Claims Tech Can Stop Leakage

By Alex Naddaff

In the current climate of uncertain economic prospects and tightbudgets, justifying IT investments is difficult at any insurancecompany. Claims departments, which are historically last to benefitfrom any new technology, have an especially difficult time makingthe case for new initiatives.

However, claims is also one of the areaswhere new technology can have the greatest impact on the bottomline. Although direct claims department expenses amount to onlyabout 13 cents of every premium dollar, indemnity costs account foranother 65 cents, making them the single largest addressable lineitem in any insurers income statement.

The key lever in improving claims performance is reducingleakage. Leakage is unnecessary loss expenses resulting frompayments on uncovered losses, over-generous settlements, claimsthat go to litigation unnecessarily, unclaimed recoveries and otherpoor claim handling practices. Industry experts say that leakagerepresents about 10 cents of every premium dollar across theindustry.

Although the real economic opportunity for insurers lies inreducing leakage, most claims initiativesin both operations andtechnologyare justified through promised reductions in expenses.But after years of cost-cutting that have increased workloads,decreased support staff and crippled training programs, there arefew dollars left to squeeze out of claims. Instead, the reallong-term benefits are to be sought in new programs or technologiesthat reduce leakage.

Technology should be seen not simply as a tool to increaseproductivity and efficiency (traditionally measured in claimclosure rates), but as a powerful weapon to fight leakage. Newtools such as business rules engines, activity management systemsand real-time monitoring systems can be used to directly affect theway claims are handled on the front lineproviding consistent claimhandling throughout the organization and ensuring quality claimhandling.

While there are many ways in which technology can influenceclaim handling to reduce leakage, this article highlights five inparticular that claims executives may want to consider.

Coverage verification. Paying for losses that are notcovered or only partially covered is a significant contributor toleakage. These unnecessary payments occur because adjusters may notrealize what exclusions apply to a loss. Claims systems can usebusiness rules to analyze claims for coverage issues and refer themto coverage experts, underwriters or legal counsel as required. Inaddition, a decision-tree approach can be used to walk adjustersthrough some basic coverage questions in order to make sure theyare exploring all possible opportunities.

High-impact claims. The majority of claims arerelatively simple and do not require extensive attention by skilledprofessionals. However, there is a minority of claims that have amajor impact on indemnity costsexpensive losses, litigated claims,important customers, etc. For these claims, the amount of attentionand skill brought to bear can have a major impact on claimoutcomes.

Software today can use carrier-specific criteria to flag theseimportant claims, giving supervisors up-to-date lists of claimsrequiring attention. Instead of reviewing every claim every 90 days(as is often the case today), highly skilled and experiencedsupervisors can instead focus on the claims that have the greatestimpact on carrier profitability.

Recovery. Subrogation against other insurers (or othercompanies, such as a facilities management contractor in aslip-and-fall case) represents a major under-exploited opportunityfor many insurers. Since most adjusters are monitored for claimcycle timeand many are overworkedthey often do not have the time toinvestigate potential subrogation opportunities. A modern claimssystem should automatically highlight claims for potentialsubrogation and refer them to specialist teams for dedicatedfollow-up.

Service levels. Some insurers estimate that savings inthe average time taken to contact a claimant may amount to millionsof dollars over the course of a year. These savings are due toimproved remediation (imagine a basement filling with water),reduced likelihood of litigation (in practice, claimants valuespeed of settlement far more than amount of settlement), andincreased customer satisfaction. And while virtually every insurerhas a standard for contacting claimants (often set at 24 hours, or8 business hours), most have no way of enforcing and tracking thisstandard. An up-to-date activity management system canautomatically enforce and monitor critical service levelsthroughout the operation, and escalate cases where service levelsare not met.

Analysis and continuous improvement. Today, it isdifficult for a claims executive to understand what exactly isgoing on in the claims operation, because claim handlinginformation is trapped in paper files and in unstructured notesscreens in the claims system. Improved software makes it possibleto track structured information about all claim activitieswhom theywere assigned to, whether they were done, when they were done,etc.to facilitate analysis of claim handling strategies and theireffects on claim outcomes. Armed with this information, claimsexecutives can modify their claim handling practices to ensure thatthey are continuously reducing leakage.

These are only a few of the ways in which todays softwaretechnology can directly affect the key drivers of leakage.Insurance carriers should review their own operations to identifytheir most pressing challenges and opportunities and learn how theycan apply technology to address these issues. But in any case, thekey insight is thinking of technology as a tool to improve theclaims operation and claim outcomes, not simply as a crutch thatmakes it possible to get by with fewer adjusters.

In making the case for new technology, claims executives shouldfocus on its quantifiable impact on leakagefor example, identifyingpotential improvements in the percentage of claims that arejustifiably denied, or the percentage of claims for whichsubrogation is successfully pursued. By translating theseimprovement opportunities into real numbers, executives can showhow investments in claims technology can translate into bottom-lineimprovements for the whole company.

Most importantly, by turning to leakage reduction rather thanfocusing narrowly on direct loss adjustment expenses, claimsexecutives can reshape the perception of claims as a cost center,highlighting instead its critical role in increasing companyprofitability. Once the strategic role of claims is recognized,executives should have no trouble demanding the tools they need tomanage their operations and reduce leakage.

Alex Naddaff is vice president of implementation services atGuidewire Software, which makes products that help property andcasualty insurers reduce leakage. He can be reached at[email protected].

Reproduced from National Underwriter Edition, March 31, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved. Copyright in this article as anindependent work may be held by the author.