In late 2013, we discussed claims audits as a way to update and improve claims programs at p&c insurance organizations, beginning with the September 2013 article titled, “Why Auditing is a Springboard to Cost Reduction.”
After all, one of the most important outcomes of effective claims management is to reduce claims costs and expenses to the lowest reasonable values, while adhering to the legal and ethical requirements inherent in good faith claims handling.
Activity Based Metrics
The balance of this article will concentrate on two major items: activity-based metrics and results-based metrics. We refer frequently to activity based metrics when we discuss claims-management best practices. It would be fair to describe best practices as the requirements and guidelines that many claims administrators believe will provide the path to optimal outcomes. Unfortunately developing and tracking performance by compliance with best practices focuses on the activities instead of the results or outcomes, which are more difficult to measure.
For liability claims, best practices may be the same for items 1 through 5, with the exception that the number of contacts may differ, depending on how many insureds and claimants are involved in the claim. For property claims, items 1 through 5 again apply, although the contact might be limited to the insured. There will, however, be other best practices specific to (and therefore applicable) to those lines of business. This may include, for example, conducting site inspection within two days of contact for property claims.
Many companies have tried to use various outcome-based metrics. In some cases, this approach has backfired, because the solution led to practices that caused issues far worse than the original problem. For example, some companies that were appropriately concerned about significant reserve development or reserve stairstepping instituted programs in which adjusters were required to report to the client or risk manager, should reserves reached a specific threshold. In such cases, management may have reprimanded the adjuster for either allowing the claim to reach that condition, or for not setting the reserve accurately in the first place.
This punitive approach led to the behaviors in which the adjusters initially set unreasonably high reserves so they would not be forced to increase reserves at a later time and be reprimanded for that occurrence. Or, perhaps they did not increase reserves until the last minute, possibly when a settlement was payable, figuring they would only have to be reprimanded once rather than several times. The result of these improperly administered, outcome-based metrics led to several additional problems, including:
One example of reserving metrics based on comparisons of final values to earlier steps and activities includes:
- Comparison of the relationship between the final closing value of a claim (at the only time when a claim’s ultimate cost is known and not subject to debate or conjecture) with the adequacy of case reserves at various points in the claim’s lifecycle.
For example, if a claim was closed after 15 months, how did the reserves at 60 days, 90 days, 180 days, 90 days before closing, and 30 days before closing compare to the ultimate total incurred cost, and what percentage of the final value did the reserve values reach at those points? The following line graph shows the comparisons for three adjusters. We will assume for purposes of this illustration that they handled the same claim with the same financial outcome. Note that they had very different reserving patterns, even though they started from the same point (possibly a table reserve mandated by senior management), and ending at the same paid value.