Enterprise risk management (ERM) has become one of the most important and valuable management tools for insurance companies. Increased focus on ERM by regulators, auditing firms, and rating agencies has heightened pressure on carriers to adopt robust ERM programs. Developments at both the state and federal level through 2014 will drive ERM initiatives further. What does this mean for an insurer's claims function?

A Wider World of Risk

ERM is the process of planning, organizing, leading, and controlling all activities of a company in an integrated fashion, in order to minimize the effects of risk on the company's capital and earnings. While individual business functional areas such as claims, underwriting and compliance typically manage specific kinds of loss or risk to the company, such as losses stemming from claims or lawsuits, an ERM program has a much broader scope. Its view is of the “whole world” of risk throughout a company.

Claims-related risks are only part of the ERM picture, but they present some of the most significant risks to the company from a compliance, financial and market-conduct perspective. Managers with enterprise risk responsibilities rank them as a high priority accordingly.

Among the most common claims-related risks are first- and third-party claims, whether settled quickly or litigated. These include indemnity payments, claims handling and any litigation expenses. The overall concept of “claims” or “underwriting losses” may not necessarily make an insurance company's list of “top risks” for its ERM program, as a certain level of claims or underwriting losses are always expected. After all, the majority of claims losses are not caused by the company itself. Therefore some losses cannot be prevented or mitigated by the application of controls such as the purchase of reinsurance. Claims themselves are considered part of doing business.

However, an ERM program might focus more narrowly on distinct unanticipated risks specifically relating to, or arising out of, the claims-handing process. Such risks could include, and be documented as:

Improper or erroneous claim handling leading to marginally larger claims payments than expected.
Payments made for claim handling allegedly conducted in “bad faith,” or
Settlements, fees, or fines relating to consumer complaints generated by claims handling.

Another significant source of claim risk is the potential violation of insurance laws and market conduct regulations. There can be significant financial ripple effects if a claim compliance breach also impacts other areas such as legal, underwriting or finance.

Claims-Specific Benefits of Implementing ERM

Adopting an ERM program, which requires looking at risks through multiple perspectives across the organization, is often a major cultural change for many companies. On the plus side, claims areas gain many benefits from establishing an ERM framework. An ERM initiative can lead to new ways of looking at claims compliance risks and controls, as more attention is paid to a thorough quantification of risk.

Prior to the implementation of an ERM program, companies often take a “siloed approach” to risk control and compliance activities; that is, there is little or no collaboration or standardization of mitigation techniques or controls between business units. Risk management efforts often focus disproportionately on risk avoidance techniques and reactive risk controls, rather than proactive, preventative measures. Frequently, risks are identified but are not assigned specific owners who are responsible for improving the risk situation.

An ERM program can significantly improve a company's chances of managing risks well, and can help the claims function do its job better in particular. Having an ERM program broadens the relationship between Claims and other business units in the organization. Discussions of potential loss faced across the enterprise by an action, event or activity can deepen all participants' understanding of inter-dependencies between departments. Claims, legal, and compliance staff, where previously segregated or working in silos, can become more aligned, facilitating the sharing of regulatory and compliance information of common interest.

Communications and overall relationships may also improve between claims and other operational departments such as underwriting, actuarial, and finance, as all areas come to better understand each others' concerns and priorities, and there may be more analysis or transparency around how claims and claim reserves impact the overall capital of the company. Insurers need to have a consistent and standard approach to risk throughout their organization. When they achieve this, particularly when facilitated by procedures and technology that help them centralize the process, they benefit from having a more transparent view of risk within their organization.

As a result, implementation of a formal ERM risk assessment process often provides new perspectives on how information about the company's risks should be organized and managed, including claims-related risks. This new perspective often leads to re-assignments of resources and staff responsibilities, warranting new or revised workflows, managerial approval procedures, or attestation processes.

Further, when the calculation of risks and the costs of controls can be measured in dollars, priorities can more easily be set. ERM highlights areas where additional staff/time/money is needed. It also encourages the strengthening of controls, particularly claims and compliance-related measures, and offers an opportunity for the company to implement “best practices” with respect to its day-to-day policies and procedures.

Establishing Claims' Seat at the ERM Table

To maximize the benefits of an ERM process, the ERM team and claims managers should work closely together, aligning themselves in a common framework, with common goals, and a coordinated approach. Claims should receive more advance notice of, and more information about, regulatory changes, new product lines, business partners, vendors, and other strategic issues faced by other departments. Encourage all departments to identify and share “emerging risks” and trends in their area of responsibility with claims, and create a formal communication loop to understand risks seen by other areas. Maximizing the information available to claims—and the speed with which this information can be accessed—will enable staff to better assess related compliance or regulatory risks and controls that may relate to future claims-handling efforts. In addition, this will enable them to make meaningful input into any decision-making process.

It is also helpful to increase focus on claims controls, with more attention to detail in policies and procedures and resource allocation to claims compliance functions. Review claim procedures and guidelines frequently, and ensure that appropriate investment is made to keep claim handling controls updated and in compliance with frequent changes in law. Also set and respect internal business (non-regulatory) controls, such as establishing caseload and signing authority limits.

Further, better integrate ERM controls and claims policies and procedures, making sure where there is an identified risk there is a control, that the control is documented in an up-to-date policy and thorough day-to-day procedure. If there is a claims procedure, then identify and document what risk it is trying to control. This kind of “gap analysis” can be helpful not only to prevent or mitigate direct losses, but also avoid market conduct criticisms.

Finally, within the ERM program, be sure to discuss the potential “group-wide” impact of improper claims handing on the company's overall reputation, including direct loss of business, strained agent relationships, and reinsurance relationships. As Warren Buffet said, “It takes 20 years to build a reputation and five minutes to ruin it.” If you think about that, you'll do things differently.” When designing any compliance or risk management policies today, reputational risk must be part of the discussion, and claim-handling issues are among the most dangerous risks affecting reputation.

Claims professionals provide crucial skills, wide perspective and valuable insight to help a company assess claims handling and related risk. Claims professionals should be VIP players on every ERM team.

Special Reports /

Carrying Claims into an ERM Program

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