Can your claims department add value to your product? Do peopletruly buy based on how your claims department functions? Theanswers to these questions depend on the metrics you utilize tomeasure performance in your claims department.

When someone is looking to buy insurance, do they really look tothose things you measure? There is no question the failure toprocess a claim in a timely, fair manner (in the eyes of theinsured) will be used as a reason to look elsewhere. But, when itcomes time to buy, does a prospective insured care or even knowabout how your claim department has a 105 percent closing ratio, orthat the average paid by line of business is down this year overlast year, or that the average claims duration is 5 percent belowindustry average? I doubt it.

While the purchase of personal lines coverage is driven byprice, this is not necessarily the case in commercial andprofessional lines. Instead, insurance buying decisions, just asmost B to B decisions, are substantially impacted by productquality supported by a sustainable competitive advantage.

A company whose product costs more than the competition and isperceived by the consumer as adding no additional value over thecompetition will not be able to compete for long.

"A company can outperform rivals only if it can establish adifference that it can preserve. It must deliver greater value tocustomers or create comparable value at a lowest price, or do both.The arithmetic of superior profitability then follows: deliveringgreater value allows a company to charge higher average unitprices; greater efficiency results in lower average unit costs."(Porter, November-December 1996)

Added value supports price structure during market changes. Goodtimes will become tough times. Developing the strategy which willset your company apart from the competition during good times isessential to maintain, and even grow, market share when the marketchanges. If your claims department is measured against the rest ofthe industry, how can it be different? How can it add value to theproduct? Your company is reduced to competing on only a costleadership strategy.

Insurance is not a trophy

Insurance doesn't shine. You cannot display it on your mantle. Apolicy is not framed and hung on the wall. No one calls a friendover to show them the new insurance they just purchased. Insuranceis a written promise to pay in the event of a covered loss anddelivery of that promise is made through the claims department.

For years, carriers have delegated strategic differentiation totheir agents; focusing on selling their ubiquitous andnon-differentiated products based on the service and relationshipdifferentiations within the agency pool. The competitive pressuresinherent within the marketing of insurance and the advent of theinternet have increased pressure on independent agents. Theindustry has generally failed to support them by continuing to sella product with a strategy based solely on cost leadership. Thereare some differences between policies, but little which wouldimpact a buying decision and support a premium pricingstructure.

Luxury items are purchased for a reason; they support thepremium price with a perception of increased value. The differencein coverage between commercial carriers, with the exception ofunique coverage offerings usually found in surplus lines, isnuanced and fails to influence the buying decision sufficiently tosupport a premium pricing structure. Instead, carriers havetraditionally relied upon the relationships agents have built withclients to support price differences.

It's important to measure the metrics that really matter topolicyholders. (Photo: iStock)

Being cheap is not the same as being good

In his book, Zig Ziglar's Secrets of Closing theSale, Zig Ziglar wrote, "Good things are seldomcheap, and cheap things are seldom good." (Ziglar, 1982).

Claim metrics destroy the ability to differentiate your deliveryof the promise from the competition. Compared against "industrystandards," they only serve to homogenize the claims process. Ifyou can't be different, you need to be the cheapest. That race tothe bottom is easy to copy, difficult to maintain and can bedisastrous when markets change.

Claims can help increase margins

In commercial and professional lines, the claims operation canadd value to the product, favorably impact the buying decision,support premium prices and increase profit margins.

A company can improve market share and increase profit marginsby adding value the customer perceives as superior to thecompetition. Agents are more than willing to sell a superiorproduct for a premium price if the product truly delivers superiorvalue to their clients.

Consider the marketing strategies for other consumer products.Smart phones advertise differences based on points like size,capacity and service areas. Cars are marketed based on features,luxury or reliability. Price is rarely utilized as a competitivedifferentiator.

Add value without increasing cost

So how can a claims department be different and add to the valuestatement of the company? The paradigm needs to change. Claimsmanagers need to adjust their vision to one of strategicdifferentiation. They need to move away from, "That's the way we'vealways done it," and measure the delivery of value-addedservice.

Buyers in the commercial market are seeking more than just alower price. They want to know that the level of protection theyare purchasing is more than just a check after a claim. They wantto know that the people who are handling their claims have theirbest interests at heart.

Aren't we doing that?

The New York Department of Financial Services InsuranceReport Card on the performance of insurance carriers inthe aftermath of Superstorm Sandy confirms how carriers measuredtheir claims performance as a function of efficiency and notvalue.

One metric measured the number of complaints. They ranged from.17 percent to 2.82 percent of reported claims. That is a 2.65percent difference from best to worse and is statisticallyinsignificant.

So what?

How often have you decided to never eat at a restaurant againbecause the service was lousy or the food was cold? Did it matterto you that the restaurant's average time to clean tables was lowerthan all the restaurants in the area?

Most buyers don't know about claim metrics and they don't care.Unpublicized statistical differences don't help the buyer decide.They add nothing to the buying process and no value to theproduct.

Related: 5 things traditional insurance carriers can learnfrom the successes of tech start-ups

(Photo: iStock)

Transformational thinking

Metrics are the antithesis of strategic differentiation. So whydo claims departments continue measuring these? "Because that's theway we've always done it," is the usual, but wrong answer.

Management uses operation metrics such as closing ratios,changes in pending, new claims received, average paid by line ofbusiness, claims duration, lag times and others to judge theirdepartment's operational effectiveness. But these measurements donothing to incentivize customers to buy a product.

What difference does it make if these claims metrics are thebest in history if no one wants to buy your insurance? Why are wemeasuring what doesn't matter to the customer?

Activity-based metrics must be developed to capture what addsvalue to the product. Activity that fulfills and exceeds thecustomer's expectations needs to be encouraged and measured, evenif it detracts from other operational metrics. Performance reviewsneed to change their focus to activity that adds value to theprocess.

Create a culture of things that reallymatter

The claims operation can do more to add to the bottom line. Itis no longer just an expense management operation. Management needsto focus on activity which adds value and utilize claims departmentsubject matter experts in marketing initiatives. Put the rightclaims personnel in front of target markets to talk about how theyprovide a different level of service than the competition.

Marketing needs to publicize extraordinary claims experienceswhere innovation in the claims operation provided unexpected andfavorable results for the insured/claimant. Experiences suchas:

• The approach taken by our property adjuster after a catastrophicfire to lead the recovery efforts put the insured back in businessthree months earlier than expected.

• The work done by the adjuster in helping board members andresolving high-profile litigation was praised at the recent boardmeeting.

• The claims department's coverage analysis enabled a successfuldefense for the directors and officers.

• By advising the insured to withdraw one portion of the propertyclaim where the deductible was higher, the claims department helpedthe insured receive more money.

These service issues are remembered by the client's decisionmakers long after the claim has been settled. They add to theclient's perception of product value and help support a decision tobuy and/or stay with a carrier when prices increase.

How does your claims department add to the company's valuestatement? What does your claims department do to support thecompany's sustainable competitive advantage strategy? Are youmeasuring what makes your operations the same as the rest of theherd or things that make them stand out? Are you using metrics tosupport your company's strategic differentiation? Don't be acommodity.

After a successful career of more than 30 years handling andmanaging multi- line claims, Don Eodice, CPCU, ARM, AIC ([email protected]) formed Eodice ConsultingLLC, where he serves as an expert witness for litigants.