Claims – Dec 2005 Exam

Section A – Multiple-Choice Questions

1. (A)(1-3) To gain an understanding of a company’s commitment to it’s clients, the mission statement is a good place to start. It underpins the philosophy the claims department will embrace for handling claims. It often focuses on the company’s core strengths, values, or culture, and could specifically articulate an approach towards handling claims. The promises made in brochures and other advertising material to promote the sale of policies should also correspond.

2. (D)(1-9) Methods used to evaluate claims handlers performance include: • reviewing all files closed by new loss adjusters to assess procedural and process issues as well as technical claims handling • a claims audit, internal or external, could assess various aspects of identified claims handling issues • policyholders could be surveyed to assess customer service issues

3. (B)(1-11) Specialists deal with one type of claim or one line of business. Loss adjusters who specialize in the more complex areas of claims handling tend to have a broad base of experience in which their work is grounded, because at the beginning of their careers they would have handled a wide variety of claims.

4. (A)(1-26) Timing issues may be artificial. Urgency can easily be confused with emotionalism.

5. (D)(2-6) When assigning claims to independent or staff adjusters, most insurers will organize their claims departments to include claims examiners to oversee and control the handling of the claim file.

6. (C)(2-7) A claims department must learn of a new claim as soon as possible. The insured often needs guidance, reassurance, and general support. Most insureds will look to the insurer for leadership during the claims process, looking for direction on what to do next. The claims handling process can be viewed as a collaborative effort between the insured and the loss adjuster.

7. (B)(2-9) The triaging process forms a critical step at the outset of the claims process. Management must set criteria for assigning claims for the claims department. A critical assessment of the claim forms part of the process for ensuring that the claim is properly assigned at the earliest possible moment.

8. (D)(3-3) A budget is a fundamental financial tool, which enables an organization to be in control of its finances. It allows management to decide what’s going to happen to its resources. A budget categorizes areas of anticipated expenditure providing documentation of financial transactions.

9. (A)(3-4) Unallocated expenses are those not allocated to individual files but rather charged to the operating budget of the claims department. Such general department expenses related to claims adjustment comprise of staff salaries, equipment, furniture, education expense, etc.

10. (A)(3-14) Outputs usually characterize the amount of work produced and usually involve quantitative measures. Outcomes often characterize the quality of work produces. A qualitative measurement for a file might help determine whether claims were handled fairly.

11. (B)(4-2) Case loss reserve amount is the loss adjuster’s best guess as to what the insurer will pay on a claim at a given point in time, in order to get it closed. Aggregate reserves cover a host of issues through various statistical and other analyses in order to better predict how much to set aside from the insurance company’s surplus into a liability account to meet future claim obligations. Case loss reserves and this aggregate reserve result in the total reserve amount.

12. (C)(4-10) Tabular reserving, similar to average cost reserve, is done automatically. It’s used for long tail exposures where known payments will be affected by the time value of money. This includes structured settlements, AB claims, clean up of environmental site…

13. (D)(4-11) The insurer needs a smaller sum of money today to meet a stated obligation at some time in the future. The projected amount of the present value and the interest is called future value.

14. Not sure where in the book

15. (A)(5-9) A claims department may receive only limited notification of an impending audit. An audit initiated to detect fraudulent practices may be more effective when there’s no warning given.

16. (C)(5-19) Following the audit report, an executive summary is often prepared to share with the insurance company’s management. The entire management team thus gains an understanding of how the claims department is being managed and the nature of its problems.

17. (D)(6-4) The insurer is entitled to the right of subrogation only if it’s paid a bona fide claim covered under the insurance policy. If the insurer decided to make a voluntary or ex gratia payment to a policyholder, the insurer would have no recourse in law to recoup its payment from the wrongdoer.

18. (A)(6-9) It’s usually to the insurer’s benefit to negotiate a partial settlement from a wrongdoer rather than risk litigation. Litigation is expensive and a defendant may go bankrupt or otherwise thwart the insurer’s efforts to recover. A compromise settlement early on often turns out to be a cost effective choice.

19. (B)(6-10) In certain provinces, legislation restricts subrogation in some lines of business, such as no-fault automobile insurance. The potential for subrogation is limited.

20. (B)(7-3) Litigation management has referred to the process of direction a lawsuit. Lawyers are predominantly responsible to conduct and supervise litigation carefully and skillfully.

21. (C)(7-5) In business, companies tender jobs by issues requests for proposals to service providers.

22. (D)(7-11) Service of the statement of claims may be the insured’s first notice of the event.

23. (A)(8-4) A catastrophe is a sudden disaster of immense proportions that causes havoc to people, property, and the natural environment. An insurance catastrophe is a sudden and unexpected event causing many insured claims, often on a large scale. The event often creates an urgent situation of need of policyholders that is a challenge to service due to the scarcity of resources in the aftermath.

24. (C)(8-22) Insurers may provide field adjusters with cheques, or permit hand written drafts to be used. Some insurers may require that loss adjusters prepare a letter to accompany each cheque written to provide some documentation for the file and for the policyholder regarding the settlement. In some circumstances, insurance companies may entrust independent adjusters to issue loss payments to policyholders on the spot.

25. (B)(9-21) The test for slander of goods: • a statement was made about the plaintiff’s goods • the statement was false • the statement was published maliciously • the plaintiff suffered special damages

26. (C)(9-22) A partial immunity that attaches itself to certain occasions.

27. (D)(9-26) Vicarious liability is the legal concept that imposes liability solely on the basis of a special relationship with the wrongdoer.

28. (A)(10-5) Substantive law defines, describes, regulates, and creates legal rights and obligations.

29. (B)(10-9) PIPEDA sets out that the Privacy Commissioner of Canada is responsible for ensuring that companies in the private sector collect, use, or disclose personal information in a responsible, transparent manner.

30. (C)(10-10) Personal information has been identified as any factual or subjective information, recorded or not, about an identifiable individual.

Section B: Narrative Questions

2(a)(1-15) (i) they develop job satisfaction because the work is done well (ii) they may be given more responsibility to match their level of competence (iii) they may be stimulated by greater advancement possibilities

2(b)(1-28) • use humour as a stimulus for creativity • invite the group to propose solutions openly and without restraint • don’t judge ideas during brainstorming it may make people self-conscious and stifle energy • critical thinking can be applied after brainstorming to retire proposed solutions

2(c)(2-4)
• complex claim that requires attention
• severe losses
• loss that are probably not covered under the policy
• losses where there’s a possibility of subrogation
• customer service commitment

2(d)(2-5)
• in some locations, the insurer may not have a sufficient volume of claims to justify hiring a staff adjuster
• during a busy claim period, staff alone may not be able to handling incoming claims
• during vacation, or periods after storms, internal resources may not sufficiently cope with the volume of claims without outside help
• for some specialty lines of business, the insurer may need expert outside assistance

3(a)
i. Baseline budgeting uses prior years’ budget to determine how much will be spent in the coming year. Adjustments are made for inflation and other anticipated factors. This type usually produces incremental cost increases from year to year. ii. Zero-base budgeting examines the root needs of the organization by justifying each expenditure. A case must be made to each budget item. It’s a labour intensive project, not undertaken each year. iii. Performance based budgeting suggests a review of each category in the budget to ensure that it contributes to the company’s overall mission and strategic goals.

3(b)(3-9) Independent adjusters: requires fewer employees and therefore lower costs for employer related to expenses such as payroll, car, telephone, and office overhead. Allocated costs are charges to the file which may be recovered under reinsurance. More internal claims personnel means higher payroll costs, car, telephone, office, and others like supervision, supplies, HR, clerical , computer, training. Independent adjusters aren’t as familiar with the insurers policies, claims philosophy…

4(a) The ultimate possible outcome theory operates as a moderate “worst case” scenario and assumes a negative outcome to judicial arguments. It’s a very conservative approach where reserves will be on the high side. This approach may be appropriate in jurisdictions where early negotiations are rarely successful and most of the larger files end up in legal proceedings. These files tend to be over-reserved.
The probably settlement value theory takes a more optimistic view of the likely outcome. It assumes that arguments put forth in support of the insurer’s position during negotiation or mediation will results in a favourable settlement. The loss adjuster will tend to give weight to more subtle factors: • impression the insured and third party will make on the judge and jury • competence of plaintiff’s counsel

In less litigious, conservative jurisdictions this approach may be preferred. This may end up under-reserving.

Over-reserving can lead to the insurance product being overpriced. This may cost the company their competitive edge and lead to lost accounts. Under-reserving means the insurance product will be underpriced, not priced adequately to cover exposures. This will eventually deplete the company’s resources, because claims costs will exceed premium income. Investors will come to distrust companies where they are led to believe that the company’s financial situations is much rosier than is the actual case.

4(b)(9-21)
1) the plaintiff must demonstrate that the defamatory charge was published, not necessarily printed, but communicated to a person other than the plaintiff
2) the plaintiff must establish that the defamation expressly, or by reasonable implication, referred to him or her
3) materials must have been false, in the eyes of a reasonable person, discrediting to the plaintiff

5(a)(5-4)
• as a management tool to help ensure that claims handling and claims operations are effective, efficient, and follow company guidelines and processes. It can ID strengths and weaknesses within the department
• a means of preventing and controlling an organization’s risk of financial leakage. It includes indemnity and expense payments as well as reserves
• a tool for assessing how well the claims department is upholding the regulations that govern claims handling
• audit results can provide a framework for planning training initiatives to improve skills of claims people
• can examine the performance of loss adjusters although formal audits aren’t the usual way individual performance is monitored

5(b)(5-6) A full review examines every facet of how a claims department operates from mail handling to report writing. It’s costly but would provide useful information to the organization to act upon. A specific audit focuses on limited aspects, perhaps where a problem is suspected. It could focus on financial reporting requirements and be limited to reserving and indemnity payments. This usually takes less time, demands fewer resources, and is much less disruptive to the claims operation than conducting a full audit.

6(a)(8-9)
1) Liaising with management, with those outside of the organization and within to share intelligence. Accounting and IT can set up special features to isolate the data recorded for the CAT. Keep underwriting apprised of developments. Brokers will be swamped with calls.
2) Temporary transfer of loss adjusters: select available staff to join the CAT team, with the use of HR. Loss adjusters who will travel will be asked to commit to a schedule based on the demands of the emergency. May hire independent adjusters. Build a team.
3) Existing claims infrastructure: talk with preferred vendors to discuss a plan of action
4) Communication: between policyholders, the insurance company, and loss adjusters
5) Equipment needs: mobile home, telephone, maps, power generators
6) Transportation:
7) Lodging: for policyholders and loss adjusters
8) Control Centre

6(b)(7-10) Original documents are sent to the lawyer with a letter in summary form outlining the facts of the case. Documents in evidence are named and briefly described in a separate list. An investigation may not be complete. Counsel may request further investigation. The claims examiner continues to oversee the file and direct litigation. In response to the statement of claim counsel must issue the necessary pleadings in response or a notice of intent to defend. Boiler plate pleadings.

7(9-17)
• First to judgment rule: gives priority to the claimant who is first to obtain judgment against the insured. This line of reasoning has fallen out of favour because of the lengthy of time and bad faith.
• First to settle rule: holds that an insurer may settle a claim in good faith even if the amount reduces or exhausts policy limits. The remaining claimants have little or no recourse. This encourages settlements and encourages claimants to make their claims promptly.
• Pro Rate rule: claimants pro rate the available policy limits based on the total amount of their claims

8 (3-18) The insurer can benefit from economies of scale possible when bulk buying occurs. They can negotiate better deals for consumers ensuring product and service quality. Pre-qualified suppliers are screened for stability and excellent workmanship and service. Insurers control indemnity costs and claimants gain value added benefits. This may include priority treatment, quality repairs, and replacement performed in a timely manner. Many service providers are trust to provide a “picture” of the claims situation. These contractors might be asked to perform emergency repairs to secure and keep premises safe. Loss adjusters will be given instructions on the appropriate service provider to use in a given area and direct policyholders to them.

Service Provider Criteria • reputation for being honest • properly licensed for service provided • competitive pricing • no surcharges • commitment to handle claims fairly and promptly • written guarantees • other value-added services • priority treatment for policyholders • modern, well maintained, and properly equipped locations – compliant with fire, environmental and health regulations • experienced staff and approved repair procedures

Sometimes there will be an informal agreement, sometimes a formal one. For vendors selling goods, the insurer would ensure that the bulk of policyholders would be satisfied with the quality of merchandise. Costs can be contained because the supplier will discount prices without compromising on quality. Fixed labour rates, unit costs, and parts can be negotiated. Ultimately, the insurer chooses the supplier or service provider to replace goods or effect repairs.