Enterprise risk management (ERM) has become one of the mostimportant and valuable management tools for insurance companies. Increased focus onERM by regulators, auditing firms, and rating agencies hasheightened pressure on carriers to adopt robust ERM programs.Developments at both the state and federal level through 2014 willdrive ERM initiatives further. What does this mean for an insurer'sclaims function?

A Wider World of Risk

ERM is the process of planning, organizing, leading, andcontrolling all activities of a company in an integrated fashion,in order to minimize the effects of risk on the company's capitaland earnings. While individual business functional areas such asclaims, underwriting and compliance typically manage specific kindsof loss or risk to the company, such as losses stemming from claimsor lawsuits, an ERM program has a much broader scope. Its view isof the “whole world” of risk throughout a company.

Claims-related risks are only part of the ERM picture, but theypresent some of the most significant risks to the company from acompliance, financial and market-conduct perspective. Managers withenterprise risk responsibilities rank them as a high priorityaccordingly.

Among the most common claims-related risks are first-and third-party claims, whether settled quickly orlitigated. These include indemnity payments, claims handling andany litigation expenses. The overall concept of “claims” or“underwriting losses” may not necessarily make an insurancecompany's list of “top risks” for its ERM program, as acertain level of claims or underwriting losses are always expected.After all, the majority of claims losses are not caused by thecompany itself. Therefore some losses cannot be prevented ormitigated by the application of controls such as the purchase ofreinsurance. Claims themselves are considered part of doingbusiness.

However, an ERM program might focus more narrowly on distinctunanticipated risks specifically relating to, or arisingout of, the claims-handing process. Such risks couldinclude, and be documented as:

• Improper or erroneous claim handling leading to marginallylarger claims payments than expected.
• Payments made for claim handling allegedly conducted in “badfaith,” or
• Settlements, fees, or fines relating to consumer complaintsgenerated by claims handling.

Another significant source of claim risk is thepotential violation of insurance laws and market conduct regulations. There can be significantfinancial ripple effects if a claim compliance breach also impactsother areas such as legal, underwriting or finance.

Claims-Specific Benefits of ImplementingERM

Adopting an ERM program, which requires looking at risks throughmultiple perspectives across the organization, is often a majorcultural change for many companies. On the plus side, claims areasgain many benefits from establishing an ERM framework. An ERMinitiative can lead to new ways of looking at claims compliance risks and controls, as more attention is paidto a thorough quantification of risk.

Prior to the implementation of an ERM program, companies oftentake a “siloed approach” to risk control and compliance activities;that is, there is little or no collaboration or standardization ofmitigation techniques or controls between business units. Riskmanagement efforts often focus disproportionately on risk avoidancetechniques and reactive risk controls, rather than proactive,preventative measures. Frequently, risks are identified but are notassigned specific owners who are responsible for improving the risksituation.

An ERM program can significantly improve a company's chances ofmanaging risks well, and can help the claims function do its jobbetter in particular. Having an ERM program broadens therelationship between Claims and other business units in theorganization. Discussions of potential loss faced across theenterprise by an action, event or activity can deepen allparticipants' understanding of inter-dependencies betweendepartments. Claims, legal, and compliance staff, where previouslysegregated or working in silos, can become more aligned,facilitating the sharing of regulatory and compliance information of common interest.

Communications and overall relationships may also improve between claims and otheroperational departments such as underwriting, actuarial, andfinance, as all areas come to better understand each others'concerns and priorities, and there may be more analysis ortransparency around how claims and claim reserves impact theoverall capital of the company. Insurers need to have a consistentand standard approach to risk throughout their organization. Whenthey achieve this, particularly when facilitated by procedures andtechnology that help them centralize the process, they benefit fromhaving a more transparent view of risk within theirorganization.

As a result, implementation of a formal ERM risk assessmentprocess often provides new perspectives on how information aboutthe company's risks should be organized and managed, includingclaims-related risks. This new perspective often leads tore-assignments of resources and staff responsibilities, warrantingnew or revised workflows, managerial approval procedures, orattestation processes.

Further, when the calculation of risks and the costs of controlscan be measured in dollars, priorities can more easily be set. ERMhighlights areas where additional staff/time/money is needed. Italso encourages the strengthening of controls, particularly claims andcompliance-related measures, and offers an opportunity for thecompany to implement “best practices” with respect to itsday-to-day policies and procedures.

Establishing Claims' Seat at the ERM Table

To maximize the benefits of an ERM process, the ERM team andclaims managers should work closely together, aligning themselvesin a common framework, with common goals, and a coordinatedapproach. Claims should receive more advance notice of, andmore information about, regulatory changes, new product lines,business partners, vendors, and other strategic issues faced byother departments. Encourage all departments to identify and share“emerging risks” and trends in their area of responsibility withclaims, and create a formal communication loop to understand risksseen by other areas. Maximizing the information availableto claims—and the speed with which this information can beaccessed—will enable staff to better assess related complianceor regulatory risks and controls that may relate to futureclaims-handling efforts. In addition, this will enable them tomake meaningful input into any decision-making process.

It is also helpful to increase focus on claims controls, withmore attention to detail in policies and procedures and resourceallocation to claims compliance functions. Review claim proceduresand guidelines frequently, and ensure that appropriate investmentis made to keep claim handling controls updated and in compliancewith frequent changes in law. Also set and respect internalbusiness (non-regulatory) controls, such as establishing caseloadand signing authority limits.

Further, better integrate ERM controls and claims policies andprocedures, making sure where there is an identified risk there isa control, that the control is documented in an up-to-date policyand thorough day-to-day procedure. If there is a claims procedure,then identify and document what risk it is trying to control. Thiskind of “gap analysis” can be helpful not only to prevent ormitigate direct losses, but also avoid market conductcriticisms.

Finally, within the ERM program, be sure to discuss thepotential “group-wide” impact of improper claims handing on thecompany's overall reputation, including direct loss of business,strained agent relationships, and reinsurance relationships. AsWarren Buffet said, “It takes 20 years to build a reputationand five minutes to ruin it.” If you think about that, you'll dothings differently.” When designing any compliance or riskmanagement policies today, reputational risk must be part of thediscussion, and claim-handling issues are among the most dangerousrisks affecting reputation.

Claims professionals provide crucial skills, wide perspectiveand valuable insight to help a company assess claims handling andrelated risk. Claims professionals should be VIP players on everyERM team.