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!
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.
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.
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.