Reciprocity – Why it is a thing of the past

April 4, 2012 Comments Off on Reciprocity – Why it is a thing of the past

Reciprocity is a word that describes a state of mutual dependence or exchange of privileges and commercial benefits. It often describes relationships between countries; it should apply to the state of affairs between insurers and restoration contractors, too. It doesn’t.

There are many names for the process of reciprocity. People familiar with sales techniques will know how the Law of Reciprocity or the Law of Action and Reaction works. Others will undoubtedly have heard of the Golden Rule. Briefly, treat others the way you want to be treated.

To phrase all this in regular commercial parley, this concept means that you give something of value in order to receive the same in return. It doesn’t have to be of the same monetary value, just the same perceived value. It all takes an interesting twist when more than two parties are involved and when the system includes services.

The field of play here is the partnership between insurers and contractors. Therefore, this also is about how that relationship benefits policyholders.

Let’s break it down: Most people cannot afford to repair the property they occupy if it is damaged beyond a small degree. In addition, they likely don’t have the skill or resources to do so. They pay a contractor to take care of this. They pay an insurance company a premium to cover most of the cost of repairs.

In the olden days (before estimating programs and vendor networks), front-line adjusters handled relationships with a few restoration contractors in their area. Reciprocity thrived. Of course, it was not always handled 100% appropriately and cynical people will speak of donuts, free lunches, hockey tickets, and rounds of golf – sometimes worse. On a positive note, supporters of the principle of reciprocity will insist that the personal relationship between the adjuster and contractor resulted in better policyholder service.

Then things got complicated and those vendor relationships were dragged into the corporate office. This resulted in a change in the principle of reciprocity. It went from contractors and adjusters working on mutual benefits to service a policyholder to contractors and vendor managers working on executing the terms of a service contract as closely as possible. The benefit to the vendor department is efficiency and cost-savings; the benefit to the contractor is a flow of jobs.

Somewhere along the way, policyholder management by both parties slid off the tracks. It went from ‘happy-insured-at-any-cost’ to ‘happy-insured-at-contractor’s-cost’. This subtle shift of perception has tilted the system considerably. Vendor managers will argue that this shift in responsibility is a fair trade for a contractor selected for a vendor program. This is a fair statement if the contractor gets a steady stream of business from the insurer. This is not always the case.

There are, of course, good reasons why insurers cannot direct a steady stream of business to their preferred vendors. The vagaries of the weather are a good example. However, there is one reason that warrants a closer look: poor results on a vendor scorecard. Contractors often get sidelined (and sometimes removed) because their results fail to meet a minimum standard.

Adding to the imbalance, insurers have mandated the use of software programs that produce very little value. This is not a failure on the part of the software programs. Every one of them is an excellent product that more than meets the needs of the industry. The failure lies in the end user. A complete inconsistency of data entry means that the output of useable information is impossible. To make matters worse, a number of vendor programs rely entirely or in part on this data to measure the performance of vendors. It brings to mind the old joke about the surgical procedure being a success but the patient died.

It doesn’t stop there. In an effort to extract information and provide customer service, most vendor programs rely on bloated instructions. Few insurers realise the impact of the shock-and-awe manuals that contractors must follow. Every vendor program is different so there are many different hoops for the contractor to jump through. A successful contractor is a true multi-tasker.

Back to the principles of reciprocity: vendor programs have tilted the advantage almost entirely to insurers. The one thing that consistently kept contractors attached to these programs was the flow of jobs. That started to change a couple of years ago when weather patterns across much of the country reduced the number of water damage losses. By this time contractors had painted themselves into a very tight corner by surrendering on prices on structural jobs in return for relatively high margins on water damage work. Most made a critical error in the process of doing this: they failed to control the operational cost of the structural jobs. Water damage jobs subsidised the cost of structural jobs. When the intake of water damage jobs declined, operating costs suddenly shot up.

So what, most insurers will ask. True, the contractors who fell into this situation have themselves to blame. However, what good is a broken network? Are insurers planning to move into this space themselves? Yes, if rumours are true. No, if they have any sense.

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