Customer Satisfaction in Auto Insurance Claims Settlement

Introduction

Whenever motor vehicles become involved in an accident and people are injured, the basis is laid for claims on the grounds of negligence, and the economic consequences can be severe. Because around 90% of drivers in the United States are insured, the responsibility for handling claims rests very largely with insurance companies (Ross, 1980). Given that the majority of motorists in the United States will eventually experience some type of vehicular accident during their driving career, the question of what factors are perceived as ensuring customer satisfaction by policyholders becomes critically important. To this end, this paper provides an examination of the importance of ensuring customer satisfaction in the settling of claims in the auto insurance industry. A summary of the research will be provided in the conclusion.

Importance of Research

The costs associated with injuries resulting from automobile accidents are the most numerous and costly of all personal injuries in North America today (Dewees, Duff & Trebilcock, 1996, p. 15). In 1989, approximately five million Americans experienced auto-related injuries, 47,000 of which were fatal. The statistics for Canada were not quite so grim but were still serious, with more than 200,000 people injured in motor vehicle accidents in 1985 and more than 6,000 fatalities (Dewees et al., 1996). The costs associated with these injuries are staggering: economic costs such as medical expenses, wage losses, and other out-of-pocket expenses of automobile injuries in the United States were estimated to have totaled $50 billion, with another estimate placing the figure at $74.2 billion per year as the 1990s closed. "Further, despite steady decreases in the annual number of traffic fatalities in Canada and the United States since the mid-1970s, injury insurance costs have risen sharply during this period, increasing by about 140% in the United States from 1977 to 1987" (Dewees et al., 1996, p. 15).

In response, automobile insurance prices increased rapidly throughout the 1980s, even as the general rate of inflation slowed and automobile accident rates declined (Cummins & Tennyson, 1992). In fact, the automobile insurance component of the consumer price index more than doubled over the decade, rising at a rate that was almost twice as fast as the overall Consumer Price Index (CPI) and faster than even medical care inflation. The discrepancy was even greater from 1984 to 1989, when the automobile insurance CPI increased at 9% per year while the all-items CPI rose at only 3.5%; by contrast, the medical component of the CPI grew only 6.5% annually over this same period. These increases were not uniform across the country, and some states were affected more adversely than others, with double-digit inflation rates not uncommon. The average premium per car ranged from $353 in Iowa to $1,074 in New Jersey in 1989 (Cummins & Tennyson, 1992). The costs of insurance policies for high-risk groups such as young males can also be several hundred percent higher than those charged to the average policyholder.

"These trends have made auto insurance harder to afford for many consumers, particularly in urban areas, and the number of uninsured motorists has grown. As a result, the costs associated with automobile insurance have become a controversial political issue that has figured prominently in gubernatorial races from New Jersey to California, and has stimulated many legislative and consumer initiatives aimed at reducing premiums" (Cummins & Tennyson, 1992). The populist view holds that high insurance costs are primarily due to inefficient and excessively profitable insurance companies. Insurance companies are charged with paying claims without adequate controls, padding their expenses, and passing the costs along to unsuspecting consumers — all while being protected by a federal antitrust exemption. Insurance companies counter that they are competitive and efficient, attributing rising costs to the excesses of the tort liability system, which is largely beyond their control. "Insurers argue that profits are declining, in part because rate regulation has prevented prices from fully adjusting to recognize claim cost inflation" (Cummins & Tennyson, 1992, p. 96). While the debate over tort reform continues across the nation, insurance carriers face a growing dilemma: how to remain profitable by providing appropriate levels of coverage for insureds that represent the best possible mix of risk and customer retention.

Private passenger automobile insurance in the United States comprises a package of coverages, some of which are mandatory or quasi-mandatory and others optional, depending on the rules adopted by a given state and the desires of the individual policyholder (Cummins & Tennyson, 1992). The optional coverages available in all states include:

Collision insurance, which provides compensation for accident damage to the insured's automobile; and comprehensive insurance, which compensates the insured for non-collision vehicle damages such as fire, theft, and vandalism.

Liability insurance is at least quasi-compulsory in all states (Cummins & Tennyson, 1992). As with other types of liability insurance, automobile liability insurance is designed to protect the insured against being held liable for others' losses rather than his or her own direct losses. As a result, it is frequently called third-party coverage, whereas insurance for one's own losses is first-party coverage. Potential liability can arise from either personal injuries or property damage sustained by others in an automobile accident with the insured (Cummins & Tennyson, 1992).

In the Information Age, consumers have an abundance of insurance carriers from which to choose. The carrier they select represents an enormous investment over a lifetime: "Once largely indifferent to insurance products, private individuals have now recognized their significance: in the course of a lifetime, a household often pays more than $150,000 in insurance premiums — enough to buy a condominium, and more than an average employee's savings at retirement" (Muth, 1993, p. 73). Given this level of investment, people naturally gravitate toward those insurance carriers that provide the best possible sense of value in meeting a wide range of needs, including a perceived return on money spent: "Little wonder that people get upset when they discover that roughly a third of these premiums are used for administration and sales charges. And little wonder that, as in other retail industries, customers have started shopping for the best buy or resorting to 'do-it-yourself' (self-insurance) solutions" (Muth, 1993, p. 74).

The research shows time and again that it is simply good business sense for an automobile insurance company to have an equitable and efficient claims processing system in place. According to Singer (1994), many American businesses have decided that developing innovative ways of handling complaints by consumers or employees can improve their public image, their sales, and their relations with workers. "Innovations such as Citibank's Peer Group Problem Review Procedure and Chrysler's Customer Satisfaction Program were established with employee or customer goodwill as well as avoidance of court in mind" (p. 83). One consumer complaint representative for the City Light Company of Seattle, for example, reported that the institution of a company complaint procedure — responsible for administering consumer concerns about rate increases, billing, credit, and collection practices — had done more to enhance the utility's public image than any other innovation in the company's history (Singer, 1994).

In the United States, virtually all rights properly called "legal rights" could be asserted and adjudicated in a court; however, only a small percentage are in fact determined in this formal manner. Ross (1980) points out that "one reason we fail to realize this is that we overlook the legal relationships involved in many of our ordinary social transactions." All commercial purchases, including new vehicles, occur in the context of a commercial law that "bristles with explicit and implicit rights and duties on the part of buyer and seller, the breach of which creates a claim for one or the other party" (Ross, 1980, p. 4).

Components of Customer Satisfaction in Claims Settlement

Today, the regulations applicable to the conduct of business are so numerous and pervasive that their violation is virtually a way of life for the ordinary businessperson. "That legal rights and duties are involved in these everyday transactions and occurrences is virtually never recognized except when something unexpected disrupts routine" (Ross, 1980, p. 4). The occurrence of unexpected events is, of course, the essence of the purpose of all types of insurance coverage; many people may not give much thought to which carrier is best for them until things go wrong. At that point, how the customer is handled by the insurance carrier becomes the essential ingredient in how the company is perceived by the policyholder.

According to Evans & Lindsay (1996), customer satisfaction or dissatisfaction occurs during moments of truth — every instance in which a customer comes into contact with an employee of the company. The consequences of even a few dissatisfied customers can be enormous: "Dissatisfied customers turn to competitors; loyal customers spend more, refer new clients, and are less costly to do business with" (Arendt & Harris, 1998, p. 27). Because it costs about five times more to gain a new customer than to keep an existing one, and since dissatisfied customers tell at least twice as many friends about bad experiences as they tell about good ones, it is clearly in a business owner or manager's interest to seek high levels of customer satisfaction and retention.

According to Gebhardt and Townsend (1990), although the notion that little things can add up to an enormous positive effect has gained wide acceptance, many companies remain sluggish in their response to the reality that little things can also have an immensely negative impact on customers' perception of performance. "There have been fundamental misapplications of the principles of continuous quality improvement with deleterious results, all of them avoidable. Examining what can go wrong is instructive" (Gebhardt & Townsend, 1990, p. 3). Clearly, the potential exists for just as many things to go wrong during the claims settlement process as for them to go right, and it is incumbent on the carrier representative to ensure that things are done correctly — particularly from the client's perspective.

According to Benjamin (1997), the one factor that helps distinguish a great insurance company from its competition "isn't cost (the government determines that), accessibility (your biggest competitor stares from the glassy windows across the street), or size (you're the biggest in the state), but customer service" (p. 11). In his book Policies and Perceptions of Insurance: An Introduction to Insurance Law, Clarke (1997) notes that the reasons for selecting one insurance carrier over another are as varied as the human condition; however, certain commonalities have been identified that companies can use to determine whether they are doing a good job of delivering services to their targeted market. According to Clarke, "At the point of choice, like the purchaser of any other product, the purchaser of insurance may be torn between price and reliability, i.e. security. Some will go for the lowest premium; others for the insurer with the reputation for support and prompt payment" (p. 18).

The choice may also depend on whether policyholders will eventually have to confront the consequences of their carrier selection. Clarke notes that "a longer view may be taken by the householder buying fire insurance than, perhaps, the exporter of goods who sells an occasional buyer a package including insurance on the goods; he is obliged only to provide commercially acceptable insurance, and, if there is a claim and if the insurer drags his feet over a claim, it is the buyer rather than the seller who suffers" (Clarke, 1997, p. 19). Automobile insurance policyholders represent a more classic example of consumers who will most likely seek the least expensive policy, particularly when legal requirements of the state or lender requirements compel them to purchase minimum levels of coverage. Clarke suggests that these consumers assume risk lightly and buy insurance only because they must: "Convinced that 'it won't happen to him,' he seeks the cheapest insurance he can find" (Clarke, 1997, p. 19).

While cost is a fundamental component of the purchasing decision, the selection of one carrier over another may also depend on the buyer's prior experience. Some recent surveys suggest that, among buyers of commercial lines, security, integrity, and continuity are now even more important than price. "The speed with which Lloyd's paid on the Californian earthquake of 1906, when other insurers were dragging their feet through the dust and the small print, did much for the prosperity of Lloyd's in subsequent years" (Clarke, 1997, p. 19). When people are treated well, they remember it and tell others. These personal testimonials represent powerful incentives for consumers to choose one insurance carrier over another.

Conclusion

According to Muth, "Providing financial capacity will not, by itself, be enough of a value proposition to attract and hold corporate customers. After the fundamental consolidation of the industrial risk market that will take place over the next few years, there is a chance that profitability will return to adequate levels for the competitors that remain" (Muth, 1993, p. 75). Failing that, industrial insurers will continue to suffer cyclical profit and loss waves until profits from private customers no longer suffice to cover industrial losses. For the foreseeable future, Muth believes that personal lines of insurance will continue to be a local business, influenced by local variations in legal systems, crime rates, buying preferences, drinking and driving habits, and lifestyles. "Only in the very long term is it conceivable that an individual insurer will be able to offer a uniform product, price, and business system. But this does not mean that personal lines markets are safe" (Muth, 1993, p. 76). Insurance companies will increasingly be confronted with fundamental challenges to providing a consistent approach to ensuring customer satisfaction. Consumers are increasingly questioning why particular risks need to be covered and insisting on acceptable customer service from their carriers; for instance, the average settlement period for claims has frequently exceeded six weeks (Muth, 1993).

Overall, Thierauf (2001) believes that newer collaborative-enabling technologies — from multi-user, multisensory virtual reality environments to 3-D data streaming across the Internet — promise to reshape collaborative processes for insurance carriers over the long term. In the shorter term, decision-processing portals are emerging that promise to provide carriers and their customers with the solutions needed to help ensure a more satisfied customer after every claims settlement event. Furthermore, these types of platforms allow users to switch seamlessly from a decision-processing system to an e-business environment. "For example, an insurance company could provide analytical and other business information about insurance claims to its key customers" (Thierauf, 2001, p. 70). A company representative at the customer's location could use the insurance company portal to access and analyze claim information and then switch to an e-business application to complete any adjustments required to the customer's coverage. "Such an effective customer and insurance company collaborative effort could help ensure a continued, successful business relationship over time" (Thierauf, 2001, p. 70). Other initiatives that insurance carriers can take to improve the quality of customer service include taking advantage of email communication with customers, suppliers, stockholders, and business partners (Thierauf, 2001).

Patrick (2001) recommends adding a sufficient number of staff members to handle increased volumes of external email on a 24/7 basis and to identify ways to justify the cost based on increased business, improved customer satisfaction, and offsets to paper-based processes. "Use flexible, predrafted responses and use software to categorize the e-mail by department or product and by whether it is feedback, a question, or a complaint. Automatically route the e-mail to the right part of the organization. Ensure that every e-mail is answered within twenty-four hours. Use a follow-up system to ensure closure on issues" (Patrick, 2001, p. 216). In the final analysis, little things do mean a lot when it comes to customer satisfaction — particularly during the claims settlement process, which is an invariable concomitant to a stressful event in a policyholder's life.

The research showed that while some people may believe only monetary compensation is the path to customer satisfaction, the reality is that an abundance of small things — such as promptly answered telephone calls or emails, a consistent demonstration of courtesy and respect, and a recognition that individuals pursuing or responding to claims are undergoing a stressful and emotional period — also contribute substantially to the perception of customer satisfaction during the claims resolution process. Insurance carriers that recognize and act upon this reality are better positioned to retain policyholders, attract new ones through positive word-of-mouth, and compete effectively in an increasingly challenging marketplace.

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