Effective Claims Management The Other Road to Profitability
The U.S. property-casualty insurance industry is enjoying its first return to profitability in more than a decade with double-digit premium growth and a combined ratio below 100 for the first time in five years. Most analysts credit this turnaround to solid pricing in a hardening market and improved fundamentals in each of the industrys main sectors: reinsurance, commercial lines and personal lines.
Underwriters are declining more business, imposing more stringent terms on the business they do write and charging adequate premiums for the exposures they are assuming. The combination of those three factors means more premiums and fewer losses, which in turn means lower loss ratios.
Whats more, the increase in premium without any significant increase in expenses means lower expense ratios. Lower expense ratios and lower loss ratios add up to lower combined ratios.
If all this can be achieved by underwriting discipline alone, you have to wonder whether claims management makes a difference.
Of course it does.
No insurer could survive without some element of claims management. At the very least, insurers need a system to verify coverage exists for the losses claimed.
The real question is how much of a difference does claims management make? This is more difficult to answer.
Because it takes place after a loss-causing event, claims management is concerned with mitigation. If a claims manager is able to settle a claim for $75,000 that might otherwise have cost $100,000, has he or she actually saved $25,000?
Perhaps–if the claim was actually worth $100,000. But in the event that the case was over-reserved, the $75,000 settlement represented the true value of the loss.
Over-reserving might be the cause if the preponderance of similar claims were being settled at less than the amounts reserved. This complexity demonstrates the difficulty of quantifying the benefit claims management can have on insurer results.
In our illustration, claims management affected the outcome of the claim to the insurers benefit and perhaps saved $25,000. But the more important consideration is how the outcome was achieved. What criteria and judgments led to a payment of $75,000 when another insurer might have paid more or possibly less?
In short, to be truly effective, claims management must be a systematic program that employs a range of disciplines to achieve equitable, accurate and fair settlements for all claims.
By practicing the following 12 rules, insurers can maintain an effective claims management program that can add to their bottom line.
1. Rely on experienced claims managers.
Claim handling always involves some subjectivity that increases according to the complexity of the claim. Effective claims managers must be experienced in the types of claims they supervise, such as aviation, medical malpractice or general liability.
Every line of business and class has its peculiarities and pitfalls. Experience can be supplemented with systems and procedures, but never substituted. An inexperienced claims manager is more likely to make costly mistakes, running up large defense costs or exposing the company to allegations of bad faith.
2. Investigate before you pay.
A claim should be investigated promptly and thoroughly. Investigating claims up front, while facts are fresh and witnesses available, establishes a record and saves time. Though an expense, investigating a claim at the outset produces savings in the long run because the cost of a claim rarely drops with age and early investigation is most likely to lead to early closure.
3. Know your policy and its coverage parts.
Thoroughly understanding and applying the policy coverage is key. Payments for claims not covered under the policy can be a significant drag on any insurers earnings and can mean the difference between a profitable or unprofitable book of business.
4. Identify potentially fraudulent claims.
Insurance fraud costs the U.S. property-casualty insurance industry an estimated $30 billion annually, which in 2000 represented 12.5 percent of the industrys $238.8 billion incurred losses (according to "The Insurance Information Institute Fact Book 2002″).
Knowing the tell tale signs of fraudulent claims and how to confront and manage these questionable claims is vital.
5. Set realistic reserves.
To establish realistic reserves for both indemnity and expenses, an effective claims manager must rigorously evaluate each claim. Timely reserving gives insurers the necessary information to make important underwriting and business decisions for the future. Should they continue to write business at existing terms? If managing general underwriters are involved, should they be entitled to the profit-related contingent commissions being sought?
6. Negotiate settlements effectively.
By properly investigating a contentious claim, the claims manager is better prepared to negotiate or defend it, which works towards getting better outcome.
7. Know when to get help and where to get it.
Claims management often requires using outside experts, including loss adjusters, lawyers and accountants.
Each of these specialists has an essential role to perform, and the successful claims manager will successfully direct the specialists activities toward a common purpose–the fair, accurate and equitable settlement of a claim. Failure to do so can be costly, with runaway expenses and needlessly protracted claims.
8. Identify and pursue opportunities for subrogation and contributions from other policies.
These steps should be considered throughout the life of a claim to ensure that any rights that might subsist are not jeopardized.
9. Maintain clear and complete records of all matters pertaining to the claim.
Very few, if any, claims are closed on first advice. Most claims require weeks or months (and often years) to settle, during which time the claims manager will be handling many other claims. Poor claims records usually result in poor decisions, which needlessly inflate the cost of the claims.
10. Retain customers.
An effective claims manager will not overlook threats to customer retention.
The preceding nine rules taken together should ensure fair and prompt handling of policyholders claims. Where this is the case, the policyholder is much more likely to remain with the same insurer, giving that insurer the opportunity to earn back money paid for the claim through future premiums.
Poor claims handling is almost guaranteed to drive business away and, in the United States, can lead to "bad-faith" penalties and damages.
11. Prepare for increasing claims complexity.
Claims are becoming more complex, involving ever larger sums of money. Asbestos and pollution claims continue to bedevil the industry, and the emergence of mold claims, "laddering" claims in the directors and officers liability insurance market (related to alleged unscrupulous practices in the allocation of shares of initial public offerings), and multi-party class actions compound the difficulties. Sophisticated and effective claims management is essential.
12. Spot trends and issues to improve underwriting.
Effective claims management can be a valuable underwriting tool. It can be used to alert underwriters to emerging trends, deficient policy wordings, distressed classes and changes in the cost of claims.
So, does claims management make a difference? The answer is obviously yes. Paying claims is the largest expense on any insurers (or reinsurers) book of business–an expense that underwriting discipline alone cannot effectively control.
How much of a difference? As our 12 rules suggest, the answer is in how well claims are managed.
If the U.S. p-c industry is able to produce and maintain a combined ratio below 100 percent, it will only be by a combination of underwriting discipline and sound claims management operating together.
Jackie Rose is head of claims management at Ellistons U.S. headquarters in New Hope, Pa. Miles Robinson is a consultant with Elliston in its U.K. offices in London. Elliston, a wholly owned subsidiary of Insurance Services Office Inc. (ISO), is a specialized consulting company, with offices in the United States and England. Elliston provides a broad range of services in claims management and general consulting.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, October 17, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.