1. The insurance industry is steeped in the principles of utmost good faith and transparency.
These are pivotal elements in every insurer’s dealings with their shareholders, employees,
policyholders, and supply chains. Service offers brim with trusting imagery. It’s the heartbeat
of the industry; ditto restoration contractors.
Given the above, it’s hard to comprehend the muddled relationship most insurers share with
the restoration contractors that service their policyholders’ property claims. Surely some of the
largest and most successful financial organisations anywhere working with so many of the
most business-savvy contractors would combine to offer the insuring public an utterly open,
transparent, and consistent service. Sadly, reality paints a different picture. Inconsistencies
abound, practices are often archaic, and many standard business processes are ignored.
What’s the problem? It appears that both parties are unable or unwilling to articulate their
own requirements or understand the needs of the other. Here are some of the major issues:
1. Pricing:
a. The accurate pricing of services rendered by contractors is clouded by
practices that border on witless
b. Lump sum charges with no detail of costs are an accepted way to price a job
c. Contractors continue to play shell games with trade charge out rates
2. Processes:
a. Contractors say insurers are squeezing costs to the detriment of work quality
b. Ineffective or slack processes that lead to excessive costs are often overlooked
3. People:
a. Adjusters are being marginalised to the point of becoming claims processors
b. Contractors and insurers are deploying new software that requires a major
change in the way their most experienced people work

2. 4. Strategies and tactics:
a. Personal relationships drive business relationships
b. Productivity rather than quality is still a primary strategy
c. Adjusters and contractors often vie for a claimant’s support against the other
d. Contractors take on any job, regardless of their capabilities and sub-contract
out
Pricing
Layers of cost, a multitude of process options, and the widespread sub-contracting of work
(with a secondary set of costs and processes) has made a dog’s dinner of pricing. In addition,
even the calculation of standard cost overhead and profit (surely one of the most
straightforward add-ons to any service) has been elevated to farcical levels. Contractors and
adjusters have grown accustomed to uplifting the cost of a job by 20% (10% apiece for
Overhead and Profit – sometimes compounded, sometimes not). Yet there are contractors who
run their business at 25% overhead and profit and others who require 50% or more. The
trouble is that it was always too difficult to agree what ‘true’ overhead is so the industry
sidestepped the issue entirely. Of course, the gap between 10% allowed overhead and actual
overhead has always been embedded somewhere in the job cost – it just isn’t visible to
anyone.
Another practice is to allow contractors to bring in sub-contractors. There’s nothing wrong with
this in principle. However, often the only input by the primary contractor is a phone call and
some onsite supervision. The sub-contractor then proceeds to present lump-sum invoices
loaded with their profit and overhead (with little or no breakdown of work performed with a
corresponding cost attached) to the primary contractor who then proceeds to add another
layer of overhead and profit to the final invoice to the insurer.
The current view of insurers is that if prices are controlled, the cost of the overall job will be
‘right’. However, some of the pricing data deployed in off-the-shelf software is acquired from
contractors or from data already in the software system. This creates a self-perpetuating
‘garbage in, garbage out’ loop that cannot correct itself. Some insurers have attempted to
remedy this by creating custom prices based on their own research with mixed results. This
route has triggered a lawsuit in the US that charges some of the largest insurers of conspiring
with their vendors to influence the assessment of losses calculated by software used in claims
adjustment. Although the lawsuit relates to the 2005 Katrina and Rita losses, no matter how it
ends, the industry’s reputation will sustain another perforation.
Processes
In the past, insurers leveraged their ability to channel work through preferred vendor
programs. In return for consistent business volumes, the contractor agreed to a reduction in
the standard 10% + 10% overhead and profit. With the cost savings thus assured (in theory),
insurers devoted considerable time and effort to process improvement. However, the advent
of new estimating software programs offered a view of claim cost details not previously
available. Insurers’ interest in process improvement was quickly supplanted by a
preoccupation with labour and material prices, thereby overlooking that technology can also
be a great driver of process optimisation. Insurers finally have a view of the way prices are
built up and now have a fixed target to shoot at. No half measures here. Process control has
been put aside. Now contractors complain they cannot afford the quality of service demanded
by insurers. The result? We see some creative solutions, e.g., the versatile employee who is
charged out at varying rates (though not necessarily being paid the same way). Thus, the
$25/hour general helper becomes a $50/hour technician in times of need. We find scaffolding
that is ostensibly erected at the commencement of work and dismantled at the end of the day
every day for a week because the software (and the insurer) allows this.
Software programs may have given insurers control of prices for now but contractors have
regained control of processes and are able to nullify some of the effects of the price fine-
tuning. The endless game of move and counter-move carries on.

3. People
There was a time when an adjuster concentrated on keeping up with construction-specific
developments. They walked the walk in the contractor’s work boots. However, this approach
didn’t allow differentiation - all insurers had the same products and services. Technology
stepped in. Adjusting skills were commoditised. The adjuster now became the service
champion, freed from administrative or transactional activities– the software took care of the
details. This allowed more personalised face-time with the policyholder and thereby provided
the differentiation hankered after by insurers. Soft skills training displaced technical skills
development and many adjusters lost touch with the reality of onsite claims management. The
most experienced often struggled with the new technology demands; others looked elsewhere
for employment. The irony is a far more important differentiator was ignored or lost, the skill
that separates adjusters from claim processors. Independent adjusters suffered the most.
Their service platform was based on technical knowledge. Now their fees came under scrutiny
– why pay for so much expertise when so little was needed? Insurers started to internalise the
adjusting process.
Contractors made exasperated sounds as they dealt with inexperienced newbies but now had
less pushback on their processes.
Strategies and tactics
There’s a long-standing tradition of personal relationships in the industry. Most of it is driven
by an equally long-standing tradition of buying local. The local broker, the local insurer, and
the local repairer work and play together. It makes perfectly good sense to deal with a known
entity. What you often lose, though, is the rigour of good business practice, the learning
derived from a wide-scale operation and the benefit of choice. There’s an excellent reason
behind the significant dollars invested by contractors in their marketing programs. Good
contractors sometimes lose business because they didn’t abide by the tactic, “Buy a lunch; get
a claim”. However, this approach was directed at the adjuster level. Nowadays shifting power
positions have nullified the strength of local control. All that software has allowed decisions to
be made at the regional or national level. Contractors have to aim higher up the corporate
ladder and be prepared to offer compelling strategic reasons why their services should be
preferred over their competitors. Not all have figured this out yet. Also, insurers continue to
experience local pockets of resistance to this power shift within their own organisations
because local teams dislike the loss of autonomy and status. The result often is thinned-out
local management structure with more discretionary power resident at the regional or national
office.
Another poor strategy is focussing on productivity. Most insurers manage their claims portfolio
off a productivity model that attempts to balance workload and resource. The system is not
always effective in practice. This is another step in the commoditisation of the claims process.
Furthermore, this preoccupation with quantitative data is usually at the expense of qualitative
data about their suppliers’ work, either through surveys, file reviews, or other tools. This
includes a failure to capture, except possibly anecdotally, information about job quality,
responsiveness, and timeliness.
Possibly the worst tactic seen in our industry is the often open contest between adjuster and
contractor to secure the support of a claimant. The contractor will do this to ensure the
approval of job scope and cost as they see it; the adjuster will do so to control costs.
Policyholders often pick up on this and every time they do, the industry’s credibility takes
another well-deserved knock.
A favoured tactic of contractors is to appear to be all things to all insurers. They will generally
not custom their job acceptance to their capabilities. Rather than service that segment of the
market they are best capable of handling, they will take on any job and then farm out all or
portions to sub-contractors. This is a perfectly acceptable strategy on the part of the
contractor; however, it can leave the insurer paying multiple uplifts of overhead and profit. In
addition, work quality may be substandard thereby opening the way for issues in the future.

4. So, where does this leave this industry? Who is to blame for this situation? Is there no hope?
The answers depend on one’s perspective. Insurers and contractors have one major goal: to
maximise profits for their respective shareholders or owners. There’s nothing wrong with that
as long as the ultimate customer, the policyholder, can see some benefit in this arrangement.
Regrettably, this is not always the case. The industry (contractors and insurers) has developed
a persona that epitomises a lackadaisical approach to self-control. Every year that the industry
announces a profit (surely there are laws prohibiting public flagellation), the press censures
the industry for this wanton accomplishment. In fairness, a lot of the emotion behind industry
bashing resides at the DNA level. It’s an understandably normal reaction to be wary of a party
that asks you to pony up all that premium in return for a few sheets of paper. Insurers are
well aware of this and public awareness campaigns abound as insurers attempt to burnish the
industry’s image and educate the buyer. In the end, though, it’s not what you say but what
you do that matters and until the industry takes the entire caboodle – every party that comes
in contact with the public - along on the ride, it will be a very hard sell.
However, there are signs of progress. Most of the major insurers have recognised the
advantage of managed supply chains vs. local suppliers and have invested in professional
supply chain practices. The professionals running these program offer insurers and contractors
an excellent opportunity to use their collective knowledge to bring about a semblance of
rationality to their relationship. The industry was too close to the issues to see the solution
now offered: Understanding your supply chain thoroughly is important; collaborating with it is
critical. There’s nothing to be gained from battering your most important business partner.
Recent developments indicate industry overhead and profit margins are becoming realistic
(and transparent), pricing is still being looked at carefully and can eventually work itself out if
contractors and insurers work together, and the long-anticipated consolidation in the
restoration industry is underway. With better resources and deeper pockets, the future mega
contractor will be able to support quality more efficiently. The downside of this development is
that unless sustainable symbiosis is brought into play quickly, the bigger contractor will create
more problems for the insurer.
According to a 2008 Towers Perrin Survey, “nine out of ten P & C claim officers ... cited the
rapidly growing importance of data analysis and technology, along with recruitment and
retention of top talent, as key determinants of meeting business goals”. This is a good
indication that the industry recognises that solutions do not lie exclusively in technology.
According to the findings of a global survey by Accenture conducted by Institutional Investor
Market Research Group, “Operational efficiency improvement – or “transformation” –
programs were ranked ... significantly ahead of product and service innovations, M&A and
business line expansion.” Again, this an encouraging sign that the industry’s status quo is
under review – as long as technical skills and common sense drive that operational efficiency.
Insurers and contractors should reflect on what their common rationale is. The issue is not to
control the other but to bring flawless service the policyholder. If they don’t do this, the
consumer is eventually going to step up and mandate change. Change imposed from the
outside rather than mutually developed internally will be difficult to adjust to.
What the industry must do is develop a mutual understanding of the processes and costs
associated with repairing damaged property. The current view is far too one dimensional to
support reciprocal business aspirations. The way to do this is to develop joint strategies in
recruitment, talent development, rewards, career progress, and customer service. Build the
basics of a partnership and take it from there. Only then can the industry boast that it serves
its customers with the same degree of utmost good faith it demands from them.