Can Adjusters Earn Bonuses Ethically?

A system that uses activity-based bonuses geared toward providing excellent claim services to claimants also has great opportunity for the adjuster to act ethically.

Everyone agreed that the further the results-based bonus is from any individual claim, the more ethical the system. No one responding believed it was good for an adjuster to receive a bonus for the results of any individual claim. Everyone responding agreed that professional adjusters put their clients interest first, or at least on the same level as the interests of the employer.

One issue was ignored. The individual who generated the original question chastised me for "watering down" the issue by suggesting that the incentive-based compensation question applied to all those involved in the insurance business and not just to adjusters.

While I understand the passion behind the criticism, I am assuming the individual does not mean to suggest that all other people operating in the insurance business are not subject to the same ethical pressures, and it is really okay to provide bonuses to all employers of an insurance company except adjusters. While adjusters clearly are a different skill class of employee, to be equitable to all employees, adjusters must be eligible for any employee benefit made available.

These thoughts led to the question for this column: "Given that adjusters will be rewarded for excellent performance, how should an ethically-based, performance-measured compensation or reward system be structured so claimants may be assured of fairness in adjusting?"

The general consensus from respondents was that results-based bonus systems dealing with keeping payments to claimants at a certain level would be subject to ethical challenges. On the other hand, several kinds of performance standards would be ethically appropriate, such as:

Keeping loss adjustment expenses at a certain level (a result).

Establishing initial contact within a proscribed time frame (an activity).

Achieving closing within an average time frame (a result).

Receiving no more than an established level of complaints (a result).

In essence, if the standard being established improves service to a stakeholder, it is ethically based. If it creates benefit for the employer at the expense of the rightful amount due a claimant, it is not.

Two specific bonus-type systems were sent to my attention. One included adjusters along with every other employee at all levels of the organization (a comprehensive-result based system) and the second was specific to adjusters (a specific-activity based system). While details of both are beyond the length and scope of this article, general comments can be made about both based on the conclusions of my previous column.

The comprehensive-results system was keyed off a combination of overall profits and premium growth results. Profit results, in turn, were based on the actual to expected combined ratio, weighted 75 percent to the holding company and 25 percent to the individuals operating subsidiary.

The expected combined ratio was adjusted for the length of time policies were on the books. In other words, the expected combined ratio over time might be 96, but new business would have a higher combined ratio reflecting increased underwriting expenses. Growth in premium was based on the growth expectations of company management.

Each employee level had a target bonus percentage established as a percentage of salary. For example, an entry-level adjuster might have a target bonus of 10 percent of salary. The actual bonus for adjusters of this level would be a mathematical combination of their actual salary, times the target bonus, times a factor determined from the profit and growth results.

Critics of this system focus on the portion of the bonus formula related to the combined ratio, alleging an unethical incentive to underpay individual claims to increase the individuals bonus. Supporters of the system respond:

The system does not rely on the combined ratio alone. Growth in premiums is equally necessary for a bonus.

The formula is weighted 75 percent to holding company results and only 25 percent at the operating level.

Adjuster activities do not emphasize or even mention ways to reduce pure loss payments, only loss adjustment expenses.

Any deliberate underpayment of a claim that was not detected would immediately lower subsequent premium levels and make future profit levels more difficult to obtain.

Any deliberate underpayment of a claim that was detected would immediately affect the combined ratio by increasing loss adjustment expenses and losses attributable to bad faith judgments, and increasing future rates, making attainment of future growth objectives more difficult.

The matrix system of a bonus based on profits and growth not only requires teamwork among all employees, but also all but eliminates the ability of any one group of employees (not just adjusters) to profit over time from deliberate, unethical activities.

Based on the comments of readers, this type of system is ethically based. It applies to all employees. It is primarily based on overall results of the enterprise in that 75 percent of the profit and 100 percent of the growth factor portion applies at the holding company level. It has no factors for any individual employee that applies to individual unethical acts.

The second bonus system submitted was based on specific categories of activities and was used only for adjusters. Under this system, management declares a sum of money available for adjuster bonuses, and the bonuses are distributed according to scores on audits of closed-claim files, with points assigned to each performance category. Claim payment outcome is ignored on the closed files.

Essentially, the performance levels of activities of the adjuster on the audited files are measured. This system was established to avoid any additional compensation based on lower pure loss costs.

Performance categories include coverage, contact, investigation, communications, evaluation, reporting, resolution, file management and recovery. Each category has quality indicators measured on audit.

For example, using the category "contact," the intent is to measure the verbal and written communications of the adjuster with another person or entity. The quality indicators associated with contact are:

Initial contact within 24 hours of receipt of claim.

Acknowledgement letters to insureds and the agent within five days of the receipt of the claim.

Assignment to adjusters, defense counsel or other appropriate entities within 48 hours of receipt of the claim.

Subsequent contacts made timely as needed in response to messages or other communications.

Points are assigned for "superior," "acceptable" or "needs improvement" on each of the quality indicators. Points for all categories are totaled from the audited files and the adjuster receives an appropriate proportion of available total bonus.

This again is an ethically based performance based bonus system for adjusters. Each of the nine categories is grouped according to appropriate activities of adjusters handling a file. Each activity has specifically defined quality indicators with careful identification of each indicator.

Performance is measured only on closed files and based on the specific performance of the activities. Adjusters who handle files well receive greater bonuses than do those who do not act or respond properly.

The general conclusion is that adjusters can be granted bonuses or incentive-based compensation without creating ethical difficulties. The systems to determine the amount may be either results or activity-based. Results-based systems should emphasize corporate or business unit results if based on profits. Activity-based systems should emphasize the quality and timeliness of activities in handling a claim.

Peter R. Kensicki is a professor of insurance at Eastern Kentucky University in Richmond, Ky., as well as a member of the Ethics Committee of the CPCU Society in Malvern, Pa.

Next Ethics Column

For the next installment of this column, I would appreciate your comments on the same topic–performance-based compensation–as it applies to independent agents and brokers.

Given that producers will be rewarded for excellent performance, how should an ethically-based compensation system, including bonuses, be structured so that insureds and insurers believe there is fairness in the system? Are commissions superior to fees for production compensation?

Please forward your responses to Dr. Peter R. Kensicki at ethics@eku.edu, or Eastern Kentucky University, Coates Box 25A, Richmond, Ky. 40475-3101. All responses will be kept confidential.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, January 7, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

Contact Webmaster