The P&C insurance industry generates top-line annualsales (net written premiums) ranging between $480 and $500 billion,depending on how you count the numbers. Roughly speaking, claimpayments and expenses account for about 70 cents of every premiumdollar. In other words, claim departments spend between $336billion and $350 billion each year in managing and settling claims.This is a huge amount of money, and something insurers constantlytry to reduce to improve the bottom line.

While the vast majority of this money is paid in claimsettlements or indemnity dollars, it is not the intent of insurersto become more profitable or less costly by reducing customersettlements. Rather, the intent is to become more efficient inservice delivery, much better at leakage reduction (including about$30 billion related to fraud annually), and quicker and moreconsistent in delivering settlement to insureds.

The ability to offer insurers reduced costs and improved servicedelivery is a huge revenue and market opportunity for technologyand software providers. As a result, many innovative minds andvendor companies are finding new ways to apply technology to theclaim process, a movement that continues to gain momentum.

It is not only the vendor community that is focused on claims. Arecent Novarica study found that improvements in claim handling wasthe second-most frequently cited initiative amongst P&Ccarriers looking to create competitive advantage.

Discussing Legacy Replacement

As recently as two or three years ago, the big technologyconversation in the claim world was whether to take the plunge andreplace the core legacy claim administration system. In just a fewshort years, the legacy replacement discussion has expanded andmigrated from the thought leaders and early adopters to include anoverwhelming majority of carrier companies.

The reasons for this rapid movement include the well-publicizedand now well-proven advantages of new administration systems, whichare based on configurable technologies. The benefits includeintegrated workflows, work management, business rules, and ease ofuse. Also, many carriers have successful implementations behindthem. It is now apparent that these new systems offer an attractivealternative to replace complex and brittle legacy systems.

As the perceived risks inherent in such a move are measuredagainst the obvious advantages, the adoption of new claimadministration systems have now gone mainstream, with the morepragmatic and conservative insurers hopping aboard. This trend willonly continue and grow through 2010 and into the foreseeablefuture.

Those thought-leader carriers that have completed or nearlycompleted claim administration replacement are now looking at abroad spectrum of new technologies that show promise in variousareas of the claim-handling process.

Prepaid Debit Cards

When you get to the front of the supermarket checkout line, thebagger asks, “paper or plastic?” Insurance carriers may soon beasking their customers and claimants the same question.

In the age of credit cards, the Internet, and electroniccommerce, insurers print and mail hundreds of millions ofclaim-settlement checks each year. In some instances —catastrophes, for example — those checks may be undeliverable. Inother instances, such as the case with workers' compensation, theclaimant may receive multiple checks over a period of years. Checksget lost, are subject to fraud, have to be cashed, take days toarrive, and according to various studies, cost about $10 each toissue and deliver.

In recent years, a few innovative insurance carriers haveexperimented with prepaid debit cards to replace paper checks.Prepaid cards offer obvious advantages in that the card is issuedonly once, and then subsequent “payments” are made electronically(which means immediately, date certain, and inexpensively). Theclaimant can then use the card to pay for services or to obtaincash without having to visit a bank or pay a check-cashing fee. Thecard can be issued before it is needed and only activated andloaded (again, electronically) when appropriate — following acatastrophe, for instance. As an added benefit, the carrier caneven brand the card for marketing purposes.

It would seem that prepaid cards are a no-brainer, especiallyfor catastrophe and workers' compensation payments. They save money— by some estimates as much as $8 to $9 per payment — whileoffering the insured more usage options. Prepaid debit cardcustomer satisfaction studies are not yet widely available withinthe insurance industry, but other industries have found highdegrees of acceptance and adoption, along with increased customersatisfaction.

Of course, the insurance industry had to wade through multiplejurisdictional and regulatory mazes in order to establish that cardpayments are an acceptable alternative to paper checks, but much ofthis ground clearing has been completed. The regulatory picture hasbecome clearer, and more carriers have become aware of the obviousadvantages of prepaid debit cards. Combined with the relativelymodest implementation costs, this technology likely will becomemore widely adopted.

Automotive Black Boxes

One development that should be of great interest to all insurersof private passenger automobiles — the largest single line ofbusiness in the P&C market with annual net written premiumsgreater than $140 billion — is the deployment of event datarecorders (EDRs). All new cars and light trucks being manufacturedare now equipped with EDRs. Another just as important developmentis the establishment of a federal data standard for the storage andretrieval of information from these devices.

An EDR is an electronic chip that is housed in the airbagcompartment of a vehicle. The EDR remains passive unless woken by asudden and unusual change in the vehicle's movement, such asacceleration, hard braking, or swerving. These are actions, whichoften presage an automobile collision, cause the EDR to startgathering data, which can prove critical in reconstructing anaccident. Amongst other things, the EDR can detect speed,direction, swerving, braking, seat-belt usage, and the time ofcollision.

This data can prove instrumental in establishing the true natureof an accident. In some instances, the data procured can indicatefraud, establish fault, and provide a strong indication as to themerits of soft-tissue claims. EDR data has been found admissibleand reliable in courts. Thus, it offers the potential to radicallychange the nature of auto claim investigations and settlements.

Like all new innovations in insurance, the use of EDR data mustrun the regulatory gauntlet. It is strongly opposed by theplaintiff lawyer lobby, which sees a large part of its income underthreat from such a development. There are still many issues toresolve, such as concerns related to ownership of data, dataaccess, chain of custody, and the American public's sensitivity toprivacy issues. In this case, the mistaken notion that “Big Brotheris watching” persists, as well. Even taking the current obstaclesinto consideration, the potential benefits in terms of reducedfraud, lowered litigation, and questionable settlement costs are somassive that carriers will work to overcome the roadblocks toensure broader use of this technology.

GIS and Mapping

In the age of Google Earth and other mapping applications, it isnot surprising that these technologies continue to penetrate theclaim arena. Geographic information system (GIS) technology hasbeen around for years and has been used to map coverageconcentrations for underwriting and catastrophe modeling.

More recently, the use of these same technologies have beenextended specifically to claims for such mundane, yet critical,tasks as locating insured properties. Hurricanes frequently destroyroad signs and other markers that would normally allow adjusters tolocate an insured residence. This was famously the case withHurricane Andrew in Dade County, Fla. Road signs, roads, and entirehomes disappeared in the Category 4 storm, in some cases leavingonly a concrete slab to mark the location of an insuredresidence.

Some carriers are even experimenting with GIS and mappingtechnologies to track wildfires and hurricanes in order to makeproactive calls to insureds. GIS data is also now being harnessedby artificial intelligence software to optimize routings for mobileclaim appraisers.

Additionally, some of the largest U.S. auto insurers havedeployed routing software to increase appraisal efficiency, reduceexpense costs, and to quickly deliver service to the insured.

The primary resistance to these technologies comes frominsurance professionals who have traditionally organized their ownroutes and schedules. They are also concerned (and perhaps rightlyso) that not only is Big Brother watching them, but that he is alsotelling them precisely where to go, when to go, and how to getthere.

Beyond auto appraisals, these technologies also offerapplication in the engagement and coordination of replacement andcleaning services. With no regulatory or consumer barriers toovercome, GIS and mapping technologies should continue to penetratethe claim market as they prove cost beneficial.

Other Technologies

While the P&C claim market represents a huge opportunity forvendors to build and sell new technologies to increase service andreduce claim expenses and leakage, we have not yet talked about theelephant in the room: fraud. Responsible for an estimated $30billion annual drain on the industry, fraud is a huge issue.Fraud-fighting initiatives' costs now exceed more than $1 billionper year.

Data analytics, which is growing rapidly in both the claim andunderwriting areas, is increasingly used to provide recognition offraud patterns, such as multiple checks paid to the same claimantat different addresses, or multiple individuals receiving checks atthe same address. Content and keyword search capabilities areemployed to identify fraud patterns in huge amounts of unfieldeddata, such as statement transcripts and fraud checks at the pointof first notice of loss. The goal is to detect fraud as early inthe claim process as possible to stop issuance of fraudulentinitial medical and loss of income payments, and to capture leadingindicators from third-party claim data to enable more proactivefraud handling.

Claim technology remains an interesting and vibrant area ofdevelopment, driven by the huge potential cost savings and theinsurance carriers' never ending goals of improving the fulfillmentof “the promise” that insureds paid for and expect at their timesof need. The development and adoption of claim technologies havegained speed in recent years. All indications are that they willcontinue to do so in 2010.