Too Big to Build

Sometimes the decision to build a system internally is wise. When it comes to claims solutions, though, a recent study comes down firmly on the buy side.

Claims is one of the most important processes in the world of property/casualty insurance because of its significance on an insurers bottom line. With combined ratios for P&C insurers averaging 96.9 for the first quarter of this year, insurers are walking a tightrope. Pure loss and loss adjustment comprise more than 70 percent of that figure, so any savings a carrier can find in the claims department is welcome in the world of profit and loss.

Celent Communications recently ex-amined a number of claims systems on the market, and Donald Light, senior analyst in Celents insurance group, came away with the view few carriers have the ability to build their own claims systems. It is not a small or easy system to put together, he says. You probably can count on the fingers of both hands the number of insurance companies that really have the skill base to start from ground zero and say, Were going to build a modern claims system with all these functionalities. The other 1,990 [P&C] insurance companies really should look at one of the vendor solutions. Given insurance company IT resources, he believes it is an overwhelming task even for the handful of insurance companies that actually could do the job.

The simple reason is the cost of building a proprietary claims system. A large insurance company can buy at a fraction of the expense, says Light. The difficulty [in building] is claims systems have to work closely with policy administration systems and first notice of loss systems and financial loss systems. The ability to integrate claims quickly, easily, and accurately is a specialized skill. That is daunting to all but a very small group of insurance companies.

One step insurers can take to gain control of the claims operation is to purchase an imaging or document management solution, Light advises. Im still surprised, to be frank, at the amount of paper that flows through insurance company systems, he says. He blames claims and new business as the main culprits. Its inefficient to have paper floating around, and it leads to inaccuracies and bad decisions because paper gets mislaid, explains Light. The idea of making all your information digital has some powerful business benefitsthats why we say image management/content management should be part of any good claims solution. The nature of the claims adjustment process is at least two peoplethe adjuster and the adjusters managermust have access to that data. If youve got additional files [digitally] accessible to everyone with the proper privileges, you dont have to worry who had it on their desk last and why it hasnt been returned to the file.

While few claims systems offer litigation management capabilities, Light points out this is an area where carriers can add on to their systems to have access to an increasingly important area of the claims management field. You have specialized litigation management solutions that have grown as a software category themselves, he says. This is a case where both the economic value and the inherent complexity of managing the work of a few dozen different law firms, with hundreds to thousands of cases, justify that kind of focus in terms of a software application. Its a bonus if you have that capability built in. I wouldnt take a lot of points away if a claims solution says it doesnt have it as long as it integrates with a variety of free-standing litigation management solutions.

Because claims solutions are so expensive, its likely insurers will purchase first document imaging or content management systems, according to Light. But in terms of size of deals, claims is an area that has nudged its way into the spotlight in the last couple of years, especially as the market softens, and I think its pretty much a given the P&C market is softening now, he says. If the combined ratio starts creeping over 100, [insurers] are going to look at their claims system to see whether it has the ability to control expenses and control their payoffs.

ROBERT REGIS HYLE