The claim functions are the heart of a property and casualty (P&C) insurer. Claim representatives, claim support staff, and claim leadership deliver on the expectations of and promises made by the carrier by addressing a claimant's issues in a time of crisis. They also manage the substantial majority of a P&C carrier's cost. In short, the claim function is one of a carrier's main instruments to deliver its overall expense and loss management strategy while retaining satisfied customers.

Increasingly, P&C insurers are marketing their claim service as a differentiator to attract and retain customers, and improve their competitive position. In fact, some carriers are transforming their claim function to add substance to the marketing message.

While the idea of transforming the claim function is attractive, it can be a lengthy and expensive undertaking. More importantly, there is a right way and a wrong way to go about it. First and foremost, insurers must align any claim transformation program with their business strategy. Sometimes, ambitious executives seek to drive change solely by implementing technology, for example, new internal core claim technology and customer facing “wrappers” such as mobile applications or web portals.

Insurers who take only this path may not achieve their ultimate goals, including reducing loss management expenses and fostering loyal policyholders. Leadership must initiate and deliver a comprehensive claim transformation program involving an integrated technology and business transformation to deliver on these goals.

A Challenging Environment

Despite recently improved underwriting results and better profitability, P&C insurers still face significant challenges, including intense pricing competition, rising operating costs, flagging investment returns, and the threat of rising fraudulent claims in a weak economy. Moreover, all policyholders have increasingly high expectations for quality service. All of this places significant pressure on insurers to improve the policyholder experience, often at a significant cost.

The confluence of these trends will make it difficult for insurers to sustain any recent gains. Many analysts expect economic growth will be relatively low for the foreseeable future, and insurers probably will not be able to offset negative trends through either price increases or a growing demand for insurance. Accordingly, controlling costs will be the most viable approach to maintaining profitability.

One way that leading insurers have been addressing these challenges is by keeping costs in check through transforming claim operations–the single largest business cost for P&C insurers and one of the most customer-facing aspects of their business. Inefficiencies in the claim process reveal themselves not only in a diminishing customer base and a revolving door full of adjusters, but in ways that directly affect the bottom line: Delayed and expensive settlements, inaccurate claim assessments, insufficient reserves, fraud, litigation, and ultimately even market capitalization.

Therefore, the goals of claim transformation, including increased efficiencies, reduced costs, and greater competitiveness, are highly desirable and are a top priority for the entire C-suite. The underlying business case is particularly strong for certain types of P&C insurers, including small carriers who are experiencing growth that outstrips their current claim infrastructure. The allure may also be strong for insurers operating with multiple legacy systems that preclude system consolidation as a solution, along with carriers that see claims as a potential way to gain a competitive advantage and want to upgrade their platform to become best-in-class.

Effective claim transformation efforts to date have resulted in internal productivity improvements, reduced legal and litigation expenses, and the successful transfer of risk to other carriers and reinsurers. Moreover, the results from several of these initiatives show that rationalizing and reforming the claim process can reduce firm-wide loss and expenses by three to five percent, with payback periods ranging from 18 months for smaller projects to three to five years for large-scale overhauls. Such savings represent a sizeable potential return in a business with historically tight margins and a measurable, sustainable competitive advantage.

In light of the potential advantages, claim transformation increasingly has evolved into a business imperative. Claim operations have become a leading venue for transformative change among P&C carriers over the past five or so years, and there is no shortage of innovative ideas about how to improve processes.

The ideas companies are implementing range from the foundational, rationalizing legacy operations to increase procedural consistency and benefit from sustained economies of scale, to the advanced, using real-time claim data to improve the level of service to claimants, manage vendors, identify suspicious claim activity, and initiate recovery opportunities. However, most insurers have limited access to investment capital, and are wrestling with how best to identify, prioritize, and implement changes.

The most effective approach to transformation is a comprehensive claim enhancement program that incorporates leading industry practices within the context of a company's own strategy and key performance indicators. Such a claim transformation program offers clear direction and practicable recommendations that balance customer satisfaction, process cost controls, and loss management.

An Analytics-Driven Approach

Any effort to revamp claim processes must reflect the fact that an ongoing shift to claim data and process management, as well as claimant and vendor communications has not only changed how individual claims are managed, but also how most functions operate at leading carriers. High-quality structured data as part of a next-generation claim management system can become the foundation for operational and strategic decision-making, and can drive improvement across all aspects of claim processing.

Consequently, carriers operating on legacy technology platforms–above those that reflect the programs and processes of several predecessor carriers–are at a disadvantage when it comes to implementing transformation processes. They are likely to need a greater investment in their technology systems before enhancing their claim platform.

However, the continued development of leading claim technologies specifically focused on the P&C sector provide insurers with an opportunity to implement a transformation initiative more effectively and efficiently, with less disruption, risk, and cost than in the past.

For example, data-driven analytics and decision support tools are changing operations management, making decisions both faster and more effective. The risk of whole system replacements–a major reason why some companies have not overhauled their claim operations–is increasingly being mitigated by easier-to-implement core claim systems and flexible integration software that allow for much lower risk introduction of new technology. Moreover, externalized rules and business process automation are enhancing control and consistency across the whole range of claims.

Select Elements of Analytics-based Claim Transformation

Analytics-based transformation can be a highly effective way of improving claim performance. The following are examples of the types of improvements that can be generated through the use of analytics.

Analyze and Manage Claim Variability: Basic reviews of claims can be made much more efficient through the use of analytics. For instance, structured claim data can power statistically valid, rules-driven claim audits that produce useful information, including flagging of potentially false or difficult claims based on pre-determined criteria.

More inclusive data can be used to recognize some of the statistically valid root causes of variability across a total claim operation, which can then be addressed in internal operational upgrade plans. The data can also be used to test various theories about the causes of claim variability and severity.

These programs provide significant flexibility in their implementations, with possibilities ranging from rules-based decisions, analytics, and reporting, to complete replacement of an entire claim system. In addition, claim systems housing externalizing business rules based on such analytics enables “anytime” review and modification of rules, with less need to rely on resources outside of claim operations.

Customize the FNOL Process: One of the best opportunities for improving the customer experience lies in the First Notice of Loss (FNOL) process. This process is often the first time that a claimant interacts with a carrier, and it provides the carrier with an opportunity to create a positive impression at a time when the customer typically is upset, confused, and uncertain. The process balances the carrier's data-gathering requirements with the need to reassure the claimant. Ideally, the process will result in rapid claim resolution, fair settlement, and a positive claimant experience.

All aspects of this process can be integrated and customized to create a seamless experience for the claimant. The process should rapidly and efficiently obtain the relevant information about the claim, share it with relevant internal and external parties, and enable them to engage with the claimant on an informed basis in a timely manner.

All claimants, insureds, and agents should be able to interact with the carrier thorough the channel of their choice (Web, call center, agent, messaging), regardless of whether the claim is being processed in-house or by a third-party provider as part of an overflow program.

Analytic Engines Can Enhance the Power of Automation: Powerful analytic engines can execute an assortment of functions in claim operations, including triage and assignment of incoming claims, fraud and recovery screening, knowledge-based decision support, trend analysis, and predictive modeling.

Carriers can externalize business rule tools to enhance these automated processes, providing superior screening and triage efficiency, better results, a retrospective review, and in-house modification.

Pre-screened claims can be referred to dedicated, in-house units that can cooperate with external networks to identify leakage and enhance recovery results. A closed-loop feedback can support both real-time refreshing of proprietary databases, and the availability of historical data for long-term mining and analysis.

Integrating Claim, Rate, and Usage Data: A transformed claim system should include fully integrated, reliable, and complete case data that is available both in-house and to vendors such as independent adjusters, repair shops, construction vendors, legal service providers, and others. The ability to actively engage these vendors as full partners is enough to justify a data integration initiative, enabling improved decisions, greater accountability, more granular spend strategies, and more accurate alignment of incentives.

Carriers can also benefit from more complete claim data, which can be used to perform audits, historical analyses, and trending breakdowns that can ensure more consistent outcomes. This consistency is important because extreme variability has a disproportionately high influence on overall claim results.

Using Advanced Analytics to Reduce Fraud: Given the risk of an increased number of fraudulent claims in today's economy, analytics can help to identify possibly suspicious claims earlier in the process. Identifying those claims earlier reduces wasted time and makesit more likely that false filings will be identified and denied.

The analytics that are currently being used most often in such anti-fraud efforts include dynamic scripting, fraud questionnaires, and all-inclusive, up-front data capture techniques. Combined with structured data, these analytics can help reviewers examine flagged claims using proprietary claimant data, special investigation unit analyses, and industry databases. The use of analytic engines and modeling tools can also help concentrate investigative resources on the highest-value targets.

Applying Case Management Software to Analyze Strategies: One of the more difficult decisions to make in the claim resolution process is choosing which strategy to pursue for a given claim. This choice is especially difficult because litigation can be such a potentially costly course of action. Analytics can help to reduce carrier defense costs by avoiding litigation in select situations when it simply would not make sense.

Predictive modeling based on analyses of historical claim outcomes allows claim leaders to compare the anticipated costs of arbitration, negotiation, and litigation in order to select the most cost-effective option based on the most probable outcome.

Analytics can also be used for reviews of historical claim data. underwriters can apply that data to develop innovative pricing techniques to align carrier and insured behavior. These strategies can include defense cost caps with the associated premium discounts, or policies which specify no defense cost coverage.

Steps to Transformation

The benefits of a claim transformation program are clear. The path forward, however, is less so for many carriers. The transformation of a process as broadly based and integral to the P&C insurance business as claim operations is requires a genuinely holistic approach that reaches across the organization and encompasses all related functions.

Similarly, a transformation should advance through a process that includes fundamental steps, including strategy development, design, construction, implementation, and transformation, with each step reflecting lessons from other companies' transformations. In particular, a company that plans to undertake a transformation should do the following:

First, decide on the direction. It is easy to become too granular before senior management has agreed to a clear direction, especially when using a broad transformation program that requires a great deal of attention to detail. Before proceeding with an analysis of the organization, its processes, and technologies, the broad direction of the transformation needs to be determined and aligned with the claim business strategy.

Keep an eye on the bottom line. All of the business and technology initiatives should focus on delivering quantifiable business value, and should be tested using precise analytical techniques for loss, claim-related process costs, and customer satisfaction. This is particularly important because CEOs and CFOs will prioritize investments based on projected risk and expected return. Pilots or proofs of concept should be used to test ideas as well as better define economic and customer impacts of the program.

Define the goals. Metrics, targets, and benchmarks should be defined for each relevant claim function, and progress towards the goals should be monitored throughout the transformation process.

Ensure accuracy. Detailed and proven cost-estimation models, validated against similar projects both internally and externally, should be used to calculate business transformation benefits, identify systems implementation costs, and measure results.

Emphasize a cross-functional approach. Claim transformation programs should recognize impacts across operational and business lines. The program should reconcile the complex relationships between the claim, underwriting, reinsurance, finance, and actuarial functions.

Ensure that the ideas are practicable. Unrealistic plans will only result in failure or, at the very least, under-achievement that will undercut management's credibility. Recommendations must be relevant, based on lessons continually learned, and, above all, capable of being implemented.

Make transformation a high priority. As with any other business operation, an initiative will be successful if it has a high profile internally and the support of senior management. An internal champion who reports directly to the CEO or the Chief Claims Officer is in the best position to drive such a transformation, making key program and business decisions.

In the end, transformation of the claim organization can help to reenergize a company's entire operation, drive additional change, and speed improvement in such areas as underwriting, finance, and marketing. Insurance companies both in the U.S. and abroad are already demonstrating the benefits of transforming claim operations; carriers that have not yet initiated a transformation program should carefully consider the competitive advantages it would offer.

Richard Pankhurst is director of claim strategy and transformation for Pricewaterhouse Coopers LLP. He may be reached at 512-867-8704, or at richard.j.pankhurst@us.pwc.com.

Russell Riggen is principal of advisory services at Pricewaterhouse Coopers LLP. He may be contacted at 630-561-3626 or at russell.riggen@us.pwc.com.

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