Twenty-three years ago in the midst of a soft market trough, Istood in an assemblage of underwriters, actuaries, and claimemployees listening to a CEO state that he could have paid theunderwriting sector to stay home and play golf for the entire yearand made more money than having them write the kind of businessthey had placed on the company's books. The messages at that timewas clear: Manage the front door. Understand what the exposure.Does it meet the organization's underwriting standards? Is itpriced appropriately? In other words, underwrite the risk beforebinding coverage. When this is performed in a consistent anddisciplined manner over time, value is created.

Today, billions of dollars have been invested in a now widelyrecognized unknown and significantly misunderstood investmentproduct called mortgage-backed securities. Once the upfront feeswere collected from the original mortgage transaction involving alot of unqualified borrowers, no one really cared about thedownstream implications of whether or not the borrower couldactually pay back the loan. Think of it in terms of self-adverseselection. The difference over time being not that someone wasn'tmanaging the front door, but that they intentionally left it open.The devastation to date has been immediate, like the aftermath ofSherman's march through Georgia. Financial markets in near ruin,banks failing, exponential mortgage defaults and foreclosures, andyet we have no soundings indicating how deep the problem goes.

Initial indicators of what property and casualty insurers facein the near term have begun to emerge -- and they aren'tencouraging. In the midst of sheer survival, buyers are moreconcerned with keeping their jobs, feeding their families, and forthose fortunate to still have one, paying the mortgage. With fewerdollars to go around, insurance becomes a second, third, orfourth-tier consideration for many consumers. The result, as we arealready seeing in the rise of uninsured motorists, is a precipitousdrop in premium dollars that, taken in combination with portfolioerosion and increasing loss and expense pressure, forge the perfectvalue destruction storm.

How then do managers charged with the responsibility ofprotecting corporate value successfully plan and execute in timesof such uncertainty? The answer, as you would imagine, is complex.It involves history, knowledge, and discipline.

Dealing with Depression

The need for value protection as financial markets continue todeteriorate and the general economy softens is the single biggestissue on corporate management's mind --or it should be. In order tonavigate successfully through this monetary minefield, managersneed to possess a thorough knowledge of both internal and externalperformance drivers.

An external example in today's economic environment is creditrestriction, which creates the potential for non-equity portfoliodeterioration. This constraint, taken in conjunction withcontinuously falling prices in the stock market, places increasedpressure on an insurer's capital base. At this point, departmentsof insurance regulators begin to pay closer attention to theorganization's overall financial strength. In short, once value hasbeen created, it must be preserved or protected. Such is the natureof enterprise. This is where the claim department comes in.

With rapidly shrinking profit margins, deteriorating investmentportfolios, and pervasive economic uncertainty, where better tofocus this attention than on the claim department, an internal andcontrollable value protection resource? The degree to which claimorganizations perform in a consistent and disciplined mannerincreases the potential for achievement of the organization'sobjectives; competitive advantage in the marketplace; and improvedvalue protection.

With the ever worsening turn of events in the U.S. and globaleconomies, insurance carriers need to focus on value preservation,since none are immune to the mortgage-lending meltdown rippleeffect.

Questions management needs to be asking that have a directeffect on value protection include: Doe the organization possess anaccurate understanding of its strengths and weaknesses? Ismanagement able to readily identify internal and externalopportunities and value threats? Does the organization haveappropriate processes and procedures in place to effectively dealwith a historic assault on the financial system from an internal aswell as external perspective? Is it consistently executing theseprocedures at or above best-practice levels in the performance ofcore adjusting skills? Does the organization have effective checksand balances in place to identify and contain trends and influenceson claims themselves? Is management measuring the right activitiesand results, with the overall combined effect being contribution tothe enterprise in effectively managing its assets?
If you don't already have the answers to these questions, or worseyet haven't begun asking them, read on.

Retrench and Recalibrate

The best place to begin confirming whether or not theorganization has an accurate assessment of current internal andexternal opportunities as well as value threats is by revisitingthe strategic plan. This will help determine if the plan remainstimely in accurately documenting significant challenges orobstacles to achieving the company's performance goals andobjectives in a rapidly changing external environment.

Although this is historically viewed as a long-term managementtool, the rules of the game have changed dramatically to the pointwhere more frequent evaluation of accuracy and appropriateness isnecessary. It is, after all, a living document and should besensitive to the environment for which it was developed. Morefrequent review will provide the organization with the opportunityto reassess its planned or current business activities, targetmarkets, product lines, and competitive position as they relate tothe present environment.

The claim department can assist with intelligence gathering andinput relative to target markets and product lines. For example, inthe current economic environment, trends regarding theft andvandalism in the personal lines property line of business arebeginning to emerge that create potential pricing and overall riskdesirability considerations.

Does the organization have clear, well-defined processes andprocedures in place to effectively deal with these challenges? Arethese processes and procedures up to date and responsive to currentchallenges and demands? For instance, in the above personal linesexample, current trends indicate an increase in the number ofunscheduled personal property theft losses occurring shortlyfollowing or in close proximity to policy inception. Have theinvolved frontline claim handlers received updated trainingrelative to recorded statement content and ground work preparationfor potential examinations under oath? Now is not the time to spareeducating claim handlers on effective and responsive adjustmenttechniques that provide increased potential for value protection.Have SIU guidelines been reviewed and modified to respond moreappropriately to these emerging trends? Most importantly, is thecommunication link with SIU clearly understood and being followedby all involved in the adjustment process? This is particularlyimportant when it comes to claims involving potential arson, wherestandard or routine adjustment procedures are not sufficient tomeet the technical requirements of investigating these difficultclaims.

What about theft and vandalism claims involving abandoned orunoccupied structures under foreclosure? These claims haveliterally exploded over the past 18-to-24 months and present theirown unique adjusting challenges, including but not limited tolender loss payable coverage considerations.

Are there effective checks and balances in place to identify andcontain the trends and influences on claims themselves? Havevarious trigger points been re-evaluated for appropriateness inthis financially pressurized environment? For example, has theorganization recently assessed its payment report threshold? Doesthe dollar amount need to be adjusted or the schedule of reviewmodified? Have supervisor and closed file audits been increased forcertain lines of business or causes of loss? Has internaldefalcation scrutiny been modified for closer monitoring of thoseinvolved in the actual disbursement of monies? No manager wants tothink his employees would be involved in such activity; however,sadly, experience tells us it can and does happen. Effective valuepreservation considers and anticipates these questions and isactively engaged in answering them.

My next question involves how this intelligence is being used orfed back to the organization to improve performance andresponsiveness. Do current audits indicate claim handlers areconsistently executing at or above effectiveness levels in theperformance of core skills (in particular, modified skills designedto increase value protection in the current environment)? Forexample, prompt same-day or 24-hour contact significantly increasesthe potential to control the loss adjustment and avoid costlyinvolvement of attorneys or public adjusters. Why should this be aninitial concern? Because over time, the same set of facts anddamages only increase in value. A missed opportunity here resultsin potential loss of control and a reduced bottom line. Statedanother way, it's value destruction.

Does the organization's level of performance translate into acompetitive advantage in the market place? Is first contact beingmade insistently and thoroughly? Are claim handlers tellingpolicyholders or third-party claimants what they need to hear inorder to be as informed as possible? Not just at a regulatorycompliance or perfunctory level, but at a substantive, professionaladjustment level that is distinguishable? Are telephone calls beingreturned in a timely manner?

Given the current level of customer insecurity driven by thefinancial markets, calling someone back takes on a whole newdimension of importance in today's environment. Prompt contact,explanation of benefits, and whatever other ancillary activityleading to final resolution in a prompt professional mannerincreases the potential for lower paid loss and loss adjustmentexpenses. If you can do it faster and cheaper than the competitionwhile at the same time delivering solid service, you have attaineda competitive advantage.

Is the organization measuring the right activities and resultsfor current environmental demands, with the overall combined effectbeing contribution to the enterprise in effectively managing itsassets? For example, most organizations have diary systems,inactivity measurements, average time measurements, etc. Howeffectively and consistently are they being used? When is the lasttime an internal meeting either focused on or referred to resultsfrom the measurement mechanisms as a bottom line influencingfactor? What about self, intra, and closed file audits? How arethese findings making their way into bottom-line managementactions? Does the organization continually measure and monitor keyvalue protection activities? What is being measured and why? Areyesterday's metrics still valid measurements within this neweconomic environment, or have they become outdated and obsolete?Are closing ratios as important today as cycle times? Are pendingcounts relevant to corporate value protection?

All About Protection

Value protection is the result of a number of dimensions beingpracticed in a continuous, accurate, and disciplined manner.Successfully managed enterprises understand that they can onlyinfluence what is within their sphere of control. Now is the time,given the level of external uncertainty and financial pressure, tobe utilizing an internal and therefore controllable corporate valueprotection resource -- the claim department -- to its fullest.While not generally recognized as a top-line contributor, the claimdepartment does maintain an important position in bottom-linecontribution and corporate value protection.

Oh, and the company to which I referred to earlier succeeded inreversing its fortunes, having learned how to manage its front doorand is today one of the strongest P&C carriers in the industry.I think we all need a happy ending these days!