EDITOR'S NOTE: This article was compiled andsubmitted by Ernst & Young's Financial Services Office,where David Connolly is principal; Jennifer Dotts is seniormanager; and Christopher Raimondo is seniormanager.

Given the intense competition and profound change that isunderway in the property and casualty (P&C) insurance market,many insurers are looking for ways to differentiate themselves inthe minds of consumers. Claims management has been an area ofstrategic focus and significant investment. Top-performing insurersrecognize claims management as among the most importantcustomer-facing processes, and one in which they can make or breakcustomer relationships. That is the fundamental reason why insurersseek to enhance their service offerings and strengthen their tiesto policyholders, brokers and agents through superiorresponsiveness, speed and user-friendliness.

Of course, the imperatives to reduce operational costs and boostoverall process efficiency are ever-present in insurance. Everydollar invested must produce tangible value—and claimstransformation programs are no exception. Within claims, the focusalways starts with minimizing leakage.

Increased regulatory scrutiny has been another driver of claimstransformation. From HIPPA to Medicare Secondary Payer (MSP) rulesto new requirements associated with the Dodd-Frank law, insurersface the challenge of complying with the full range of new rulesand regulations in financial services, including those forged inthe post-crisis environment.

On a practical level, that means they must report more (and moredetailed) data than ever before, and face significant fines andpenalties for non-compliance.

For many P&C insurers, the goal has been to create morecompetitive, flexible and scalable claims operations. While somehave seen bottom-line benefits from improved claims handling andreduced expenses, the benefits have often been limited by a siloedapproach; that is, too many insurers have invested in “point”solutions that allow them to comply with MSP regulations, forinstance, but don't fully integrate processes or data flows foroptimal process efficiency and effectiveness.

Further, insurers are constrained by their limited capabilitiesin predictive analytics and business intelligence (BI). In today'smarket, it's essential for insurers to be able to segmentcustomers, identify promising new markets, gain precise customerintelligence and make better decisions. These elements areespecially important relative to claims performance and can providea sustainable advantage. Finally, they can provide an edge in termsof making regulatory compliance programs more efficient and lesscostly.

The bottom line is that P&C insurers must adopt more robustBI and analytics capabilities if they are to successfully transformtheir claims operations, create true customer-centricity and meetevolving (and expanding) regulatory requirements.

This article will address the nature of the challenges P&Cinsurers face today and provide a roadmap for those carriers readyto move forward and use BI and analytics as a lever for effectiveclaims transformation and regulatory compliance.

Why Claims Transformation Now?

A number of market drivers have made claims transformation animperative for many P&C insurers:

Claims fraud and leakage

The current economic environment has greatly increased the riskof claims fraud and placed additional emphasis on claims leakage.As a result, insurers need broader capabilities in trend analysisand pattern identification. At a minimum, they must be able tocross-reference parties involved in claims. Today, however,stand-alone data repositories and limited visibility acrossfunctions mean many insurers are vulnerable to claims fraud andhave little capacity to measure the effectiveness of theirfraud-prevention efforts and teams.

BI and predictive analytics tools are part of the story.Traditionally utilized by the underwriting and marketing/productdevelopment units, predictive modeling is being used by claimsleaders in the areas of fraud detection, leakage analysis,large-loss identification and subrogation and salvage recoveries.Identifying fraudulent claims at an early stage in the claims lifecycle can be a tremendous cost-saver for the industry.

With a multifaceted approach to fraud identification andreferral based on automated, sophisticated business intelligencetools in conjunction with leading practices, insurers areeffectively reducing indemnity costs.

An intensifying regulatoryspotlight

Insurers are especially focused upon the analytics required toremain compliant with new regulatory requirements andjurisdictional mandates, including many that may seem more targetedat large investment banks and hedge funds. While well-knownregimes, like HIPPA, MSP and Dodd-Frank, generate most of theheadlines, state-level initiatives can be just as challenging interms of data gathering; for instance, the New York Department ofFinancial Services, which oversees both banks and insurers, isconducting an ongoing investigation into the “forced-place”insurance for homeowners who missed mortgage payments or failed tokeep homeowners' policies up to date. Insurers will likely have toprovide objective data to show that they were not forcing consumersinto inappropriate or overly costly policies, and that loss ratios,premiums and commissions paid to referring parties (like mortgageservicers) were in line with standard practices.

Weak or inefficient performance in regulatory compliance canhave serious consequences. Costs, penalties and fines fornon-compliance can be significant, while the price tag associatedwith inefficient and excessively manual data-gathering andcompliance processes can be just as daunting. In fact, someinsurers face a choice of either paying fines or investing in newsystems so they can produce the data they need to avoid the fines.

The regulatory scrutiny falls not just on the companiesthemselves, but on their leadership teams as well. An Allen &Overy/Willis Group study determined that the “combination ofheightened public and shareholder scrutiny, and a proliferation ofpowers amongst, and growing interaction between regulators globallymeans the spotlight is on directors and officers like neverbefore.” The study found that 64% of respondents identifiedcriminal and regulatory fines and penalties as the second mostsignificant risk to their business (“Regulatory Investigations TopDirectors' List of Concerns: Willis/Overy Survey,” InsuranceJournal, 14 December 2011).

Indeed, eliminating the risk of fines—the amounts of which havebeen increasing steadily—and streamlining compliance are twotangible components of the business case for BI-enabled claimstransformation.

Aging systems and lack ofintegration

Many insurers have accepted the reality that their existing ITsystems and toolsets simply are not up to the challenges ofcompeting in the 21st century insurance marketplace. In fact, atmany insurers, key systems have reached the end of their lifespans. Thus, any organization interested in automating back-officeprocesses, increasing claims staff productivity and enhancing thecustomer experience will likely need to upgrade core systems.

Some insurers can only implement stand-alone solutions to meetthe MSP fund-reporting requirements while others can configure therequirements within their current claims management system. Inother cases, specific applications or databases have beenmodernized, though not necessarily integrated across functions,which is where the most substantial value proposition lies. Part ofthe challenge comes from fragmented IT portfolios. The links andintegration among claims, billing and CRM systems, for instance,are very tenuous.

Claims and underwriting should also consider integrating theirdata repositories, given that they generate the vast majority ofdata used by the entire enterprise.

Rising customer and brokerexpectations

More empowered customers are also a force for transformation.Accustomed to using sophisticated banking and retail websites andtransacting via smartphones, today's policyholder now expectsinsurers to deliver similarly streamlined processes, integrateddata streams and personalized information. That's especially truefor the highly visible process of claims management: ideally,insurers should be able to provide “on-demand” updates of claimsstatus and a fully “mobilized” user experience.

Higher broker expectations are part of the story as well.Brokers expect to receive automated notifications about milestonesin the claims process, as well as intuitive self-service tools fortheir own use. Insurers who cannot meet the rising customer demandsmay struggle to retain the full brokerage force as well.

Understanding the landscape

The right path to claims transformation will vary greatly,depending on the unique market portfolios of different types ofcarriers. For instance, personal lines carriers routinely havehigher-frequency but shorter-cycle claims. That means their optimalsolution design allows for the ready capture of all the necessarydata elements for compliance reporting, without slowing overallclaim-handling and outcome cycles.

Commercial and specialty insurers routinely write higher-valuedpolicies that have longer cycle times and greater total financialexposure attributable to higher policy limits; however, swiftimplementation is still a necessity. With these lines of business,insurers must maintain constant interaction with regulatoryagencies.

Professional liability insurers, which write coverage forprofessionals such as lawyers, doctors and architects, will haveother concerns. Such policies routinely have high limits simplybecause of the nature of the work performed by the insured. Relatedclaims have longer cycle times, often with a requirement that theinsured approve any settlements. These attributes create a uniquesituation for insurers as there can be considerable delay in theadjudication of a claim, thereby creating a need for the insurer tomaintain a high-touch interaction with the regulatory agency.

The Analytics Advantage

Advanced BI and analytics capabilities have already helpedforward-looking insurers address several of their most urgentchallenges, ranging from expense and cost management to evolvingcustomer preferences, shifting risk profiles and changingregulatory regimes. For example, insurance organizations that haveexcelled in risk management have been successful in aligningperformance analytics with strategic initiatives by adoptingconsistent metric frameworks and role-based use cases. The key hasbeen in aligning data assets to the metric frameworks and use casesto promote data integrity, security and system performance. The useof advanced modeling techniques has led to significant improvementsin enterprise risk management as well.

Given these advantages, it's no wonder market interest in BI andanalytics is on the rise, especially relative to claimstransformation. In recent years, more than half of North Americanand UK insurers have identified improvement in analytics as a goalfor their initiatives. In 2009 and 2010, 14% of North American andUK insurers increased their spending on business intelligence bymore than 10% while another 22% increased their spending onbusiness intelligence by 5%–10% (Ellen Carney, “The Outlook forInsurance Software Spend in 2011? More of the Same,” InsuranceNetworking News, 28 January 2011).

While there is growing recognition that effective analytics cananticipate market trends and deliver critical insights more quicklyto stakeholders across the enterprise, there is also legitimateconcern that the underlying technology platforms (especially inclaims management) may be incapable of supporting the advancedtools needed for BI-enabled claims transformation. Specifically,upgrades of existing claims technologies or deployment of newplatforms may enable further automation of current processes andstreamline manual compliance processes.

Further, the integration of core functional systems — likeclaims and underwriting — as part of broad-based transformationprograms “turbo-charge” the business case: the returns oninvestments for both claims transformation and BI and analyticsprograms rise dramatically.

Risk management in the context of claimstransformation

Enterprise risk management (ERM) is one area where advancedanalytics has demonstrated its value for executives seeking betterinsight into market conditions and operational performance and forimproved decision support. At its best, ERM involves the creationof a holistic perspective of risks as opposed to siloed views,which allows the organization to analyze the contingencies andinterdependencies of risks across all core functions of thebusiness.

To the extent that they enable ready access to insightsregarding trends and scenario modeling, BI and analytics toolsetshave proven invaluable for helping insurance executives makecritical decisions about resource allocation and new productdevelopment to improve overall performance. In this sense, ERM hastruly become part of business management. In the past, it was oftena siloed exercise within capital management or actuarial groups,where necessary reserves were “guesstimated” based on worst-casescenarios and the best available data (which might not have beencurrent or complete).

Long-term planning and immediate actions: theroadmap to claims transformation

Insurers looking to leverage BI and analytics to drive claimstransformation and streamline regulatory compliance must consider arange of important steps.

Automate for speed and efficiency

The speed of today's marketplace means insurers must respond toclaims submissions more quickly, provide informational updatessooner and more regularly, and “close the loop” on the overallprocess much more efficiently. The only way to meet these newcustomer-driven realities is to automate every step of the claimsmanagement process. Automation is at the heart of every successfulclaims transformation program. The processing of reinsurance claimsand aggregate limits are two areas where automation can payparticularly impressive dividends.

Focus compliance on businessbenefits

While many insurers give in to the temptation to view regulatorycompliance as a “check-the-box” exercise, top performers embrace aphilosophy of regulatory compliance that is geared toward creatingbusiness value. For instance, by integrating all repositories forcustomer information, companies will be able both to communicatewith customers more effectively and to complete regulatoryreporting more efficiently. Further, by applying advanced analyticstoolsets, they can track patterns and identify opportunities forincreased cross-selling, as well as provide early warnings onpotentially fraudulent consumer behavior.

The key is to view regulatory requirements as a single entityand manage it centrally, which creates the ability to leverageobject-oriented solutions and use single data sets to meet multiplereporting needs.

Think holistically and avoid one-off, “point”solutions.

Broad process integration may be as important as automation interms of enabling claims transformation. Specifically, all new BIand analytics toolsets must link effectively within the broadertechnology ecosystem. Again, the end-game involves ensuringindividual data assets that support multiple processes are housed,managed and validated in a consistent and robust fashion.

Experience teaches us that stand-alone solutions—such as thoseto meet the MPS fund-reporting requirements—only go so far indriving transformation when they are piled on top ofalready-fragmented legacy systems. A better solution is toconfigure requirements within current claims management systemsthat meet near-term needs for regulatory reporting withoutdisrupting the customer-facing aspects of claims management.Embedding regulatory compliance into well-designed and broaderclaims management processes takes more up-front planning butultimately pays considerable benefits in terms of eliminating therisk of fines and penalties and reducing the cost while enhancingefficiency.

Create transparency to focus on value-addingwork

Transparency is a prerequisite to supporting the necessary trendanalysis and improved claims resolution performance. It is a keycapability that will provide a competitive edge and the ability toaccess instantly a summary of each customer — a single, integratedview providing a snapshot of every claims interaction that customerhas had with the company over time. This will create confidencethat the operation is compliant, efficient and effective.

From a compliance standpoint, insurers need to monitor theenvironment to minimize costs associated with non-compliance. Thistype of transparency allows organizational leaders to focus staffon true drivers of customer satisfaction. For instance, someinsurers estimate that up to 30% of staff time is spent onadministrative activities — like trying to track down customer data— that aren't specifically tied to faster claims resolution.

Evaluate the technology options

Many insurers have reached a clear consensus regarding theinsufficiency of existing claims management systems to meet the newmarket and regulatory requirements. Therefore, the essentialquestion becomes whether to upgrade current platforms or replacethem with a next-generation toolset.

Many business factors contribute to this decision. If thedecision is to deploy new software, evaluation and selectioncriteria must be formalized, with input from both business and ITleaders. Packages must be weighed in terms of their suitability forphased implementation and integration with other core systems, likepolicy administration and underwriting.

Configuration and customization options must also be addressed.If the plan calls for upgrading current systems, similar questionsmust be raised about new modules, compatibility with datarepositories and reporting capabilities. It is safe to say thatestablishing a flexible platform that can be modified and extended is critical to ensure that organizations areprepared to respond to future market and regulatory shifts.

Optimize processes — not justtechnology

While advanced, modernized technology is a core element of thesolution, insurers can't afford to overlook the opportunity tooptimize processes as part of their transformation initiatives. Inother words, new, modernized technology will not automaticallysolve existing process inefficiencies.

Deploying new systems or upgrading existing ones offers anexcellent opportunity to streamline, synchronize and automateprocesses for optimal efficiency and effectiveness. The developmentphase of claims management systems must take into account allclaims processes to determine if they are helping to satisfypolicyholders, agents and brokers.

Re-engineering processes is commonly carried out when there isimplementation of a new claims management system. The areas offocus vary; however, reinsurance, aggregate limits and regulatoryreporting and compliance are consistently priority areas. Whilethere is much uncertainty and many options for claims and IT teamsto navigate, one thing is clear — maintaining the status quo is nolonger an option.

Don't overlook training andeducation

Training, education and organizational change management oftenmake the difference between mere systems implementation and truetransformation that effectively repositions the organization.Training programs and educational tools that support theimplementation of new toolsets can also reduce barriers to change.Sharing the business case for new systems, process optimization andthe revitalization of claims operations (whether the case is basedon regulatory requirements or cost savings) may mitigate the riskof staff resistance to new ways of working.

Expect further evolution

While the volume of change in the P&C market seemsunprecedented, the reality is that this degree of change is likelyto continue, thanks to rising competitive stakes and increasingcustomer expectations. Ongoing change is also likely on theregulatory front. It is essential to understand the impact thesechanges may cause and to comprehend how to incorporate the neededcapabilities within current in-flight initiatives. Part of thisprocess would be knowing which capabilities should be added as afactor in the planning of a new initiative or be added to a workstream for an existing transformation project.

Addressing the measurement of compliance while working tooptimize claim processes is possible through a holistic approach.Again, using BI and analytics toolsets to gain insight acrossclaims transformation and ERM programs will help the organizationsucceed across all the dimensions of operations required to win inthe marketplace.

Whether companies have already invested in a new claimsmanagement system or are considering such an upgrade, they mustconsider the new realities — including higher consumerexpectations, the need to achieve and maintain agent and brokerloyalty and the continuing evolution of the regulatoryenvironment.

In the P&C market, customer-centricity is the hallmark ofthe top-performing carriers. That is why claims transformation isno longer optional. What was recently considered leading-edge orhighly innovative will soon be viewed as baseline capabilities orstandard operating procedures.

Ever-changing regulations have also created the need forinsurance organizations to re-examine the sources of their currentBI and analytical data models. New reporting requirements call fornew and more robust approaches to ERM (a challenge also faced bybanks and other financial service firms).

Due to the critical role of claims management in insurance, anyeffort to transform the organization will require considerableinvestment, commitment and discipline. But the business case fortransformation is real, as evidenced by the significantinvestments being made by the P&C industry in its claimsorganizations and by the results being realized—especially thosethat embrace advanced BI and analytics capabilities as part oftheir transformation initiatives. Whether an organization is at thebeginning of the claims transformation process or in the midst of amulti-year program, one thing is clear: those companies not makinginvestments risk being left behind by their competitors as theclaims function continues to grow in importance as a strategicdifferentiator in the marketplace