As credit becomes tighter and companies more litigious, management can at least reassure corporate finance departments that improved insurance payment times have arrived. Balance sheet working capital can but benefit from the new electronic claims system sweeping the insurance industry, writes James Sterling.
As we enter the final quarter of financially troubled 2008, the insurance market expects finance directors to become embroiled in legal claims against their companies and officers. This worrying development is part of the continuing fallout from the collapse of the US sub-prime mortgage market and the wider credit crunch that has followed. Indeed, some analysts believe that the final total of claims linked to the credit crunch could be in excess of $10bn. Likely claimants include shareholders and institutional investors - the latter are expected to be held to account by their investors for poor investment decisions (for example credit-backed investments linked to the US property market).
Nevertheless, financial directors can take comfort from the fact that such claims should be covered by their companies' insurance policies, provided the policy terms and conditions are satisfied. These policies are intended to protect a director or officer of a company from financial exposure to claims arising out of a breach of company duty.
At the same time, directors can take encouragement from one other development of significance that has been seen in the insurance market in 2008: the introduction of an electronic claims handling system. This has been developed as part of a London Market Reform initiative to improve claims processes and to sharpen London's competitive edge in the international insurance market.
Historically, the London insurance market has had a reputation for the slow handling of claims, partly due to its affection for handling claims on paper which has strengthened the challenges from Bermuda, continental Europe and Singapore. As they have developed market share, it has underlined the importance of faster service and first-class claims handling.
By London having insisted to remain with paper for so long, it has inevitably meant that claims can take a long time to be settled. This results in financial uncertainty for insureds, such as companies, as they await confirmation that large potential exposures will be met by insurers. It can also have deep impact on working capital requirements.
The insured will be the ultimate beneficiary of the new electronic process, called the electronic claim file (ECF), as it should in most cases, mean that claims are processed quicker than in the past. Under the new system, authorised insurers, reinsurers and other parties involved in the claims handling process have access to a document repository. This allows documents held electronically to be accessed concurrently thereby improving the circulation of claim information and the time within which claims can be agreed.
Since the start of 2008, an increasing number of claims have been being notified electronically. Further, a recent independent survey (initiated by City law firm CMS Cameron McKenna and leading international insurer Markel International and conducted by Populus) has revealed that, of insurers, brokers and other market practitioners, three quarters of the London market has bought into the new system, including 96% of Lloyd's managing agents and 86% of brokers.
The intention is that, by the end of 2008, 100% of all claims that can be processed using the electronic system (these are known as in-scope claims and form the majority of all new claims) will be being processed this way. This streamlining of the claims process should provide companies with a noticeable business benefit, thereby easing some of the financial strain at what is, inevitably, a difficult time.
James Sterling is a solicitor with CMS Cameron McKenna LLP.