The P&C insurance industry is undergoing sweeping change ascarriers are placing increased emphasis on innovation todifferentiate themselves in a crowded, mature marketplace. Claimmanagement has increasingly become an area for strategicinnovation, with insurers directing a significant amount of focuson claim-related business and technology initiatives to improvecustomer service, total claim results, operational efficiency, andstaff retention. While a soft market has some companies shiftinggears toward more top-line concerns, the carriers that willultimately take a leading position will invest in claims to promotefurther market differentiation, gain market share, and protecttheir bottom lines.

Those companies that choose to stick with their current claimoperations risk being left behind. One significant risk isclaim contagion, the negative trickle-down effect of poorclaim operation performance, which can eventually extend to allbusiness operations. Furthermore, the claim organization plays apivotal role in a carrier's ability to satisfy its regulatoryobligations. Historical under-investment in the regulatorycompliance area has made the claim function a consistent andleading offender as carriers struggle to address their mountingcompliance requirements and to pay out the fines associated withnoncompliance.

Here we will explore the innovations and leading practicescompanies are employing to improve and, where required, transformtheir claim organizations, business processes, and systems. We'lllook at the way these changes are aligning carriers' operations tosupport their strategic business objectives. Finally, we also willhighlight the business and technical challenges commonlyexperienced throughout the current claim lifecycle and the businessperformance issues that can undermine the improvement process.

Chartering and launching a claim transformation program is quiteeasy relative to the effort and structural rigor required toproperly monitor progress against the program charter and to assurethat the program's results align with the objectives. A compoundingfactor is the amount of time before substantial benefits from thisinvestment can be realized. We will present a compelling approachto transformation planning and execution and the related benefits,which typically outweigh the effort and associated costs.

Current Trends in Claim Investment

According to a survey by Celent published in 2008, claims rankssecond behind policy administration for the highest budgetallocations for new information technology (IT) projects among USmid-sized P&C carriers. This phenomenon is coupled with arecent trend for P&C insurance companies to devote more oftheir IT budgets and resources to new projects than to maintainingexisting processes and systems.

A deeper analysis of statistical data shows that insurance claimorganizations are spending in the areas of new technology andsystems; business process and workflow automation; improved dataand content management; and business intelligence. Claimorganizations must also meet regulatory demands by embeddingcompliance into their operations, technology, and claim-handlingprocesses. Results from Wolters Kluwer Financial Service's 2007report, "Top 10 Criticisms on Insurance Market Conduct Exams; HelpProperty/Casualty, Life/Health Insurers Prevent NoncomplianceViolations," show that claims continues to be an area of majordeficiency, especially in timely payment or denial; claim filedocumentation; and adequate communication associated withsettlement delays, statutes, denial reasoning, and customerrights.

In an ongoing effort to achieve a competitive advantage anddrive positive financial results, companies are leveraging theirinvestment dollars to improve several key claim areas: customerservice, total claim results, operational efficiency, and staffretention. In addition to driving the initiatives to improve theseareas, claim leaders are looking beyond their own functions tobetter align their strategies with those of the broader business.Organizations that have neglected to invest in their claim functionmay experience deteriorating market share or a loss of a leadershipposition. This situation may be avoided by recognizing thesymptoms, risks, challenges, and cross-functional benefitsassociated with a claim transformation initiative.

While claim transformation is a major focus for carriers, it isour experience that too many insurance companies initially pursuethis transformation in IT, addressing the systems' needs withoutfirst paying proper attention to improving the business processesand operating models that drive the claim area.

The Broader Implications

Claim improvements can improve a carrier's business performancein numerous ways:

• Quality and timely claim responses foster higher customersatisfaction levels.
• Better data management leads to more effectivedecision-making.
• Increased resource capabilities provide greater control overoperational risk in underwriting and claim processes.
• Managing case reserves results in more accurate ultimate lossprojections.
• Correct case estimates across the claim portfolio strengthencapital efficiency.
• A more effective claim supply chain contributes to costoptimization.

At their best, improvements in the claim area reduce businessuncertainty through better risk management and enhance a carrier'sfinancial performance. Superior service and a positive customerexperience during the claim process can drive brand enhancement anddifferentiation in the marketplace. Claim improvements will supportpricing effectiveness by reducing the uncertainty over claimdevelopment, which leads to more accurate reserves and IBNR values.They also contribute to managing the insurance soft- andhard-market cycles and maximizing company profitability by helpingto lower loss and expense ratios and identify redundant reserves.Most significantly, at a time when insurers are embracing newglobal accounting and capital standards, an improved claim processwill support a successful compliance and regulatory agenda thatincludes International Financial Reporting Standards and SolvencyII.

Recognizing Symptoms and Risks

Claim transformation can be a major undertaking that seeks toaddress the full suite of organizational, business, and technicalchallenges across the claim value chain. There are many lessons tobe learned as companies redesign their operating models to balancethe competing objectives of customer service and cost management,implement new technologies to replace legacy systems, and alignbusiness processes with business strategies. Key symptoms thatsignal the need for a change in claims include:

• The variable execution of the claim-handling process, whichresults in inconsistent customer service, longer processing times,and increased leakage.
• An inability to track and manage indemnity spendeffectively.
• A manual and lengthy coverage verification process withmultiple file hand-offs.
• A tendency to make decisions regarding processes andinvestments using allocated loss-adjusted expenses (ALAE) orunallocated loss-adjusted expenses (ULAE), two of theless-essential areas in the claim cost equation.
• A heavy reliance on non-integrated third parties forclaim-handling processes and data.
• A high IT overhead resulting from system applicationredundancy, data quality issues, and disparate systems.
• An inordinate percentage of staff time spent on non-claimoutcome activities such as research, content and mail-handlingversus evaluation, negotiation, and other functions that addgreater value to the bottom line.
• An overwhelming volume of consistent compliance issues, fines,penalties, and excess costs.
• A loss of knowledge capital due to an aging and transitioningworkforce.

Neglecting/ignoring these symptoms can cause deleterious effectson the entire company. Performance issues can result in lost orunprofitable business, redundant or inaccurate case reserves,increased capital requirements, and added costs associated withhigher staff attrition rates and loss of intellectual capital. Theissues can reduce the ability to identify operational risk in claimand underwriting processes and can mask warning signs that maypoint to greater risk exposure for the entire organization. Equallyimportant, optimal business values can be undermined by the riskthat rating agencies could reduce an insurer's securityoutlook.

Essential Elements of Transformation

Leading insurance carriers are combining claim technologyinvestments with a review of and, where required, upgrade to theirrelated business processes and organizational structures to improvetheir operations and charter projects that drive meaningful changeand deliver true bottom-line value.

A notable development shaping the future of claims is a single,interfacing claim management system that replaces or consolidatesmore costly, archaic legacy systems with modern, flexibletechnology. Its adoption provides many benefits:

• Simplifies the claim function by consolidating, rationalizing,and centralizing claim platforms and data.
• Provides a flexible, resilient, and extensible claim datamodel.
• Facilitates data-based decision-making and performancemonitoring.
• Leads to more visibility for the claim-processing functions andincreased automation in administrative claim services.
• Helps companies to address regulatory compliance issues byimproving audit capabilities in claim financial transactions, alongwith business rules and content management capabilities.

The trend toward a single, interfacing claim management systemis effectively supported by a general market shift fromcustom-developed claim systems to configurable vendor packagesolutions. As the claim vendor marketplace continues to mature,success rates for claim-package implementations have effectivelyeclipsed those of custom builds.

Another essential component of a claim transformation is claimleakage analysis. A leakage capture study focuses on current claimprocesses and reviews claim-handling guidelines, filedocumentation, and final outcomes from the adjudication process.Quantification and qualification analysis estimates the amount ofclaim leakage by business line and recommends areas forimprovement. An analysis of the results, along with a benchmarkingstudy, can identify gaps and opportunities relative to leadingclaim practices. The outcomes provide companies a perspective forevaluating their competitive industry position against that oftheir peers.

Along with claim leakage studies, companies are makinginvestments in predictive modeling tools and technologies.Traditionally utilized by the underwriting and marketing/productdevelopment units, predictive modeling is being used by claimleaders in the areas of fraud detection, resource allocation,large-loss identification, and subrogation and salvage recoveries.Immediate results from both leakage analysis and predictivemodeling have been seen in claim fraud detection and prevention.Identifying fraudulent claims at an early stage in the claimlifecycle can be a tremendous cost-saver for the industry. With amultifaceted approach to fraud identification and referral thatuses automated, sophisticated business intelligence tools inconjunction with leading practices, insurers are effectivelyreducing indemnity costs.

Other areas for improvement on the claim transformation agendainclude advanced business rules engines and more robust businessintelligence solutions to standardize processes and supportdata-based decision-making. Companies are also benefiting frompaperless imaging systems with document storage and retrievalsystems that enhance claim response times and file managementcapabilities. In addition to processes and operations improvements,these initiatives also support increased control around the riskmanagement and regulatory compliance areas mentioned earlier.

Carriers should not underestimate the "people impact" resultingfrom the significant changes typically associated with new claimtechnology and business processes. In addition to launching formalchange management programs as part of their claim transformations,organizations are also taking the opportunity to address knowledgecapital loss, which manifests itself through resource attrition anda retiring workforce. To address claim staff retention, insurersare developing career paths with better-defined expectations andprogression, realigning hierarchical relationships across theorganization, and implementing more practical performancemanagement scorecards at all levels. Beyond increasing training fortheir junior staff, carriers are also embedding more claimworkflow, technical knowledge, and business rules in their newsystems to capture and leverage the broad expertise of experiencedstaff before they walk out the door.

Claim Outsourcing

Typically, insurers rely on a large number of business partnersor third parties for claim-handling processes. Insurance carriershave made great strides in the last few years consolidating thesevendors to leverage spend for volume discounts and to lower vendormanagement overhead. Despite this success, many carriers have beenslow to take the next and critically important step: integratingthe vendors into their core operations to achieve more consistentand seamless customer service and case management processes, whichwill enhance the value of the relationship between the carrier andvendor.

Furthermore, as companies initiate new projects and increasetheir focus on managing expenses, there is continuing interest inpursuing traditional offshore outsourcing of noncore businessoperations, such as accounting services, human resource functions,IT infrastructure, and maintenance of noncore applications.According to a 2007 report by DataMonitor, 52 percent of insurancecompanies surveyed around the globe now outsource at least onebusiness process, compared with just 41 percent in 2005.

Given the complexity of the claim-handling process, we envisionthat business process outsourcing of core claim processes will belargely experimental over the next two to three years withcall-center, back-office and data collection activities still beingthe most prevalent. However, one area at the core of claimprocessing where outsourcing is gaining traction is claimmanagement system application maintenance and development. Thistrend parallels the insurers' move toward more package systems fortheir core claim-processing needs.

Creating a Results-Driven Program

A results-driven claim transformation program includes abusiness case; the proper chartering and execution of claim processimprovements; and the implementation of technology.

When constructing a business case for claim transformation,carriers should have a clear framework for capturing and measuringbenefits. Traditional categories for tracking the resultsassociated with claim projects include indemnity, ALAE, and ULAE.Increasingly, claim executives are also including nonfinancialdrivers — soft benefits — in their business cases toillustrate the strategic importance of claims to the entireorganization. When naming soft benefits, it is important to linkthese drivers to more tangible measurements, such as the impact ofcustomer satisfaction on policyholder retention.

The claim process improvements that should be charteredand monitored during the transformation program include:

• An improved focus on customer service.
• Better spend management that controls ALAE, ULAE, and indemnitycosts.
• Accurate metrics and reporting.
• Less administrative burden on highly specialized claimstaff.

The claim technology improvements that should bechartered and monitored during the transformation programinclude:

• A migration towards a common portal for all claim services andadministration;
• Workflow transformation and management to supportstraight-through processing; and
• A flexible platform with a service-oriented architecture tosupport less costly and more robust integration with other internalor external systems.

Process and technology improvement initiatives must beeffectively executed to avoid the significant business disruptionthat can otherwise occur. Additional risks include increasedemployee turnover and runaway project costs, both of which canerode the business case for performing the transformation.

Driving Enterprise Benefits

Carriers that have undertaken claim transformation initiativesare already realizing the return on their investments. In somecases, financial savings gained from early claim projects are beingused to fund subsequent phases of the claim transformation.Companies have also begun to recognize that success at theoperational level will ultimately drive improved risk managementand increased business that, if priced effectively in themarketplace, will generate additional profits. Other key driversfor success include identifying redundant reserves that are tied tounrecognized profit and releasing capital or lowering capitalrequirements to increase financial efficiency. The last, butperhaps one of the most important for insurers, is an improvedsecurity rating, which reflects financial stability and growth.Companies with higher financial ratings have access to morecapital, are better positioned in global insurance markets, andhave the reputation to attract quality customers.

Making the Case

Due to the inherent complexity of claim processing and itscritical role within an insurance carrier, any effort to transformthe organization will require significant investment, commitment,and discipline. The importance of implementing structured,independent governance and measurement throughout the claim processcannot be underestimated.

The case for transformation is real, as evidenced by thesignificant investments being made by the P&C industry in theirclaim organizations and by the results they are realizing. Whetheryour organization is at the beginning of the claim transformationprocess or in the midst of a multi-year program, one thing isclear: those companies not making investments risk being leftbehind by their competitors as the claim function continues to growin importance as a strategic differentiator in the marketplace.

David Connolly is principal of financial services and ChrisRaimondo is manager of financial services at Ernst & Young.Connolly may be reached at 650-849-4710, [email protected],while Raimondo may be reached at 702-267-9078,[email protected].