Study: AFAs Proliferate for P&C legal matters

by | Apr 19, 2016

Study AFAs Proliferate in P&C Claims and Law Departments

Alternative fee arrangements (AFAs) use is rising among property and casualty (P&C) insurance carrier legal and claims departments, according a new survey, the third such survey in a series, by the LexisNexis® CounselLink® team. The use of AFAs moved up from 69 percent in August 2015, to healthy 76.9 percent.

In other words, nearly 80 percent of this segment of business is actively engaged in some type of AFA, and these numbers are only anticipated to rise.

Survey participants cite controlling litigation costs while balancing value as their number one challenge and motivation for using AFAs:

“Reducing legal spend without reducing quality,” one respondent, explained of the situation in an open-ended question.

“To continue outstanding legal representation of insureds …and contain expenses,” added another.

On top of controlling cost without compromising value, participants named mitigating risk, managing vendors and measuring effectiveness among the other top three challenges driving increased AFA adoption.

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Here are four brief survey takeaways:

  • AFA use is Increasing Rapidly. In addition to AFA growth, the data indicates 40 percent of claims and legal departments are using AFAs for just 10 percent of their outside legal spend. This means there’s room for significant additional penetration of AFAs in this segment.
  • P&C Generally Satisfied with AFAs. Overall respondents said they are satisfied with AFAs and likely to increase AFA use in coming year.
  • Flat fees Favored, Blended Rates Trail Closely. While P&C legal and claims departments use all types of AFAs, flat fees are being used most frequently. More than half of respondents reported using either flat fees (82 percent) or blended rate AFAs (78 percent).
  • Still Some Law Firm Resistance. Not unexpectedly, the survey shows there’s is still some resistance from law firms when attempting to implement certain types of AFAs, based on the reported experience of some survey respondents. On the flip side, there was also some concern expressed by the carriers that AFAs must be fair to the law firm in order to be an effective tool.

In terms of the overall effectiveness of AFAs, study participants named cost containment, increased legal budget predictability and greater efficiency, as the three major benefits of deploying AFAs for this type of legal work.

“Controlling costs with right firms in place,” said one respondent of the cost control benefits of using an AFA.

“Provides greater certainty over legal spend,” said another participant, about the predictability piece.

Lastly, said one respondent,

“Encourages firms to be efficient in their work- discourages unnecessary work and ultimately helps control lit[igation] spend costs.”

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This post is by Dan Ruderman of the LexisNexis CounselLink Strategic Consulting team.


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