The “do as much as you can in the aggregate” incentive for adjuster profit maximization versus “estimate more on one claim and get paid more” was the debate in 2015 Congress following Superstorm Sandy flood insurance debacle. This blog followed the last two posts, Churn and Burn Adjusting—An Admission From An Independent Adjuster, and Is “Running and Gunning” Adjusting the Same As “Churn and Burn” Adjusting?.
In 2015, Congress had an investigation into the cause for the underpayments and altered engineering reports in flood claims following Superstorm Sandy in 2012. I would suggest that readers of this blog study pages 42 through 46 of the Senate Committee Staff Report about the two differing views on how flood adjusters are compensated.
The summary of key points indicated the following:
WYO and Adjuster Compensation Structure
WYOs participating in the NFIP are compensated, in part, as a percentage of claims paid, In addition to other fees they collect from FEMA on the basis of written premiums,
Banking Investigative Group Investigative Review 2015-01
WYO participants in the NFIP make more money as the total amount of claims paid out to their policyholders increases. This gives WYOs a financial stake in maximizing claims paid.
The adjusters who estimate flood damage in the field – and the adjuster companies whose staff examiners review field reporting – also have an incentive to maximize claims value, because they are paid pursuant to an NFIP Fee Schedule that pays them more on larger claims than on smaller ones.
It is theoretically possible for an adjuster to make more money by rushing to complete multiple claims than by thoroughly completing a smaller number, and this could perhaps result in flood damage being missed, leading to underpayment. It is also possible, however, for such haste to result in too much damage being claimed – producing an overpayment – making its net impact unclear. Adjusters are also generally unable to receive any payment if the policyholder has not concurred in the damage estimate, which may also make at least major omissions less likely.
There is no evidence to support the hypothesis that engineers working in the NFIP reflexively downplay flood damage because that is what they are accustomed to doing in other insurance lines.
Whatever incentives may or may not exist for WYOs, it is notable that the Direct side of the NFIP – where there are no WYOs – exhibits the same pattern of claims problems as the WYO side. This suggests that WYO incentives play no role in generating such problems.
I italicized theoretically because that is my opinion of what factually happened. We routinely subpoena individual adjuster billing records for how many claims were done a day to prove this. The Congressional investigators did not do this for some reason.
Still, I had another independent adjuster friend write me just the opposite yesterday, stating:
This person’s assessment of flood claims is totally inaccurate – You cannot do 8 flood claims a day. In today’s world you do not get that many flood claims so there is an incentive to include everything damaged. Sorry if he is a friend.
I agree you cannot do eight or ten accurate estimates in a day. That is our point. Maybe my independent adjuster friend I quoted above is one of the “good guys” ethically handling claims. But I get a lot of others privately reporting to me that this is exactly what is going on the field following major disasters.
In Hurricane Michael, I even obtained a “confidential” Order of Magnitude damage report indicating $1.2 million of damage from a major insurance company vendor. Yet, the estimated report of damage sent to support the insurance claims payment was less than $400 thousand. Maybe it is explainable, but there should be a lot more transparency of something in the ballpark of $1.2 million going to a third of that.
A method to determine if all of this “running and gunning” is true is to see the insurance company billing records from their vendors. Market conduct studies should demand this information. Policyholders would want to obtain all drafts of reports and final reports as a matter of transparency. Changes in opinions are perfectly fine so long as they are made in good faith and can be explained.
Policyholders and consumer advocates should be fighting for laws and regulations requiring their insurers to turn over their internal claim files. Insurance commissioner offices should demand these as a matter of routine follow up anytime a consumer complaint is filed. California is one state that has such a rule and it helps keep insurance adjusters honest regarding their claims practices.