The key lever in improving claims performance is reducing leakage. Leakage is unnecessary loss expenses resulting from payments on uncovered losses, over-generous settlements, claims that go to litigation unnecessarily, unclaimed recoveries and other poor claim handling practices. Industry experts say that leakage represents about 10 cents of every premium dollar across the industry.

Although the real economic opportunity for insurers lies in reducing leakage, most claims initiativesin both operations and technologyare justified through promised reductions in expenses. But after years of cost-cutting that have increased workloads, decreased support staff and crippled training programs, there are few dollars left to squeeze out of claims. Instead, the real long-term benefits are to be sought in new programs or technologies that reduce leakage.

Technology should be seen not simply as a tool to increase productivity and efficiency (traditionally measured in claim closure rates), but as a powerful weapon to fight leakage. New tools such as business rules engines, activity management systems and real-time monitoring systems can be used to directly affect the way claims are handled on the front lineproviding consistent claim handling throughout the organization and ensuring quality claim handling.

While there are many ways in which technology can influence claim handling to reduce leakage, this article highlights five in particular that claims executives may want to consider.

Coverage verification. Paying for losses that are not covered or only partially covered is a significant contributor to leakage. These unnecessary payments occur because adjusters may not realize what exclusions apply to a loss. Claims systems can use business rules to analyze claims for coverage issues and refer them to coverage experts, underwriters or legal counsel as required. In addition, a decision-tree approach can be used to walk adjusters through some basic coverage questions in order to make sure they are exploring all possible opportunities.

High-impact claims. The majority of claims are relatively simple and do not require extensive attention by skilled professionals. However, there is a minority of claims that have a major impact on indemnity costsexpensive losses, litigated claims, important customers, etc. For these claims, the amount of attention and skill brought to bear can have a major impact on claim outcomes.

Software today can use carrier-specific criteria to flag these important claims, giving supervisors up-to-date lists of claims requiring attention. Instead of reviewing every claim every 90 days (as is often the case today), highly skilled and experienced supervisors can instead focus on the claims that have the greatest impact on carrier profitability.

Recovery. Subrogation against other insurers (or other companies, such as a facilities management contractor in a slip-and-fall case) represents a major under-exploited opportunity for many insurers. Since most adjusters are monitored for claim cycle timeand many are overworkedthey often do not have the time to investigate potential subrogation opportunities. A modern claims system should automatically highlight claims for potential subrogation and refer them to specialist teams for dedicated follow-up.

Service levels. Some insurers estimate that savings in the average time taken to contact a claimant may amount to millions of dollars over the course of a year. These savings are due to improved remediation (imagine a basement filling with water), reduced likelihood of litigation (in practice, claimants value speed of settlement far more than amount of settlement), and increased customer satisfaction. And while virtually every insurer has a standard for contacting claimants (often set at 24 hours, or 8 business hours), most have no way of enforcing and tracking this standard. An up-to-date activity management system can automatically enforce and monitor critical service levels throughout the operation, and escalate cases where service levels are not met.

Analysis and continuous improvement. Today, it is difficult for a claims executive to understand what exactly is going on in the claims operation, because claim handling information is trapped in paper files and in unstructured notes screens in the claims system. Improved software makes it possible to track structured information about all claim activitieswhom they were assigned to, whether they were done, when they were done, etc.to facilitate analysis of claim handling strategies and their effects on claim outcomes. Armed with this information, claims executives can modify their claim handling practices to ensure that they are continuously reducing leakage.

These are only a few of the ways in which todays software technology can directly affect the key drivers of leakage. Insurance carriers should review their own operations to identify their most pressing challenges and opportunities and learn how they can apply technology to address these issues. But in any case, the key insight is thinking of technology as a tool to improve the claims operation and claim outcomes, not simply as a crutch that makes it possible to get by with fewer adjusters.

In making the case for new technology, claims executives should focus on its quantifiable impact on leakagefor example, identifying potential improvements in the percentage of claims that are justifiably denied, or the percentage of claims for which subrogation is successfully pursued. By translating these improvement opportunities into real numbers, executives can show how investments in claims technology can translate into bottom-line improvements for the whole company.

Most importantly, by turning to leakage reduction rather than focusing narrowly on direct loss adjustment expenses, claims executives can reshape the perception of claims as a cost center, highlighting instead its critical role in increasing company profitability. Once the strategic role of claims is recognized, executives should have no trouble demanding the tools they need to manage their operations and reduce leakage.

Alex Naddaff is vice president of implementation services at Guidewire Software, which makes products that help property and casualty insurers reduce leakage. He can be reached at [email protected].

Reproduced from National Underwriter Edition, March 31, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.