The Underwriting-Claims ‘Disconnect’ In Casualty Insurance: An ERM Issue?

There are good business reasons why claims and underwriting professionals of casualty insurance carriers don’t talk to each other about claim denials, underwriting executives said last week, with one offering enterprise risk management as part of his explanation.

“There’s a lot of separation of church and state that supports the credibility of how claims get handled,” said Joseph Cellura, senior vice president, property and casualty, for Allied World.

“How do you keep me [on the underwriting side] from influencing a claims examiner’s loss reserve” if the two sides do talk to each other, he asked. If the claims examiner “puts up a loss reserve, I want it to be low for my P&L,” Cellura said, referring to profit-and-loss summaries of underwriting businesses.

Should claims professionals scale the wall to the underwriting side to understand more about disputed claims? Should claims professionals scale the wall to the underwriting side to understand more about disputed claims?

“There are conflicting interests that you want to have separate just for [the sake of] enterprise risk management,” he concluded.

Cellura, who was participating on a panel of property/casualty insurance executives during a session of Advisen’s Casualty Insights Conference, didn’t offer the usual response to a question raised by Matthew Jacobs, a partner in the Washington, D.C. office of Jenner & Block.

“The policy speaks for itself” is the more typical answer Jacobs says he hears from insurance carrier claims professionals, when he asks a direct question during depositions related to liability coverage disputes: “Did you ever talk to the underwriter or look at the underwriting file?”

Speaking from the audience at the Advisen conference, Jacobs addressed the panel, which was assembled to discuss trends in the casualty umbrella and excess liability insurance markets. Jacobs described what he termed “a disconnect” between underwriting and claims.

“You never called…the underwriter, who spent months underwriting this risk—who knows everything about the client?” he said he asks incredulously during the depositions he takes in his role as a policyholder attorney. “You never thought that was relevant to your handling of your claim?”

“That projects a very bad impression of how the industry is handling those claims,” Jacobs told the panel. This is where “the rubber meets the road,” he said, expressing the view that the back-end claims handling is a critical part of the buyer’s experience with the carrier.

“It’s very important for the buyer to understand that the claims person is handling the claim with the underwriting [intent] in mind,” he said.

Jacobs went on to ask the panel: “Am I just getting the odd claims person who should have been talking to the underwriters? Or is there a reason why there is often a disconnect between the side that brings in the premium and the side that pays the claim?

“There’s a lot of separation of church and state that supports the credibility of how claims get handled,” says Allied World SVP Joseph Cellura.

Russ Johnston, casualty product line executive for the U.S. and Canada at AIG, suggested that the long-tail nature of the coverage made the prospect of communication unlikely in many situations.

“One of the challenges you’re always going to face, specifically in excess casualty, is that if you write an occurrence cover, it could be out there for 20 years,” Johnston said. “We’re adjudicating a policy that was written in 1998 today,” he said, adding that the underwriter might be retired.

Johnston agreed with Jacobs that there’s good reason to want the discourse between underwriting and claims to take place. “I think anyone on the panel would say we all try to connect the dots between claims and underwriting—because at the end of the day that’s the product,” he said.

Christopher St. Jeonos, a partner for Wilkie Farr & Gallagher LLP who defends insurers and brokers in legal actions, said that over the years, “the claims transaction has become increasingly more of a “business transaction—less about the policy terms and provisions and more about what is a fair way to settle a major problem for a major client.”

“We’re adjudicating a policy that was written in 1998 today,” says AIG’s Russ Johnston.

Like the others, Cellura agreed with Jacob that the “disconnect” is an issue that “absolutely has to be addressed” before he went on to describe the ERM challenges of doing so.

“How do you maintain that and still have the communication so the client’s best interests are met? I think the onus is on the underwriting department,” Cellura said. “My job is to service my customers—to make sure that they’re being taken care of.”

A claims executive in the audience suggested that “the functional equivalent of a conversation with the underwriter” takes place when the claims person speaks with the broker. “The broker was involved in the placement of the coverage and knows what went on. So that conversation does occur,” he said.

The claims professional also said he and his colleagues are “all sensitized” in the legal environment. “Why open up the underwriters to unnecessary questions and depositions because there’s a fishing expedition going on,” he asked.

The audience participant, who said he had been working in claims for 30 years, also said there is a great deal more coordination between claims and underwriters than there was 10 years ago.

Jacobs told Carrier Management he’s seen a change back in the other direction.

Reacting to Cellura’s suggestion that risk management structures drive a separation between underwriting and claims, Jacobs said “that completely misses the perspective of the insurance buyers.” They want to be “comforted” that when they submit claims that those claims will be handled in a manner that is consistent with the underwriting intent at the time they bought the coverage.

During a phone interview following the conference, Jacobs shared an experience related to a directors and officers liability insurance claim that was denied on the basis of a prior-wrongful-acts exclusion. He said the underwriter was aware at the time the coverage was written that there were existing facts and circumstances that might give rise to a claim—and the underwriter priced the coverage accordingly. Still the claims professional was unmoved, pointing to the language of the policy to explain the denial.

“I don’t think carriers understand how significant their behavior in claims handling is to their overall financial success,” Jacobs said. He reported that he’s seen several risk managers recently swear off certain carriers after being deposed by carrier coverage counsel over large disputed claims.

Reporting that more coverage disputes are being handled by arbitration, Jacobs, like St. Jeanos, said “business factors come into play.” A client that has paid $20 million of premium to an insurer over five years isn’t going to be happy with a carrier that denies the only claim it has ever presented, offering a reason that is not consistent with the original underwriter’s intent.

Clients “understand that there can be differences of opinion,” he said. “But when the insurer wants to maintain an ongoing business relationship, they should take that into account,” he suggested.

He said “creative” conversations, in which carriers say they will give more favorable treatment to claims than the policy language would dictate in order to continue to do business with a policyholder, “don’t happen as much as they should.”

“The other conversation happens more than it should,” he said.