The claim department rarely has an opportunity to add to an insurer's bottom line. However, uncollected third-party deductibles (TPDs) can offer an opportunity to significantly contribute to a company's profits.
By current estimates, the U.S. property and casualty industry generates between $500 million and $1 billion dollars in TPDs each year. While most TPDs originate on the sales and underwriting side, administering them falls to the claim function. Individually, TPDs may not warrant attention. Yet when combined as a whole, they have the potential to make a positive impact.
In Feb. 2007, Paragon conducted a study that compiled information from claim administrators, supervisors, and other financial executives at 60 leading insurance companies. According to the results, the mean value of TPDs is $4,604. Approximately 30 percent fall between $500 and $1,499, while another 29 percent range from $1,500 to $7,499. Only eight percent of TPDs are for amounts $499 or less, while 17 percent are valued at $10,000 or greater. These statistics prove the point that it is possible for even small volumes to quickly accumulate.
Why TPDs Go Uncollected
The business lines that generate the most TPDs are general liability, garage keepers, workers' compensation, commercial auto, and professional liability. More than 50 percent of survey respondents reported that TPDs help keep pricing competitive and allow for greater underwriting flexibility. Forty-two percent of insurers polled agreed that TPDs are a method to manage loss results by lessening claim frequency and severity.
In order for insurance companies to benefit from TPDs, they must be collected. TPDs remain uncollected for a variety of reasons including:
- Claim closing standards. Industry norms encourage adjusters to close claims quickly. When "claims closed" is the measuring stick used to evaluate performance and assign compensation, TPDs can be overlooked.
- Complex processes. Keeping track of and ultimately collecting TPDs require that the underwriting, policy, claim, and recovery systems consistently communicate to identify and bill deductibles. According to the survey, 38 percent of companies cited a lack of IT resources as a major reason for missing TPDs.
- "Creative" underwriting. Underwriters are willing to modify or customize contract language because of competition and the insurance cycle. These standard policy language deviations -- per claim or occurrence, expense inclusion, and variable deductibles -- are not always communicated to the claim department. With no clear mandate or evidence of existence, TPDs often remain uncollected.
In recent years, companies have become more aware of TPDs because of improved corporate governance, the adoption of enterprise risk management (ERM), more competent middle management, and a greater awareness of best practices. To identify and collect these missing funds, insurers have two options: improve their internal systems, or use outside resources.
Companies that choose to improve their internal systems find organizational structure and poor data recording/reporting to be the most significant problem areas. Sure, companies can encourage adjusters to collect TPDs and discourage underwriters from deviating from standard practice. Perhaps the most effective way to improve recovery success, however, is to establish a centralized department with proper management oversight and technology.
Frequently, outstanding TPDs become overwhelming. Companies may seek external consultants, but methodologies and success rates vary. One traditional method is to assign these consultants to review uncollected TPDs, although many organizations find this process labor-intensive, lengthy, and highly intrusive.
In recent years, another option has surfaced: Automated data mining systems with custom algorithms have been developed to search insurers' computers for missed TPDs. This is typically performed from a remote location without disrupting day-to-day business operations.
Once the TPDs have been electronically identified, companies can expect approximately 70 percent of outstanding deductibles to be collected from third parties with little more than a letter or a phone call. The remainder requires additional efforts, and a small amount of recoveries necessitate legal action.
Insurers cited that close to 40 percent of policyholders who initially objected to paying outstanding TPDs ultimately did pay. According to the insurers, the remainder of policyholders did not pay because they were either unaware that a deductible payment was due; they had declared bankruptcy; or there was a lack of documentation.
Often, insurers are unaware of the value of uncollected TPDs. Consider the following case histories: One P&C insurer overlooked 10 percent of its TPDs annually, with an average yearly loss of $1 million. Efforts made on behalf of a large insurer collected TPDs totaling $5.5 million in three months. A well-known P&C insurer that recently outsourced its TPD recoveries now collects nearly $40 million in TPDs annually.
While most TPDs are for modest sums, their volume does have the potential to contribute -- sometimes significantly -- to an insurance company's bottom line. The prompt identification and collection of TPDs reduces losses. This can also help an insurer maintain pricing, which can be a competitive advantage in today's softening market.
Joe Warnagiris is president of the asset recovery practice of Paragon Strategic Solutions, Inc. He may be reached at 412-375-6400.