Over the last several postings, we’ve discussed 10 challenges facing the insurance industry and the restoration industry. They are
- A stratified insurer market
- Three parties to a transaction
- What is the ‘insurance promise’?
- Whose contract matters?
- What does ‘choice’ really mean?
- Who really knows disaster restoration?
- Onsite evaluation
- Structural market imbalance
- Value justification
- Who defines ‘best practices’ or ‘standard of care’?
I am sure there are more, but those are 10 that occur to me and sit, to some degree, at the intersection of our two industries, though we really participate in one larger industry, just from two different business models and perspectives. That is why the single, most critical barrier that inhibits progress to shrinking the gap between insurers and restorers is so ironic. It’s because we don’t talk to one another.
Now I don’t want to suggest that individuals literally don’t talk to one another. Of course we do. Restorers talk to insurers as individuals all the time on job sites, at local claims association meetings, on the phone discussing payment, or scope, or coverage, perhaps even over lunch. But institutionally and as industries, we don’t converse. If you attend PLRB, you will find hundreds of restoration professionals plying their wares, but will find very few restorers in any educational sessions, and you will not find a Town Hall Meeting where restorers and insurers can discuss issues pertinent to them both. At RIA, you will find several insurers trying to sell restorers on their various property, environmental and liability programs on the trade show floor, and periodically there will be a panel discussion like there was in Colorado Springs this past Spring. But there was only one carrier represented in Colorado and I expect they did not feel comfortable speaking for the entire insurance industry, nor should they have been expected to.
The bottom line is we talk a lot about each other, but we don’t to talk to each other.
Now before we can propose solutions to any of these challenges, there are three set of facts that must be well understood.
(To be continued…)
Challenge #10 — Who Defines ‘Best Practices’ or ‘Standard of Care’?
This is similar to Challenge # 6, but is a tad different because it also ties into Challenge # 3. How should we approach a property loss from a service, quality, technical and financial perspective, especially when restorers and insurers each have a vested interest in the outcome?
I believe that best practices from a technical perspective can only be developed by the restoration contracting community. These professionals are the ones actively engaged in the true process of damage repair and are the only ones capable of sharing, based on real experience, what works and what doesn’t work. Restorers should be open to hearing new concepts and testing new technologies, but how they get integrated into actual practice, and therefore get adopted into a standard of care, needs to remain in their hands.
But I also believe there is a place at the table for insurers in the development of best practices from a service, quality and financial perspective. There is a shared customer of each party who expects a good experience from their chosen service provider—insurer and restorer — and therefore much can be gained by working together to create that positive experience. Until that gap is bridged to determine how to accomplish this, friction in the area of who defines best practices will continue to build.
(To be continued…)
Challenge #9 — Value Justification
Everyone competing in today’s market has the need to spend resources wisely. This is true for mutual companies, stock companies and restoration companies. No one seeks to waste precious resources. Thus all expenditures are theoretically reviewed on a regular basis to ensure that there is an appropriate return on the investment made (ROI).
For restorers, it is easier to justify a return on investment in their services. For a price, the restorer will return a property to its pre-loss condition, and in fact, usually better than it was. The investor (the property owner and/or the insurer) can visibly see the impact of their investment just by looking at the before-and- after pictures. While it is true that there are periodic challenges to the amount of the investment “because Uncle John, my normal handyman, could do it for less” or because there is a lack of knowledge on the part of the investor regarding psychrometry, stachybotrys, lead certification, containment, clearance testing and other factors related to a restoration that follows industry standards, these challenges tend to be on the margin. Restorers generally have no need to cost justify what they do; only how much they get paid to do it.
By contrast, insurers have a more difficult time validating their expenditures related to the property claims process, primarily within their own organizations. The claims department is a cost center for an insurance company; the department generates no revenue. Further, there are two types of costs: indemnity costs (what they must directly pay to cover each loss) and adjustment costs (what they must pay internally to manage the claims process.) It is these latter costs – the adjustment costs – that are most under the microscope, especially the largest subset of these costs, which are people costs. It is critical that each employee (or retained vendor) demonstrate the financial value that their work brings to the table (a positive ROI). The easiest way to do this is to demonstrate savings —showing some way that their work has specifically lowered the insurer’s cash outflow.
Suffice it to say, this need to deliver a positive ROI to justify headcount expense can periodically create friction costs between restorers and insurers.
(To be continued…)
Challenge #8 — Structural Market Imbalance
While there is some correlation between the amount of property loss claims payments made each year and the amount of revenue generated by restoration contractors (most losses are covered by insurance and most post-damage work is performed by professionals within the restoration industry), that is where the market’s structural alignment ends.
In the property insurance world, there are hundreds of insurers with the 10 largest representing over 63 percent of the total insurance premiums written, according to the 2009 homeowners data from the Insurance Information Institute. This is a very high concentration of the market. By contrast, in the restoration contractor market, there are thousands of restoration companies with the 10 largest restoration entities representing significantly less than 10 percent of the market. This is very low concentration. This difference in market concentration has a significant impact on market dynamics and market influence.
Consider simply that if the largest insurance carrier were to cease doing business with a particular contractor, or to pull out of the market all together, the effect would be an immediate 20 percent reduction in revenue for each market contractor, on average. Given that most carriers in fact have significant concentrations of their business with a considerably smaller group of contractors, the impact of a change in approach by the largest carrier would have a dramatic impact on one or more of those contractors, including potentially putting them out of business.
By contrast, if the largest restoration company were to cease doing business with a particular carrier, or to pull out of the market altogether, the impact on the insurance industry would be negligible, if noticed at all. This difference in market power creates obvious challenges, both real and imagined.
(To be continued…)
Challenge #7 — Onsite Evaluation
Property damage repair is a hands-on business. Unlike other industries where tasks are increasingly performed thousands of miles away from the site of actual product or service delivery (I can have my iTunes order delivered to my computer workstation in Illinois by a customer service technician in Bangladesh,) you cannot mitigate water damage in a basement in Minnesota while clicking keys on your Blackberry in the Caribbean. You have to actually be in the basement in Minnesota (or at least adjacent to it). And you really need to be onsite to get an overall feel for the loss situation. Property damage restoration is truly a ‘five senses’ business if done well. Old-school field adjusters understand this.
As the insurance industry has migrated to a greater reliance on desk adjusters in centralized call centers to more efficiently process claims (a logical and encouraged development), it has placed an increased burden on the restorer to be the eyes, ears, nose, hands and mouth of the insurer onsite. When this burden is placed on the restorer, with a corresponding level of trust in the ability of the restorer to properly and accurately assess the situation, everyone wins—faster claims settlement, lower overhead, increased customer satisfaction, etc. However, when the desk adjuster attempts to make assessments that can be best made—and perhaps only made—by qualified professionals onsite, friction costs begin to rise and often surpass any savings that were previously being realized.
Today’s technology can do amazing things, but there are limitations to it as well. Figuring out the delicate balance between the restorer and the adjuster in this regard is critical.
(To be continued…)
Challenge #6 — Who Really Knows Disaster Restoration?
This is a tough one on many fronts. There are individuals who buy property damage repair franchises after having been mainframe computer programmers for 20 years and they are told that after 4 to 6 weeks of training, they will be experts in the field. There are individuals who have been home builders for 15 years who think they can make the switch to becoming a 24/7/365 restorer overnight. There are folks who have studied course material for four years at some of our country’s leading universities (DKI financially supports one of them) who think that on their first day in the industry, they can run circles around the guys who didn’t follow a similar academic path. There are insurance personnel who have never worked on a restoration job or in a restoration office, but have written scopes and have attended one or more restoration-related classes, and therefore think they are as qualified as any restorer to assess exactly what needs to be done on a job and how to price it to make a fair profit for the business.
In fact, the person in the best position to assess a damaged property and write a proper scope is a seasoned professional, trained by schooling and hands-on experience in both the art and science of damage repair. Similarly, the person in the best position to adjust an insurance claim and determine the proper amount to pay the policyholder is a seasoned professional, trained by schooling and experience in the business and legalities of insurance claims adjustment, not a restoration contractor.
Just think about orthopedic surgery. A medical student can attend as many surgeries as he’d like, watching from the viewing gallery above. A medical claims adjuster can say “I’ve paid out on hundreds of knee surgeries in the last 12 years.” An anesthesiologist could say “I’ve put thousands of patients under in the operating room in the last 20 years. A doctor is a doctor.” But the reality is the only professional who is in a position to say they really know orthopedic surgery is an orthopedic surgeon who has the battle scars to prove it.
(To be continued…)
Challenge #5 — What Does Choice Really Mean?
For nine years, I watched, up close, the debate over consumer choice in the auto crash repair industry. For the last 10 years, I have watched the debate in the property damage industry over consumer choice. Frankly, I believe it is (mostly) much ado about nothing if we understand two core realities.
The first reality is that there are hundreds of insurance companies that sell property insurance, and certainly dozens, at a minimum, in any given state. The second reality is that the property owner market is made up of adults who are free to purchase insurance from any carrier they choose. There is no outside coercion to buy from one company versus another. While it may be true that the risk related to a particular individual or the geographical location of a particular property may limit the choices, it doesn’t change the fact that the property owner is in complete control of where they buy property and from whom they buy property insurance. There is 100 percent consumer choice.
The issue arises from the fact that many (most?) insurance purchasers do not do any research into what they are buying. While they may make 10 trips to a dealer lot and take 20 test drives of a vehicle before they purchase it, the same consumer will buy an insurance policy after giving the decision approximately 10 minutes of consideration; they’ll generally buy whichever policy is the least expensive. Then, when they actually use the policy (file a claim), they don’t like that the carrier they chose three years ago is encouraging them to use a particular restorer. Had they done any homework three years earlier (or at the time of annual renewal), they would have known this. But they didn’t, and this is now deemed the insurance carrier’s fault. Further, the contractors who are not on the insurance carrier’s program are also blaming the carrier. This appears to be nothing more than sour grapes given that:
- We live in a capitalistic society, not a socialistic society
- Property owners are free to purchase insurance from any carrier they choose
- Insurance carriers are free to structure their insurance policies and claims programs any way they like
- Property owners are able to choose any contractor they like to restore their property unless they waived that right within the structure of the insurance policy they purchased
- Insurance carriers are free to offer additional benefits to policyholders who choose certain restorers as part of the claims process.
Clearly, everyone has a choice, and ignorance on the part of some consumers should not hamper the opportunity of others to participate in a vibrant, rapidly changing, capitalistic market.
(To be continued…)