Last year was one of the costliest years for insurers inhistory, with record-setting Atlantic hurricane losses amounting to$43 billion, as well as man-made catastrophic disasters culminatingat $7 billion — nearly double the annual averages from 2007. Withclaim costs averaging 60 to 70 percent of an insurer's costs,losses could add a minimum of three to four points on operatingcosts. This is not a good thing in the current marketenvironment.

Stop the Bleeding

A few years back, a large number of insurers could have absorbedsuch costs. However, many P&C carriers have seen their resultserode because of the current economic downturn and substantialfinancial losses generated on their investment portfolios. Thatmeans many insurers have lost a main source of income.

In addition to the financial results being impacted from thecost side of the equation by increased claims and on the revenueside by lower investment returns, insurers are being hit on a thirdfront: customer attrition. Insurers that until now have placedlittle attention to improving customer experiences and interactionswithin their organizations find themselves with alarming attritionlevels that directly impact their top source of income: the premiumline.

In its 2007 world insurance report, Capgemini recognized that 40percent of non-life customers had switched providers in the pastyear because of the poor quality and quantity of the interactionsthey had with their insurers. Considering that those results werefound during a time of economic growth, it is not hard to imaginehow much larger the numbers may be now. In recessionary times,customers are apt to be more critical of the value they receivefrom their insurers and are thus more likely to switch.

Customers have very little patience for poor service. Claimhandling is recognized as one of the top sources of customerattrition and, when combined with an insurer's inability toappropriately handle increasing levels of losses, it becomes a grimpicture. Already, according to the same Capgemini report, badlyhandled claims and poor service experiences in the claim departmenthave been shown to result in an attrition rate of nearly 22percent.

While we cannot assess how investment returns will perform inthe years to come in support of profitable growth strategies,insurers that take a more strategic approach to improving theircustomers' experiences give themselves a better chance at managingtheir bottom-line losses. Identifying and controlling sources ofcosts while delivering exemplary customer experiences can stem theloss of profitable customers and hone retention for key existingcustomer segments.

Catalysts for Change

Enhancing processes and channel interactions is not a new idea.However, now more than ever, every dollar saved through operationalefficiency initiatives is important if companies are serious aboutmeeting required shareholder value and return on investment. Suchinsights are illustrated by many analyst houses, in particular byForrester's Marc Cecere in his November, 2005 report on keyrequirements for insurance claim systems. This is also illustratedby Gartner's Kimberly Harris-Ferrante in her September, 2008report. To be competitive and meet consumer and user demands,insurers will need to deliver updated, integrated, seamless, andintuitive claim systems supported by robust, business-driven toolsand optimized processes customized for different user profiles.Selecting applications that can enhance an organization's abilityto utilize all relevant internal and external insights on claimsand customer trends while improving customer interactions through avariety of communication channels will also become important in aworld that has become more inclined to use social and digital mediachannels.

As customer service agents find themselves with less orvirtually no time in which to answer simple routine questions suchas “Did you receive my claim?”, “What is the status of my claim?”,“What is my deductible/How much of my deductible have Isatisfied?”, or “Why was this claim not paid or denied?” it becomescritical to find ways to evolve current capabilities withinnovative interaction. This allows claim professionals to respondto such basic inquiries and also to promote customer satisfactionthrough transparency, speed, and convenience.

The next catalyst for change involves reducing claim coststhrough non-intrusive, real-time leakage detection. Claim leakagedetection and prevention has always been one of the primary areasof concern for insurers. However, this function has not alwaysreceived the investment funds and resources required tosignificantly impact the operational financial results of anorganization. It has often been considered little more than a costcenter by many carriers.

By leveraging advanced decision-making capabilities such aspredictive models and advanced reasoning strategies, insurers arenow able to investigate and apply (in real-time) the latestfinancial terms and conditions from an insurance contract. They canalso detect missed recovery opportunities through sophisticatedinterviewing techniques. By applying additional intelligence toexisting systems and applications, insurers can detect and channelfraudulent behaviors, as well as supply chain errors and abuses tothe most qualified resources. We believe that operational savingsin this domain could reach between 30 and 40 percent.

Claim leakage represents 10 percent of an organization's claimcosts. So if we imagine a small insurance organization thatgenerates $100 million of premiums in one of its P&C businesslines, an average of $65 million of that income will be consumed tomanage and settle claim costs, including $6.5 million inadvertentlydisbursed to cover leakage costs. It has been found that more than$2 million in leakage costs can be shed by leveraging advancedanalytic predictions combined with a decision-making approach andtechnology.

The last catalyst involves deploying “Next Best Action”strategies to ensure settlement accuracy and enhance customerexperiences. The key contributor to a competitive advantage in sucha marketplace may not solely be the detection and prevention ofleakages throughout the processing of claims — which will certainlydeliver operating costs savings — but instead the ability toprovide a customer with the best settlement option for his specificcircumstances while taking into consideration an organization'ssavings or growth objectives and contractual agreements with thirdparties. It also must take place in a very short period of time.Such strategic alignment will deliver additional cost savings, asonly the most relevant options will be presented to a customer or aclaim support advisor. It becomes a key contributing criterion thatdifferentiates leading customer retention-focused carriers from themasses.

How Do We Know?

This is an idea that matters in the current market environment.Indeed, whilst the operational cost theme is top on the agenda,every one percent of deflection eliminated could represent millionsof dollars of existing revenue retained and potential incomingupstream revenues. We have already seen the positive impact of suchimplementations on early adopters.

As the old adage goes, “The customer is king,” and this islikely to shape insurers' views of their customers for theremainder of 2009 and beyond. The question is whether insurancecompanies are prepared to consider new ways to retain customers bydeploying the right technology components in the claim department.K

Sabine VanderLinden is director of worldwideinsurance solutions for Chordiant Software. She may be reached [email protected], www.chordiant.com.