Before an auditor can fully understand what he or she is looking at—either in an insurer’s or self-funding entity’s overall loss data or in individual claim files—the auditor must understand that insurer’s or entity’s claims philosophy.
Every insurer or self-funding entity has a basic philosophy to dictate how claims should be handled. Some self-insureds are so paranoid that they believe every claimant is a thief and a fraud, even their own employees. They are ready to fight every claim all the way to the Supreme Court if necessary. A few insurance companies follow a similar philosophy: lowball everybody, stonewall to the bitter end, and don’t settle until standing on the courthouse steps. These tactics work occasionally, wearing the claimants or insureds down to the point where the claim is surrendered out of sheer frustration. Other times, the claim ends up in court with the jury awarding punitive damages to the insured or claimant for the aggravation they have sustained. Fear not; there will be an appeal!
Handling claims in this manner is not a good way to save money. It can, however, result in the insurer saving some money and lowering premiums to remain competitive with insurers that offer better service. This is also difficult on the adjusters who have to fight with every insured or claimant in order to keep the boss happy. This can lead to unhappy employees. Examine any company in the risk business that has high turnover, and one may find a punitive claims philosophy behind it.
The Big ‘Give-Away’
Some companies seem to take the opposite approach. If they live up to their advertising, then they may delight in getting claims and paying quickly and generously. Nothing is too good for their insureds; it is red-carpet service every day. Well, not exactly, but such insurers and self-funders often hold to the philosophy that it is better to get rid of the routine claims as quickly as possible with as little effort as possible, because doing so avoids litigation and perhaps makes some economic sense. Sure, it may result in a bit higher premium for comparative coverages. However, that insurer or self-insurer is able to offer outstanding service.
When one takes a closer look, however, it may become apparent that the claims are settled so quickly because the claims staff is far too small and lacks the time to examine each claim to the extent that common sense would suggest. Claims are not “adjusted” in such companies; rather, they are “processed.” The likely result is that a fair number of paid claims were either fraudulent or not eligible for payment under the terms of coverage or liability. Instead, adjusters settled such claims because of “get rid of it” philosophy. “Quicky claims service,” can be very expensive claims service.
With such a philosophy, the adjuster never learns how to investigate each loss correctly. When a major loss occurs, the adjuster has no real experience on which to rely. As a result, the claim is more likely to end up in litigation because the adjuster did not understand what to do. A complicated claim cannot just be processed. It must be adjusted, which means an adjuster must investigate, evaluate, and negotiate first the coverage, then the liability, and finally the damages.
One time while adjusting storm claims, I encountered a number of insureds in a particular neighborhood who had claims (or parts of claims) that clearly were not covered under their policies. However, an adjuster for another insurer also had several policyholders in the same neighborhood, and he had paid his insureds for what were clearly uncovered damages. It made the company that paid uncovered claims look like a hero to those neighbors, while the company that stuck to the policy terms and conditions was made to look like a thief. Maybe that other adjuster’s insurance policy read differently, but that is doubtful. Perhaps the other adjuster was new and did not know about something called coverage analysis. Another probable scenario could have been that other insurer was being threatened by the local insurance commissioner because of prior problems. There may have been many explanations, but what is right is right, and what is wrong is wrong. To overpay a claim is as bad as underpaying a claim. It cheats other policyholders and results in higher premiums for everyone.
A Realistic Philosophy
Most of the adjusters I have met over many decades of claims adjusting, teaching, lecturing, writing, and auditing have been true professionals. They have carefully studied for their chosen vocation, taken pride handling claims professionally, and know how to properly investigate and evaluate. They will question claims that may be potentially fraudulent, settling legitimate claims quickly while denying fraudulent claims. Their approach to each claim will be personal, and made with a desire to help the insured or claimant. After all, the insured or claimant is the party that has suffered the loss.
There are a certain number of claims that can be processed by a clerk or a computer without great fear of over or underpaying–minor thefts, minor collision and “fender-bender” claims, some medical claims, and so on. Overall, simply processing claims will end up being far more costly than handling them correctly.
As Claims Editor Christina Bramlet wrote in her October 2011 editorial letter, she and the staff were “intrigued, indignant, and yes, disconcerted” regarding the 2011 adjuster salary survey. “The brunt of feedback echoed a defeated, overwhelmed tone. Reported pay increases? Those were negligible. Accolades from management? Fat chance. What about the customer-claims interaction? Eh, those policyholders are a bunch of whiners,” she wrote.
The Iconoclast was less surprised or intrigued. The images suggested were exactly those I have been attempting to smash. Periodically the Consumers Union conducts a survey of insurer satisfaction in Consumers Reports. Monitoring of these over the decades reveals that the public’s opinion of personal lines insurers, with a few key exceptions, has continually grown more dismal. In the latest J.D. Powers survey, only three major insurers received an overall high satisfaction rating. Four were rated “better than most,” and the rest were blah. Less than 10 percent were considered great by their customers. Back in the 1960s, more than 60 percent of the public thought their insurers were great. That number has declined ever since. If the same question were asked today, then the results would probably be the same: the public rated insurance adjusters lower than used car salesmen. No wonder adjusters feel defeated. They have to represent insurers with lousy claims philosophies.
The poor salary situation in 2011, worse in the insurance company industry than in the independent adjusting industry, is indicative of national attitudes. When the Insurance Information Institute (I.I.I.) suggests that $30 billion is lost to fraud in the property and casualty (P&C) industry annually, with another $70 to $120 billion lost in the medical/disability arena, it is clear that the public views the insurer as an easy target. With disgruntled claims personnel who are overwhelmed with claims and paid little compared to their peers in other vocations, the public sees what is happening: claims that are not owed get paid; legitimate claims are resisted. Each day, hundreds, maybe thousands of advertisements for tort lawyers air on television. What do the insurance companies show us? They show pretty girls handing out coverage boxes, or a lizard crossing a parking lot, or some other foolish nonsense. What are the CEOs of these companies thinking? The public knows: Those insurers are thinking “if we pay a bunch of fraudulent claims, we can just pass the costs along in the next premium.”
Medicare and Medicaid fraud is rampant. Instead of investigating claims before a payment is made, Centers for Medicare & Medicaid Services (CMS) pays first and checks later, if ever. CMS has probably been ignoring subrogation for some of their payments as well.
So what is the government’s response to all the overpayment made by CMS? Cut Medicare payments by upward of 30 percent this year. Would it not be cheaper to hire enough claims auditors at CMS to investigate the claims before paying out that 70 percent spent on fraud. They could hire a lot of adjusters for that $100 billion in fraudulent claim loss.
Well, like it or not, our image is smashed. Even those insurers with sound claims philosophies get plunked in the bucket with the nasties and goodie-goodies. Whether the company overpays most claims to just “get rid of them,” or fights like a Tasmanian devil on whether the claim is owed or not, next year’s salary survey will probably not be much different. Best’s Review reports the number of adjusters and average pay every month have been flopping around, up or down, for more than a few years. Maybe it is time for the robots and computers to take over claims handling. Some insurers already rely on computers to tell the adjuster what to pay. Computers might as well do the whole job. Wouldn’t the CEOs love that?
Audits by Regulators
State and federal insurance regulators need to understand an insurer’s claims philosophy if they are to do a proper job for the citizens. State insurance commissioners get involved with individual claim files when there is a complaint against the insurer made by an insured or third-party. When the commissioners are looking at an insurer’s overall claims data, the assets, the liabilities including reserves, claims philosophy can be an important aspect of that auditor’s evaluation. Regardless of what the insurer may be showing as premium income, investments, surplus, and all the positive side assets, the claims side will reveal whether that insurer is healthy or on the brink of disaster, and whether the rates will be fair, adequate, and non-discriminatory.
Factors such as the ratio of open to closed claims are one key item. If for any fiscal year the volume of open claims or claims in litigation has expanded greatly from previous fiscal years, then there may be a philosophical problem. Why is the insurer not closing its claims expeditiously, or why has the number of litigated claims increased? This factor generally indicates a problem, either too small a staff, or an attitude of resisting claims that ought to be settled.
It is also necessary to determine the average value of all the closed claims in any one book of business, such as personal auto-injury liability. If the average cost of the closed cases, including any litigation or other allocated expenses, is, say, $5,750, then what is the average reserve of the open claims? Suppose examination of those reserves indicate that 80 percent of the files are reserved at $2,500. Is there a reasonable explanation for such an average reserve? If the insurer has a reinsurance treaty that pays for any claim amounts over $2,500, then the reserve may be OK. That, however, is generally not the case—the reserves is simply too low. When the amount of the reserves are set against the assets it may become clear that the insurer is in deep trouble.
What an insurer shows as assets also needs to be verified. An insurer a number of years ago was publishing public records that showed its major asset was uncollected retrospective premium. It involved the truck insurance business during an economic downturn. Would the insurer ever be able to collect all of those premiums? The company in question had no real claims philosophy. Already on the brink of collapse, the company was defunct within a year.
Perhaps one of the most important aspects of an insurer’s or self-funder’s claims philosophy is whether to handle claims locally. Should the adjuster be assigned a company car to personally investigate and make direct contact with insureds, claimants, physicians, attorneys, and witnesses, documenting each claim with as much evidence as needed to correctly evaluate the coverage, liability, and damages?
Claims adjusters allowed to operate locally learn the territory, enabling them to make more accurate adjustments. Today many insurers and entities want “cheap” claims service, with even serious losses being handled remotely from some regional or central location. Although this may be cheaper for the company in the short run, inevitably the claims will not be handled economically. There will be more mistakes regarding determining coverage or liability, more litigation as a result of incorrect evaluations, and claims handled remotely will add to that $30 billion lost in fraud. A better claims philosophy may be, “if you don’t go, you won’t know.”
Like it or not, each insurer and self-funding entity must analyze its claims philosophy and decide what impact it has on the company’s overall health. Reputation, public reaction, and fiscal responsibility all rest on whether the company is considered a tightwad or overly generous. Both approaches can be detrimental, but the auditor has to know. Next month we will begin to look at auditing individual claims files.