The P&C insurance industry continues to experience significant momentum in specific operational transformation areas, as recent events in the financial markets have caused carriers to take a fresh look at their existing operating models, capital positions, and overall exposure to risk. In response, many carriers have made deep and sometimes painful cuts across their enterprises, leading to substantial reductions in both subject matter resources and business and technology spending for new and/or existing projects.
However, one operational area that continues to see noticeable investment is claims, especially in respect to modernizing claim technology, improving data management, and transforming claim intake and adjudication operations. The investment in claim-management systems has remained steady over the past few years. According to a Gartner report published in 2007, the vendors that were reviewed reported 28 new claim systems in 2006. In Gartner's 2009 report, the claim technology vendors that were reviewed reported 31 new purchases, a 10-percent increase from 2006.
We expect this investment trend to continue, as those carriers who have been idled on the sidelines for the past few years must now aggressively catch up to competitors who are well into their claim transformation programs. As an added incentive to push forward with investments, the marketplace leaders who have instituted well-managed claim transformation programs are now able to self-fund future phases of their projects based on the benefits reaped from initial implementations.
As an update to Ernst & Young's 2008 publication, "Building the Case for Claims Transformation," this article will provide a review of the key drivers behind the continued investment in claim transformation. In addition, we will focus on specific areas related to claim transformation that have a high potential for return on investment (ROI) and can complement the implementation of new claim technology: data management and delivery and claim leakage analysis.
What are the Transformation Drivers? Click Next!
The following themes continue to make the short list of key business and IT reasons why carriers want to—or in some cases need to—transform their claim operations:
- Inefficient and inconsistent claim-handling processes that lengthen cycle times, increase leakage, and negatively impact customer service.
- High support costs and increased operational risk because of aging/legacy technology.
- Excessive percentage of employee time spent on non-value-added activities instead of claim-handling functions that have a greater impact on total claim results.
- Deficiencies in regulatory compliance leading to excess costs from fines and penalties, along with the added expenditures of corrective actions.
- Considerable knowledge gaps across the claim department resulting from a retiring workforce and difficulty in retaining younger employees.
- Inability to access or present the right claim information at the right time, which impedes effective decision making and can lead to customer service deficiencies.
- Limited integration between internal business units and systems and external service providers, which increases manual processing and reduces data integrity across the claim value chain—includes proactive identification, monitoring, and detection of potential fraud.
The persistence of these problems, combined with the growing importance of the claim operation to the success of the entire business, indicates a continuing need in the marketplace for improvement in this area.
One of the most popular solutions to address these challenges has been the purchase and implementation of a new claim management system. As stated earlier, for the past few years, carriers have purchased new claim-management systems as the backbone of their claim transformation program. When describing the expected benefits associated with a new claim system, insurers often cite improvements in the following areas:
- Customer satisfaction
- Employee retention
- Identification and remediation of leakage
- Vendor and medical case management
- Regulatory compliance
- Identification and reduction of fraud
- Tracking and management of indemnity spend
- Time to resolve claims
- Management of claim case loads
- Use of data analytics and business intelligence to drive decisions and workflow.
Although purchasing a new claim system or significantly enhancing existing claim technology can be an important step during a claim transformation journey, neither is a silver bullet for addressing all of the concerns nor the only means by which to achieve the maximum ROI. In the following section, we explore several more challenging—and quite rewarding—transformation areas to pursue.
Next: Optimizing the Benefits of Transformation
Improving data management is critical to enable a carrier to make timely decisions, ensure regulatory compliance, support operational execution and reporting, and meet rising demands for agent and customer self-service portals. In interviews with insurance executives, data management initiatives ranked as the number two imperative for 2010 to position their firms for market recovery and to prepare them to handle external forces changing the industry.
When building a case for claim transformation, many carriers have cited increased visibility into claim-processing functions, more robust internal analytics, and improved compliance reporting as key objectives of their programs. However, our experience has shown that while carriers have invested a great deal in implementing new claim technology to support the capture of data, the actual delivery, aggregation and later, strategic analysis of that data are significantly under-invested. As a result, programs often fall short of meeting the expectations set out in the specific business case related to leveraging a carrier's data going forward. The main causes of this gap include: 1.) a lack of understanding of the existing claims data landscape; 2.) failure to define a claim data strategy; and 3.) inadequate business and technical planning to support this strategy throughout the transformation.
In working with carriers that are implementing new claim technology, we find that the project team working on the implementation does not always have an enterprise-level understanding of how claim data is being used by other business units and external parties or systems. There is also insufficient awareness of how the claim data is supplemented by or has an effect on other internal operational systems and functions, such as distribution, underwriting, finance, actuarial (pricing and liability forecasting), compliance, billing, and collection.
When incorporating a data strategy within the overall claim transformation program, both IT and business stakeholders should recognize that improving data management can easily become its own transformation, with implications throughout the business. Ownership of transformation, at both the executive and business levels, is critical in order for it to be successful.
Which Data Initiatives Go Hand-in-Hand with a Claim Transformation?
Data initiatives that go hand-in-hand with a claim transformation, specifically the implementation of new claim technology, include:
Understanding the systems landscape. This is an essential first step to improve data management and should begin by taking an inventory of data sources and data flows. The inventory should include all of the data sources that will either migrate to or integrate with the claim technology. In addition, the inventory should contain the business objectives and a view of how the systems and business constituents, internal and external, are intended to interact with one another.
Understanding reporting needs. It is our experience that too many insurers pursue a tool or a system that can support management and operational reporting without first fully comprehending all of the requirements of internal and external stakeholders. Consequently, carriers are left with an unnecessarily elaborate system with enhanced data capture capabilities that may fail to address the right information needs at the right time for the end customer. Reporting requirements should be business-driven, address critical business issues at the root-cause level, and represent the needs of multiple business units. Once requirements are realized, a gap analysis should be conducted to determine if an organization has the capability to obtain and deliver the necessary information or data to the targeted parties.
Defining data quality management controls and measures. The increased demands of agents, regulators, employees, and customers for instant access to data has made it necessary to determine how data will be validated for completeness and accuracy when transforming claim processes and implementing new claim technology. When creating the overall claim data strategy, it is crucial to analyze and define the data architecture or the approach and tools to use for exchanging and delivering data while ensuring data quality and information protection throughout the process. There is a growing interest among carriers, notably in the P&C realm, to leverage data transfer standards such as Acord XML or CSIO XML.
Next: How to Identify and Address Leakage
Claim leakage analysis should be an essential component of a transformation program because it can identify, quantify at the root-cause level, and then deliver significant cost savings and process improvement opportunities in accordance with leading practices. Our experience has shown the cost savings that can be realized by identifying and addressing claim leakage at the root-cause level by line of business can be used to fund initial and ongoing claim operation improvement initiatives.
When implementing a claim management system, a claim leakage analysis should be the basis for a consistent measure of performance and identification of continuous performance improvement. It should also be used to measure the ROI of the new technology.
In a claim leakage analysis we conducted for a commercial lines carrier, claim leakage reported across all lines of business was primarily attributed to deficiencies in the investigation, evaluation, negotiation and settlement, as well as vendor management sub-processes. Our recommendations for improvements noted items such as: consolidating multiple claim-management systems onto one modern claim platform; enhancing the claim intake and assignment processes; enhancing claim authority and approval controls; and significantly enhancing management reporting capabilities, including the standardization of data.
Many packaged solutions on the market have capabilities that support the evaluation and negotiation/settlement sub-processes. However, to produce results, system capabilities should support clearly defined business processes, and the technology alone should not be viewed as an independent solution. Once institutionalized, upfront resolutions can be implemented to address leakage. These solutions should then be analyzed again for additional gaps and improvements as part of a continuous improvement program.
Industry data supports this assertion. It is estimated that a 4- to 6-percent reduction in pure losses and a 10- to 12-percent reduction in loss adjustment expense (LAE) are feasible through the appropriate claim data segregation and selection, implementation and application of modern claim technologies along with the completion of process improvement initiatives, such as addressing claim leakage. This estimate may represent a reduction of up to 4 to 5 percent in a carrier's combined ratio, which is a significant opportunity that carriers should not overlook when planning and executing transformation programs.
Regardless of economic trends, insurers continue to make substantial investments in their core operations areas, specifically in claim transformation. The business case for transformation is readily built, as the areas for improvement tend to be plentiful. Getting the maximum value from a program is often the challenge and requires a clear definition of goals, beyond the fairly obvious claim system replacement strategy. Effective data management and delivery, claim leakage analysis, and continuous improvement after initial implementation are three key areas we have explored that can add significant benefit to a claim transformation program and ultimately deliver measurable, strategic value to the entire enterprise.
