Filed Under:Agent Broker, Agency Management

Metrics can turn claims into a commodity

Claims departments have a unique opportunity to add value to a company by highlighting unexpected and favorable results. (Photo: Shutterstock)
Claims departments have a unique opportunity to add value to a company by highlighting unexpected and favorable results. (Photo: Shutterstock)

Can your claims department add value to your product? Do people truly buy based on how your claims department functions? The answers to these questions depend on the metrics you utilize to measure performance in your claims department.

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

While the purchase of personal lines coverage is driven by price, this is not necessarily the case in commercial and professional lines. Instead, insurance buying decisions, just as most B to B decisions, are substantially impacted by product quality supported by a sustainable competitive advantage.

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

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

Added value supports price structure during market changes. Good times will become tough times. Developing the strategy which will set your company apart from the competition during good times is essential to maintain, and even grow, market share when the market changes. If your claims department is measured against the rest of the industry, how can it be different? How can it add value to the product? Your company is reduced to competing on only a cost leadership strategy.

Insurance is not a trophy

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

For years, carriers have delegated strategic differentiation to their agents; focusing on selling their ubiquitous and non-differentiated products based on the service and relationship differentiations within the agency pool. The competitive pressures inherent within the marketing of insurance and the advent of the internet have increased pressure on independent agents. The industry has generally failed to support them by continuing to sell a product with a strategy based solely on cost leadership. There are some differences between policies, but little which would impact a buying decision and support a premium pricing structure.

Luxury items are purchased for a reason; they support the premium price with a perception of increased value. The difference in coverage between commercial carriers, with the exception of unique coverage offerings usually found in surplus lines, is nuanced and fails to influence the buying decision sufficiently to support a premium pricing structure. Instead, carriers have traditionally relied upon the relationships agents have built with clients to support price differences.

Woman graphing change

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

Being cheap is not the same as being good

In his book, Zig Ziglar's Secrets of Closing the Sale, Zig Ziglar wrote, “Good things are seldom cheap, and cheap things are seldom good.” (Ziglar, 1982).

Claim metrics destroy the ability to differentiate your delivery of the promise from the competition. Compared against “industry standards,” they only serve to homogenize the claims process. If you can't be different, you need to be the cheapest. That race to the bottom is easy to copy, difficult to maintain and can be disastrous when markets change.

Claims can help increase margins

In commercial and professional lines, the claims operation can add 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 margins by adding value the customer perceives as superior to the competition. Agents are more than willing to sell a superior product for a premium price if the product truly delivers superior value 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 competitive differentiator.

Add value without increasing cost

So how can a claims department be different and add to the value statement of the company? The paradigm needs to change. Claims managers need to adjust their vision to one of strategic differentiation. They need to move away from, “That's the way we’ve always done it,” and measure the delivery of value-added service.

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

Aren't we doing that?

The New York Department of Financial Services Insurance Report Card on the performance of insurance carriers in the aftermath of Superstorm Sandy confirms how carriers measured their claims performance as a function of efficiency and not value.

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

So what?

How often have you decided to never eat at a restaurant again because the service was lousy or the food was cold? Did it matter to you that the restaurant's average time to clean tables was lower than 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 the product.

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

business people working on a plan

(Photo: iStock)

Transformational thinking

Metrics are the antithesis of strategic differentiation. So why do claims departments continue measuring these? “Because that's the way 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 of business, claims duration, lag times and others to judge their department's operational effectiveness. But these measurements do nothing to incentivize customers to buy a product.

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

Activity-based metrics must be developed to capture what adds value to the product. Activity that fulfills and exceeds the customer's expectations needs to be encouraged and measured, even if it detracts from other operational metrics. Performance reviews need to change their focus to activity that adds value to the process.

Create a culture of things that really matter

The claims operation can do more to add to the bottom line. It is no longer just an expense management operation. Management needs to focus on activity which adds value and utilize claims department subject matter experts in marketing initiatives. Put the right claims personnel in front of target markets to talk about how they provide a different level of service than the competition.

Marketing needs to publicize extraordinary claims experiences where innovation in the claims operation provided unexpected and favorable results for the insured/claimant. Experiences such as:

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

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

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

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

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

How does your claims department add to the company's value statement? What does your claims department do to support the company's sustainable competitive advantage strategy? Are you measuring what makes your operations the same as the rest of the herd or things that make them stand out? Are you using metrics to support your company's strategic differentiation? Don't be a commodity.

After a successful career of more than 30 years handling and managing multi- line claims, Don Eodice, CPCU, ARM, AIC ( formed Eodice Consulting LLC, where he serves as an expert witness for litigants.


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