The P&C insurance industry is undergoing sweeping change as carriers are placing increased emphasis on innovation to differentiate themselves in a crowded, mature marketplace. Claim management has increasingly become an area for strategic innovation, with insurers directing a significant amount of focus on claim-related business and technology initiatives to improve customer service, total claim results, operational efficiency, and staff retention. While a soft market has some companies shifting gears toward more top-line concerns, the carriers that will ultimately take a leading position will invest in claims to promote further market differentiation, gain market share, and protect their bottom lines.
Those companies that choose to stick with their current claim operations risk being left behind. One significant risk is claim contagion, the negative trickle-down effect of poor claim operation performance, which can eventually extend to all business operations. Furthermore, the claim organization plays a pivotal role in a carrier’s ability to satisfy its regulatory obligations. Historical under-investment in the regulatory compliance area has made the claim function a consistent and leading offender as carriers struggle to address their mounting compliance requirements and to pay out the fines associated with noncompliance.
Here we will explore the innovations and leading practices companies are employing to improve and, where required, transform their claim organizations, business processes, and systems. We’ll look at the way these changes are aligning carriers’ operations to support their strategic business objectives. Finally, we also will highlight the business and technical challenges commonly experienced throughout the current claim lifecycle and the business performance issues that can undermine the improvement process.
Chartering and launching a claim transformation program is quite easy relative to the effort and structural rigor required to properly monitor progress against the program charter and to assure that the program’s results align with the objectives. A compounding factor is the amount of time before substantial benefits from this investment can be realized. We will present a compelling approach to 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 ranks second behind policy administration for the highest budget allocations for new information technology (IT) projects among US mid-sized P&C carriers. This phenomenon is coupled with a recent trend for P&C insurance companies to devote more of their IT budgets and resources to new projects than to maintaining existing processes and systems.
A deeper analysis of statistical data shows that insurance claim organizations are spending in the areas of new technology and systems; business process and workflow automation; improved data and content management; and business intelligence. Claim organizations must also meet regulatory demands by embedding compliance into their operations, technology, and claim-handling processes. Results from Wolters Kluwer Financial Service’s 2007 report, “Top 10 Criticisms on Insurance Market Conduct Exams; Help Property/Casualty, Life/Health Insurers Prevent Noncompliance Violations,” show that claims continues to be an area of major deficiency, especially in timely payment or denial; claim file documentation; and adequate communication associated with settlement delays, statutes, denial reasoning, and customer rights.
In an ongoing effort to achieve a competitive advantage and drive positive financial results, companies are leveraging their investment dollars to improve several key claim areas: customer service, total claim results, operational efficiency, and staff retention. In addition to driving the initiatives to improve these areas, claim leaders are looking beyond their own functions to better align their strategies with those of the broader business. Organizations that have neglected to invest in their claim function may experience deteriorating market share or a loss of a leadership position. This situation may be avoided by recognizing the symptoms, risks, challenges, and cross-functional benefits associated with a claim transformation initiative.
While claim transformation is a major focus for carriers, it is our experience that too many insurance companies initially pursue this transformation in IT, addressing the systems’ needs without first paying proper attention to improving the business processes and operating models that drive the claim area.
The Broader Implications
Claim improvements can improve a carrier’s business performance in numerous ways:
- Quality and timely claim responses foster higher customer satisfaction levels.
- Better data management leads to more effective decision-making.
- Increased resource capabilities provide greater control over operational risk in underwriting and claim processes.
- Managing case reserves results in more accurate ultimate loss projections.
- Correct case estimates across the claim portfolio strengthen capital efficiency.
- A more effective claim supply chain contributes to cost optimization.
At their best, improvements in the claim area reduce business uncertainty through better risk management and enhance a carrier’s financial performance. Superior service and a positive customer experience during the claim process can drive brand enhancement and differentiation in the marketplace. Claim improvements will support pricing effectiveness by reducing the uncertainty over claim development, which leads to more accurate reserves and IBNR values. They also contribute to managing the insurance soft- and hard-market cycles and maximizing company profitability by helping to lower loss and expense ratios and identify redundant reserves. Most significantly, at a time when insurers are embracing new global accounting and capital standards, an improved claim process will support a successful compliance and regulatory agenda that includes International Financial Reporting Standards and Solvency II.
Recognizing Symptoms and Risks
Claim transformation can be a major undertaking that seeks to address the full suite of organizational, business, and technical challenges across the claim value chain. There are many lessons to be learned as companies redesign their operating models to balance the competing objectives of customer service and cost management, implement new technologies to replace legacy systems, and align business processes with business strategies. Key symptoms that signal the need for a change in claims include:
- The variable execution of the claim-handling process, which results in inconsistent customer service, longer processing times, and increased leakage.
- An inability to track and manage indemnity spend effectively.
- A manual and lengthy coverage verification process with multiple file hand-offs.
- A tendency to make decisions regarding processes and investments using allocated loss-adjusted expenses (ALAE) or unallocated loss-adjusted expenses (ULAE), two of the less-essential areas in the claim cost equation.
- A heavy reliance on non-integrated third parties for claim-handling processes and data.
- A high IT overhead resulting from system application redundancy, data quality issues, and disparate systems.
- An inordinate percentage of staff time spent on non-claim outcome activities such as research, content and mail-handling versus evaluation, negotiation, and other functions that add greater 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 transitioning workforce.
Neglecting/ignoring these symptoms can cause deleterious effects on the entire company. Performance issues can result in lost or unprofitable business, redundant or inaccurate case reserves, increased capital requirements, and added costs associated with higher staff attrition rates and loss of intellectual capital. The issues can reduce the ability to identify operational risk in claim and underwriting processes and can mask warning signs that may point to greater risk exposure for the entire organization. Equally important, optimal business values can be undermined by the risk that rating agencies could reduce an insurer’s security outlook.
Essential Elements of Transformation
Leading insurance carriers are combining claim technology investments with a review of and, where required, upgrade to their related business processes and organizational structures to improve their operations and charter projects that drive meaningful change and deliver true bottom-line value.
A notable development shaping the future of claims is a single, interfacing claim management system that replaces or consolidates more costly, archaic legacy systems with modern, flexible technology. 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 data model.
- Facilitates data-based decision-making and performance monitoring.
- Leads to more visibility for the claim-processing functions and increased automation in administrative claim services.
- Helps companies to address regulatory compliance issues by improving audit capabilities in claim financial transactions, along with business rules and content management capabilities.
The trend toward a single, interfacing claim management system is effectively supported by a general market shift from custom-developed claim systems to configurable vendor package solutions. As the claim vendor marketplace continues to mature, success rates for claim-package implementations have effectively eclipsed those of custom builds.
Another essential component of a claim transformation is claim leakage analysis. A leakage capture study focuses on current claim processes and reviews claim-handling guidelines, file documentation, and final outcomes from the adjudication process. Quantification and qualification analysis estimates the amount of claim leakage by business line and recommends areas for improvement. An analysis of the results, along with a benchmarking study, can identify gaps and opportunities relative to leading claim practices. The outcomes provide companies a perspective for evaluating their competitive industry position against that of their peers.
Along with claim leakage studies, companies are making investments in predictive modeling tools and technologies. Traditionally utilized by the underwriting and marketing/product development units, predictive modeling is being used by claim leaders in the areas of fraud detection, resource allocation, large-loss identification, and subrogation and salvage recoveries. Immediate results from both leakage analysis and predictive modeling have been seen in claim fraud detection and prevention. Identifying fraudulent claims at an early stage in the claim lifecycle can be a tremendous cost-saver for the industry. With a multifaceted approach to fraud identification and referral that uses automated, sophisticated business intelligence tools in conjunction with leading practices, insurers are effectively reducing indemnity costs.
Other areas for improvement on the claim transformation agenda include advanced business rules engines and more robust business intelligence solutions to standardize processes and support data-based decision-making. Companies are also benefiting from paperless imaging systems with document storage and retrieval systems that enhance claim response times and file management capabilities. In addition to processes and operations improvements, these initiatives also support increased control around the risk management and regulatory compliance areas mentioned earlier.
Carriers should not underestimate the “people impact” resulting from the significant changes typically associated with new claim technology and business processes. In addition to launching formal change management programs as part of their claim transformations, organizations are also taking the opportunity to address knowledge capital loss, which manifests itself through resource attrition and a retiring workforce. To address claim staff retention, insurers are developing career paths with better-defined expectations and progression, realigning hierarchical relationships across the organization, and implementing more practical performance management scorecards at all levels. Beyond increasing training for their junior staff, carriers are also embedding more claim workflow, technical knowledge, and business rules in their new systems to capture and leverage the broad expertise of experienced staff before they walk out the door.
Typically, insurers rely on a large number of business partners or third parties for claim-handling processes. Insurance carriers have made great strides in the last few years consolidating these vendors to leverage spend for volume discounts and to lower vendor management overhead. Despite this success, many carriers have been slow to take the next and critically important step: integrating the vendors into their core operations to achieve more consistent and seamless customer service and case management processes, which will enhance the value of the relationship between the carrier and vendor.
Furthermore, as companies initiate new projects and increase their focus on managing expenses, there is continuing interest in pursuing traditional offshore outsourcing of noncore business operations, such as accounting services, human resource functions, IT infrastructure, and maintenance of noncore applications. According to a 2007 report by DataMonitor, 52 percent of insurance companies surveyed around the globe now outsource at least one business process, compared with just 41 percent in 2005.
Given the complexity of the claim-handling process, we envision that business process outsourcing of core claim processes will be largely experimental over the next two to three years with call-center, back-office and data collection activities still being the most prevalent. However, one area at the core of claim processing where outsourcing is gaining traction is claim management system application maintenance and development. This trend parallels the insurers’ move toward more package systems for their core claim-processing needs.
Creating a Results-Driven Program
A results-driven claim transformation program includes a business case; the proper chartering and execution of claim process improvements; and the implementation of technology.
When constructing a business case for claim transformation, carriers should have a clear framework for capturing and measuring benefits. Traditional categories for tracking the results associated with claim projects include indemnity, ALAE, and ULAE. Increasingly, claim executives are also including nonfinancial drivers — soft benefits — in their business cases to illustrate the strategic importance of claims to the entire organization. When naming soft benefits, it is important to link these drivers to more tangible measurements, such as the impact of customer satisfaction on policyholder retention.
The claim process improvements that should be chartered and monitored during the transformation program include:
- An improved focus on customer service.
- Better spend management that controls ALAE, ULAE, and indemnity costs.
- Accurate metrics and reporting.
- Less administrative burden on highly specialized claim staff.
The claim technology improvements that should be chartered and monitored during the transformation program include:
- A migration towards a common portal for all claim services and administration;
- Workflow transformation and management to support straight-through processing; and
- A flexible platform with a service-oriented architecture to support less costly and more robust integration with other internal or external systems.
Process and technology improvement initiatives must be effectively executed to avoid the significant business disruption that can otherwise occur. Additional risks include increased employee turnover and runaway project costs, both of which can erode the business case for performing the transformation.
Driving Enterprise Benefits
Carriers that have undertaken claim transformation initiatives are already realizing the return on their investments. In some cases, financial savings gained from early claim projects are being used to fund subsequent phases of the claim transformation. Companies have also begun to recognize that success at the operational level will ultimately drive improved risk management and increased business that, if priced effectively in the marketplace, will generate additional profits. Other key drivers for success include identifying redundant reserves that are tied to unrecognized profit and releasing capital or lowering capital requirements to increase financial efficiency. The last, but perhaps one of the most important for insurers, is an improved security rating, which reflects financial stability and growth. Companies with higher financial ratings have access to more capital, are better positioned in global insurance markets, and have the reputation to attract quality customers.
Making the Case
Due to the inherent complexity of claim processing and its critical role within an insurance carrier, any effort to transform the organization will require significant investment, commitment, and discipline. The importance of implementing structured, independent governance and measurement throughout the claim process cannot be underestimated.
The case for transformation is real, as evidenced by the significant investments being made by the P&C industry in their claim organizations and by the results they are realizing. Whether your organization is at the beginning of the claim transformation process or in the midst of a multi-year program, one thing is clear: those companies not making investments risk being left behind by their competitors as the claim function continues to grow in importance as a strategic differentiator in the marketplace.
David Connolly is principal of financial services and Chris Raimondo is manager of financial services at Ernst & Young. Connolly may be reached at 650-849-4710, firstname.lastname@example.org, while Raimondo may be reached at 702-267-9078, email@example.com.