Post Magazine 10th July 2008
Post Magazine
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Damage Management
I don't know what you did last summer
10 July 2008
For more than 30 years the commercial damage management industry has remained largely unregulated, leaving much confusion as to its cost-effectiveness. But, asks Dr Greg French, is it now ready for change?
What did last summer's floods reveal about the health of the commercial damage management marketplace? When asked, companies in the sector claimed they were on top of the situation. But how could anyone tell otherwise? The reality is that not a great deal could be learned because there is virtually no way of gathering information on the performance of individual companies, such as the number or size of claims companies are working on, the insurers and loss adjusters they are working for, the value of the assets they are able to save or what they charge for services. Without such information, how can anyone assess the usefulness of the industry in general, and in individual companies specifically?
While insurer-appointed damage management companies are required to supply seemingly endless management information, insurers cannot tell whether they are receiving satisfactory service or value for money if none of this information is shared among their peers.
Irrelevant information
Perhaps part of the problem is that much of the required MI is, in reality, largely irrelevant to the work being undertaken by damage management companies. Insurers seem to insist on knowing the 'soft' factors they can easily measure, such as telephone statistics, job life cycles, estimating accuracy and grievance handling, while checking on none of the 'hard' factors like the quality of the practical work delivered on site. Many damage management companies feel this skewed data collection process gives them little opportunity to demonstrate their specific operational qualities and value propositions and believe their service is, as a result, seen purely as a commodity to be purchased on price alone.
In fact, given the focus by insurers on soft factors the basis for selection of a given damage management contractor is sketchy in the first place. It is likely to be driven by price and the knock-on effect is that opportunities for industry improvement are limited.
The apparent lack of transparency surrounding the commercial damage management industry has been an issue for many years, especially for loss adjusters. A complaint commonly heard is that it is impossible to compare companies on a like-for-like basis - not only in terms of operational delivery but also, more importantly, in terms of pricing methodology.
Many adjusters are left confused and annoyed after asking for quotes from damage management companies as they receive documents from different companies that bear little or no resemblance to each other in terms of the extent of the required works, the decontamination methodologies to be employed, the work timescale and the price.
Often the adjuster will select a company based on the price quoted, only to find the invoice differs because the damage management company will claim the scope of works changed during the course of the project. This leads to immense frustration as reserves are seriously impacted and reputations damaged.
So how has this situation come about? The reality is that since the birth of the industry in the early 1970s the commercial damage management industry has been able to operate without 'independent' technical scrutiny. Unlike a building contractor, brought in after a fire or a flood that would look to a quantity surveyor for a bill of quantities to quote against, commercial damage management companies operate as both consultants and service providers. They decide what has been contaminated and how severely, then specify what needs to be decontaminated and to what degree - deciding then on what methods to use and what pricing methodology to employ. Rarely do they submit fixed price quotes, preferring to work on an open-ended time and materials basis.
Outdated methodology
This method of working was successful in the early days of the industry where work was obtained through relationships with adjusters based on familiarity and trust. But this situation has changed.
The advent of insurer supply chains means the 'moderating' influence of the adjuster has diminished, especially on smaller claims, and the damage management contractors now have even greater freedom to operate unchecked with no effective independent technical auditing taking place.
This is an unhealthy situation when the insurer is only auditing soft factors. How do they know if the scope and scale of the work performed is correct? If price commoditisation is the only selection criterion available to insurers, as opposed to service quality and value, has this left them somewhat financially vulnerable?
Complaints are not uncommon from smaller specialist and regional damage management companies at being excluded from insurer panels because they apparently lack capacity and are thus facing uncertain futures. So is the insurance industry in danger of becoming completely reliant on a very small number of operationally and commercially 'unregulated' national commercial damage management providers? If so, what is required?
There is no single answer to this problem particularly as standardisation of work and pricing methodologies across the damage management industry would not only be unwelcome by the companies involved it might also be deemed anti-competitive. But all the parties involved must acknowledge there has to be a better way of delivering the service. Insurers must become more sophisticated in how they purchase the service and manage their chosen suppliers.
The advent of independent damage management consultants means expertise is available to insurers - expertise they can tap into that enables them to look beyond just the soft factors. Instead they can focus on what their customers are ultimately interested in: the quality of service on the ground. Damage management companies must also become more professional in their approach, specifically by being more transparent in their pricing methods; for example, embracing rather than fighting competitive quoting situations. A significant step forward would be the separation of the works specification role from that of the service provider, thus allowing transparency and facilitating balanced competition on individual jobs.
The question, however, is whether all the parties involved are ready to change. If damage management companies do not change surely they will remain vulnerable to price procurement alone? And are insurers prepared to move away from rating soft factors to focus instead on hard data that could improve their customer offering and claims cost efficiency?
It would appear some insurers and loss adjusters are beginning to embrace this different way of thinking as evidenced by the number of claims damage management consultants now being appointed. The question is, how will the damage management industry respond?
- Dr Greg French is a director of Davis French and Associates.
Source: Post Magazine© Incisive Media Ltd. 2008Incisive Media Limited, Haymarket House, 28-29 Haymarket, London SW1Y 4RX, is a company registered in the United Kingdom with company registration number 04038503
