need to be aware of relates to the
different types of policy and cover available in the insurance market. We explore what these
are in the next chapter. Together, these two chapters will form the basis of our consideration
of claims handling in the rest of the study text.
Chapter 1
Key points
The main ideas covered by this chapter can be summarised as follows:
Legal requirements for a claim
• When an insured makes a claim the onus of proof is on them.

• The insured needs to prove that an insured peril arose and the amount of the loss that
resulted.
Policy conditions
• Policy conditions can either be precedent to the contract, subsequent to the contract or
precedent to liability.
• If a condition precedent to liability is not observed, insurers may avoid liability for a
particular loss, but need not repudiate the contract as a whole.
• Certain policy conditions mean a claim may only be partially met.
Duties of the insured after a loss
• Implied duties are imposed by law and include duties such as taking steps to minimise
the loss and not hindering the investigation of the claim.
• Express duties are written into the contract and detail specific action the insured must
take when an insured loss occurs, e.g. the need to notify the insurer promptly.
Documentary evidence
• On being notified of a claim, the insurer may ask its insured to complete a claim form.
• The claim form is designed to help the insurer determine whether the insured is entitled
to an indemnity, the severity of the claim, the potential for third party involvement and
the possibility of recovery.
• The insurer will compare the answers on the claim form with the proposal form to
ensure that the condition of good faith has been met.
• For complex claims a loss adjuster will be appointed.
• Supporting evidence is required to confirm a claim and this depends on the
type of loss.
Proximate cause
• The proximate cause is ‘the active, efficient cause that sets in motion a train of events
which brings about a result, without the intervention of any force started and working
actively from a new and independent source’.
• The proximate cause of an occurrence is always the dominant cause and there is a
direct link between it and the resulting loss.
• Once the proximate cause is established, the insurer must establish whether it is an
insured peril, an excepted or excluded peril or an uninsured peril.
Question answers
1.1 b. Putting the insured in the same financial position after a loss as they were in
before the loss occurred.
1.2 a. It is the amount that is deducted from each claim and is paid by the insured.
1.3 The proximate cause of Jo’s death would be riding the horse, as no other cause has
arisen to break the chain of events.
(The circumstances would be different if Jo had managed to get help, had been
taken to hospital and caught an illness in the hospital from another patient. The
proximate cause of her death would be the illness, as riding the horse would be too
remote a cause and the chain of events would have been broken.)
Chapter 1
Self-test questions
1. What is meant by the 'onus of proof' in relation to a claim?
2. What does an insured have to prove when making a claim?
3. What facts must an insurer check when establishing whether a claim is valid or not?
4. What policy conditions may result in a claim only being partially paid?
5. What are the principal purposes of a claim form or first notification?
6. What is the meaning of 'proximate cause'?
7. Generally speaking, what is the position where an excepted peril is at the start of a
chain of events?
You will find the answers at the back of the book
2
Chapter 2
Insurance products
outcomes
Introduction
A Motor insurance 2.1
B Household insurance 2.2
C Gadget insurance 2.2
D Travel insurance 2.2
E Extended warranties (and breakdown insurance) 2.2
F Commercial property insurance 2.3
G Pecuniary insurance 2.3
H Creditor insurance 2.3
I Liability insurance 2.4
J Health insurance 2.5
Conclusion
Key points
Question answers
Self-test questions
Learning objectives
• describe the basic features and typical policy cover of the following insurance types:
motor, household, gadget, travel, extended warranties, commercial property, pecuniary,
commercial liability, and health insurance.
2/2 WCE/March 2023 Insurance claims handling (non-UK)
Introduction
There are various forms of insurance available with specific considerations that apply when
Chapter 2
handling claims. For this reason, it is necessary to be aware of the features of each type of
insurance.
Before reading on, remind yourself what is meant by:
• An excess.
• An exclusion.
The first four sections of this chapter will deal largely with personal insurance; that is
insurance that is designed for the individual. The following four sections will deal with
commercial insurance; that is insurance for businesses. The exception is commercial motor
insurance, which is included with personal motor insurance because of their similarities.
Key terms
Benefit policy Commercial Creditor insurance Extended warranties

insurance
Health insurance Household insurance Liability insurance Motor insurance
Pecuniary insurance Personal insurance Property insurance Travel insurance
A Motor insurance
Question 2.1
Before reading on, remind yourself what is meant by:
a. An excess.
b. An exclusion.
Motor insurance is compulsory in many parts of the world, including China, India and parts of
the Middle East. In many countries, insurance applies to the vehicle, not to a named driver,
meaning anyone with a valid licence may drive it.
A1 Private motor insurance

For some regions, this is the most significant compulsory insurance. Legislation can make it
illegal to drive or be in charge of a vehicle on a public road unless an insurance policy is in
force. The policy must cover the driver’s legal liability for injury to others and damage to their
property. There are three common levels of cover available.
Question 2.2
Take a look at your own motor insurance policy or obtain one from a family member
or a friend. What sort of cover is provided?
Be aware
In China, insurers do not differentiate private motor insurance and commercial insurance.
However, Chinese insurers categorise motor vehicles as follows:
• motor cycle and tractors;
• automobiles; and
• special vehicles (such as mobile lift, bulldozer, truck mixer, fire engine, cleaning
vehicle, tanker truck).
Chapter 2 Insurance products 2/3
A1A Third party only

This is the most common form of compulsory insurance and can provide:
Chapter 2
• cover for any injuries to the third party (regardless if the insured is injured in the same
incident);
• third party property damage cover (in some regions the insurer will cover all property
damage);
• passenger indemnity; and
• cover for the legal costs of defending a claim.
There are two specific exclusions:
• damage to the vehicle itself (regardless of whom was driving it); and
• liability covered by another policy (e.g. when driving someone else’s car, cover may be
provided under that car owner’s insurance).
Example 2.1
The Road Traffic Safety Law of the People’s Republic of China 2003 made third party
insurance compulsory in China. The compulsory insurance only covers property damage
and personal injury of third parties arising from a road traffic accident. However, the limit is
quite low. The limit for death or disability of third party is only RMB 180,000.
Similarly, India has the Motor Vehicles Act 1998. Under the provisions of the Act, it is
mandatory that every vehicle should have a valid third party insurance to drive on
the road.
In parts of the Middle East, third party insurance is mandatory and provides a sum
awarded by the courts for bodily injuries, and up to established limits for property
damages:
• unlimited in Qatar;
• up to AED 2m in UAE;
• up to OMR 150,000 in Oman; and
• up to BHD 500,000 in Bahrain.
Saudi Arabia is unique as it has a combined limit for both third party property damage
(TPPD) and third party bodily injury (TPBI) up to SAR 10m.
A1B Third party, fire and theft

This includes, in addition to the above:
• the cost of repair or compensation to the insured if the vehicle is stolen or damaged
during theft or attempted theft; and
• damage by fire, lightning or explosion.
The same exclusions apply here as to third party only. In addition, ‘loss of use’ (i.e. the extra
expense to the insured of having to use alternative transport whilst their car is out of action)
is specifically excluded. Some policies may include a benefit to include cover for a hire car if
the insured vehicle is stolen or damaged by theft.
This is not a popular product in several regions (for example, the Middle East). However,
some companies are happy to offer the same upon the customer’s request for an increase in
premium.
A1C Comprehensive
This is the widest possible protection and includes any accidental or malicious damage to
the insured vehicle. The cover is ‘all risks’, i.e. all loss or damage is covered, with the
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following exclusions:
• wear and tear;
• depreciation;
• loss or damage to spare parts and accessories (unless the parts are on/in the vehicle or
in the insured’s garage);
• loss of use (though this can sometimes be purchased as add-on cover, usually in the
form of a hire car);
• mechanical and electrical failure; and
• tyre damage from punctures or blow-outs.
A comprehensive policy may also extend cover for the policyholder to drive a vehicle not
belonging to them, so long as it is not hired to them under a hire-purchase agreement. This
cover only extends to third party liability and does not include damage caused to the vehicle
being driven.
The policy may also extend to include personal accident, medical expenses and personal
effects.
Example 2.2
In India, a comprehensive motor insurance plan provides cover for all the damages
caused to a third party, as well as suffered by the insured. The damages caused may be
due to human acts or a natural calamity and cover is for damages to the insured motor
vehicle, third-party legal liability, theft and personal accident cover. Customers can also
add covers to the comprehensive motor insurance plan like engine protector, accessories
cover, zero depreciation cover etc.
In parts of the Middle East, comprehensive cover also includes named perils like fire and
theft and subject to specific exclusions and conditions as per the Insurance Authority’s
Unified Wording. Insurers should keep the Unified Motor Insurance Policy wording as a
minimum cover but they can still extend the wording to add more covers and services,
which is usually the practice.
On the Web
You can access the UAE’s Insurance Authority’s Unified Motor Insurance Policy wording
here: bit.ly/2CPKzFl.
Be aware
Ensure that you are familiar with the difference between third party, fire and theft
cover and comprehensive cover.
The most fundamental difference between third party, fire and theft cover and
comprehensive cover is that in a comprehensive policy the insured's own vehicle is
covered for damage or loss over and above that caused by theft, fire, lightning or
explosion.
A1D Extensions
Extensions to a motor policy are widely available and may be included as part of the core
product or offered as additional add-ons for a slightly increased premium (or a combination
of both). For instance, many motor policies contain benefits for personal accident, but legal
expenses cover is often offered as an added extra, in return for an increased premium.
Examples of the optional extensions available include:

• breakage of glass (on a non-comprehensive policy – it is usually covered by a
comprehensive policy);
Chapter 2
• personal belongings and clothing (in addition to the limited standard cover provided by a
comprehensive policy);
• young additional drivers (these may be added as occasional users, but if they are one of
the main drivers then the additional premium charged would be based on their age and
experience);
• loss of use at a fixed amount per day or the provision of a courtesy/hire car;
• additional personal accident benefits;
• racing, competitions, rallies and trials;
• caravans and trailers (usually third party cover whilst attached to the insured vehicle);
• breakdown cover (for instance the provision of helplines or a certain amount of cover for
the costs of roadside assistance);
• natural calamities;
• legal assistance; and
• joint policies.
This list is not exhaustive.
A1E Exclusions
There will be general and market exclusions in addition to the specific exclusions. These
include exclusions such as:
• contractual liability, for situations where the liability would not exist but for the terms of a
contract;
• war risks;
• use other than as specified in the certificate of insurance;
• riot and civil commotion;
• terrorism; and
• sonic bangs (i.e. damage caused by pressure waves from sonic/supersonic aircraft or
other aerial devices).
A2 Motor cycle insurance

This includes any mechanically propelled cycle. The same levels of cover (third party only,
third party, fire and theft, and comprehensive) are available. The policy format is the same as
that for private motor insurance, with the following differences:
• there is usually no automatic cover for theft of accessories or spare parts unless the
motor cycle is also stolen;
• the liability section generally indemnifies the insured (or their personal representatives in
the event of their death) and others who were permitted to drive the motor cycle or who
used it for social, domestic and pleasure purposes; and
• there is no personal accident, medical expenses (beyond emergency treatment fees) or
personal effects cover.
There are extensions available for the payment of additional premium, such as:
• accessories or spare parts;
• trailers;
• driving other cycles;
• more than one cycle insured; and
• invalid carriages.
The policy typically is essentially the same as for private motor insurance.
A2A Commercial vehicles

This is a form of commercial insurance and is dealt with here for convenience. However, you
should be aware of the distinction with personal motor insurance.
Chapter 2
The main types are:

• goods-carrying vehicles;
• passenger-carrying vehicles;
• agricultural and forestry vehicles; and
• vehicles of special construction, e.g. ambulances, cranes, fork-lift trucks.
Be aware
It is also important to note that some regions (such as China) do not differentiate between
commercial and private vehicles in terms of insurance.
The insurance is primarily concerned with the risks that attach to the vehicles themselves
whilst being driven, parked or carried by sea or air.
There is usually a standard policy wording, which is then modified depending on the type of
vehicle insured. The range of cover is largely the same as for private motor insurance.
However, certain benefits are excluded, e.g. driving other cars, personal accident and
personal effects cover. It also differs depending on the basis of the vehicle’s use.
The third party liability section provides unlimited indemnity for death or bodily injury to
third parties. There would be a limit for third party property damage. The following are often
included or are available as extensions of cover.
Loading or unloading cover for third party liability can also be applied to accidents whilst loading and
unloading
Indemnity to driver usually anyone may drive on the insured’s order or with their permission
Indemnity to user the insured may allow others to use the vehicle for social, domestic or pleasure
purposes
Indemnity to passengers indemnity for their acts of negligence is covered
Legal costs the policy can usually be extended to cover legal costs
There is a fairly extensive portfolio of optional extensions available at an additional premium,

e.g. medical expenses, windscreen cover, loss of use etc.
Limitations are typically the same as for private motor insurance.
Mention should also be made here of fleet insurance. Fleet insurance can be used to cover
a number of vehicles under one policy, for example all of a business’ company cars.
Generally, the cover available is similar to that offered under private motor policies; however,
other covers are often included, for example:
• contingent third party insurance (i.e. third party only cover for where an employee is using
their own vehicle on the property of the insured’s business and their own insurance is not
operative);
• joint insured clause or cross liabilities clause (i.e. two or more named insureds are treated
as separate policyholders if one has a claim against the other);
• occasional business use (as per the contingent extension but for comprehensive cover);
• roadside assistance; and
• helplines.
B Household insurance
A household insurance policy is bought by householders to provide protection for both the
building itself and its contents. Often this cover is bought as one all inclusive policy, but
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buildings cover and contents cover can be bought as separate policies in some regions.
Here, we will look briefly at buildings and contents insurance.
Question 2.3
When would a person only buy contents cover for their home?
a. When the value of their personal possessions is greater than the value of the □
building.
b. When buy a property as part of a shared ownership scheme. □
c. When living in a rented property as a tenant. □
There is no such thing as a ‘standard’ household policy, both cover and wordings vary
depending on the customer’s choice and the cover offered by particular insurers.
B1 Buildings insurance
The definition of 'building' includes not only the main structure of the building, but also
garages, sheds, greenhouses, outbuildings, swimming pools, tennis courts etc. Anything you
would normally leave behind on moving from the house is part of the building, e.g. double
glazing, fitted kitchens and bathrooms. The cover generally available is as follows.
Fire, lightning, explosion and earthquake
Riot, civil commotion, strikes, Cover usually excludes loss or damage if the building is unoccupied for more
labour or political than 30 or 60 days, malicious damage is usually subject to an excess
disturbances, malicious
damage or vandalism
Storm or flood Usually subject to an excess
Falling trees or branches Though damage to walls, gates, fences or hedges will be excluded
Escape of water With an unoccupied exclusion (30 or 60 days) and with an excess
Escape of oil With an unoccupied exclusion (30 or 60 days) and with an excess
Theft or attempted theft With an unoccupied exclusion (30 or 60 days) and with an excess
Impact Collision into, or impact of, road vehicles, animals, aircraft (or other aerial
devices) and things dropped from them
Subsidence, ground heave or Usually with a large excess. (Subsidence is the movement of the land on which
landslip the building stands due to movements in underground workings, e.g. mines.
Ground heave results when previously dry ground suddenly takes in water and
swells, e.g. after a drought. Landslip is a small landslide)
Breakage or collapse of television or radio receiving aerials, aerial fittings and masts
Accidental damage to drains, pipes, cables or underground pipes
Accidental breakage of glass and sanitary fixtures
Legal fees, architects’ and Incurred whilst reinstating the building after suffering loss or damage
surveyors’ fees, cost of debris
removal
Loss of rent
Accidental damage As an optional extension

B2 Contents insurance
The term 'contents' means household goods and personal effects of every description that
belong to the insured or to a member of the family living in the property. It includes cash and
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stamps (that are not part of a collection) usually up to an agreed limit, and any fixtures and
fittings belonging to the insured.
The risks covered are essentially the same as for buildings insurance, but with the following
differences:
• theft (or attempted theft) of cash, currency, bank notes and stamps may be excluded if it
does not involve forcible and violent entry or exit;
• theft (or attempted theft) while the building is lent, let or sub-let in whole or in part may be
excluded if it does not involve forcible and violent entry or exit; and
• accidental damage cover: certain contents are excluded, e.g. clothing, money and
stamps, plants etc.
There are usually limits on single articles of value (e.g. 5% or 10% of the total sum insured)
and a valuables limit (e.g. one-third of the total sum insured). In other words, the maximum
sum insured for an individual article will be regarded as being no more than 5% or 10% of
the total sum insured. Valuables, taken together, will not usually be covered for a sum
greater than one-third of the total sum insured. However, they can be disclosed and insured
separately. Most household policies can provide cover for specified articles that are not
within 5% or 10% of the total sum insured.
The following extensions are usually included automatically:
• temporary removal to another premises (with restrictions);
• clothing and personal goods of domestic servants (with restrictions);
• accidental breakage of mirrors and glass or furniture; and
• loss of rent.
Other extensions can be included for the payment of an additional premium, for example:
• accidental damage to entertainment equipment;
• accidental damage during removal; and
• the cost of replacing keys and door locks after the loss or theft of keys.
Typical exclusions may be as follows:
• property more specifically insured elsewhere;
• medals and coins, unless specifically insured;
• motor vehicles; and
• livestock (other than horses).
All household policies also cover legal liability to third parties for accidental injury or
accidental damage to material property, as follows.
Buildings Liability of the owner and also their liability for faults in property that the insured
used to own or occupy
Contents Liability of the occupier for property in other premises that they use for
temporary holiday accommodation
Consider this…
What else, beyond those things we’ve already listed, might a householder wish to be able
to claim for?
The most common extensions to the household policy are as follows:

• ‘All risks’: usually only given in conjunction with contents cover and is for personal
belongings taken outside the property. There will usually be specified and
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unspecified items.
• Money (e.g. cash, cheques, postage stamps and travel tickets) and credit cards each with
a limit of indemnity, specific conditions (e.g. reporting the loss to the police and card
issuer within a certain time) and exclusions.
• Bicycles, with usually a limit per bicycle and with a lock or storage clause.
• Freezer contents, covering their damage as a result of a change in temperature or
contamination by refrigerant fumes.
• Sports equipment.
• Personal accident and hospital cash benefit.
• Creditor insurance, i.e. the inability to keep up credit instalment payments.
• Domestic animals.
• Legal expenses.
Each of these have specified cover and benefits, with exclusions and usually an excess. For
example, legal expenses cover provided by a household policy typically provides cover for
the following:
Recovery costs For legal action taken to enforce the legal rights of the insured against third
parties
Civil defence costs For the defence of certain types of civil claims not covered by other forms of
insurance
Prosecution defence costs For the defence of certain criminal charges which may arise from unwitting acts
of the insured
Employment dispute costs For the pursuit of a claim on behalf of the insured against their employer
through the court system, e.g. for unfair dismissal
C Gadget insurance
A fact of modern life means we all own many gadgets, such as smart phones, tablets,
laptops or e-readers. Some insurers have created a new insurance model, whereby it is
possible to insure specific gadget items against loss, damage or theft, rather than having
them covered by a traditional household policy. Some of these policies also provide travel
insurance cover as an add on, or even household cover specifically including gadgets.
Bicycles can also be covered.
Be aware
Gadget insurance may not be available in some countries (like China).
However, a few Chinese insurers have developed smartphone breakage insurances. In
case of breakage of smartphone screen by accident, the insured could replace the
damaged screen using the designated repairer. The policy could only be triggered once
during the policy period. Some insurers do not cater to this market due to high loss ratios.
Cover can be arranged on a month by month basis, with different gadgets swapped in and
out of cover.
As we move into an increasingly connected world the popularity of such policies will grow,
especially with the younger generations.
Consider this…
Carry out some research into modern insurance policies such as for gadgets to fully
understand the cover and exclusions provided. Think about how such policies might
develop as we move forward into an autonomous and connected world.
D Travel insurance
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Consider this…
What risks can you think of that are associated with travelling?
There are many risks associated with travel. A trip may be cancelled because of sickness or
delayed by an industrial dispute. Luggage may be lost, damaged or delayed. Connections
may be missed because of late running public transport. The traveller may become ill or
suffer an accident while away.
Travel insurance is designed to cover such risks and most travel policies cover the following:
• Personal accident benefits: an amount for death, loss of eyes or limbs, or permanent total
disablement. Hazardous activities are generally excluded but can be underwritten for an
additional premium.
• Medical and associated expenses, e.g. the cost of treatment, being brought home or
having to stay away longer than planned.
• Loss of deposits, i.e. if the holiday is cancelled due to necessary and unavoidable holiday
cancellation.
• Loss of, or damage to, baggage, personal effects and money.
• Personal liability for accidental injury to third parties or damage to their property.
• Delayed baggage.
• Hospital cash benefits, i.e. a daily amount of cash whilst the insured is in hospital.
• Travel interruption, that is the extra costs involved when public transport fails to deliver
you on time to make your connection or take the trip booked.
• Travel delay.
In addition to the ‘standard’ cover, the following optional extensions are usually available:
• Failure of tour organiser;
• Lack of services or amenities at the hotel because of industrial action lasting at least
48 hours;
• Loss of passport;
• Legal expenses associated with pursuing claims for compensation for death or injury; and
• Hazardous activities, such as quad biking, jet skiing etc.
There are general exclusions, such as pregnancy and childbirth, physical or mental defect,
suicide, confiscated luggage, damage to fragile objects etc. Policies can be sold to
individuals or groups and may be sold on a ‘single trip’ basis, a ‘multiple trip’ basis or an
‘annual basis’. They may provide cover for specific countries, regions or for any location in
the world.
E Extended warranties (and breakdown

insurance)
If, for example, you purchased a new washing machine, it is probable that the manufacturer
will provide a guarantee (or warranty), which will usually last for twelve months. It is,
however, possible to buy a policy to extend this period for two, three or even five years.
These policies, issued by insurers and sold by some large authorised retailers, cover the
cost of repairs following electrical and mechanical defects.
Policies are also available to cover all an insured’s electrical products. There is usually a
condition that the repairs must be carried out by an authorised repairer.
The following exclusions apply to an extended warranty policy:

• negligent handling and/or failure to comply with manufacturer’s instructions;
• risks normally covered by a household contents policy;
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• war etc.;
• the cost of repairs to bulbs, aerials, external wires, knobs, handles, driving belts etc.; and
• deliberate damage by the insured.
F Commercial property insurance

Apart from commercial motor insurance, all the policies considered so far have been
personal insurances for the individual. In this section we move on to look at commercial
policies, which insure businesses.
F1 Fire and special perils insurance

Fire policies tend to be standard across the territory concerned. Standard fire cover is often
made up of three parts:
1. Fire (excluding explosion resulting from fire, earthquake or subterranean fire, and the object’s own
spontaneous fermentation or heating)
2. Lightning
3. Explosion (restricted to explosion of boilers or gas used for domestic purposes only)
Individual insurers issue their own versions to include ‘extra’ perils (known as special perils
or named perils).
The special perils that may be included are as follows (each is preceded by ‘damage caused
to the property by…’):
• explosion: namely those emanating from chemical reactions producing suddenly
expanding gas;
• the crashing of an aircraft or other aerial device, other than that resulting from fire
(excluding sonic bangs);
• riot and civil commotion, either for fire caused by riot and civil commotion or for any
damage so caused;
• malicious damage;
• earthquake;
• subterranean fire;
• spontaneous fermentation or heating of the property itself;
• storm, i.e. damage caused by some form of atmospheric disturbance;
• flood;
• escape of water (commonly referred to as ‘burst pipes’ cover);
• impact by vehicles or animals belonging to or controlled by a third party (though this can
be extended to apply to those owned or controlled by the insured or its employees);
• sprinkler leakage; and
• subsidence, ground heave and landslip (with special exclusions).
Standard exclusions
The standard exclusions for the whole policy are as follows:
• war risks;
• radioactive contamination/explosive nuclear assemblies;
• pollution or contamination;
• marine policies;
• ‘more specifically insured’ clauses (i.e. where there is a more specific policy in force
covering the peril in question); and
• ‘consequential loss’ exclusion, i.e. loss following and consequent upon a loss proximately
caused by an insured peril.
F2 ‘All risks’ insurance

It was generally realised that uncertainty of loss is not restricted to events brought about by
fire and special perils. Nor is it limited to events occurring on or about the insured’s
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premises.
All loss or destruction of or damage to the property insured is recoverable, as long as:
• it has occurred accidentally in respect of the insured; and
• the cause is not specifically excluded.
There are no optional extensions: everything is covered, unless specifically excluded.
The exclusions can be divided into four groups as follows.
1. Absolute exclusions war, pollution, contamination and

consequential loss
2. Gradually operating exclusions e.g. corrosion or rust, wind or rain damage to

property in the open
3. Aspects of cover which can be written into the e.g. money, glass and subsidence
policy for additional premium
4. Property or risks more appropriate to another e.g. motor vehicles or aircraft

class of business
F3 Theft insurance
There is no standard wording for policies of theft insurance. Most countries consider a
person guilty of theft if they dishonestly take property belonging to another, with the intention
of permanently depriving the other of it. Many insurers add a phrase saying that it must
include force and violence, either in breaking in or out of the insured premises. This means
that entry by a key, a trick or concealment on the premises while open, and leaving without
forcible exit would not be covered. If a key were obtained by threat or force, cover would
normally apply.
Common extensions are as follows:
• Breakage of glass (if not insured specifically elsewhere).
• Replacement of locks.
• Temporary removal.
• Index linking the sum insured (with premium adjustment at the end of the policy period).
• Extended or full theft: i.e. the ‘forcible and violent entry’ phrase is deleted.
Exclusions can include the following:
• Collusion, e.g. plotting and agreement between the thief and employee(s), though this
can be included, subject to the underwriter’s agreement and an additional premium.
• Fire and explosion (insured under the standard fire policy).
• Cash, bank notes etc. (this should be covered under a money policy).
• Livestock (again, these will be more specifically insured elsewhere).
Cover is often sought on a first loss basis, i.e. for an amount that is less than the total value
of the subject matter of the policy. This is because the insured recognises that a thief would
be selective in what they steal. A small premium discount would usually be given.
Be aware
In some regions (for example, China), theft insurance is not a stand-alone product, and is
often an extension of property insurance.
F4 Glass insurance
The standard policy covers destruction or damage to all fixed glass, including windows,
doors, fanlights, showcases, mirrored glass and glazed partitions. It usually includes an
extension to cover the cost of boarding up damaged glass until it can be replaced. Cover is
‘all risks’, but scratching or chipping is usually excluded. It may be extended, for an
additional premium, to include damage to storefront contents because of broken glazing, and
damage to washbasins and sanitary fittings in hairdressing salons.
Damage by fire, lightning and explosion is generally excluded (these perils are covered
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under a standard fire policy). An excess is standard to avoid small claims.
F5 Money
The definition of money under a money insurance policy includes cash, coins, bank and
currency notes, cheques, postal and money orders, postage stamps, national insurance
stamps and luncheon vouchers.
A policy covers the risk of loss or damage to or destruction of money on an ‘all risks’ basis. It
includes damage to safes or strongrooms caused by theft or attempted theft and provides
cover against loss of cash or currency while in transit due to accident. The insurer can also
pay for the cost of replacement or repair of a safe or strongroom in the event of theft or
burglary.
It can be extended to include:
• personal accident due to assault; and
• credit cards (which are not covered by a standard money policy).
The principal specific exclusions are losses due to:
• error or omissions in accounting and book-keeping;
• the dishonesty of an employee that is not discovered within seven days;
• damage arising outside the jurisdiction of the insured; and
• a safe or strongroom being opened by a key left on the premises whilst closed for
business.
G Pecuniary insurance
G1 Legal expenses insurance
These policies cover the costs to firms or companies arising out of the need to take action in
the courts or to defend an action brought against them. They also cover the cost of the
insured’s and their employees’ time spent in court.
A standard policy will be subject to a monetary limit. It typically consists of five main sections
as follows.
1. Employment cover Covers the cost of defending unfair dismissal or racial or sexual
discrimination claims plus any awards made against the insured if
unsuccessful
2. Criminal prosecution defence Covers the cost of defending an action against the insured, usually
cover under Health and Safety legislation. Fines are not covered as this
would be against the public interest
3. Property disputes cover Covers the cost of representation for legal disputes with a
neighbouring property owner or regarding purchase or sale of the
insured property
4. Motor cover Covers legal costs relating to motor vehicles, e.g. personal injury,
uninsured loss recovery and defending motor prosecutions
5. Patents Covers the cost of defending the insured against an action for
breach of registered designs, copyright and trademarks, and
associated damages
Refer to
Covered in Household insurance on page 2/7 and Uninsured loss recovery services on
page 4/10
Legal expenses insurance is also available to individuals and is often offered as an optional
extension to a household insurance policy. It is also sometimes sold alongside a motor policy
where it will indemnify the insured for the cost of defending a claim or pursuing uninsured
losses.
In all cases, the costs and expenses must have been approved by the insurer before the
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action starts. The cover does not extend to meet the cost of any fines imposed or the
defence of any deliberate criminal acts committed by the insured. Also, claims made
between husband and wife are generally excluded.
G2 Business interruption insurance

Business interruption insurance covers a business for the actual or potential loss of earnings
and the additional expenses incurred as a result of a material loss covered under property
insurance.
Consider this…
Why do you think business interruption insurance could be required?
Property insurance only covers material loss following damage or destruction but that
damage may have consequences for the insured’s ability to carry on its business, resulting in
a financial loss.
The consequences of physical damage (material loss) to an insured’s business premises are
as follows:
• Earnings may reduce or stop altogether following property damage.
• Certain overheads will still need to be paid at their full level.
• There may be increases in certain costs just to keep the business operating.
All these are covered by business interruption insurance, as well as the cost of paying the
charges of accountants employed to help present the claim.
An indemnity period is chosen by the insured, usually 12, 24 or 36 months. Cover will begin
with the occurrence and end not later than the maximum indemnity period chosen. Cover is
restricted to the time the business was actually affected.
There are three items insured under a business interruption policy:
• profit;
• wages; and
• accountant’s (or auditor’s) fees.
There will usually be a material damage warranty. This requires that a property policy,
covering the physical damage for the incident, should be in place before the business
interruption policy comes into operation. In practice, the two policies will usually be linked
and provided by the same insurer.
Question 2.4
Why is it necessary for a property policy covering the physical damage to be in place
before the business interruption policy comes into operation?
The most common policies are:
Fire and special perils The standard perils are extended to include non-domestic boilers, and included
under special perils are six engineering special perils not covered by the
material damage policy (although because of the material damage warranty the
material risk will need to be covered by an equivalent engineering policy)
‘All risks’ Insurers often issue a combined material damage and business interruption
policy
Engineering The perils covered are usually either:

• failure of the public utilities supply; or
• sudden and unforeseen damage from any accidental cause not specifically
excluded
Certain optional extensions are available for an additional premium. These generally apply to
locations other than the insured premises. Cover may be for the same perils as at the
insured premises or may be more limited.
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Examples are:
• specified suppliers: cover is extended to those suppliers whose ability to supply is
important to the business’ ability to function;
• unspecified suppliers: extends the cover to any supplier;
• specified customers: based on an estimate of the maximum trading to each customer;
• transit: i.e. the property of the insured whilst in transit;
• prevention of access: i.e. where damage to a neighbouring property may prevent access
to the insured premises; and
• public utilities: i.e. damage to electricity, water, gas or telecommunication supplies,
causing an interruption in supply to the insured.
Common exclusions include:
• third party claims;
• fines and penalties payable due to delayed fulfilment or cancellation of sale/service
contract;
• war and nuclear perils;
• loss of goodwill;
• loss of market; and
• failure to recover debts owing to destruction of records.
Example 2.3
XYZ Garages carry out repairs to motor vehicles. All its tyres are supplied by Tyres ‘R Us.
If there was a fire at Tyres ‘R Us that prevented it from supplying tyres then this would
have serious consequences for XYZ’s business. XYZ decide to extend its business
interruption cover to Tyres ‘R Us.
XYZ Garages has a large contract with a local car dealership to service all its second-
hand vehicles before they go on sale. The income from this contract makes up a large
proportion of its profits. Therefore, XYZ decide to extend its cover to this specified
customer.
H Creditor insurance
Creditor insurance covers an insured's inability to continue credit instalment payments in the
event of redundancy or unemployment. Cover would be limited to (for example) 24 months,
and would generally exclude the first month of any period.
I Liability insurance
Everyone has a duty of care to those who they come into contact with on a day-to-day basis.
In the event of a breach of this, a party (whether an individual or a corporate body such as a
firm) can be liable to pay damages (compensation) to another who suffers loss or damage
arising from their negligence (lack of care). Even if found not liable, a party may have to pay
the costs of taking legal action or advice. Covering such damages and costs is the purpose
of liability insurance, and in this section we will deal with the various types.
The scope of liability insurance can be defined in law.
Example 2.4
In India liability insurance is defined by the Public Liability Insurance Act 1991. The
objective of the Act is to provide (through insurance) immediate relief to anyone injured or
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taken ill as a result of handling a hazardous substance (on behalf of the owner) on a no-
fault liability basis. The definition of an ‘owner’ covers any person who owns or has control
over any hazardous substance at the time of accident. This includes any firm or its
partner; association or its members; company or its directors; and all other persons
associated and responsible to that company in the conduct of their business.
I1 Employers’ liability
Employers’ liability or workmen’s compensation insurance provides legal liability cover for
compensation to employees for bodily injury or death caused by accidents or diseases
arising from and in the course of employment.
Example 2.5
China has Work-related Injury Insurance which is managed by its social security
department. The premium is paid by employers and the rate based on the risk of injury in
different sectors.
India’s workmen’s compensation was renamed employers’ liability in 2010 when its 1923
Workmen’s Compensation Act was amended. The amendments mean cover is no
longer restricted to workmen.
In parts of the Middle East, while the Regulations focus on workmen’s compensation,
insurers offer a combined workmen’s compensation and employers’ liability policy. This
meets the Regulations and extends a limit of liability for employers. Although the concept
of negligence operates in the Region’s courts, they tend to protect the least financially
powerful party.
The most important provisions of an employers’ liability policy are as follows.
Legal liability Bodily injury as a result of the employer’s negligence or breach of statutory
duty is covered
Damages For loss of (and future loss of) earnings, and for pain and suffering and loss of
amenity
Claimant’s costs and That is costs (usually legal fees) involved in the claimant substantiating their
expenses claim, plus any award of cash and damages by the court
Definition of ‘employee’ ‘Any person who is under a contract of service or apprenticeship with the
insured’. This is usually extended to include, for example, self-employed
persons, work experience students
Arising out of and in the The time a person is considered to be at work is usually counted from the
course of employment moment they pass through the ‘boundary gates’
Trade or business Usually extended to cover the insured’s ancillary activities which directly form a
part of the business
Territorial limits Usually the base country of the insured or while temporarily outside these
territories
Period of insurance Provided the injury or the cause of the disease occurred during the period of
insurance, insurers are liable even if the policy has expired
Defence costs and expenses The costs incurred by the insured when defending a claim
Additional person(s) insured This refers to any director, partner or employee of the insured in their personal
capacity, for actions brought against them for which the insured would be
entitled to indemnity under the policy. This cover may be offered as an optional
extension under some policies
Cover may be limited by restricting the definition of ‘business’ and excluding certain kinds of
work, machines and/or processes. However, as this is a compulsory class of insurance, the
insurer cannot refuse to deal with a claim on these grounds. It merely obtains a right of
recovery against its insured once it has made a payment.
Some countries, like the UK and India, have legislation which makes employers’ liability
insurance compulsory for all businesses.
I2 Public liability insurance
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A public liability policy covers all legal liability that is not specifically excluded. It provides an
indemnity to the insured for legal liability to third parties for damages (including claimants’
costs and expenses). This is for bodily injury, death, disease or illness, and for any loss of, or
damage to, third party property, which happens in connection with the business insured
under the policy during the period of insurance.
Consider this…
Can you think of three examples of where a claim could arise under a public liability
insurance policy?
Examples could include:
• a sign hanging from an insured's premises may fall down and injure a passer-by;
• a customer could slip on a wet floor, hurting themselves;
• a loose roof tile could blow from the insured's building, damaging a vehicle parked on
the street.
The list is endless – any potential legal liability could have been named.
Claims handlers should consider the following.
Accident the occurrence was not a deliberate act or omission of the insured
Injury to persons there must be some form of physical or medical impairment and/or
Loss of or damage to property damage to third party property, but may exclude intangibles (e.g. copyrights) or
indirect economic loss
Consequential loss e.g. when a vehicle has been damaged by a roof tile falling from the insured’s
premises, the insured may be liable for the cost of a hire car for the third party
whilst their vehicle is being repaired, and this would be covered
Limit of indemnity usually, a limit per occurrence and in the aggregate
A number of exclusions apply, and these are:

• injury to employees (this would be covered under an employers’ liability policy);
• property belonging to the insured (covered under a property policy);
• product liability;
• professional negligence;
• contractual liability where a liability would not exist if it were not for the existence of the
contract;
• cost of rectifying defective work;
• deliberate acts, i.e. not ‘accidents’;
• injury or damage caused by the insured’s motor vehicles;
• injury or damage caused by the insured’s vessels and craft;
• lifts, elevators and boilers (covered under an engineering policy);
• war risks; and
• radioactive contamination.
Be aware
Make sure you understand why each exclusion is inserted in to the public liability
insurance policy.
Many of the exclusions are inserted because there are more specific policies available to
cover these risks.
I3 Product liability insurance

The standard product liability policy covers legal liability for bodily injury or third party
property damage which arises out of goods or products manufactured, constructed, altered,
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repaired, serviced, treated, sold, supplied or distributed by the insured. Cover is usually
combined with the basic public liability policy.
• Cover is for consequential loss following actual injury or damage.
• Financial loss is not usually covered as standard, unless accompanied by bodily injury or
loss of or damage to property. However, a financial loss extension may be purchased by
the insured to cover financial loss that does not accompany bodily injury or damage to
third party property. This is called ‘pure financial loss’.
• The basic cover is dependent on an element of accident.
• The injury or damage should occur during the period of insurance, although some
standalone product liability insurance may be written on a claims-made basis. Where this
is the case, the trigger for the claim attaching to the policy is when the claim was made,
rather than when the loss occurred.
• A yearly aggregate limit of indemnity is usually specified.
There are a number of exclusions that you would expect to find in a product liability
insurance policy. These are:
• contractual liability;
• damage to the actual product(s) supplied; and
• faulty design or formula.
I4 Professional indemnity insurance

This covers professional people’s liability for injury, damage or financial loss to their clients or
the public that comes about as a result of a breach of professional duty, or from their
negligent acts, errors or omissions in their professional capacity.
Consider this…
Try to think of some examples of where a professional person may give advice which,
when followed, leads to someone suffering loss or damage.
Examples could include an architect designing a house incorrectly or a stockbroker
recommending some shares in a disastrous company.
With professional negligence, the courts may award damages to the claimant for pure
financial loss.
It is usual for the policies to offer cover on a claims-made basis. This means that the policy
applies to claims made against the insured during the period of insurance rather than
claims occurring during the policy period.
Dishonesty of the insured will usually be excluded.
J Health insurance
Health insurance can usually be broken down into three types as follows.
Chapter 2
Personal accident provides payments in the event of accidental death or bodily injury
Sickness provides payment for disablement due to sickness
Medical expenses provides cover for individuals who seek medical treatment when they are ill
A personal accident and sickness policy is a benefit policy, as opposed to a policy of

indemnity. It is a contract to pay a sum of money should a defined event occur, whether or
not the insured sustains a direct financial loss. Some regions do not have benefit policies (or
they are considered under another type of insurance).
Personal accident and sickness policies can be purchased as stand-alone policies, but are
often ‘add-ons’ to travel, motor or household insurance. You can purchase as much benefit
cover as you can afford. Should you have an accident that is covered under the terms of the
policy, you would receive benefits in accordance with the actual cover purchased. Because
they are benefit policies and not policies of indemnity, even if you have more than one policy,
contribution will not be an issue.
However, insurers are eager to ensure that the benefit is no more than normal earnings. If it
were, this could provide an inducement to remain off work. Consequently, they will
specifically ask about the existence of other policies on the proposal form. In this way, they
can check that the overall benefits provided by all the policies are set at realistic levels.
J1 Personal accident insurance

Accident cover pays lump sums in the event of death or specified injuries. It can pay weekly
benefits (for period of time) if the insured experiences temporary total disability due to an
accident (and reduced benefits if temporarily partially disabled). An annuity would be paid in
the event of permanent total disablement. There is also a personal accident cover which
provides a stipulated amount to be paid as a lump sum in the event of death or injury.
Example 2.6
In India, accident cover will pay the sum assured in the event of death. However, in
instances of permanent disablement, 50% of the sum assured will be paid. In the instance
of temporary disablement, typically 1% of the sum assured is paid per week. However, as
a control mechanism, most insurers have a clause stating payments cannot exceed Rs
3,000 per week and shall not be payable for more than 100 weeks.
J2 Sickness insurance
Sickness cover can provide a weekly benefit for a number of weeks if the insured is
disabled from following their usual occupation due to sickness or disease. Cover usually
excludes any sickness contracted within the first 21 days of the start of the policy period and
is subject to a franchise.
A franchise refers to a period of time or an amount of money under which a policy would not
come into force. No benefit or indemnity would be paid for periods or amounts falling below
this threshold. However, unlike an excess, once this period or amount is exceeded then the
whole period or amount is covered.
For a sickness policy the franchise is usually seven days. An insured who is sick for less
than seven days receives no benefit, but an insured who is sick for more than seven days
receives benefit for their entire period of sickness.
Example 2.7
Karim takes out a sickness policy with a seven-day franchise. Three months later he falls
ill and cannot work for six days after which he returns to work. No benefit is paid to him by
Chapter 2
his policy.
Fatima takes out a similar policy. Three months later she too falls ill for two weeks (i.e. 14
days) after which she returns to work. Fatima receives benefits from her policy for 14 days
of sickness.
J3 Policy benefits
The policy benefits provided under personal accident and sickness policies usually include
payments on the event of any of the following.
Death usually within twelve months of the event giving rise to the claim
Total loss of sight in one or both eyes
Permanent total disablement usually a capital sum or an annuity is paid, but often not until 12 or 24 months
after the accident as it may take this long to decide whether the disability is
permanent and total
Permanent partial disablement that is, a permanent disablement that stops the person getting on with a
substantial part of their normal business
Temporary total disablement usually a weekly benefit is paid for a maximum of 104 weeks
Temporary partial disablement this only applies following an accident (i.e. not for sickness)
Medical expenses incurred for treatment or appliances given or prescribed, up to a fairly low limit
J3A Exclusions
There are a number of typical exceptions, for example:
• the insured being under the influence of, or being affected by, alcohol or
non-prescription drugs;
• the consequences of a pre-existing infirmity or disease;
• self-inflicted injury or disease including suicide; and
• childbirth, pregnancy, venereal disease and/or AIDS.
J4 Medical expenses
Medical expenses insurance covers members of the public, either individually or in group
schemes, against most of the expenses of undergoing in-patient or out-patient treatment in
private hospitals. These policies are often sold as group schemes to businesses as an
employment benefit for staff and their families. There is a wide range of products available
on the market. Basic cover is likely to have many exclusions (for example, the treatment of
pre-existing conditions) and lower ‘per treatment’ limits. More expensive cover and group
cover will be wider, have considerably fewer exclusions and significantly higher ‘per
treatment’ limits.
Conclusion
You should now have an understanding of the different types of insurance and the attributes
of each. We can now start to focus on how claims are handled. We will start in the next
chapter by looking at general claims administration and some of the key considerations
when handling particular claims.
Key points
Chapter 2
Motor insurance
• Private motor insurance is compulsory in many regions.

• It can take the form of third party only, third party, fire and theft and comprehensive.
• The same levels of cover are available for motor cycles.
Household insurance
• Buildings insurance covers the main structure of the building along with garages,
sheds, greenhouses, outbuildings, swimming pools, tennis courts etc.
• Contents insurance covers household goods and personal effects belonging to the
insured or their family living in the property.
Gadget insurance
• Gadget insurance is a modern insurance cover, allowing short term cover for electronic
tablets and other technology, often linked to travel and household cover.
Travel insurance
• Covers the risks associated with travel, such as cancellation, delay, lost luggage and
accident and sickness while away.
Extended warranties (and breakdown insurance)
• Extended warranties, issued by insurers and sold by some large authorised retailers,
cover the cost of repairs following electrical and mechanical defects.
Commercial property insurance
• With ‘all risks’ insurance, everything is covered unless specifically excluded and certain
exclusions are standard, e.g. war risks.
• Insurers definition of theft often includes ‘with the use of force and violence, either
breaking in or out of the insured property’ or similar.
Pecuniary insurance
• Legal expenses insurance covers the cost to firms and individuals arising out of the
need to take or defend an action in the courts.
• Business interruption insurance covers the impact on the business of physical damage
to its premises.
• A material damage warranty states that property insurance, covering the physical
damage, must be in place before the business interruption policy will operate.
Creditor insurance
• Creditor insurance covers an insured’s inability to continue credit instalment payments

in the event of redundancy or unemployment.
Liability insurance
• Employers’ liability insurance meets the legal requirement of some regions that
employers must be insured against their liability for the bodily injury or disease of their
employees, arising out of their employment.
• A public liability policy covers all legal liability not excluded for bodily injury, death,
disease or illness and for any loss of or damage to third party property, which happens
in connection with the business insured during the policy period.
Key points
• Products liability covers the legal liability for bodily injury, or third party property
damage which arises out of goods or products made, altered, repaired or sold by the
Chapter 2
insured.
• Professional indemnity insurance covers professional people’s liability for injury,
damage or financial loss to their clients or the public arising out of a breach of
professional duty or negligence.
Health insurance
• Health insurance covers personal accident insurance, sickness insurance and medical
expenses insurance.
Question answers
2.1 a. An excess is an amount that is deducted from each claim and is borne by the
Chapter 2
insured.
b. An exclusion is a peril that is named in the policy as being specifically not
covered by that policy.
2.2 You should find that the cover provided will depend on the type of policy it is. By and
large the cover will match the descriptions given in section A. There may well be
differences as motor insurers adapt their cover to gain a competitive edge.
2.3 c. When living in a rented property as a tenant.
2.4 By its very nature, business interruption insurance is designed to cover the financial
impact on the business of damage caused to the premises by the operation of an
insured peril.
Self-test questions
1. What is the difference in the scope of cover between third party, fire and theft cover
Chapter 2
and comprehensive cover for private motor vehicles?
2. What are the main policy benefits provided under a personal accident policy?
3. How are buildings defined in a typical household policy?
4. What are the basic sections of cover available under a travel insurance policy?
5. What are the three perils covered by a standard commercial fire policy?
6. How do insurers define the meaning of 'theft'?
7. What cover is provided under an employers' liability policy?
8. What is the purpose of professional indemnity insurance?
9. What cover is provided under an extended warranty?

Claims considerations
3
and administration
Chapter 3
outcomes
Introduction
A Claims staff 3.1
B Service standards and managing customer expectations 3.2
C Third party claimants 3.3
D Estimating and reserving 3.4
E Fraud 3.5
F Disputes and complaints 3.7
G Fair treatment of customers 3.6
Conclusion
Key points
Question answers
Self-test questions
Learning objectives
• describe the basic functions of claims staff;
• explain the importance of service standards and managing customer expectations
accordingly;
• discuss the variations of the approach by insurers in dealing with third party claims as
opposed to their own clients;
• explain estimating and reserving policies and their implications;
• explain the how fraud affects claims;
• describe the mechanisms for dispute resolution; and
• describe the ways in which a claims department may ensure that customers are treated
fairly.
Introduction
Now that we have established what a claim is and taken a brief look at the different types of
insurance available, we can start to look at how an insurer responds to a claim. We stated in
the first chapter that the claims department is the ‘shop window’ of the insurance company
as it is only when a policyholder comes to make a claim that they find out the value of the
insurance they have been paying for. In this chapter we will look at some of the things that
the claims department needs to consider when handling the claims it receives.
Chapter 3
Key terms
Claims handler Dispute Reserving Service standards

Third party claimants
A Claims staff
The claims department plays an important role in shaping the opinion a policyholder has of
their insurer. Furthermore, the claims department is a vital component in ensuring the proper
management of pooled funds.
For these reasons, it is vital that the claims department is efficient, and is staffed by
competent and professional claims handlers.
Consider this…
What is the role of a claims handler?
To summarise, the role of a claims handler is to:

• deal with all submitted claims quickly and fairly;
• settle claims with the minimum of wastage or avoidable overpayment (this is also known
as leakage);
Refer to
Leakage covered in Leakage (or overpayment of claims) on page 7/4
• estimate accurately the final cost of outstanding claims; and

• distinguish between genuine and fraudulent claims.
This overview embraces the two-pronged function of the claims department and in this
chapter we shall deal with these issues in greater detail.
B Service standards and managing customer

expectations
Customer service has become a dominant issue for a number of reasons. These include the
following.
Consumer awareness Consumers are more aware of their increased rights and insurers have had to
react accordingly. They also have a much stronger voice with the rise of social
media platforms, such as Instagram, Twitter and Facebook, and are becoming
more vocal about perceived poor service. Consumers are more likely to share a
bad experience online, which could have damaging consequences for an
insurer’s reputation.
Expectation of service Customers are ever-increasingly expecting value-added services, driven largely
by insurers’ marketing campaigns. Service can be used to sell products over
price, although most consumers will opt for price in the first instance.
Chapter 3 Claims considerations and administration 3/3
Competition Insurers cannot expect to compete with other insurers if they are not satisfying
their existing customers’ needs. In addition, there are new disruptors entering
the market which, through the application of new technology and techniques,
may be able to provide a better customer service experience and have a
greater ability to provide the service the consumer expects.
These increasing consumer demands have led to improved customer service and an
increase in the skills and professionalism of the claims handlers providing it.
As with any department or firm, a claims department will have a philosophy that will embrace
its service standards, i.e. how it intends to deal with the claims presented to it by its
Chapter 3
customers. In addition, every insurer will have an approach to key claims issues.
The service standards, as documented within the claims philosophy, will usually have a
section setting out the broad approach and covering the following:
• the quality of service aimed for; and
• how valid claims will be handled.
These will then be further developed, covering such issues as:
• the nature of the claims service at each stage of the claims process;
• the speed of the claims service; and
• the economic efficiency of the claims service.
The service standards should balance the need to treat the customer fairly, efficiently and
sympathetically with the need to ensure only valid claims are paid.
Consider this…
Whatever job you are currently doing, there may well be targets and goals. What targets
are set in your job?
While it is good practice to maintain quality service standards, consumers are likely only to
measure their experience against their own perception of what good looks like. This
perception could come from an experience of a different sector, or even a previous claim
with a competitor. Insurers need to be able to adapt to, and ideally stay ahead of, the ever-
changing demand of public expectations, rather than simply refer to a published set of
standards. The publication of a claims philosophy can, however, act as a strong statement of
the service the insurer intends to provide, and creates a degree of accountability should the
customer experience not match the expectations created. While there would be great
similarity in products and process in insurance industry, it is the claims philosophy which will
be very unique to the organisation.
Consider this…
What are the benefits of providing good quality customer service?
Good customer service can come in many different shapes and forms. Typically, it
incorporates efficient and prompt notification, investigation and settlement of a claim. It is
usually considered to involve treating the customer fairly, with empathy and as a fellow
human being.
Providing good customer service does not only benefit the customer, the insurer also
benefits. The main benefits of quality customer service are that it:
• encourages customer loyalty: it is a lot cheaper to keep customers than it is to get
new ones;
• attracts new customers;
• attracts and keeps high-quality employees through increased job satisfaction;
• marks the company out from its competitors;
• improves a company’s profitability;
• increases productivity; and
• improves the working environment.
If a customer’s claim is not handled according to their expectations it can lead to severe
dissatisfaction. It can lead to protracted disputes which are costly for insurers and damage
their reputation.
C Third party claimants

Consider this…
Who or what is a ‘third party’ in respect of insurance claims? And who are parties one
Chapter 3
and two?
Before we deal briefly with third party claims negotiation, it will be useful to define who is a
‘third party’.
The first party would be the person or company insured by a particular insurance company
(i.e. the policyholder)
The second party can be viewed as the insurance company insuring the first party
The third party refers to anyone else involved in a loss event, e.g. in a motor accident a third
party could be another vehicle owner, property owner, a passenger or a
pedestrian
Handling third party claims is an extremely important part of the work of a claims department.
For instance, a motor policy will include cover for personal injury to, and damage to the
property of, third parties. If an insurer is notified of a claim by its insured and they indicate
that there is third party property damage or injury, the insurer must start to take the
necessary steps for handling these third party claims as soon as possible.
The third party does not, however, have a contractual relationship with the insurer. This has
the following consequences:
• The third party must, legally, pursue their claim against the insured, not the insurance
company (which will then indemnify its client).
• In practice, the claim is likely to be presented to the insurer by the claimant or their
representative.
• The third party’s expectations of the level of claims service may be greater than those of
the insured because they may be hostile (they are, after all, the victim of the insured’s
negligence), and may see the insurers as the insured’s agent.
• The third party may not identify with the insurer, and so may be more prone to
exaggerating their claim.
• The amount of pressure a third party can exert on the insurer to respond quickly will
usually be less, as the insurer owes no loyalty to the claimant.
• Conversely, a well handled third party claim may result in that claimant moving their own
policy to the insurer at renewal.
• A third party will not be fully compensated in the event of contributory negligence (i.e.
when they’re partly to blame for what happened).
• A third party will not be liable for any excess or deductible.
• The recovery of legal costs will generally be more common, as a third party is more likely
to use the services of a solicitor. If the third party is successful in their claim the insurer
will usually be obliged to pay their legal fees, unless the size of the claim does not enable
recovery of legal costs.
Other issues that arise when managing third party claims are:
• third party claims are liability claims and could be more complex in comparison to other
claims; and
• a third party’s final option in a dispute is litigation and they may be more willing to issue
court proceedings if they are not managed fairly.
While there is no contractual obligation to do so, it is common and good practice for an
insurer to manage the needs of a third party to the same standards as are applied to a
paying policyholder. This will ensure the claims handling process avoids disputes and
delays, and may lead to increased business in the longer term.
D Estimating and reserving

Refer to
Reserving also covered in Reserving: the process on page 6/4 and Reserving practice
on page 7/7
Chapter 3
Claims reserving is the process that a company carries out in order to assess the level of
funds that are required to meet current and future claims liabilities. It is a key indicator of
whether a company is financially solvent.
Claims reserving is required for internal and external reporting purposes and for monitoring
financial performance. It is used to assess the:
• overall financial performance of the company, as the claims reserve will affect the net
profit and net worth of the company;
• relative profitability of the various classes of business; and
• adequacy of premium rates.
So, how does an insurance company arrive at a reserve figure? In other words, how do
insurers estimate the future cost of claims?
There are various methods used to produce a ‘global’ claims reserve, i.e. a reserve covering
the whole book of business, but these methods fall outside the scope of this syllabus.
However, in order to calculate this global figure, individual estimates must be produced, and
this is done on a case-by-case basis. Insurers place an estimate on each individual claim
file, usually split into categories to reflect the sections of the policy being claimed against,
e.g. accidental damage (AD), third party damage (TPD) and third party injury (TPI). In
household claims the estimate may be allocated against the peril claimed against, e.g.
escape of water, fire or theft.
In essence, in order to establish the size of reserve that is required:
• a value is placed on each claim; and
• an allowance is then made for direct claims expenses, e.g. the fee charged by a loss
adjuster who has been called on to use their expertise in establishing a claim.
Reserves are regularly reviewed to ensure they continue to reflect the likely cost of the claim.
It is vital that underwriters, actuaries and claims managers are involved in reserving reviews.
This is because the reserving specialist will require their input on the book of business
written and details of any unusual characteristics.
E Fraud
Consider this…
What constitutes insurance fraud?
Insurance fraud can be illustrated by the following examples:

• inventing a loss event that never took place, e.g. a burglary at home;
• exaggerating the number of items stolen during an otherwise honestly reported break-in;
• deliberately creating an insured event, e.g. throwing paint on a carpet at home; and
• exaggerating the effects of an insured event, e.g. claiming compensation for whiplash
after an innocuous car accident where no injuries were sustained.
It is difficult to quantify insurance fraud because it can go undetected. However, quantifying it
by collecting data on the types and amounts of fraud is becoming increasingly important.
This is because identifying and quantifying the effects of fraud is the first step towards
eliminating it.
E1 Fraud prevention
Fraud prevention is best undertaken at a strategic level and most jurisdictions will have some
form of insurance bureau to lead the insurance industry’s collective fight against insurance
fraud. An insurance bureau will act as a central hub for sharing insurance fraud data and
intelligence. Using its position at the heart of the industry and its access to data the bureau
can detect and disrupt organised fraud networks.
Insurance bureaux use a range of data and intelligence to achieve two primary objectives:
1. To help insurers identify fraud and avoid the financial consequences.
Chapter 3
2. To support police, regulators and other law enforcement agencies in finding fraudsters
and bringing them to justice.
Fraud prevention and combat is becoming a global practice and regulators across the world
are pushing hard to implement controls to minimise its impact.
E2 Fraud detection
Technology is being harnessed in the drive towards fraud detection. This includes the use of
pooled claims databases where insurers can share information with a variety of other
insurers. With this practice, insurers can identify claimants who put in repeat claims by
matching their new claims details against those already held.
The claims handler plays a vital part in detecting fraud. Methods of detection vary across the
classes of business, but there are many common indicators. Examples of these include:
• claims made soon after a policy has been taken out;
• frequent change of insurer, which gives the impression that the claimant is trying to
disperse the information held about them by frequent changes;
• uncharacteristic increase in the level of cover, e.g. a request to add accidental cover
halfway through the policy term;
• financial difficulties, which may not be immediately apparent but may come to light. For
example, when bank statements are provided to substantiate a loss of cash claim;
• prevarication by the insured;
• excessive pressure to settle;
• inconsistencies in the story given;
• lack of co-operation (a genuine claimant has nothing to hide and would want their loss to
be remedied as soon as possible);
• poor or missing documentation, e.g. a total lack of receipts to substantiate purchase; and
• perfect documentation, which appears to be ‘too good to be true’ to the experienced
claims handler.
Other measures within the insurance industry have also combated fraud, whilst actually
being implemented to enhance customer service and cut costs, for example:
• completing claims forms over the telephone: individuals often find it harder to lie directly,
as opposed to when merely filling in a form;
• claims settlement by replacement rather than cash: if a perpetrator claimed for a ‘stolen’
television to get cash, it would be frustrating for them to receive a replacement, which
they would have to sell to get the cash (the fraud would still be successful, but this acts
as a deterrent); and
• the use of cognitive behaviour tools to listen for inconsistencies in voice and action during
the claims process.
It is most important for insurers to detect and eliminate as much fraudulent activity as they
can in order to maintain a profitable account. Most of the larger insurers now employ one or
more in-house fraud detection teams. These tend to be staffed by insurance fraud detection
experts who are often people with experience in the surveillance or security services and the
police.
E3 Consequences of fraud
Consider this…
What are the consequences of fraud?
If a fraudulent claim is paid, it will have an impact on all the various parties concerned:
The insurer The cost of fraud is enormous. If individual insurers fail to take action on this, it
Chapter 3
will have an impact on their bottom line (profit), claims costs will rise, meaning
premiums will too, making them less competitive. They may even get a
reputation as a ‘soft touch’, which may lead to genuine insureds avoiding them
whilst attracting an ever growing number of fraudulent claims
The insureds Genuine policyholders will be affected by the commensurate increase in

premiums, not just the fraudsters
Fraudulent claimants If they get away with it once, the temptation will be there to continue this
practice in the future
It is important that insurers are seen to be preventing fraudulent claimants, so as to protect

the integrity of their genuine customers.
Question 3.1
Why is it important that insurers are seen to be prosecuting fraudulent claimants,
through defending civil proceedings and on occasion bringing contempt
proceedings? (Select all that apply.)
a. To show the fraudsters that crime does not pay.
b. To protect the premiums invested for genuine customers.
c. To protect the integrity of their genuine customers.
F Disputes and complaints

No matter how efficient a claims department is, or how well it explains its actions to its
customers, there will be situations where the customer is not happy with the outcome of their
claim. It may have been turned down for reasons that seem valid to the insurer, but the
customer feels it is unjustified or unfair. The claim may have been agreed but the customer
remains unhappy about the amount of settlement they have been offered. Systems and
structures have been put into place to deal with such situations and these are considered in
this section. The policy document outlines the complaints procedure to be followed if a
dispute arises. When these processes fail, the policyholder has further options to explore
and we will also consider these in this section.
Regulated firms are required to nominate a senior individual (someone in a governing
function, like a director, chief executive or partner) to have responsibility for the complaints
handling function within the firm.
The published complaints procedure only applies to the insured person and not any third
party. However, we will examine here ways in which disputes between insurers and third
parties can be dealt with, without resorting to litigation, which is the ultimate resolution for a
third party dispute.
Internal procedures should always take into account the rules and regulations related to
complaint dispute management in each of the jurisdictions the company operates in.
F1 First party disputes

F1A Ombudsman services
An ombudsman service is a completely independent and impartial mechanism for dealing
with disputes between an insured and the insurer. They will investigate any cause for
complaint, but these usually concern claims. The ombudsman will first ensure that all
possible steps are taken by the insurer to try to resolve the dispute. If it still remains
unresolved, only then will the ombudsman step in and make a decision.
On the Web
www.policyholder.gov.in/ombudsman.aspx
Be aware
Some regions do not have an ombudsman service.
F1B Arbitration
Chapter 3
Many insurance contracts contain an arbitration clause. This means that if the customer feels
that the amount offered in settlement of their claim is incorrect or unjust, they have the option
of referring their dispute to arbitration.
Insurers prefer arbitration to litigation because it allows disputes to be settled in private by
someone who has expertise in the subject of the dispute. A court of law, on the other hand,
is a public arena (with the risk of bad publicity) and the judge may have no particular
expertise in the issues surrounding the dispute. However, the cost of arbitration is usually
higher than the cost of litigation.
Once a customer has decided to resort to arbitration it is usual for them to write to their
insurer stating the following:
• the names and addresses of the parties;
• a brief description of the dispute and how they would like to see it resolved; and
• who they think the arbitrator should be or how they should be chosen.
There only needs to be one arbitrator, but as many as three can be appointed. One will be
chosen by each party, with the third being chosen as chairman. It is possible to have two
arbitrators, but this contains the risk that they will not be able to agree.
The arbitration, otherwise known as the tribunal, will allow each side to present its case and
respond to its opponent’s case. They will act fairly and impartially at all times. In return, both
parties must co-operate fully with the tribunal.
The arbitrator has the same powers as the courts to order the parties to do something, or to
stop doing something and to order specific performance of a contract or rectification. It is
possible to challenge the findings of the tribunal, but only on certain specific grounds. The
arbitrator’s decision is final on all questions of fact.
Be aware
In India, the powers of the arbitrator(s) and the processes to be followed are governed by
the Arbitration and Conciliation Act (Amendment) Act 2015.
F2 Third party disputes – alternative dispute

resolution (ADR)
Alternative dispute resolution offers another way of settling disputes, without resorting to
litigation. It is most commonly used for third party disputes prior to the commencement of
legal action but can also be introduced as part of the litigation process as well. There are two
broad options to consider, depending on the nature of the dispute.
F2A Adjudicative options
Parties determine the choice of process but lose control of the outcomes, as determination of
the dispute rests with an individual neutral to the parties and the dispute.
Arbitration
• May be agreed by the parties post dispute, but the parties will need to agree the terms of
the arbitration agreement (in writing).
• Principal problem with this approach is inflexibility. The individual neutral to the
agreement to arbitrate cannot be bound by the arbitrator’s decision.
Adjudication
• Typically required by regional statute in disputes over construction contracts.
• Covers disputes between policyholder and sub-contractors.
• A determination is made by an independent party within 28 days.
Expert determination
• A purely technical dispute may be appropriate for expert determination.
• Agreement is needed in terms of reference, process and expert to be used.
• An example could be technical disputes over computer specifications or valuation of
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shares.
• The decision is legally binding on the parties.
F2B Non-adjudicative options
In a non-adjudicative dispute resolution, the parties retain control of the process and the
outcome of the resolution.
Negotiation
• Most disputes are resolved through negotiation. This would be the starting point for any
dispute resolution.
Joint settlement/round table meetings
• Common place in personal injury cases where the parties come together round the table
to discuss options to resolve the case.
• Commonly used for quantum disputes, where liability is admitted but the amount of the
claim is disputed.
Mediation
• A facilitated decision.
• Parties do not meet but the dispute is heard simultaneously by the mediator who goes
between two rooms, seeking common ground between the parties in dispute.
Early neutral evaluation/expert evaluation
• Used to provide an early view on the case (for example, as to whether liability may attach
to a party).
• A voluntary procedure which is not binding on either party.
Conciliation
• Often used in employment cases, industrial disputes etc.
• Compulsory for employment tribunals.
• Provided by approved agencies.
G Fair treatment of customers

It is good practice for insurers to have a documented underwriting and claims philosophy
which forms a basis of its claims practices. With this in place, an insurer can demonstrate
that they are consistently treating customers fairly.
G1 Regulatory environment
In some countries legislation exists to protect certain types of customers from unfair
treatment in their dealings with organisations, including insurers. Depending on the
regulatory environment, certain initiatives exist to deliver fair outcomes for all customers. For
example, in the UK, regulation of the fair treatment of customers is the responsibility of the
Financial Conduct Authority. All regulated firms must be able to demonstrate that they are
consistently treating their customers fairly.
Globally there has been push for the insurance industry to curb malpractice and protect
consumer interests.
Example 3.1
India’s (Protection of Policyholders’ Interests) Regulations 2017 is key in ensuring the
fair treatment of customers. The legislation sets out: stringent timelines for the
investigation and settlement of claims and a procedure for grievance redressal.
The Insurance Law of the People’s Republic of China 2009 is written in the insured’s
favour. There is no specific fair treatment of customer regulation, but the fair treatment of
customers is a core concept in practice.
Chapter 3
It is important to understand how vulnerability can impact customers. The growth of the
financial services industry, and products and services that it provides, has placed more
responsibility on individuals to make decisions regarding their own financial wellbeing.
The Financial Conduct Authority (FCA), defines a vulnerable customer as 'someone who,
due to their personal circumstances, is especially susceptible to detriment, particularly when
a firm is not acting with appropriate levels of care'. The FCA has also identified four key
drivers of vulnerability in customers:
Health Life events Resilience Capability
Physical disability Retirement Low or erratic income Low knowledge or

confidence in managing
financial
Sever or long-term illness Bereavement Over-indebtedness Poor literacy or numeracy

skills
Hearing or visual Income shock Low savings Poor English language

impairments skills
Mental health condition of Relationship breakdown Low emotional resilience Poor or non-existent digital
disability skills
Addiction Domestic abuse (including Learning difficulties

economic control)
Low mental capacity or Caring responsibilities No or low access to help or

cognitive disability support
Other circumstances that

affect people's experience
of financial services e.g.
leaving care, migration or
seeking asylum, human
trafficking or modern
slavery, convictions
Vulnerability is not a static consideration. Changes to a customer's personal situation and

circumstances could lead to them becoming vulnerable. So, where an ongoing relationship
exists between firm and customer, the firm should take steps to ensure the assessment of
vulnerability is also ongoing. Many customers will not consider themselves to be vulnerable,
even when the drivers above are evidenced. Therefore, firms should approach customer
interactions with sensitivity and empathy.
Consider this…
What could the potential consequences of vulnerability be for a customer
On the Web
For further reading about vulnerable customers, you can access the Financial Vulnerability
Taskforce's resource library here: https://www.fvtaskforce.com/resource-library
Importance of ethical behaviours in delivering positive customer outcomes

Regulatory principles reflect the professional and ethical standards that should guide those
who work in insurance as they go about their day-to-day activities. It's vitally important, for an
industry that relies on trust, that customers to have confidence that they are dealing with
people who are putting their interests first; not because they have to, but because they
believe it's the right thing to do.
Organisations with a record of great customer service, treating every customer fairly and with
respect, build themselves a good reputation; those who don't won't be recommended to
other people.
The CII Code of Ethics provides members of the insurance and personal finance profession
with a framework in which to apply their role-specific technical knowledge in delivering
positive consumer outcomes. Under the fifth 'Core duty' within the Code, members are
required to: 'treat people fairly regardless of: age, disability, gender reassignment, marriage
and civil partnership, pregnancy and maternity, race, religion and belief, sex and sexual
orientation'.
Chapter 3
On the Web
The CII Code of Ethics can be found here: www.cii.co.uk/media/9223937/
cii_code_of_ethics.pdf.
You can also access the CII's transparency companion guide to the Code of Ethics here:
bit.ly/3mRysid.
G2 Application to claims handling

An insurer should document its approach by defining its customer base and setting out
procedures to ensure that it:
• handles claims promptly and fairly;
• provides reasonable guidance to help a policyholder make a claim and appropriate
information on its progress;
• does not unreasonably reject a claim; and
• settles claims promptly once settlement terms are agreed.
All insurance intermediaries must manage conflicts of interest fairly and it is best practice for
insurance intermediaries to document their conflict of interest procedure.
Conclusion
We have considered who it is that handles claims and what customers might expect when
their claim is being handled. We have developed this to look at the options available if there
is a dispute about the claim and how to identify if the claim is fraudulent. All claims must be
handled within the regulatory context of each country and, specifically the various treating
customers fairly requirements. In the next chapter we will look at the specific considerations
that relate to different types of insurance.
Key points
Claims personnel
• Claims staff need to be competent and professional and deal with claims quickly, fairly
and with the minimum of overpayment.
Service standards and managing customer expectations

Chapter 3
• A claims department will have a philosophy that will embrace its service standards.
Third party claimants
• The third party refers to anyone involved in a loss event who is not either the insured or
the insurer.
Estimating and reserving
• Claims reserving is the process that a company carries out in order to assess the funds
that are required to meet current and future claims liabilities.
Fraud
• Fraud prevention is best undertaken at an industry-wide level and a number of

databases exist to enable insurers to share information and detect fraud.
Disputes and complaints
• Alternative dispute resolution is another way of settling disputes without resorting to the
law or arbitration. The two main methods are mediation and conciliation.
Fair treatment of customers
• All regulated firms are expected to treat customers fairly.

Question answers
3.1 a, b and c. Insurers should be seen to be prosecuting fraudulent claimants for all
the reasons stated.
Chapter 3
Self-test questions
1. How could the role of a claims handler be summarised?
2. What are the three main reasons why customer service has become so important
recently?
3. What is a reserve?
Chapter 3
4. What four forms can insurance fraud take?
5. What are the two main ways of seeking to resolve disputes by alternative dispute
resolution?
6. In what circumstances may an insurer become involved in a conflict of interest when

handling a claim?
Claims handling
4
procedures and related
claims services
Chapter 4
outcomes
Introduction
A Personal insurance 4.1, 4.2, 4.5
B Commercial insurances 4.3, 4.4
C Related claims services 4.1, 4.6
Conclusion
Key points
Question answers
Self-test questions
Learning objectives
• identify the key issues relating to claims arising under personal and commercial
insurances; and
• describe the additional product services available, and explain how they are used as part
of the claims handling process.
Introduction
Chapter 2 detailed the various classes of insurance and the cover available for each class.
This chapter will deal with class-specific claims matters to provide an insight into the varying
characteristics of the claims processes.
We will demonstrate that each class of business will result in claims being notified, but each
will call for a different response from the insurer. For example, a minor rear-end collision
motor claim in which no-one was injured. This could be settled in a few days if the insurer
were proactive. Compare this to a fatal accident under a liability policy, which may take years
to resolve and would require a different level of sophistication and expertise.
The claims process can be summarised using the following flowchart.
Figure 4.1: Claims process flowchart
Response to Claim
Chapter 4
Notification Review
claimant investigation
Claim Claim
Review Recoveries
settlement negotiation
The chapter will be split into:

• personal lines (i.e. insurance of the person and their belongings); and
• commercial lines (i.e. insurance of businesses).
Key terms
Authorised repairers Claims-made basis Losses-occurring Risk control

basis
Uninsured loss
recovery
A Personal insurance
We will deal here with:
• private motor claims – cars and motor cycles;
• health – personal accident and sickness;
• household – contents and buildings;
• travel; and
• extended warranties.
A1 Private motor claims – cars and motor cycles

The considerations for both cars and motor cycles will be the same, subject to certain policy
differences. We outlined these in chapter 2.
There are seven aspects to the claims process.
1. The insured is bound by the claims notification policy condition to report all accidents. This applies
whether or not they intend to claim or expect a third party to claim against them.
2. At notification, the insured may be required to complete an accident report form (ARF) which could be
done over the telephone or internet.
3. When the insurer has received the necessary information, it will set up a file. In practice, this is likely to be
electronic and no longer a physical paper file.
Chapter 4 Claims handling procedures and related claims services 4/3
4. If a claim is to be made, the insurer will firstly establish whether a policy is in force and whether the
insured is entitled to an indemnity. Depending on the nature and size of the claim it may be investigated.
This could be done as a desktop exercise by the insurer or else a claims investigator or loss adjuster may
interview the drivers and witnesses, as well as visit the accident scene. If there is a valid claim, repairs to
the insured’s vehicle will take priority. The repairs are often carried out at the insurer’s own authorised
repair centres.
5. If there are claims under other sections of the policy (for example, for property in the vehicle that was
damaged in the accident), these are reviewed as necessary.
6. A third party may claim for damage to their vehicle or there may be damage to other property, such as a
boundary fence or hedge. The third party will generally be required to submit estimates for the repair or
replacement of the damaged items, which the insurer will consider and either approve or renegotiate. It
will establish who was at fault or ascertain the degree of negligence by each party. If the insured is at fault,
the insurers may offer to proactively handle the third party claim as a way of controlling costs.
7. If a third party is injured in the accident, claims can be complex and costly to settle. The degree of
negligence must be established before consideration is given to the extent of the injury, the medical
prognosis, and other relevant considerations (e.g. whether the claimant was unable to work, or had
required care whilst incapacitated). A claims handler must be able to analyse this information and place
Chapter 4
an accurate valuation against the injuries in line with current damages awards made by the courts in order
to negotiate settlement of the claim.
Where the insured has non-comprehensive cover (i.e. third party, fire and theft or third party
only), they must still report the incident to their insurer as one of the claims conditions.
However, the insurer will take no further action in respect of any damage to the
policyholder’s own property, because they have no cover for this. The insurer would only
deal with third party claims, subject to liability. The insured would have to make a claim
against the responsible party or their insurer where they would be dealt with as the ‘third
party’ as discussed above.
Refer to
Subrogation is covered in Recovery on page 6/6
Where an insured has comprehensive cover and has a claim against a liable third party, their
insurer would utilise the subrogation condition in the policy to recover the costs they have
incurred.
Consider this…
What rights does the subrogation clause give the insurer?
A2 Health claims
Health claims are those regarding personal accident and sickness policies. The handling of
such claims is vastly different from those under indemnity policies. This is because they are
benefit policies and the settlement figure has already been agreed at policy inception.
When a health claim is submitted, the insurer will check that a valid contract was in force and
that the policy conditions have been met. The appropriate supporting evidence must be
provided and this includes the following. If the insured:
• has died as a result of an accident or sickness, there may be a coroner’s inquest and a
post-mortem examination, and a death certificate must be provided;
• suffered the loss of a limb or limbs, sufficient proof must be provided; and
• is temporarily or permanently disabled, they must provide a medical certificate and be in
the care of a registered doctor.
The insurer may wish to involve its own investigators to confirm the extent of any illness or
disablement.
Question 4.1
Why are personal accident and sickness policies always benefit policies rather than
indemnity policies?
a. Because insurers want to pay the minimum amount possible. □
b. Because the loss of a limb or health is something it is impossible to put a financial □
value on.
A3 Household claims
A3A Contents
Household contents are divided into two categories:
1. Durable goods Things like household furniture, refrigerators and freezers etc.
Chapter 4
2. Consumer goods Less durable items that are likely to wear out more quickly, such as curtains,
towels and clothing
Most insurers will state in their policy wordings that claims for durable goods are generally
settled on a ‘new for old’ basis. This means that damaged goods will be replaced by new
items, rather than the claim being settled on an indemnity basis.
Claims for consumer goods are generally settled as new for old or on the basis of the cost of
replacement, less wear and tear, according to their age. A claims settlement on this latter
basis is more likely to lead to disagreements between the insurer and the policyholder,
unless the policyholder’s expectations are well managed.
A3B Buildings
Claims under the buildings section of the household policy are usually settled by repairing
the buildings. Practically speaking, the indemnity sum for the loss or damage to the buildings
has been calculated as the cost of repair or reinstatement at the time of loss less an
allowance for betterment. Usually a loss adjuster is used to provide an expert’s opinion as to
any substantial damage.
Betterment arises when certain aspects of the repaired property are in a better condition
than they were before the loss (for example, the installation of new wiring) or the repaired/
replaced article is better than the original one was when new, e.g. double glazing replacing
an old single-glazed window.
Consider this…
Think back to the definition of 'indemnity'. Why is an allowance for betterment subtracted
from the indemnity sum?
The principle of indemnity states that the insured must be placed in the same financial
position after a loss as they enjoyed before the loss. Such improvements to their property
would increase the value of the property leaving the insured better off than before the loss.
This is against the principle of indemnity.
A4 Travel claims
The processing of travel claims will depend on which section of the policy the claim is
covered. Claims for:
• personal accident or sickness benefits. The considerations that apply to health claims
will generally apply;
• travel interruption or delay. The insurer can make its own enquiries with the travel
authorities or ask that the insured obtains the necessary proof;
• medical and associated expenses. Usually authorised prior to treatment so that costs
can be controlled, and emergency medical expenses claimed after treatment are
scrutinised prior to payment; and
• baggage, personal effects and money. The insurer will usually request proof of
purchase for the items claimed for, together with confirmation that the loss has been
reported to the necessary authorities.
A5 Extended warranties
Claims under extended warranty policies are unlike those we have already discussed. A
claims ‘settlement’ would result in the covered appliance being repaired or replaced.
Because there is no cash incentive to be gained, these policies are not subject to fraudulent
claims as frequently as other lines, like household or motor insurance.
It is very seldom that a claim form is even required, and a telephone call to the issuing
company is usually the only action required by an insured. The issuing company will then
instruct a repairer to attend the insured’s premises and carry out the necessary repairs,
which can sometimes be subject to an excess.
A6 Creditor insurance
Chapter 4
Creditor insurance provides protection to the policyholder in the event that they are unable to
repay a loan due to their death, disability or losing their job. Before settling any claims on a
creditor insurance policy the insurer will require:
• proof that the insured is not working; and
• evidence of the payments that the insured needs to make.
B Commercial insurances
This section will cover:
• property claims – fire and special perils, all risks, theft, glass and money;
• pecuniary claims – legal expenses and business interruption;
• liability claims – employers’, public, products and professional indemnity; and
• commercial vehicle claims.
B1 Property claims
B1A Fire and special perils
In the event of loss or damage, the insured has a duty to:
• notify the insurer immediately;
• mitigate their losses, i.e. carry out, or permit to be carried out, any reasonably practical
action to prevent further damage;
• deliver to the insurer full information about the property lost, destroyed or damaged and
the amount of damage, in writing; and
• provide proof of loss (e.g. a builder’s estimate for repair) and, if required, complete a
statutory declaration of the truth of the claim.
The insurer would then establish the following.
1. Whether the policy is in force
2. Whether the claim is valid (i.e. an insured peril caused the loss)
3. Whether the policy covers the loss
If the claim is large, the insurer will usually appoint an independent loss adjuster. The loss
adjuster investigates the loss and prepares a report recommending the amount payable
under the terms of the policy. They investigate the cause of the loss as well as its extent, and
check that the insured has complied with any related endorsements or warranties. The loss
adjuster also advises on any recovery prospects.
The insured may appoint a loss assessor to act on their behalf and negotiate with the
adjuster and/or the insurers.
Sometimes, a monetary payment is made. Otherwise, the insurer may exercise its options by
reinstating the building or replacing, repairing or restoring the property, as appropriate.
B1B All risks claims

The procedure for claims here is the same as that described for fire and special perils
insurance. For larger claims, an insurer usually appoints a loss adjuster who will ensure that
the claim is valid and negotiate settlement on the insurer’s behalf.
B1C Theft claims
For theft claims, the insurer requires the insured to notify the appropriate authorities (i.e. the
police) of the theft. Insurers often request a copy of the police report and, especially with
larger claims, appoint a loss adjuster or, if fraud is suspected, a specialist claims investigator.
The insurers then usually liaise with the police so that if the stolen goods are recovered, the
insurer can claim them as salvage.
B1D Glass claims
It is usual for insurers to have approved repairers for these claims. As there is little financial
incentive to be gained and claims can rarely be ‘overstated’, when the insurer has satisfied
itself that the claim is covered, repairs will usually be authorised. The invoice from the
Chapter 4
repairer will be sent directly to the insurer. Glass claims are usually subject to an excess to
avoid small claims.
B1E Money
When the insurer has completed its standard investigations in respect of cover, it will request
proof of loss, including:
• proof that the money, cheques or stamps etc. were on the premises;
• details of the occurrence; and
• confirmation that the matter has been reported to the authorities.
There is great scope for abuse here, and insurers will want assurance that there is no fraud
involved. If necessary, specialist investigators will be enlisted to assist their enquiries.
B2 Pecuniary insurance
B2A Legal expenses
Claims under such policies are different from other claims. This is because an insurer can
assess its potential liability before the claim commences. The insured has an obligation to
notify their insurers before action is commenced and the insurer can then take any steps it
deems appropriate. This includes things such as appointing its own solicitors and, if
appropriate, co-operating with the insured in attempting to reach a settlement before the
court action starts.
B2B Business interruption (BI)
Business interruption insurance covers the insured’s loss of profits following damage to their
property caused by the action of an insured peril.
Consequently, there is always a property damage proviso in a business interruption policy,
i.e. the underlying property must be insured before an interruption policy is issued. Both
policies are usually with the same insurer and the BI claim will be run in conjunction with the
property damage claim.
BI claims are unique, in that at the proposal stage questions are asked about how the
proposer will react in the event of a claim. Examples of such questions would be:
• have they got alternative premises;
• how soon can they get up and running; and
• is there a detailed disaster recovery plan?
The insurer can ‘participate’ in the claim here because, unlike any other type of claim, the
indemnity period selected (usually 12, 24 or 36 months) represents the maximum length of
the claim. The insurer can, and often does, have representation to minimise the loss.
B3 Liability claims
Liability losses are claims arising out of legal liability for incidents involving injury to third
parties (including employees) or damage to their property.
Employers’ liability insurance covers indemnity against bodily injury or disease sustained by
the insured’s employees arising out of, and in the course of, their employment. It is common
for this policy to be combined with a public liability policy. Employers’ liability claims are a
particular concern in industries with a high incidence of accidents or disease, e.g. mining.
Public liability policies cover loss of or damage to third party property and/or third party injury
caused by the insured’s negligence or breach of statutory duty. This is often combined with
product liability insurance, which provides the same cover, but for losses arising out of the
sale or supply of the insured’s product.
Professional indemnity policies protect the insured against their legal liability towards third
parties for injury, loss or damage arising from their own professional negligence, or that of
their employees. Liability usually arises from breach of contract, though it can also arise from
Chapter 4
negligent misstatements or a breach of the duty of care.
It should be noted that professional indemnity insurance is generally written on a claims-
made basis. This means that, provided a claim is made during the period of insurance, it
does not matter when the event leading to the loss took place. For this reason, it is important
for professional indemnity claims adjusters to consider whether the policy was in force at the
time the claim was made against the insured. The exact claims notification required depends
on the policy terms.
It is also common for product liability policies to be written on a claims-made basis, though it
can be written on an occurrence basis too. Public and employers’ liability policies are usually
written on a losses-occurring basis.
Example 4.1
Jose is a solicitor. He has the following insurance history:
• In 2016 he had professional indemnity (PI) insurance with XYZ Insurance and public
liability (PL) insurance with the same company;
• In January 2017 he moved both his PI and PL insurance to ABC Insurance.
His PL policy is written on a losses-occurring basis and his PI policy is on a
claims-made basis.
In October 2016, two incidents occur:
• a client, Julia, trips over a loose carpet tile in his office, badly injuring her knee; and
• as a result of his bad advice another client, Roberto, loses a lot of money.
In March 2017 two claims land on Jose’s desk: one from Julia desiring compensation for
her injury and one from Roberto demanding compensation for his loss. Jose takes the
following action:
• because his PL policy is on a losses-occurring basis he contacts XYZ Insurance as its
policy was providing cover at the time the incident leading to the loss took place; and
• because his PI policy is on a claims-made basis he contacts ABC Insurance as this is
the policy in force at the time the claim is made.
Simply put, the issue is as follows.
For policies written on a claims-made basis the When was the claim made?
questions are:
Was it in accordance with the policy terms notified to the
insurer?
Did insurance cover exist at that time?
For policies written on a losses-occurring basis, the When did the loss occur?
questions are:
Did insurance cover exist at that time?
Once the insurer is satisfied that the loss is covered within the policy period a full
investigation will be carried out. This will include:
• investigating what work was being carried out and whether it was included within the
business description on the policy schedule;
• obtaining all relevant documentation; and
• interviewing any witnesses.
In practice, the insurer negotiates directly with the third party or their representative. The
insured must immediately pass any claim made against them to their insurer, in accordance
with the policy terms.
For third party property damage, insurers investigate the facts of the case and reach a
decision on liability. This includes:
• a request for a written report of the negligence alleged against the insured;
• evidence to support the amount of the claim; and
Chapter 4
• if required, an inspection of the damaged property.

Claims involving personal injury usually come from the third party’s solicitors, who will obtain
a medical report on the injury. Damages are paid to the claimant under two headings as
follows.
Special damages General damages
Those losses that can be quantified (e.g. medical Less tangible losses, such as compensation for pain,
expenses, future loss of earnings) suffering and loss of amenity (PSLA) and loss of use of
vehicle
Some cases proceed to court. Once in court, a judge may:

• make a decision that allows for a reassessment after a period of time;
• award a single lump sum payment;
• allow a structured settlement, which provides an income to the claimant over a period of
time; or
• allow a periodic payment which provides pre-determined sums at certain dates in the
future.
B4 Commercial vehicles
Refer to
Private motor claims discussed in Private motor claims – cars and motor cycles on page
4/2
The claims considerations here are essentially the same as for private motor vehicles.
However, the insured will often arrange and pay for the repairs and then submit the invoice
to their insurers for settlement, net of the excess. Many commercial vehicles require
specialist repair, which may not be available at the insurer’s authorised repairer.
C Related claims services

There are a variety of services that can be utilised in the claims handling and settlement
procedures. In this section, we will deal with the following and their impact on the
procedures:
• legal helplines;
• authorised repairers;
• uninsured loss recovery services;
• legal costs service;
• risk control/advice; and
• rehabilitation.
C1 Legal helplines and advice

A legal helpline is an advisory and/or assistance service provided by telephone. They are
usually free to the user, and often operate 24 hours a day. The emphasis is on immediate
practical action, which has the benefit of meeting customer expectations.
Helplines offer two main services:
• advice and assistance in respect of potential claims. This is especially relevant to the
legal advice services offered in conjunction with legal expenses insurance; and
• advice only (usually legal advice).
Advisers will guide a policyholder through the legal process in a practical way. Calls may be
made on common legal issues (such as boundary disputes) or more complex contractual
implications and obligations. The helpline can help the insured pursue or defend a claim.
The three main elements in the majority of cases are as follows:
• Does the party in question have the basis of a claim in law?
Chapter 4
• What legal rights are involved?
• What is the best way to enforce such legal rights if pursuing a claim?
Legal helplines often act as the first notification of loss (FNOL) stage for claims under legal
expenses insurance policies. This is because advisers will have an understanding of the
cover provided and whether there is a claim which can be settled by the insurer.
Refer to
Outsourcing considered in Outsourcing companies on page 5/8
Helplines are often outsourced to specialist providers because of their experience,

economies of scale and IT specialisation.
C2 Authorised repairers
Insurers will often negotiate with various suppliers and/or repairers to provide services at a
discounted rate, and at an agreed standard. This benefits the provider, the insured and the
insurer.
Example 4.2
Mo has a household policy covering breakage of windows. A window is broken in an
accident. Mo notifies the insurer, which has an agreement with a glazing service. The
insurer confirms that the claim is valid and so a glazier visits Mo’s premises and repairs
the window. The glazier submits the invoice directly to Mo’s insurer.
Such contractors or suppliers are termed approved or authorised repairers.

Motor insurance has the most prevalent use of approved repairers. Private motor insurers
have a panel of authorised repairers and, when a claim is reported, insurers usually provide
their insured with the details of such repairers in their area.
Consider this…
What are the principal benefits of a panel of approved repairers to motor insurers?
The main benefits of using approved repairers are:

• convenience;
• cost (a price reduction on labour and parts will normally be negotiated); and
• competence (as mentioned, approved repairers are vetted first and continuing quality
control and monitoring takes place).
Tow-ins may also be arranged through approved repairers if a vehicle is not driveable. The
use of equipment such as digital cameras mean that an insurer’s engineer need not attend
the repairer’s premises to ‘inspect’ each vehicle and authorise repairs. The repairer will email
the photograph or video clip of the damage to the insurer, which can then authorise the
repair. However, spot checks and audits are common.
C3 Uninsured loss recovery services
Consider this…
What are ‘uninsured losses’?
Uninsured losses are those losses that an insured may suffer that are not directly covered by
a policy of insurance relevant to an insured event.
Example 4.3
Mr Aziz is stationary at a red traffic light when Mr Rahman drives into the rear of his car.
Mr Aziz is insured comprehensively with Zooropa Insurance, with an excess of US$100.
Zooropa does not provide courtesy cars to its clients.
Chapter 4
Zooropa Insurance will arrange for the repairs to Mr Aziz’s vehicle (assuming all policy
terms and conditions have been met), but Mr Aziz will need to pay his US$100 excess to
the garage when picking his vehicle up.
Assuming liability was not in dispute, Mr Aziz would have a right of recovery against Mr
Rahman (Mr Rahman would look to his own insurers for indemnity, but the right of
recovery is against Mr Rahman) for his excess of US$100. This is an uninsured loss, as it
is not covered by his insurer.
Consider this…
What other uninsured losses could arise as a result of the above circumstances?
Other examples could be:

• the cost of a hire vehicle;
• loss of use (where a replacement vehicle cost was not incurred);
• personal injury;
• loss of earnings; and
• the cost of alternative transport, e.g. buses, trains.
This list is by no means exhaustive, and you should try to think of others.
Some insurance intermediaries provide help with recovering uninsured losses, but practices
vary widely.
Most insurers and intermediaries offer legal expenses insurance, which provides for the
instruction of solicitors to recover uninsured losses. This is usually purchased with a motor
policy to provide cover for these occurrences. The wordings of such policies vary, but
typically they provide an indemnity for legal expenses incurred in pursuing an uninsured loss
claim, where reasonable prospects exist. There is usually an indemnity limit on the level of
legal costs which the policy will cover.
Uninsured loss recovery is a service that sits alongside the claims recovery carried out by an
insurer’s claims handlers. An insurer’s recovery team will usually only try to recover the
outlay they incurred.
However, that does not mean that the two are always exclusive. An insurer may agree to
attempt to recover an insured’s policy excess from a liable third party or their insurers. In
practice, a liable third party insurer will often issue an excess cheque at the same time as an
outlay cheque.
A final consideration is the issuing of proceedings through the courts to recover losses. A
single event can only support one cause of action. Therefore, if a solicitor was to issue
proceedings in respect of a client’s uninsured losses, they would necessarily need to include
their client’s insurer’s outlay.
In some scenarios, where insurers agree, their outlay will not be included in the proceedings,
so as not to escalate legal costs. Insurers agree, on a case by case basis, to abide by any
court decision and agree to reimburse outlays on the basis of the judgment given.
C4 Legal costs services

In most situations, the cover provided by a legal expenses insurance policy is appropriate for
any legal costs associated with an incident likely to give rise to a claim. This is termed
‘before the event’ (BTE) cover.
Other organisations, such as accident management companies and solicitors, may offer a
service to recover uninsured losses. They sometimes provide replacement vehicles and
pursue personal injury claims. These are usually on a ‘no win, no fee’ basis where, if the
claim is successful, the accident management company is entitled to a percentage of the
recovery. These agreements are called ‘conditional fee agreements’ (CFAs).
A conditional fee agreement (a ‘no win, no fee’ agreement) is one in which a solicitor and
client agree to share the risk of litigation by arranging a success fee, calculated as a
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percentage of the solicitor’s legal fees, which will be payable by the client in the event of
success.
C5 Risk control and advice

Companies use ‘risk management’ to control the risks that impact their business. Risk
control is one of the three main elements of risk management. The other two are risk
identification (which involves identifying the actual risks of loss that the company faces) and
risk measurement (which involves evaluating the cost to the company of a particular risk
coming into play). Risk control is concerned with minimising the adverse effects of an event,
if and when it occurs.
Risk controls may be either:
• financial; or
• physical.
C5A Financial risk control
It is unlikely that a policyholder would be able to remove every possibility of a loss occurring.
Therefore, they need to make sure that money is available to meet the losses that do occur.
This they could do through:
• risk retention;
• risk transfer; or
• a combination of both.
Risk retention is when a policyholder decides to meet the cost of its losses itself. It can do
this in a number of ways. For example, by simply paying for losses out of its own cash flow
as and (when losses occur) by setting up a captive insurance company or by building up a
separate fund which can then be used to meet the cost of any losses (self-insurance).
Risk transfer means that the responsibility for meeting the cost of any losses is passed on to
someone else. The purchase of insurance is the most common way to transfer risk.
C5B Physical risk control
Physical risk control refers to the practical techniques that are used to reduce the frequency
and/or severity of losses. It can be done through either:
• risk avoidance; or
• risk reduction.
Risk avoidance can often only be achieved by abandoning the prospective cause of a loss.
As the cause of the loss may be something inherent to the company’s business, this is
generally neither practical nor desirable. Risk reduction, however, can be achieved by taking
practical measures to reduce the frequency and/or severity of a loss. Examples of such risk
reduction measures would be the installing of sprinkler systems and fire breaks, establishing
fire drills etc.
Consider this…
Think of some risk reduction measures that your company could make.
Advice on risk control is readily available from insurers, brokers and specialist risk
management companies, and is mostly used in relation to commercial insurance. Insurers
have a vested interest in controlling the risks that have been transferred to them and will
often deploy risk surveyors to provide technical advice to commercial policyholders. Often,
an insurer will only offer cover on the adoption of certain risk control measures that it has
identified as being necessary to reduce the impact of the risk. Alternatively, cover will be
offered at a reduced premium following the adoption of suggested measures.
C6 Rehabilitation
When a third party claimant has been injured and makes a claim against another who holds
liability insurance, the liability insurer may wish to consider helping the injured claimant to
recover by offering rehabilitation. This is because early intervention with rehabilitation can
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improve a claimant’s long-term prognosis, especially for more serious and catastrophic
injuries. This can also reduce the final liability amount.
Many insurers prefer to fund early rehabilitation because improving the claimant’s long-term
prognosis and assisting their early return to work should reduce any future loss of earnings
claim, to the financial benefit of the insurer.
There are three options:
1. Medical This deals directly with the claimant’s injury or disease by traditional medical
methods, such as surgery
2. Vocational If a return to the claimant’s pre-accident job is not possible, then vocational care
helps them to find alternative employment and/or provides retraining for other
employment. For example, a bricklayer losing an arm may be retrained to become
a computer programmer
3. Qualitative This helps claimants to overcome their impaired capabilities to enable them to lead
as full a life as possible
Very few insurers have in-house rehabilitation facilities, although there are a number of
independent firms offering these services to insurers.
Conclusion
In this chapter we have returned to look at the different types of insurance available. We
have built on our earlier knowledge to examine the particular claims issues associated with
each. A customer’s perception of their insurer is highly influenced by how their claim is
handled and the level of service. Competition from other insurers means that it is not enough
simply to pay the claims accurately and efficiently. Insurers seek to help their customers
further by offering other services, such as risk control advice and helplines. It is hoped that
these services will provide more opportunity for the insurer to demonstrate its quality to its
customers.
In the next chapter we will look at what you need to do when the claim actually lands on your
desk, for settlement.
Key points
Introduction
• Each class of business will result in claims being notified.

• Each class will call for a different response from the insurer.
Personal insurance
• The insured under a motor policy is bound by the claims notification policy conditions
to report all accidents, whether they intend to claim or not.
• For health claims supporting medical evidence will be required.
• Household contents are divided into durable goods and consumer goods. Damage to
durable goods is usually settled on a new for old basis, whereas wear and tear is taken
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into account when settling for damage to consumer goods.
• The indemnity sum for the loss or damage to buildings is the cost of repair or
replacement at the time of loss, less an allowance for betterment.
Commercial insurance
• For fire and special perils and all risks property damage claims the insurer would
establish whether the policy was in force, whether the claim was valid and whether the
policy covered the loss.
• Claims under legal expenses policies differ from others in that the insurer can assess
its potential liability before the claim has started.
• For a business interruption claim to be valid the underlying property insurance claim
must be valid first.
• Liability policies can be issued on a claims-made basis (e.g. PI) or on a
losses-occurring basis (e.g. EL and PL).
• Most small motor, employers’ and public liability injury claims are dealt with
electronically, via the Claims Portal.
Related claims services
• Help and advice lines offer policyholders assistance in notifying claims and advice/
assistance on any repairs necessary. Legal advice helplines also exist to offer legal
advice.
• Authorised repairers are contracted by the insurer to carry out repairs to the insured’s
property and are usually paid direct by the insurer.
• Uninsured loss recovery services assist policyholders claim against third parties for
losses not covered by their policy.
• Insurers, brokers and specialist risk management companies are all available to help a
business identify and control the risks it faces.
• When a third party claimant has been injured and makes a claim, the liability insurer
may wish to offer rehabilitation.
Question answers
4.1 b. Because the loss of a limb or health is something it is impossible to put a
financial value on.
Chapter 4
Self-test questions
1. If Mr Singh holds a motor policy with XYZ Insurers, and Mr Singh collides with the
wall of Mr Patel's property, damaging it, how would XYZ proceed in settling Mr
Patel's claim, assuming a valid claim?
2. What is settlement on a 'new for old' basis?
3. What is the basis of settlement under an extended warranty claim?
4. Who would appoint a loss adjuster and who would pay their costs?
5. What does it mean when a risk is underwritten on a claims-made basis?
6. What are the benefits of a helpline to an insured?
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7. What are uninsured losses?
Claims handling systems
5
outcomes
Introduction
A Analysis of claims systems 5.1
B Organisational structure 5.2
C Support services 4.6
Conclusion
Key points
Chapter 5
Question answers
Self-test questions
Learning objectives
• describe the key features, structure and objectives of a claims system;
• explain the integration of the claims function within the overall organisational structure;
and
• identify and outline the support services that may be used in the claims process, and
when and why each would be used.
Introduction
In this chapter, we are going to look at claims handling systems. In the first instance we will
look at information technology (IT) in this context. However, as you will see, a company’s IT
strategy is not just limited to claims – it will encompass the whole organisation.
Logically, therefore, we will need to examine where the claims function sits within an
organisation and the impact this will have on the claims handling system.
Finally, we will look at the role of organisations, other than the insurer, that support the
handling of claims and thus must be incorporated into or managed by the claims handling
system.
Key terms
Claims systems Disaster recovery Loss adjuster Organisational

company structure
Outsourcing
A Analysis of claims systems

Chapter 5
A1 Role of IT
We are going to consider information technology (IT), with specific reference to claims
handling and the development of an appropriate claims management system.
IT relates to the storage, production (or processing) and communication of information.
IT already plays an important role in the insurance market place. However, if you reflect on
developments in the last few years, you will realise that the role it plays in the future could
make the difference between success and going out of business.
While this section only discusses IT in relation to its claims management aspect, you should
always bear in mind that a company’s IT strategy will encompass its whole organisation. For
instance, underwriting information can and will be used in claims handling (and vice versa).
Insurance companies will also have ‘digital’ strategies for underwriting, selling and marketing
products, to meet the ever changing needs of the customer.
Insurers can benefit from the provision of better quality, faster and more relevant
management information in relation to their claims. Such provision will also help the insurers
to respond to and meet their customers’ expectations. Technology is also improving case
management and reducing operational costs through automated or online claims
adjudication.
Effective control and planning depend on information (which is the data, ‘the raw material’)
being processed in such a way as to have some meaning to its recipient. A manager will use
this information to make informed decisions that are based on their experience and prior
knowledge.
An insurer’s claims management system must be designed with reference to a company’s
corporate claims philosophy and their claims management procedures. It should be able to
record appropriate information and process it in a way that is compatible with the company’s
overall objectives.
Increasingly, insurers and other technology providers are using online servicing through
electronic portals. Insurers also use technology to share data to aid decision making;
especially in motor claims, where electronic recoveries are possible using an online portal to
share information about the claim.
This demonstrates that IT is merely one element of a much bigger network. IT actually
controls the technical issues of the system that has been developed to meet an
all-encompassing objective.
Chapter 5 Claims handling systems 5/3
A2 Characteristics of claims and their impact on claims

handling systems
To understand the role of IT in claims handling, you need to be aware of some of the
characteristics of insurance claims. Characteristics such as the:
• volume of claims; and
• complexity of claims.
A2A Volume
Imagine how many insurance claims are made every day. There are thousands of insurers
worldwide and most individuals and businesses have insurance of one type or another. For
an individual insurance company, there is likely to be a very large number of claims
transactions to be processed, including:
• claims reserving and estimating;
• claims payments; and
• recoveries (including reinsurance recoveries).
An insurer should have in place systems and controls that take account of foreseeable peaks
in demand. Such systems are necessary to allow the insurer to continue to deal with claims
promptly even in such circumstances.
A2B Complexity
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The following factors should be considered in an individual claims handling context:
• The claims process (notification, agreement and settlement) requires communication
between insurer and insured (and broker, if applicable) and could also involve loss
adjusters, legal experts and witnesses.
• The greater the number of co-insurers, the greater the complexity. (With commercial
insurances, especially bigger risks, there may even be hundreds of insurers.)
• Are brokers involved? If so, they will often handle the flow and/or production of
documentation.
• Insurers may require reinsurance to reduce their net commitment to an acceptable level.
Where a loss is reinsured, details of the claim will need to be passed to the reinsurer.
• Some claims may be fraudulent, repeated or exaggerated and may require more detailed
investigation.
Many people can be involved in any one claim. This is particularly true of larger, commercial
claims. Complex systems need to be in place to ensure that the information is collated from
all the potential sources (e.g. witnesses, brokers, other insurers, loss adjusters) and is
analysed and passed on as appropriate (e.g. to the reinsurer, or the specialist claims
investigator). The claims handler will need to ensure that they are aware at all times of the
status of the claim as it passes through the system.
A claims system needs to be capable of:
• processing large amounts of data;
• processing it quickly;
• processing it accurately; and
• delivering information in a meaningful manner.
The application of IT must be accompanied by a review of present claims procedures and
practices, and the employment of new methods of operation, if appropriate.
A powerful, flexible and adaptable claims system is not a substitute for experienced people.
IT systems are only as good as the people who have programmed them. They can be
designed to carry out complex and important tasks and decisions, but will have certain
limitations. An effective IT strategy balances the efficacy of a comprehensive IT solution with
the skills and talents of experienced claims staff.
Question 5.1
A lorry collides with a car injuring the driver before hitting a wall. What sort of people
are likely to be involved in the claim?
A3 Major components of a general insurance claims

system
The claims management system chosen by an insurance company will vary according to a
number of factors:
• the structure of the company;
• the type of business written; and
• management decisions about the extent to which their computer systems should be
developed.
Consider this…
All claims will have certain basic elements recorded. Can you list some of these?
For all claims, regardless of the class of business, certain information is typically recorded.
These include:
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• the name of the policyholder;

• the policy number and claims reference;
• details of the claim, including dates;
• contacts;
• payments; and
• reserves.
In addition to these elements, there will be details that were previously recorded at the
underwriting stage. These will be used in conjunction with the above. For example:
• a description of the risk;
• a description of the cover provided;
• supporting risk information; and
• whether there is more than one insurer and if so, the name of insurer, its share of the risk
and respective references.
A4 Using IT in claims handling

Before considering the benefits and difficulties of using IT in claims handling, the main aims
of using IT need to be considered. These are two-fold, to:
• reduce the cost of claims administration; and
• improve the service provided to the insured.
A4A Benefits of using IT
Consider this…
Think about all that you have learned about the claims process so far. Can you think of
any benefits that using IT would bring to that process?
What are the main benefits of using IT in respect of claims handling?

• Single data entry: this eliminates the duplication of effort and data. Less people involved
in the data entry process should mean fewer errors in data inputting.
• Reduced use of paper files: with the associated benefit of quicker distribution of claims
details, especially if there is more than one insurer. For example, in Lloyd’s files are often
shared among managing agents electronically and in many general insurance claims
departments there is no longer any reliance on paper files at all.
• Quicker claims settlement: this flows from the above, because the information is
distributed faster.
• Electronic authorisation of claims payments: this speeds up the claims settlement
process. It also results in a reduction of paperwork, minimises bank charges and prevents
unnecessary re-entry of data. In addition, some systems automatically generate cheques
or automatic transfers of money, thereby ensuring that money is paid quickly and in the
most efficient manner.
• Increase in communication channels: those such as email, social media and live chat
are all enabled by IT. They allow greater customer service, quicker communication and
more efficient claims handling.
• Portals and extranet services allow customers to self-serve and obtain real time
updates on the progress of their claim.
There are other less tangible or associated benefits for insurers hoping to gain a competitive
advantage, such as:
• the improved service should mean that more customers are retained;
• technical assistance and/or advice can be given to the claims handler via the IT systems,
e.g. the handler could be prompted to ask certain questions or adopt certain tactics for a
given scenario;
• streamlined administration, e.g. the use of online databases for replacement goods;
• the allocation of appointments by the computer system based on priority and/or the date
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of loss notification (e.g. loss adjusters, customers etc.);
• automatic checking for fraudulent, exaggerated or repeat claims; and
• automated payment of loss adjusters’ fees.
In summary, the main benefits of using IT in claims handling is administration is streamlined
with a reduction in the duplication of effort and an increase in processing speed. Information
can be stored, collated and communicated efficiently, resulting in claims being met promptly
and customers retained.
These, then, are some of the benefits. But what difficulties arise with the use of IT in claims
handling?
A4B Difficulties in using IT
These are some of the difficulties associated with the use of IT in claims handling:
• If the emphasis is placed on IT as the only solution to claims handling, there may be an
increase in claims costs.
• Non-standard, large or more complex claims may not fit within the framework of the IT
system: a system has to be incredibly flexible to cover all eventualities.
• The system may be more difficult to operate, less flexible and more expensive than
initially considered.
• There may be a possible adverse cashflow effect: claims payments are speeded up, but
premium payment and reinsurance recoveries may not be.
• The delivery of a claims service arising from a centralised, electronic function may result
in claims being dealt with by process rather than observation. Personal service may be
reduced, removing flexibility and initiative.
• Productivity may increase, but this may result in contained, rather than reduced, costs.
• The system will need to be maintained and updated, which can be expensive.
A5 Influence of customer expectations on the design of

systems
Customer expectations should also be considered when choosing or developing a claims
system.
We can identify two types of ‘customer’ in this respect:
• the insurance company itself, as a customer of the supplier of the system (whether the IT
department is internal or not); and
• the general public and the businesses/organisations who are customers of the insurance
company.
Although the insured is the ‘ultimate’ customer, who may be attracted to the company
because of their state-of-the-art claims service, the business needs and associated
expectations of the insurer itself must be analysed. This is to ensure that the information
recorded and collated is of a nature and quality to match the needs and expectations of all
customers.
An insurer may expect the following from a claims management system:
• the ability to process large amounts of data;
• the ability to process data quickly and accurately; and
• the delivery of information in a meaningful manner.
The system should be flexible enough to deal with:
• claims notification;
• the involvement of loss adjusters and other experts as appropriate;
• the correct amount of claim detail appropriate for the class of business written (and the
likely types of claim expected); and
• the authority levels given to different staff grades, both in terms of reserving and the
making of payments.
However, as mentioned, the ultimate customer is the policyholder. The expectations of
the customer may have a large influence on the design of the system. Often customers’
expectations will be surveyed before the design process begins and this will establish the
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basic quality threshold. General expectations (for example, a quick response and a quick
settlement) can be assumed. It is in the more specific areas that consideration is required.
Many companies are reluctant to introduce new, innovative procedures until accepted by the
public at large. New ideas are difficult to evaluate in terms of expectations. However,
customers (both personal and commercial) can have sophisticated knowledge of what they
want and what is available. Customers expect innovative, reliable and cost-effective
solutions from their insurers.
B Organisational structure
Insurance companies often have a complex structure. This is due to their size and
involvement in a varied number of activities. These activities include:
underwriting claims investigation and marketing investment

payment
Every company will require some form of organisational structure. This structure will then
enable the company to meet its stated business objectives in an efficient manner. There are
three main ways to structure a company’s departments. They can be structured by:
Function Division Or a blend of both

e.g. claims, underwriting etc. e.g. product, geographical area etc.
B1 Functional structure
A structure based on function is the traditional form of insurance company organisation. It is
best suited to smaller companies with a limited range of products. Its organisational chart
would look similar to figure 5.1.
Figure 5.1: Example of a functional structure
CEO
Board of Directors
Operational Head of Department
Human
Finance IT Marketing Underwriting Claims
Resources
Consider this…
What are the advantages of this type of structure?
B1A Advantages and disadvantages
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There are both advantages and disadvantages to operating this kind of company structure.
Advantages Disadvantages
Employees can specialise in their type of work because Inflexibility, for example, claims personnel tend to see
all those involved in the same or a related activity are in their role as purely claims handling and may not
the same department recognise the need for them to give feedback and
communicate with their underwriting and marketing
colleagues
Larger units may be more cost effective due to the It is difficult to co-ordinate the different functions, e.g.
uniformity of the procedures used there may be a lack of common interest between the
different functions
B2 Divisional structure
A divisional structure (demonstrated in figure 6.2) is adopted by most large multi-product
companies. Each division is partially autonomous to the extent of designing, producing and
marketing its own products.
Figure 5.2: Example of a divisional structure
Home Country Home Country

International
Commercial Personal
Division
Division Division
The degree of autonomy that each division is given depends on whether its operations are:
• centralised; or
• decentralised.
Centralised organisations retain authority at the top, with little delegation. With
decentralised organisations, there is more delegation, with divisional managers making
more decisions.
An insurer may have a centralised or decentralised claims settlement policy when it comes
to the relationship between its head office and its branch offices. The choice of system will
depend on:
• the size of the company; and
• the type of business being written.
Very large claims settlements will usually be advised to head office, even within a
decentralised structure. This is because there are usually limits to the authority delegated to
the branches.
Centralised claims settlement methods have the following advantages and disadvantages:
The required level of expertise is available (which would There may be a lack of contact between policyholders
not always be the case at every office location) and local staff, which could have repercussions in
respect of customer retention
Accessing records (electronic and paper) and There will be an inevitable delay involved in advising
underwriting staff is easier head office and waiting for a response in respect of
significant underwriting and claims issues
C Support services
There are various external services available to an internal claims team, which can assist
them in their functions. They are:
• outsourcing companies;
• loss adjusters;
• disaster recovery companies;
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• surveyors;
• solicitors; and
• loss assessors.
C1 Outsourcing companies
‘Outsourcing’ is using a skilled resource from outside the company to handle work
traditionally performed by in-house staff. Essentially, a function (or part of a function) is
delegated to a third party. This can be done by either sending the work out or by bringing the
resource into the company.
The reasons behind outsourcing are:
• the perceived cost benefits (i.e. the belief that the work will be done more cheaply than if
carried out in-house);
• to manage a specific issue (for example, a surge event); and
• to gain access to a wider skills base.
Let us take the opportunity to remind ourselves of the claims process by looking again at the
figure we introduced in chapter 4.
Figure 5.3: Claims process flowchart
Response to Claim
Notification Review
claimant investigation
Claim Claim
Review Recoveries
settlement negotiation
Depending on the region, any or all of the claims functions can be outsourced. If a company
chose to outsource the whole process, along with the financial reporting and management of
the operation, then there would be no need for an internal claims department. However,
internal responsibility for claims would be retained by the insurer for compliance purposes.
This is generally satisfied by regular audit activity.
The outsourcing could be provided by:

• third party administrators;
• insurance company claims departments (i.e. to non-insureds);
• brokers;
• solicitors; and
• loss adjusters.
Be aware
The Insurance Regulatory and Development Authority of India (IRDAI) prohibits any ‘core
activity’ being outsourced. Claims is one of them along with underwriting and investments.
The IRDAI emphasises that the core functions require a high level of maintenance and
professional standards and should be handled ‘in-house’ by insurance companies. The
processing of claims (like call centres collecting information and filled forms, data entry in
system and field investigations) can be outsourced but the decisions on the claims cases
can be only by the in-house employees.
Consider this…
What are the advantages and disadvantages of outsourcing?
Chapter 5
C1A Advantages and disadvantages
Strategy Concentration on core activities Loss of control

Better capacity to cope with an increase in Dependence on provider
workload
Costs This often results in cost savings Unforeseen problems

Extra co-ordination and audit costs
Service Through access to a wider skill base and/or May be a problem, especially in respect of
improved technology etc. customer retention
Staff Reduces the requirement for staff, and Loss of the opportunity to retain, and
avoids the peaks and troughs of workflow develop in-house expertise
and the loss of expertise
There are then potential gains and potential pitfalls in using an external skilled resource.
Both need to be analysed before any decision is made.
C2 Loss adjusters
A loss adjuster (also known as a claim assessor) is an expert in processing claims from
start to finish.
Small claims are usually negotiated and settled by an insurer’s in-house claims staff. In the
case of larger claims or complex policy wordings, the investigation, negotiation and
recommendation for settlement is usually delegated to a professional loss adjuster.
The loss adjuster will investigate the cause of the loss and advise the basis for settlement. If
it is a cash settlement, they will recommend the amount payable. If the insurer is satisfied, it
will offer this sum to the insured, usually via the loss adjuster.
Their function is to negotiate a settlement, within the terms of the policy, that is fair to both
the insurer and the insured. Loss adjusters are independent, professionally qualified, and
their fees are met by the insurers who instruct them.
Some adjusters are delegated to negotiate settlement of claims on behalf of the insurer,
without needing to seek specific authority on a case by case basis.
C3 Disaster recovery companies

Disaster recovery companies are organisations that are specialists in ensuring business
continuity for a company in the event of an interruption to the normal flow of business. They
are concerned both with the implementation of plans in the event of an interruption, and the
analysis before the event of a company’s requirements. Their function, therefore, would at
times overlap with a company’s normal risk management programme.
Disaster recovery companies are therefore often involved in:
• management analysis of the effect and impact of losing resources;
• identifying and evaluating operational risks that may impact operations;
• compiling recovery strategies;
• addressing specific emergency situations, for example, terrorist attacks, fire, significant
escape of water etc.;
• the actual work done to return business operations to normal, or as close as possible to
normal; and
• trials to assess the effectiveness of plans.
It should be noted that disaster recovery companies will usually address the complete
scenario of disasters, from the backing up and retrieval of information technology (IT)
systems, to the cleaning and restoration of individual pieces of paper from files that may
have been affected by soot from a fire.
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C4 Surveyors
The risk surveyor is the person who acts as the eyes and ears of the underwriter; they can
equally be used by the claims department post loss.
The surveyor will prepare a report of a risk that will include:
• a full description of the risk;
• an assessment of the level of risk;
• a measure of the maximum probable loss (MPL), i.e. what they consider to be the most
that could be lost should the insured event take place;
• recommendations on loss prevention; and
• the adequacy of the insurance being requested.
After a claim, a surveyor may be instructed to undertake a post loss survey. They will review
these aspects and report on the cause of the loss. The surveyor will give their view as to the
compliance, or otherwise, with any relevant policy conditions or warranties.
C5 Solicitors
A firm of solicitors can be used as a pre-litigation advice facility. It may also supply
specialised services, such as the negotiation of complex injury claims. A firm of solicitors is
often used to either issue court proceedings where negotiations have reached an impasse,
or to defend claims where proceedings have been issued against an insurer’s customer.
They may also be used for legal advice services, including policy wording interpretation and
reinsurance disputes.
Some insurers employ in-house solicitors and barristers or have a financial interest in a firm
of solicitors for cost reasons. They utilise external solicitors where there would be a conflict
of interest or for matters that their in-house team is unable to deal with.
C6 Loss assessors
As with loss adjusters, loss assessors are experts in dealing with insurance claims. However,
they are appointed by the insured to prepare and negotiate a claim on the insured’s behalf.
The loss assessor’s fees are payable by the insured themselves. It is important to note that
the loss assessor’s fees do not form part of the insured’s claim and that loss assessors are
not impartial: they represent the insured in order to maximise their recovery from the insurer.
Question 5.2
'A loss adjuster is paid by the insurance company and works for it to manage the
cost of the claim down.' True or False?
Conclusion
An insurer’s claims handling systems need to be able to handle efficiently fluctuating
numbers of claims having varying degrees of complexity. They will need to gather
information from a variety of sources and work well with the organisation’s structure.
Consequently, an IT system will need to be robust and flexible, but will also need to
complement the skill and expertise of the claims handler.
So far, we have looked at the background: the knowledge and structures that lie behind
effective claims handling as well as the all-important settlement process. In the final chapter
we will look in detail at all aspects of managing the expenses of a claims function as a whole.
Chapter 5
Key points
Analysis of claims systems
• A large number of claims transactions need to be processed at any one time and the
system should take account of foreseeable peaks in demand to ensure that claims
continue to be dealt with promptly.
• Claims can be complex, involving many different kinds of people.
• A claims system needs to be able to process large amounts of data quickly and
accurately and deliver information in a meaningful manner.
• The aims of using IT in claims handling are to reduce cost and improve service.
Organisational structure
• An insurance company structure can be based on function, which allows for staff
specialisation and can be cost effective.
• Alternatively, a company can have a divisional structure.
• Such organisations can be centralised, with authority remaining at the top and little
delegation to the divisions, or decentralised with more decision-making authority
delegated to the divisions.
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Support services
• Outsourcing companies provide a skilled resource from outside the company which
performs tasks traditionally carried out in-house by the insurer’s own staff.
• Loss adjusters investigate and negotiate the settlement of large or complex claims.
• Disaster recovery companies specialise in ensuring business continuity for a company
following an incident. They consider such things as IT support, offer alternative
accommodation and restoration services.
• Surveyors act as the eyes and ears of the insurer, preparing a report on the risk under
consideration.
• Solicitors meet the legal needs of the insurer, including defending claims and issuing
proceedings. They can either be employed by the insurer or outsourced.
• Loss assessors are experts in dealing with insurance claims who are appointed by the
insured to help them with their claim.
Question answers
5.1 The people involved could include:
• the commercial vehicle insurer of the lorry driver’s haulage company;
• the broker who arranged the commercial vehicle insurance for the haulage
company;
• the car driver’s insurance company;
• the insurance company of the owner of the damaged wall;
• the injured car driver may decide to sue the lorry driver and appoint solicitors;
• the commercial vehicle insurer will also probably then need to appoint solicitors;
• a loss adjuster may be appointed;
• authorised repairers could be used to repair the damage to the car;
• eyewitnesses will need to be contacted and statements taken; and
• the police may have been involved.
You may be able to think of more.
5.2 It is false.
Although the loss adjuster's fees are paid by the insurance company, loss adjusters
are independent and unbiased. They seek to ensure that a claim is settled fairly for
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both the insured and the insurer, bearing in mind the terms of the policy.
Self-test questions
1. What is information technology?
2. What is data?
3. What is the role of IT in claims handling arising from the volume and complexity of
claims?
4. What are the aims of using IT in claims handling?
5. What are the main ways to structure a company?
6. What is the difference between a centralised and a decentralised organisation?
7. What is outsourcing?
8. Why do companies outsource?
9. What are the disadvantages of outsourcing?
10. What is the function of a risk surveyor?

Chapter 5

Claims settlement
6
outcomes
Introduction
A Claims settlement 6.1
B Reserving: the process 3.4
C Invalid and partially met claims 6.2
D Recovery 6.3
E Salvage 6.3
F Average 6.2
G Market agreements 6.3
H Excesses, deductibles and franchises 6.2
I Uninsured motorists 6.4
Conclusion
Chapter 6
Key points
Question answers
Self-test questions
Learning objectives
• explain how claims can be settled;
• discuss the components of the reserving process;
• explain why a claim may be invalid or only partially met;
• explain how insurers can recover the cost of claims; and
• describe the methods used to mitigate the risk of untraced or uninsured drivers.
Introduction
In this chapter, we look at how claims are settled, how a reserve is set to cover the
settlement and the reasons why a claim may, or may not, be fully met. We will also consider
the circumstance where an insurer can recover the money it has paid out in settlement of a
claim from a third party. Finally, we look at how insurers make agreements between
themselves to smooth the process of claims settlement and to reduce its cost. First however,
we will look at the practical ways in which an insurer can settle a claim.
Key terms
Average Claims settlement Excess Franchise

Invalid claim Partially met claims Reserving Salvage
Subrogation
A Claims settlement
Consider this…
When a claim has been notified, and assuming that all the parties have carried out their
respective duties, all that remains is for the claim to be settled. How is ‘settlement’
actually achieved?
There are four ways in which the claim can be settled. These are:
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• payment of money;
• paying for repairs;
• replacement; and
• reinstatement.
A1 Payment of money
The payment of money directly to the insured is the easiest and most common form of
settlement. It is simply a cash payment (often fulfilled by electronic transfer) to the insured
covering the amount of their claim.
A2 Paying for repairs

The insurer can also pay for repairs. This is very common with motor vehicle repairs (often
by using authorised repairers). An estimate would usually be provided to the insurer which
would then authorise repairs. If the repairs are extensive, an engineer may inspect the
vehicle first. The invoice would be sent directly to the insurer for settlement (minus any policy
excess).
A3 Replacement
Insurers can also arrange to replace damaged or lost goods. This is often the case with
glass insurance for instance, as glaziers frequently offer discounts to insurers. Replacement
can be used as a form of indemnity in the case of suspected fraud. If someone were to make
a fraudulent claim for a 'stolen' item in order to raise cash, it would be frustrating for them to
receive a replacement, which they would then have to sell in order to get the money.
A4 Reinstatement
The final option available to an insurer is to reinstate that which has been damaged by the
insured peril. For example, in the case of extensive damage to or destruction of a building,
insurers can take control of the repair and/or rebuilding themselves. This course of action is
seldom used as it carries onerous obligations for the insurer and, even if the sum insured is
exceeded, the insurer is responsible for paying the full amount.
Chapter 6 Claims settlement 6/3
A5 Key considerations
The following are considerations and comments to be regarded when making settlement:
• Replacement and reinstatement only apply if stated in the policy. If they are not offered
by the policy as settlement options, they do not apply and the insured only has a right to
financial compensation.
• Whichever method of claims settlement is selected, an explanation must be provided to
the insured of the usual way in which such claims are settled.
• There are circumstances (other than the authorised repairer example) where an insurer
will pay someone other than the insured, for example:
– paying a hire purchase company the amount still outstanding for a lost item with the
balance of the value paid to the insured;
– paying a third party for a motor or liability claim;
– paying a mortgage company following severe damage to a property; and
– paying a doctor under a private medical insurance policy.
These must also be explained to the insured, before payment is made in order for the
insurer to comply with the principle of the fair treatment of customers.
Consider this…
Can you think of another circumstance in which the insurer would pay someone other than
the insured?
Other circumstances would be those relating to liability claims when the insurer would pay
the third party any damages or compensation that had been awarded. The insured would
be indemnified by not having to pay them out of their own pocket.
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A6 Surge events
Insurers are facing increasing numbers of what are known as ‘surge events’. This is where
an insured event causes a higher volume of claims than normal, placing greater demand on
the insurer’s claims resources. This could be as a result of a significant storm, a period of
prolonged rain leading to flooding or an exceptionally cold period of weather leading to
increased claims for burst pipes. Surge events are usually restricted to property claims,
either residential or commercial, but could also affect other classes of insurance.
Consider this…
Can you think of another type of insurance which could be affected by a surge in claims?
Travel insurance could be affected. One example occurred following the volcanic eruption in
Iceland in 2010, when the unusual ash cloud that formed led to the widespread cancellation
of flights across Europe. Insurers faced a surge in claims from people either stranded abroad
or unable to leave following cancellation of their flights.
Insurers need to be ready for a surge event as it is not easy to predict when it might occur.
Staff need to be trained to be able to handle claims they would not usually deal with, and
claim notification processes need to be adapted to cope with the number of calls, without
impacting the validation of claims.
Surge events are often localised and insurers will interrogate their databases in times of
surge and proactively contact customers in the affected area to establish if claims need to be
made. They will also send staff to local temporary offices near the affected area, to make the
process easier for the customer. Mandatory documents for processing the claims can be
waived in instance of a surge event, depending on the situation and the information available
to government bodies.
In times of surge, requesting documentation/quotes for repair is sometimes difficult. In these
situations customer descriptions or photographs may be sufficient to validate the loss,
something that would be less acceptable in normal circumstances.
In a surge event, it is important for an insurer to prioritise customer needs and manage the
expectations of those with lower priority claims.
B Reserving: the process

Refer to
Reserving introduced in Estimating and reserving on page 3/5
B1 Global reserving process

Global reserving is mainly the responsibility of the actuarial department of the insurance
company. It looks at the overall reserving process and its impact on the business as a whole.
It is also referred to as actuarial reserving.
The claims reserving process can be viewed as a flowchart as seen in figure 6.1:
Figure 6.1: Claims reserving process
Checking data integrity
Collating historical data
Projection of claims
B1A Checking the integrity of the data

The insurance company must ensure that individual case estimates are up to date and that
no processing backlogs exist. All the estimates should also be correctly coded according to
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the type of business and the type of loss.

B1B Collating historical data
The data must then be collated into similar groups. Motor business, for example, can be
sub-divided into private and commercial, and these can again be divided into sub-classes.
However, the groupings should contain sufficient data to maintain statistical credibility.
The historical data should contain premiums earned, the number of claims and the amount
paid along with outstanding claims data. This data should be capable of being sorted by
underwriting, calendar, policy and accident year for reporting purposes.
B1C Projection of claims
The claims then need to be projected to establish the likely ultimate gross payout. A method
used to project claims is the Loss Development Factor Method which has the
following steps:
1. Setting out the data in the form of a table showing the development of premium, claims and incurred
claims (paid and outstanding) at each point in time. This data can be analysed and compared by accident,
underwriting, calendar or policy year. (This is called ‘triangulation’)
2. Analysing the trend
3. Calculating the claims reserve
Various averaging techniques are then used to determine development factors for all
underwriting years combined.
The claims reserve for each accident year is then calculated by multiplying the cumulative
claims to date for that year by the development factors for the number of years which remain
undeveloped.
A detailed analysis of this method is beyond the scope of this course.
B2 Individual case reserves

A claims handler has a very important role, ensuring that (on a case by case basis) reserves
are accurate. The estimation of individual cases will have an impact on the global reserving
process.
Insurance companies have different strategies and philosophies on reserving and it is
important to understand what they are. They are usually documented within reserving
guides, published internally by the company.
Reserves are required for all aspects of the claim. These could include:
• damage to property (either own or third party);
• damages for personal injury (general damages);
• third party special damages;
• legal costs (claimant and defence); and
• loss adjustment fees and expenses.
Information provided by loss adjusters, surveyors or engineers can assist in setting an
accurate reserve, as their reports will contain detailed costings to repair/replace the
damaged property.
It is important to consider possible policy or third party liability issues when setting a reserve.
For example, allowances can be made should the claim be settled on a split liability basis.
Reserves should be regularly reviewed to ensure they remain adequate. They should be
reduced as payments are made, but equally should be increased if extra information comes
to light, or if the claim becomes more complex. For example, should the claim involve
litigation or be heading for a court trial, the legal costs could greatly increase and have a
significant impact on the reserve. Companies prefer to be conservative while making
estimates for claims reserve. However, being too conservative can also lead to having
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reserves much more than required which is also not a best practice; hence there needs to be
a right balance.
Reserves are usually entered onto the claims system, broken down according to policy cover
or section.
Refer to
This analysis described in Projection of claims on page 6/4
An alternative method of individual case reserving, employed by some companies, is factor

or flag reserving. This involves a factor being added to each claim, rather than a whole case
reserve. This is common in motor damage or small personal injury claims, and is used to
identify certain types of cases for trend analysis by actuaries. A ‘standard’ or factor reserve
would be added to every claim of a certain type (for example, motor accidental damage).
C Invalid and partially met claims

Consider this…
What circumstances can you think of where an insurer will refuse to pay a claim?
There are a number of circumstances in which an insurer will refuse to pay a claim. This is
known as repudiation.
Examples of such circumstances are as follows.
Cover was never in force A claim occurred outside the policy period, or was for damage to the
insured’s own car under a third party only motor policy
Breach of a material warranty A theft occurs while a burglar alarm has not been set, and there is a
warranty that it will be set (the emphasis here being on ‘materiality’)
Breach of a policy condition A claim was reported so late that the insurers were prejudiced in
respect of any recovery rights. If the policy condition in question is a
condition precedent, then prejudice does not have to be proven and
insurers can decline policy liability in respect of the loss, regardless as
to whether the insurers were prejudiced by the late notification or not
Fraud If this can be proven, all policy benefits will be forfeited from the date
of the fraudulent act and the insurer may keep the premium
Consider this…
The above examples show claims that are invalid, and no payment will be made by the
insurer. Can you think of examples where insurers will make a payment of less than a full
indemnity?
The following terms and conditions may mean that a claim may be only partially met:
• A limit to the maximum amount recoverable. For example, by a sum insured (in respect
of property insurance) or by a limit of liability (in respect of liability insurances). If a loss
is greater than this sum or limit, the insured’s recovery is limited to that amount.
• The application of an average clause in the case of underinsurance on a property policy.
This occurs where an insured understates the value at risk and is charged a reduced
premium as a result. Any claim will be paid in proportion to the sum insured.
• The application of a compulsory excess or deductible (i.e. first amounts payable by an
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insured, resulting in a less-than-full indemnity).

(In any of the above cases, the insurer must provide an explanation as to why there is a
difference between the amount claimed, and the settlement figure.)
• An ex gratia payment, which is a claim payment made by an insurer as a gesture of
goodwill, is made even though there is no obligation to pay. It may result in a loss being
only partially met.
D Recovery
An insurance contract is one of indemnity. The intention is to put the insured in the same
financial position after a loss as they were before it occurred. Therefore, an insured cannot
recover their loss from another source if their claim has already been settled by their insurer.
The insurer, therefore, has subrogation rights. These mean it can pursue any right of
action available to the insured, which may reduce the insurer’s loss. Essentially, the insurer
‘stands in the shoes’ of its insured and avails itself of the rights and remedies open to the
insured.
The insurer can pursue a responsible third party to recover from them any payments it has
made. There will usually be a condition in the insurance policy giving the insurer subrogation
rights before any payment is made, but the insurer cannot actually recover until it has made
payment. If a responsible third party has insurance covering their liability, their insurers may
make payment, but any right of recovery will be against the third party directly.
Recovery of payments is most clearly seen with motor insurance, and insurers will often
have whole departments dedicated to recovering monies from negligent third parties or will
outsource this role to a dedicated supplier.
E Salvage
Consider this…
In an insurance claims context, what does the term ‘salvage’ refer to?
Salvage is the damaged article that has been the subject of a claim. An important
consideration for the claims department on settling a claim is whether a damaged item (the
salvage) has any residual value.
Most insurers will have a condition in their policy wordings that (on settlement of a claim) the
salvage will become the insurer’s property. The insured has no right to abandon the property
to the insurer: it is the value of the salvage to which the insurer is entitled.
When a motor insurance claim has been settled on a total loss basis, the insurers usually
keep the salvage and sell it through specialist salvage companies to minimise costs.
Alternatively, the insured may be allowed to retain the salvage. The claim payment will then
be reduced by whatever amount has been agreed to be the value of the salvage.
The same principles apply with property insurance. For example, if a carpet is damaged by
paint, the insured may want to keep the carpet and cut it down to use it in a smaller room.
The insurer would then negotiate with the insured to pay a sum to retain the salvage (or
reduce the payment to the insured by that amount).
F Average
With property insurance, the amount payable by an insurer is limited to the sum insured (a
value declared by the insured at the start of the policy). This figure is then used by the
insurer to determine the insured’s contribution to the common pool (the premium).
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What happens when this declared figure is less than the actual figure at risk? It would mean
that the insured had contributed less to the premium pool than they should have done, which
would be unfair. Therefore, most property insurances incorporate an average clause (also
called a pro rata condition of average). This states that the insured is acting as their own
insurer for the difference between the actual value and the declared value and will bear an
appropriate proportion of any losses.
Example 6.1
If Mr Ahmed owned a house worth US$200,000 which he insured for US$100,000, he is
his own insurer for 50%, i.e. the US$100,000 that he has underinsured.
If his house burnt down (a total loss), he could only expect to recover half the value – he
has insured the balance himself.
He would receive 50% of US$200,000, i.e. US$100,000.
If the house sustained damage within the sum insured, the claim would be reduced by the
same proportion.
What if the figures were a little more complicated than those used in this example? It is for
such situations that we use a formula to calculate the claim, as follows:
sum insured
× loss
value of goods at risk
Example 6.2
Mr Said’s house is valued at US$500,000 and insured for US$400,000 under a policy
subject to an average clause. If he suffers a US$100,000 loss, how much will his
insurers pay?
US$400, 000
× US$100, 000 = US$80, 000
US$500, 000
Question 6.1
Thinking about what you have just learned:
1. Apply the formula to Mr Ahmed’s situation in example 6.1.
2. Now, instead of Mr Ahmed suffering a total loss let us assume that he suffered a
partial loss of US$50,000. How much will his insurers pay in these
circumstances?
G Market agreements
Consider this…
Why do you think insurers have arranged agreements among themselves?
In the past, market agreements were introduced with one or more of the following aims
in mind:
• to reduce the cost of dealing with claims: if there is an agreement on how claims are to be
settled, there is no need for the respective parties to argue regarding liability, and this will
reduce litigation costs and administration expenses;
• to speed up the repair and claims settlement procedure; and
• to promote good relations between insurers.
Many of these agreements, such as ‘Knock for Knock’, the Third Party Sharing Agreement
and Memorandum of Understanding may no longer be in place; although some insurers,
especially in the motor insurance market will agree to abide by the spirit of such agreements
in order to promote good relations and speed up settlements.
Chapter 6
G1 Bi-lateral agreements
Rather than operate a market-wide agreement, more and more insurers are entering into
bi-lateral agreements with others who operate in the same market. By doing this they can
engage with similar, like-minded insurers which may share the same philosophy or
underwrite a similar book of risk.
An example of this would be the motor insurance subrogation portal to which some insurers
subscribe. Insurers who operate the agreement, on a bi-lateral basis, enter details into the
portal of claims against another insurer as they are reported. If liability is agreed then (on
uploading details of its outlay) the ‘non-fault’ insurer will receive settlement electronically
from the ‘at fault’ insurer quickly and without further evidencing. This saves time spent in
seeking agreement on liability, validation and agreement of outlay, and even the cost of
writing letters, as everything is processed through the online portal.
Example 6.3
Two insurers sign a bi-lateral agreement with each other and connect their IT
infrastructure to an online subrogation portal. On a daily basis, each insurer’s system
automatically uploads basic details of new claims reported where the other insurer is
involved. These details include the vehicles, driver and circumstances of the accident.
Within 24 hours, each insurer will respond electronically. They will either confirm that the
details match and that liability is agreed, or else, remove the case for manual review.
For cases remaining in the portal, once the non-fault insurer’s outlay is established, this is
uploaded to the portal, again electronically by the system, whereupon a settlement is
requested. It is paid by the at-fault insurer automatically and without delay.
The process involves little in the way of manual intervention and reduces the chance of
delay, error or backlog, meaning the insurers can improve efficiency.
G2 Contribution agreements
The purpose of a contribution agreement is to:
• avoid adverse publicity and criticism of the insurance industry generated by insurers
referring policyholders to other insurers for payment of part, or all, of their claim;
• avoid costly and time-consuming handling and the payment of small contribution
amounts; and
• to set out rules for contribution between the participating insurers.
Question 6.2
What is contribution?
a. The right of an insurer to call upon other insurers who are similarly, but not □
necessarily equally, liable to the same insured to share the cost of an indemnity
payment.
b. The assumption by a third party of another party's legal right to collect a debt or □
damages.
c. Where an impartial third party assists disputing parties in resolving conflict through □
the use of specialised communication and negotiation techniques.
The agreement relates to subscribing insurers that transact household, all risks, motor, travel
and other defined personal insurances.
It deals with claims for the loss of personal effects covered by two or more policies and
applies regardless of any policy provisions to the contrary (e.g. non-contribution or ‘property
insured elsewhere’ clauses). The rules are:
• motor accidents and thefts: no contribution;
• specified items: generally no contribution;
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• all other circumstances: contribution is required. Settlement will be made by the insurer
against whom the claim is made, and it may recover a contribution from other liable
insurer(s), provided that:
– the amount paid out by the insurer exceeds a certain amount; and
– the other policy is not a motor policy.
Are no claim discounts affected? Usually, with non-motor policies, a discount provision will
not be prejudiced if a payment is made to another insurer in reimbursement under the
agreement terms, but this does vary between insurers.
Example 6.4
In India, the General Insurance Council, which represents all general insurance
companies to the regulator (the Insurance and Development Authority of India (IRDAI))
has implemented a claims settlement platform, the Electronic Transaction Administration
and Settlement System (ETASS), for capturing of co-insurance transactions, reconciliation
and settlement of balances between member insurance companies.
H Excesses, deductibles and franchises

An excess is the first amount of each and every claim which is not covered by the policy.
When the claim is settled, the amount of the excess is taken away from the payment made
to the insured. For example, a loss of US$500 on a policy with a US$100 excess would
result in the policyholder receiving US$400 in settlement of the claim. Excesses can be
either compulsory or voluntary.
A compulsory excess is one that is applied by the insurer as a term of the policy. It reflects
the fact that a higher risk might apply.
In motor insurance, a compulsory excess may be applied to a young or inexperienced driver
or to a named driver who had a poor driving record (accidents or motoring convictions).
These excesses may be low depending on the level of risk being proposed and the insurer’s
willingness to accept it. In some countries (for example, India) the compulsory excess
amounts are regulated by insurance authorities.
In home insurance, a compulsory excess would apply to different perils, for example in
relation to claims for escape of water or subsidence. They may be used as a disincentive for
customers to make small claims. Such excesses in home insurance may be a few hundred
dollars. However, in the case of subsidence claims, which can cost many thousands of
dollars to rectify, the excess is usually higher.
A voluntary excess can be applied to a policy at the policyholder’s request. In return for
accepting the first proportion of any claim, the policyholder receives a discounted premium.
This is more common in motor insurance than home, although it is possible to have a
voluntary excess in any class of business. It would be for the insurer and policyholder to
agree what the excess would be and what discount would apply in return.
It is possible to have both compulsory and voluntary excesses applying to the same risk and
policy.
In liability policies, such as motor insurance where the policyholder is not responsible for the
damage caused, it is possible for them to recover their policy excess from the responsible
party. This would be deemed an uninsured loss. It is possible to purchase legal expenses
insurance to help recover such losses, and in such a scenario the services of an uninsured
loss recovery service would be employed.
A deductible is, essentially, a large excess (though the term can have a more specialised
application in certain circumstances, which are beyond the scope of this course). An insured
(usually with a large commercial concern) may wish to restrict their cover to only large claims
and be its own insurer for smaller claims. The deductible would apply to the first amount of
each and every claim.
Example 6.5
Chapter 6
A transport company owns a fleet of trucks and vans. It may elect to take a deductible of
US$10,000, so effectively self-insuring for all losses, both first and third party, up to the
limit of the deductible for each and every claim. It would likely employ a risk manager or
group insurance manager to deal with any claims which fell within the deductible. In the
event that a claim exceeded the amount of the deductible, the insurer would step in and
pay the balance.
A franchise is a threshold that is used to decide when a claim is to be paid. Once the claim
exceeds the level of the franchise, the claim is paid in full. If a policy had a franchise of US
$500, and a claim occurred for US$400, the insured would receive nothing. If the claim was
for US$600, the insured would receive the full US$600. A time franchise (i.e. in terms of
hours or days) may also be applied, usually in personal accident policies. Franchises are not
as common as deductibles and excesses, and are largely confined to commercial
insurances.
Reinforce
Make sure you are clear about the differences between excesses, deductibles and
franchises, and know how they apply.
I Uninsured motorists
Most jurisdictions will have an agreement between the motor insurance industry and the
government to provide compensation for the victims of uninsured or untraced motorists.
Under this agreement, a central fund is set up by the motor insurance market to benefit the
victims of motor accidents caused by such motorists.
Example 6.6
In India, the India Motor Third Party Insurance Pool (IMTPIP) was set up in 2007, but this
was replaced by the declined risk pool (DRP) in 2012. The DRP was then dismantled in
2016 and a new quota-based system was introduced.
In the Middle East, the Insurance Association, Emirates Investment Authority and the
ARAB Insurance Association (GAIF) are monitoring and regulating the practice of
facilitating compensation for the victims of uninsured or untraced motorists. In Bahrain,
insurers have been recently asked to allocate 1% of premium for a fund that is managed
by Central Bank of Bahrain and the Bahrain Insurance Association to benefit the victims of
motor accidents caused by hit and run claims.
Its primary function is to ensure that compensation is provided for innocent victims of road
accidents, when the demands of the traffic departments and insurance authorities (that
all vehicles should have a certain level of insurance), have not been met. In other words, to
help innocent victims in situations where the accident concerned was caused by uninsured
drivers or untraced drivers.
Conclusion
In this chapter, we have focused on actually handling a claim. You should now know what to
Chapter 6
consider when deciding the validity of the claim and the facts to take into account when
deciding how to settle it and for how much.
Getting the claim amount wrong could be costly to your employer. Given that paying claims
forms a significant part of an insurer’s expenditure, it has been demonstrated that managing
these expenses is crucial to the insurer’s continued profitability.
In the next chapter, we will consider the systems required in order to manage the claims
process from beginning to end.
Key points
Claims settlement
• A claim can be settled through either the payment of money, paying for repairs,
replacement or reinstatement.
• Replacement and reinstatement only apply if stated in the policy and, in any event, a
full explanation of the method being used should be given to the insured.
Reserving: the process
• The insurer must ensure that the data to be used is accurate, up to date and correctly
coded as to its characteristics.
• The data should then be collated into similar groups, with sufficient data being retained
in each group to maintain statistical credibility.
• The claims then need to be projected to establish the likely ultimate gross payout using
a recognised method, such as the loss development factor method.
Invalid or partially met claims
• An insurer may refuse to pay a claim if cover was never in force, a relevant warranty
and/or condition has been breached or if there is fraud.
• An insurer may only partially meet a claim if the loss was greater than the policy limits,
if there was underinsurance and an average clause applied or if there is an excess or
deductible.
Recovery
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• The insurer has subrogation rights allowing it to pursue any rights of action available to
the insured, which may reduce the insurer’s loss.
Salvage
• Salvage is the damaged article that has been the subject of a claim and which,
generally, becomes the property of the insurer after the claim, who has to decide if it
has any residual value.
Average
• The average clause covers the situation where the declared value given by the insured
is less than the actual value at risk.
• It states that the insured is acting as their own insurer for the difference between the
actual value and the declared value and will bear an appropriate proportion of the
losses accordingly.
Market agreements
• Whole market agreements are, in the main, no longer in place. They have been
replaced with bi-lateral agreements between specific insurers with the aims of reducing
costs and speeding up the claims process.
Excesses, deductibles and franchises
• An excess is the first amount of each and every claim which is not covered by the
policy.
• A deductible is essentially a large excess, but can have more specialised meanings.
• A franchise is a threshold, which once exceeded means that a claim is paid in full, but
not at all if it is not reached.
Key points
Uninsured drivers
• A pool is established to compensate the victims of uninsured or untraced drivers.
Chapter 6
Question answers
6.1 1. You answer should look like this:
US$100, 000
× US$200, 000 = US$100, 000
US$200, 000
2. Your answer should look like this:
US$100, 000
× US$50, 000 = US$25, 000
US$200, 000
6.2 a. The right of an insurer to call upon other insurers who are similarly, but not
necessarily equally, liable to the same insured to share the cost of an indemnity
payment.
Chapter 6
Self-test questions
1. In what four ways can claims be settled?
2. What three steps make up the reserving process?
3. Under what circumstances will a claim be only partially met?
4. What is 'salvage'?
5. Why do insurers enter into bi-lateral or market agreements?

Chapter 6
Management of expenses
7
outcomes
Introduction
A Role of the claims manager 7.1
B Leakage (or overpayment of claims) 7.2
C Monitoring financial performance 7.3
D Reserving practice 7.4
Conclusion
Key points
Question answers
Self-test questions
Learning objectives
• describe the role of the claims manager;
• explain what claims leakage is and how to identify and reduce it;
• detail the methods and explain the importance of the monitoring of financial performance;
and
Chapter 7
• explain the basis and significance of reserving practice.
Introduction
Not only is the claims department the ‘shop window’ of the insurance company, it is also the
department with the largest expenditure. For this reason, it is imperative that the cost of
settling claims is accurate, carefully monitored and properly reserved for. If the claims
department regularly sets aside insufficient funds to cover the cost of claims, this could have
a negative effect on the profitability, and even the solvency, of the company. A similar effect
will be produced if claims are regularly over paid (this is called leakage).
Clearly, the claims department costs the insurer money when it settles a claim (called
indemnity spend), but there is also the cost of running the claims department to consider.
The role of the claims manager is crucial in all these areas, so we will start this chapter by
looking at the areas the claims manager is responsible for.
Key terms
Incurred but not Incurred but not Leakage Reserving

enough reported reported (IBNR)
(IBNER)
A Role of the claims manager

The claims department creates and manages the largest amount of money spent by an
insurance company. Therefore, the position of the claims manager is vital to developing
operational excellence.
A1 Strategy
All insurers require a coherent approach to all aspects of claims management, including:
• a corporate claims philosophy;
• clear claims procedures, including reserving practices;
• if appropriate, a quality management system;
• an efficient use of information technology (IT); and
Chapter 7
• the use of outsourcing, where appropriate.

The strategy will be worked out at senior management level, but the claims manager will be
responsible for its day-to-day implementation.
In the context of a company’s overall approach to claims management, the claims manager’s
key tasks would be to:
• ensure the company’s strategic direction is followed;
• set business plans and objectives to ensure smooth operation of the plans;
• maintain a sufficiently senior status so that they are able to exert the influence the role
demands;
• have sufficient resources budgeted to the department to meet their objectives, and have
an effective departmental structure to ensure the work is done;
• ensure suitable links are maintained with other departments, including underwriters,
actuaries and claims support functions where, e.g. suppliers, best practice and
complaints may be managed;
• have suitable computer systems that produce effective, accurate reports and preferably
incorporate a workflow system;
• maintain best practice within the claims department;
• be aware of current underwriting practice and reserving methodology; and
• ensure that the company's approach to environmental, social and governance (ESG) is
implemented where possible.
Chapter 7 Management of expenses 7/3
A2 Cost
There are two main aspects to the claims manager’s responsibilities when it comes to
considering cost:
1. Overseeing the internal cost of running the claims department (claims expenses), the
largest elements of which are:
• staff salaries and benefits;
• the cost of any outsourcing; and
• IT provision.
2. Monitoring the cost of the claims themselves (claims indemnity), which encompasses the
average lifecycle as well as:
• payment of claims;
• subrogated recovery; and
• recovery from reinsurers, where appropriate.
Question 7.1
Which of the following is NOT a consideration for a claims manager when
determining costs and expenses of running their operation?
a. Payments made to customers. □
b. Payments made to suppliers. □
c. Cost of recruiting staff. □
d. Office rent and rates. □
e. Cost of IT for claims staff. □
Consider this…
Why is it important for the claims manager to look at both the cost of indemnity and
expenses when considering the cost of running the department?
Chapter 7
It is important to consider both indemnity cost and expenses because both will have an
impact on the bottom line profitability of the company. The claims department has the
largest impact on profit, through indemnity spend, but if claims expenses such as staff
costs/overtime/outsourcing etc. are not also managed, any benefit accrued through
indemnity initiatives could be reduced or even completely wiped out.
A3 Staffing
The claims manager also needs to:
• ensure they have the means to recruit, train, motivate and retain intelligent and
competent staff; and
• effectively manage and motivate staff by:
– planning tasks and responsibilities,
– acting as a senior point of referral for technical queries,
– providing leadership through decision-making and pro-active working methods,
– controlling and monitoring progress, and
– co-ordinating training and ensuring staff improvement.
B Leakage (or overpayment of claims)

Within the claims process, the claims handler needs to make important decisions
concerning:
• the validity of the claim (that is, does the claim fall within the scope of the insurance
contract); and
• if it is a valid claim, the size of the payment.
However, within this process, there is scope for paying more than is justified by the details
and circumstances of the claim. This potential overpayment is referred to in an insurance
context as leakage, and can be defined as:
the amount by which the actual settlement exceeds the amount that would have been
required to make an acceptable settlement under the policy.
Consider this…
Would you think that ex gratia payments should be included in overpayment?
Ex gratia (out of grace) payments are often made in the following circumstances:
• where an exclusion is a borderline one;
• where hardship would be created; or
• to preserve good business relationships.
It is debatable whether such payments should be categorised as ‘leakage’ as they are not
based on contractual obligation. Given that they would be authorised by the claims manager,
they cannot really be regarded as avoidable overspend and may be problematic should a
recovery be required from reinsurers.
To identify overpayment, a detailed review of the handling of a claim through its various
stages is required. The review may consider whether:
• the cause of loss falls within the policy scope;
• the date of loss falls within the policy dates;
Chapter 7
• the claim was notified within the time limit;

• there is sufficient proof of the extent of the loss;
• the correct policy excess has been properly applied;
• the effect of under-insurance has been properly calculated and applied to the settlement
figure;
• all recoveries have been made;
• all subrogation has taken place;
• all contribution has been taken into account;
• any fees paid are reasonable and not inflated;
• depreciation has been taken into account;
• it is a repeat claim;
• the insured damage or site has been (re-)inspected; and
• the settlement was appropriate.
Quantifying overpayment is not an exact science and entails a degree of subjectivity. It can
be categorised as either soft or hard leakage.
It can be represented in a formula:
Overpayment (or leakage) = What was actually paid – What should have
been paid
Once any overpayment has been identified, steps should be taken to prevent or limit its
reoccurrence.
Example 7.1
Mya owns a motor car. She purchased it new five years ago and it cost her US$10,000.
She is insured comprehensively with an excess of US$500. The car is now worth US
$2,000. Mya has an accident caused by a third party and her car is written off. Mya
notifies her insurers and her claim is dealt with by a poorly trained handler who notes that
the policy is comprehensive, as well as the fact that Mya paid US$10,000 for her car five
years ago, and offers Mya US$10,000 in settlement of her claim. Mya accepts, payment is
made and the file is closed.
In this scenario, Mya should have been offered US$2,000 less the policy excess, making
a total offer of US$1,500. Leakage is calculated as:
What was actually paid – What should have been paid = LEAKAGE
US$10,000 – US$1,500 = US$8,500 plus salvage and any subrogated recovery.
How could this have been avoided?

In this example, the claims handler should have been properly trained and systems should
have been in place to ensure that before the file was closed:
• an indemnity offer was made;
• the excess was taken into account;
• salvage was sold to the benefit of the insurer; and
• subrogation rights were exercised against the third party.
Consider this…
Having understood ‘leakage’, what steps can you think of that could be taken to prevent it
happening again?
B1 Prevention
There are a number of steps that can be taken to reduce leakage, including the following.
1. Senior management Senior management could put emphasis on reducing claims payments in
Chapter 7
focus particular rather than expenses in general. Also, management control should
be in place in respect of all claims, not just the large ones
2. Employee skills Employees should be trained to the appropriate levels, and be encouraged to
take professional qualifications. Training should include:
• legal training;
• awareness of market practices; and
• knowledge of best practice
3. Supervision of staff Supervisors require all the same skills as the rest of the employees plus:
• management training; and
• presentation training
4. Quality management Adequate checks should be in place to avoid hard leakage and as many
aspects of soft leakage as possible
Checks are usually undertaken by way of regular audit
5. IT checks Computer systems can be designed to stop certain areas of leakage

For example, a system could warn or stop a user from making a payment for
which an excess or deductible has not been applied
6. Culture Insurers should allow a culture of accuracy and open challenge to flourish.
This encourages staff to be more attuned to ensuring the accuracy and
validity of their actions, and ultimately reduces errors and omissions
The main cause of leakage is often considered to be because of poorly skilled, badly trained
staff using ineffective, disparate systems. An improvement in business processes will directly
affect profitability. In essence, the longer it takes to process a claim, the more opportunity
there is for money to ‘leak’ out of the company.
C Monitoring financial performance

Most policyholders (individuals and companies alike) pay premiums for cover and in the
event of a claim, expect to be paid an indemnity. An insurer is effectively a ‘trustee’ for the
vast amounts of money generated by all those premiums and it is critical that it ensures that
it has sufficient funds to pay the claims that are made. An insurer must always have a
mandatory solvency margin, which means that it must have a proportion of its funds set
aside to pay out reported and estimated claims. It is even critical that an insurer’s financial
state is continually assessed to ensure that it remains in a position to pay its liabilities, i.e.
its claims.
Consider this…
Can you think of the reasons for monitoring a company’s financial performance?
There are a number of reasons why it is necessary to monitor a company’s financial

performance:
• the regulators need to be satisfied that the company is solvent in order to allow it to
continue underwriting and pay claims;
• for purposes of their annual reports and accounts; and
• to maintain management control (especially in respect of budgeting).
C1 Annual reports and accounts

These are often required by law. They include a:
• profit and loss account; and
• balance sheet.
The profit and loss account shows the transactions carried out by a company during the
financial year. The balance sheet shows the financial position at the end of the financial year:
it shows the assets and liabilities of the company. Premium reserves, such as outstanding
claims and incurred but not reported (IBNR) claims are disclosed in the liability section.
C2 Management control
Management accounts enable a company to:
Chapter 7
• plan (i.e. budget);

• monitor; and
• control
the company’s operations. They are produced more frequently than the annual reports and
accounts.
Summary
It is imperative that a company’s financial performance is monitored regularly. Then
appropriate action can be taken if necessary and the interests of related parties are
protected at all times. The monitoring of claims outstanding and IBNR are an integral part of
this. It is extremely important, therefore, that this aspect of a company’s operations is
carefully monitored.
D Reserving practice
Refer to
Reserving is discussed in Estimating and reserving on page 3/5 and Reserving: the
process on page 6/4
The objective of claims reserving is to estimate the future cost of claims. The insurance
market and the processing mechanism operating within it involve delays, such as the ones
between the:
• incident occurring and the notification of that claim to the insurer; and
• notification of a claim and the settlement of that claim by the insurer.
It is because of these delays that an insurance company needs to set up reserves for
unsettled or unnotified liabilities.
D1 Outstanding claims reserve

The outstanding claims reserve contains all the reserves allocated to each individual claim
by its claims handler. It is the aggregation of individual claim reserves, covering the cost of
claims that have been incurred and reported to the insurer.
D2 Incurred but not reported (IBNR) reserve

As the name ‘incurred but not reported (IBNR) reserve’ suggests, the claim has been
incurred by the insured but has not yet been reported to the insurer, who consequently
knows nothing about it. There is a possibility that the insurer may incur a liability to pay the
claim, but as the insurer is not aware of the matter it is impossible to reserve for it
individually.
The amount to be reserved to take account of this situation is calculated using various
statistical techniques. These are based on past experience of claims, in conjunction with
actuarial modelling, along with a number of other sources of information, e.g. legislation,
market knowledge and judicial developments.
D3 Incurred but not enough reported (IBNER) reserve
Chapter 7
The incurred but not enough reported (IBNER) reserve covers shortfalls in provisions for
outstanding claims reserves. This could occur where amounts reported are understated, or
where the insurer has insufficient information on which to decide what would be adequate
reserves.
D4 Other reserves
There are a number of other reserves to be considered while on this topic, such as the
following.
Equalisation reserves These are required by law and are designed to smooth fluctuations in loss
ratios (i.e. the ratio of premiums to claims) for certain classes of business
Catastrophe reserves These are set up to cover a large number of related individual losses
arising from one event (e.g. hurricane)
Unearned premium reserve and The unearned premium reserve is that element of the premium for which
unexpired risk reserve insurance cover has not yet been provided. For example, if only six
months of a policy period has expired at year end, only half the premium
has been ‘earned’. An unexpired risk reserve is only needed where a loss
is foreseen in relation to the unearned premium reserve
Provision for claims handling To cover the anticipated future costs of settling claims; it includes direct
expenses costs (e.g. loss adjusters’ fees) and indirect costs (e.g. office expenses)
Re-opened claims reserves This occurs where the claim is closed but then the underlying
circumstances of the claimant deteriorate. This often occurs with personal
injury claims, which have to be re-opened later with a suitable reserve
Conclusion
The claims function is the main source of money spent by an insurance company. If this is
not properly reported and controlled, the very existence of the insurer is under threat. This
chapter has considered how this expenditure is managed and the financial considerations to
be aware of when settling any particular claim.
This concludes our consideration of the claims handling process. You should now be aware
of all the different aspects and be able to demonstrate how accurate claims handling goes
beyond answering the simple question: ‘Is the claim covered by the policy?’
Chapter 7
Key points
Role of the claims manager
• The claims manager is responsible for the day-to-day implementation of the strategy of
the company with regard to claims.
• They are responsible for monitoring and controlling the cost of running the claims
department as well as the cost of meeting claims.
• They must ensure that policyholders are treated fairly as stipulated by the Regulator.
• They must recruit and manage intelligent and competent staff.
Leakage (or overpayment of claims)
• Leakage can be defined as avoidable overspend in settlement of a claim.

• It can be soft leakage, e.g. failing to negotiate an adequate adjustment for wear and
tear, or hard leakage, e.g. failing to deduct a policy excess.
• Leakage = what was actually paid – what should have been paid.
• Leakage can be prevented by senior management being concerned that staff are
properly trained and supervised and that adequate checks are in place.
Monitoring financial performance
• It is important for a firm to monitor its financial performance because:

– it is critical that an insurer has sufficient funds to pay claims made;
– the regulators monitor insurer’s solvency; and
– management accounts enable a company’s management to plan (budget), monitor
and control what is happening to their company effectively.
Reserving practice
• The objective of claims reserving is to estimate the future cost of claims.

• The outstanding claims reserves cover claims that have been incurred and reported to
Chapter 7
the insurer, but have not yet been settled.
• The incurred but not reported (IBNR) reserve covers claims where the loss has
occurred, but has not yet been reported to the insurer. The amount to be reserved is
calculated using statistical techniques.
• The incurred but not enough reported (IBNER) reserve covers shortfalls in provision for
outstanding claims reserves.
Question answers
7.1 d. Office rent and rates.
Chapter 7
Self-test questions
1. What two aspects constitute the claim manager's role in respect of cost?
2. What is 'leakage' in respect of claims?
3. What is the difference between 'soft' and 'hard' leakage?
4. What are the main reasons for the monitoring of a company's financial performance?
5. What are IBNER reserves?

Chapter 7
i
Chapter 1
self-test answers
1 'Onus of proof' is the expression used to describe the duty imposed on an insured to
prove that they have a valid claim.
2 The insured must prove:
• that an insured peril arose; and
• the financial extent of the loss.
3 An insurer must ensure that:
• cover was in force at the time of the loss;
• the insured is that named in the policy;
• the peril is covered by the policy;
• the insured has taken reasonable steps to mitigate their losses;
• appropriate conditions and warranties have been complied with;
• the duty of disclosure has been complied with;
• no exceptions apply; and
• the amount of the loss is reasonable.
4 The following conditions may result in a claim not being fully met:
• sum insured/limit of liability being exceeded;
• average clause; and
• application of excesses/deductibles.
5 The main purposes of the claim form or first notification can be summarised as
follows:
• to establish whether an insured is entitled to indemnity under their policy;
• to provide information to enable an insurer to begin to process a claim, if
appropriate;
• to enable an insurer to assess a potential claim quantum;
• to enable an insurer to assess whether a third party claim is likely; and
• to enable an insurer to assess whether subrogation or contribution is likely to arise.
6 Proximate cause is the active, efficient cause which sets in motion a train of events
which brings about a result, without the intervention of any force started and working
actively from a new and independent source.
7 Any losses arising from this peril as the proximate cause would not be covered by the
insurance policy.
ii WCE/March 2023 Insurance claims handling (non-UK)
Chapter 2
self-test answers
1 In addition to the cover offered under a third party, fire and theft policy, a
comprehensive policy also covers other accidental and malicious damage to the
insured vehicle.
2 Policy benefits under a personal accident policy may cover the following:
• death;
• loss of sight in one/both eyes;
• permanent total disablement;
• permanent partial disablement;
• temporary total disablement;
• temporary partial disablement;
• medical expenses.
3 'Buildings' are the main structure of the private dwelling and includes garages, sheds,
greenhouses and other outbuildings. Also included are swimming pools and tennis
courts. Generally speaking, anything you would normally leave behind on moving is
part of the building (and anything that you would take with you when moving is
classified as contents).
4 Most travel policies will contain the following:
• personal accident benefits;
• medical/associated expenses;
• loss of deposits;
• baggage, personal effects and money;
• personal liability;
• delayed baggage;
• hospital cash benefits;
• travel interruption; and
• travel delay.
5 The standard perils are:
• fire;
• lightning;
• (restricted) explosion.
6 Insurers include a phrase under their theft policies stating that the theft must include
an element of force or violence (either in breaking in to, or out of the insured
premises). This excludes things such as entry by key or by trick.
7 An employers' liability policy covers legal liability for damages (plus costs and
expenses incurred) for any employee sustaining bodily injury, disease, illness or death
arising out of and in the course of employment by the insured. Property damage is not
covered.
8 A professional indemnity policy covers the legal liability of professional persons for
injury, damage or financial loss to clients or the public as a result of a breach of
professional duty or negligent acts, errors or omissions.
9 An extended warranty policy will cover repairs to items covered following electrical and
mechanical defects, for a specified period of up to five years.
iii
Chapter 3
self-test answers
1 The role of a claims handler is:
• to estimate accurately the final cost of outstanding claims;
• to distinguish between genuine and fraudulent claims;
• to deal quickly and fairly with all claims submitted; and
• to settle claims with the minimum of wastage or leakage.
2 The three main reasons for the increase in the importance of customer service are:
• increased consumer awareness;
• greater expectations of service; and
• competition.
3 A reserve is an amount allocated to a claim as the expected value of future liabilities in
respect of that claim.
4 Fraud can arise where:
• a loss event is invented that never took place;
• an insured exaggerates the amount of the claim;
• an insured exaggerates the effects of a claim; and
• an insured event is deliberately created.
5 The two main ways of resolving disputes by ADR are:
• mediation; and
• conciliation.
6 One likely circumstance relates to motor or liability claims involving several parties,
some or all of which are insured by the same insurer.
iv WCE/March 2023 Insurance claims handling (non-UK)
Chapter 4
self-test answers
1 Generally speaking, Mr Patel would be asked to submit estimates for the repairs to
XYZ insurers. XYZ would then consider the estimates and possibly negotiate
settlement, or authorise repairs to continue and request that they (the insurers) be
invoiced by the repairers directly.
2 'New for old' conditions are often contained in household contents policies and
basically mean that damaged items under a certain age will be replaced with brand
new items. No deduction for wear and tear is made in these circumstances.
3 The basis of settlement under an extended warranty policy would be the repair or
replacement of the item concerned.
4 A loss adjuster, an expert in processing claims from start to finish is an independent,
professionally qualified person who would be appointed by an insurer, who pays
their costs.
5 Underwriting on a claims-made basis means that provided a claim is made during a
period of insurance, it does not matter when the event leading to the loss took place.
(This should be contrasted with policies underwritten on a losses-occurring basis,
where the critical date is when the loss occurred.)
6 The benefits of a helpline to an insured are:
• immediate access to services;
• a simplified claims process;
• improved repair and replacement services; and
• faster claims settlement.
7 Uninsured losses are losses that an insured may incur as a result of an insured event,
but that are not covered by the insurance policy covering that event.
v
Chapter 5
self-test answers
1 Information technology (IT) is the use or production of a range of technologies
(especially computer systems, digital electronics and telecommunications) to store,
process and transmit information.
2 Data is the raw material, which is processed and turned into information; essentially,
the data is the unprocessed information.
3 IT's role is to provide systems capable of:
• processing large amounts of data;
• processing quickly;
• processing accurately; and
• delivering information in a meaningful manner.
4 The aim of using IT in claims handling is to reduce the cost of administering claims
and to improve the service to the insured.
5 The main ways to structure a company's departments are by:
• function;
• division; or
• a blend of both.
6 Centralised organisations retain authority (and power) at the top with very little
delegation, whilst with decentralised organisations, there is more delegation with
divisional managers making more decisions.
7 Outsourcing is the use of skilled resource outside a company to handle work
traditionally performed by in-house staff.
8 Companies outsource for a number of reasons, for example, shortage of staff, but the
two principal reasons are the (perceived) cost benefits and the ability to tap into a
wider skills base.
9 The disadvantages of outsourcing are as follows:
• loss of control;
• hidden costs;
• dependence on the service provider;
• customers may not approve (of the service or the concept);
• inability to develop trained and experienced in-house personnel.
10 A risk surveyor functions as the 'eyes and ears' of an underwriter (and can also be
used by the claims handler post loss). They will visit a risk and prepare a report on the
nature and description of the risk, an assessment of the level of the risk, estimates on
maximum probable losses and loss prevention recommendations.
They may also conduct post loss surveys, reviewing these aspects of the risk,
reporting on the cause of the loss and giving their view on whether relevant policy
conditions/ warranties were complied with.
vi WCE/March 2023 Insurance claims handling (non-UK)
Chapter 6
self-test answers
1 Claims can be settled by:
• payment of money;
• paying for repairs;
• replacement; and
• reinstatement.
2 The reserving process is as follows:
• checking data integrity;
• collating historical data;
• projection of claims.
3 Claims may be only partially met because of the following:
• limits to the maximum amount recoverable (i.e. the sum insured or limit of liability
was exceeded);
• application of an average clause; and
• application of excesses or deductibles.
4 Salvage is the damaged article that has been the subject of a claim.
5 Insurers usually enter into bi-lateral or market agreements for one or more of the
following reasons:
• to reduce the cost of dealing with claims;
• to speed up the repair and claims settlement procedure; and/or
• to promote good relations between insurers.
vii
Chapter 7
self-test answers
1 The two aspects of the claims manager's role in respect of cost are:
• the monitoring and control of the internal cost of running the claims department;
and
• the monitoring and control of the cost of the claims themselves.
2 Leakage can be defined as the avoidable overspend in the settlement of claims.
3 Soft leakage is leakage that is difficult to identify, whilst hard leakage is that which is
relatively easy to identify.
4 The main reasons for monitoring a company's financial performance are:
• the requirements of the regulators;
• for the purpose of the annual report and accounts; and
• to aid management control.
5 Incurred but not enough reported (IBNER) reserves occur where there is a shortfall in
provisions for outstanding claims reserves, e.g. where reported amounts are
understated or an insurer does not have enough information to make a proper
assessment.
ix
Legislation
C
Consumer Protection Act 2019 (India), 1B1
I
Insurance Law of the People’s Republic of
China 2009 (China), 1B1, 3G1
M
Motor Vehicles Act 1998 (India), 2A1A
P
Protection of Policyholders’ Interests
Regulations 2017 (India), 3G1
Public Liability Insurance Act 1991 (India), 2I
R
Road Traffic Safety Law of the People’s
Republic of China 2003 (China), 2A1A
T
The Indian Arbitration and Conciliation
(Amendment) Act 2015 (India), 3F1B
W
Workmen’s Compensation Act 1923 (India),
2I1
x WCE/March 2023 Insurance claims handling (non-UK)
xi
Index
A condition (continued)
subsequent, 1B
accident report form (ARF), 4A1 conditional fee agreement (CFA), 4C4
action by the insured, 1C2 contents insurance, 2B2
all risks, 1A, 2A1C, 2B2, 2F2, 2F4, 2F5, 2G2, contribution, 6G2
4B, 4B1B, 6G2 cost, 7A2
‘new for old’, 4A3A creditor insurance, 2H, 4A6
alternative dispute resolution (ADR), 3F2 criminal prosecution defence cover, 2G1
annual reports and accounts, 7C, 7C1, 7C2 customer expectations, 3B
arbitration, 3F1B, 3F2A
authorised repairers, 4C, 4C2, 6A2
average, 6F
D
clause, 1B, 6C, 6F damages
pro rata condition of, 6F general, 4B3
special, 4B3
B data
collating historical, 6B1B
before the event (BTE) cover, 4C4 integrity, 6B1A
benefit policy, 2J decentralised organisations, 5B2
betterment, 4A3B deductible, 1B, 6C, 6H
breach disaster recovery companies, 5C3
of policy condition, 1B, 1C2, 6C disputes, 3F
of warranty, 6C divisional structure, 5B2
buildings, 2B2, 4A3B doctors, 1D3
insurance, 2B1 dominant cause, 1E
business code of conduct, 1B duties of the insured, 1C
business interruption insurance, 2G2, 4B2B express, 1C
implied, 1C
duty of disclosure, 1A, 1D2A
C
centralised organisations, 5B2 E
claim form, 1D2
claimant employers’ liability, 2I1, 4B3
fraudulent, 3E3 employment cover, 2G1
third party, 3C engineering, 2G2
claims estimating, 3D
characteristics of, 5A2 ex gratia payment, 6C, 7B
handler, 3A excess, 1B, 6C, 6H
handling, 5A2 compulsory, 6H
handling expenses, 7D4 voluntary, 6H
invalid, 1C1, 6C extended warranties, 2E, 4A5
investigation process, 1C1, 1D3
management systems, 5A5
manager, 7A
F
overpayment of, 7B fair treatment of customers, 3G, 6A5
partially met, 6C financial risk control, 4C5A
procedure, 1C2 first loss basis, 2F3
projection of, 6B1C first party, 3C
reserving, 3D fleet insurance, 2A2A
services, 4C franchise, 2J2, 6H
settlement, 6A fraud, 3E
staff, 3A consequences of, 3E3
systems, 5A detection, 3E2
claims-made basis, 2I4, 4B3 prevention, 3E1
commercial functional structure, 5B1
insurances, 4B
property insurance, 2F
vehicles, 2A2A, 4B4 G
complaints, 3F
glass
comprehensive cover, 2A1C
claims, 4B1D
condition
replacement, 6A3
express, 1B
implied, 1B
of utmost good faith, 1D2A
precedent, 1B
xii WCE/March 2023 Insurance claims handling (non-UK)
H outsourcing companies, 5C1

outstanding claims reserve, 7D1
health
claims, 4A2
insurance, 2J
P
exclusions, 2J3A patents, 2G1
policy benefits, 2J3 pecuniary insurance, 2G, 4B2
helplines, 4C1 perils, 1E
household fire and special, 2F1, 2G2, 4B1A
claims, 4A3 named, 2F1
insurance, 2B special, 2F1
personal accident insurance, 2J1
I personal injury and sickness claims, 1D3
physical risk control, 4C5B
incurred but not enough reported (IBNER) policy conditions, 1B
reserve, 7D3 private motor
incurred but not reported (IBNR) reserve, 7D2 claims, 4A1
information technology (IT), 5A1, 5C3, 7A1 insurance, 2A1
product liability insurance, 2I3, 4B3
professional indemnity
L insurance, 2I4
leakage, 7B policy, 4B3
legal property
costs services, 4C4 claims, 4B1
expenses insurance, 2G1, 4B2A disputes cover, 2G1
liability proximate cause, 1E
claims, 4B3 public liability
insurance, 2I insurance, 2I2
limit of, 1B, 6C policy, 4B3
loss
adjuster, 1D2A, 5C2 Q
assessors, 5C6
first notification of, 1D1 quantum, 1A
Loss Development Factor Method, 6B1C
losses-occurring basis, 4B3
R
M recovery, 6D
rehabilitation, 4C6
management control, 7C2 reinstatement, 6A4
mandatory solvency margin, 7C replacement, 6A3
market agreements, 6G repudiation, 6C
material damage warranty, 2G2 reserves
material loss, 2G2 catastrophe, 7D4
medical expenses, 2J4 equalisation, 7D4
money, 2F5, 4B1E unearned premium, 7D4
motor unexpired risk, 7D4
accident notification, 1D2A reserving, 3D
cover, 2G1 actuarial, 6B1
cycle insurance, 2A2 factor, 6B2
damage claims, 1D3 process, 6B
engineers, 1D3 risk
liability claims, 1D3 avoidance, 4C5B
motor insurance, 2A control, 4C5, 4C5B
exclusions, 2A1E identification, 4C5
extensions, 2A1D management, 4C5
third party only, 2A1A measurement, 4C5
third party, fire and theft, 2A1B reduction, 4C5B
retention, 4C5A
transfer, 4C5A
N
notification, 1C2A S
hospitalisation, 1D2A
property claim, 1D2A salvage, 6E
second party, 3C
service standards, 3B
O sickness insurance, 2J2
onus of proof, 1A single article limit, 2B2
organisational structure, 5B solicitors, 1D3, 5C5
xiii
staffing, 7A3
strategy, 7A1
subrogation rights, 6D
sum insured, 1B, 6C
support services, 5C
supporting evidence, 1D, 1D3
surge events, 6A6
surveyors, 1D3, 5C4
T
theft
claims, 1D3, 4B1C
insurance, 2F3
third party, 3C
liability, 2A2A
travel
claims, 4A4
insurance, 2D
U
underinsurance, 6C
uninsured
loss recovery services, 4C3
motorists, 6I
Pawsey v. Scottish Union and National
(1907), 1E
peril, 1E
untraced drivers, 6I
W
warranty, 2E
xiv WCE/March 2023 Insurance claims handling (non-UK)
Chartered Insurance Institute
3rd Floor, 20 Fenchurch Street,
London EC3M 3BY
tel: +44 (0)20 8989 8464
customer.serv@cii.co.uk
www.cii.co.uk
Chartered Insurance Institute

@CIIGroup
© Chartered Insurance Institute 2023
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Insurance

Updates and amendments

© The Chartered Insurance Institute 2023

Using this study text

Activities: reinforce learning through Key points: act as a memory jogger at

Consider this: stimulating thought Reinforce: encourages you to revisit a

Examples: provide practical illustrations Sources/quotations: cast further light

Insurance claims handling

Summary of learning outcomes Number of questions

1. Understand the general principles in the claims handling process. 12

2. Understand insurance products and associated services. 13

3. Understand claims considerations and administration. 13

4. Understand claims-handling procedures and related claims services. 13

5. Understand the claims function and how it may be structured. 6

6. Understand claims settlement. 10

7. Understand how expenses are managed. 8

Published February 2023

2. Understand insurance products and 7. Understand how expenses are managed.

3. Understand claims considerations and

4. Understand claims-handling procedures

5. Understand the claims function and how

Published February 2023 2 of 3

Reading list Examination guide

Published February 2023 3 of 3

Syllabus learning outcome Study text chapter

Study skills and

3: Claims considerations and administration

4: Claims handling procedures and related claims services

5: Claims handling systems

Claim Claimant Duties of the insured Notification

A Legal requirements for a claim

Conditions precedent to the Conditions subsequent to the Conditions precedent to liability

C Duties of the insured after a loss

D1 First notification of loss (FNOL)

The benefits to the insurer are:

D2A Contents of a claim form/notification

A hospitalisation notification may require the following:

Solicitors to give legal opinions, or to commence or defend legal proceedings

Surveyors to estimate rebuilding costs

Doctors to verify or assess the severity of injuries and assist in rehabilitation

Jo is thrown from the horse

Jo lands in a ditch, and

Jo cannot move and spends

Insured perils those named in the policy as covered

Excepted or excluded perils those named as specifically not covered

The main ideas covered by this chapter can be summarised as follows:

Legal requirements for a claim

• When an insured makes a claim the onus of proof is on them.

Duties of the insured after a loss

2. What does an insured have to prove when making a claim?

5. What are the principal purposes of a claim form or first notification?

6. What is the meaning of 'proximate cause'?

Benefit policy Commercial Creditor insurance Extended warranties

A1 Private motor insurance

A1A Third party only

A1B Third party, fire and theft

Examples of the optional extensions available include:

A2 Motor cycle insurance

A2A Commercial vehicles

The main types are: