The "Value-Added" Tax

The value of information becomes quite clear from a risk-management standpoint. It is one thing to know that an accident costs a specific amount of money, but the more information available, the more risk managers can do to both prevent the accidents and reduce the costs of those that do occur. This is the idea behind a good RMIS — risk management information system. The raw data can be converted to useful knowledge, but this can only happen if the data put into the system is detailed and accurate. If those two conditions are in any way flawed, the information produced is worthless.

Obviously, none of us can really know the quality of all the information being processed by the insurance and self-funding risk industries. Some of it may be extremely timely, accurate, and detailed. But my suspicion is that most of it is not. What passes for a claim investigation in the 21st century is probably a far cry from that of 50 years ago when hundreds of adjusters were out on the streets taking statements, examining loss scenes, and determining causation. Perhaps that was, in one sense, more important back then because of the contributory-negligence rule. Under common law in effect in most jurisdictions, if an accident victim contributed even one percent to his own loss, the claim was barred by law. Gradually, various types of comparative-negligence rules were either legislated or established by the courts and precise investigation into all of the factors of a claim seemed less important.

Perhaps adding to the lesser need for detailed investigation was the trend toward broader insurance coverage. As more types of losses were covered, detailed investigation of the applicability of the policy seemed unnecessary. Or so it seemed. As the theory ran, why bother conducting an extensive outside investigation if the claim was going to be paid anyway? Economize on the investigation and save money. Surely that should make premium costs drop, shouldn't it? Well, that didn't happen.

Any half-astute observer of the insurance coverage litigation scene in 2006 could tell you that, if anything, coverage now is more crucially complex than ever! But who reads that stuff? Some readers may recognize the name Don Malecki; he was a Fire, Casualty, & Surety Bulletins editor back in the 1970s and an author of many insurance coverage textbooks, including several for the American Institute for Property and Liability Underwriters (CPCU). He and I corresponded on a coverage issue recently and I asked, "How many people do you suppose list 'insurance coverage' as a hobby? Not many, I suspect!" And what a shame! Is there any greater literature available for reading than the most recent releases from the Insurance Services Office? For those of us in the claim-handling business, the answer had better be, "No!"

Value from Data

While very few of us get our jollies from studying obscure endorsements to a commercial general liability form, it is against this minutia that every conceivable factor involved in a loss must be measured. Every small detail can be significant if the claim is to be properly adjusted and valuable information about how loss occurs — and how similar losses can be prevented in the future — is to be derived. Accuracy must be brought to bear in the production of the facts of any loss if the resulting information is to be timely and useful.

Several times before, this Iconoclast has suggested that there is a great difference between a "loss" and a "claim." A claim is just a financial transaction at law or under a contract. Loss is a vastly more complex process, beginning with hazards that build upon an exposure until a peril creates damage. It's alive with all sorts of bits and pieces of data that are important.

The Value of Litigation and Fraud Prevention

One added value of an accurate and detailed investigation is that it leads to the correct settlement of claims. Where there is misinformation, there is an incorrect evaluation. That leads to a breakdown in negotiation and the claim ends up in the courts. That's expensive. When insurance companies or self-insured entities spend more on legal services than on good, sound loss investigations, they are probably wasting their money.

Ditto with fraud. Insurance fraud expert Barry Zalma often has told me that he agrees with the idea that if adjusters investigated claims "the old-fashioned way" — out there on the street where the loss occurred — there would be much less fraud. Fraud costs our industry billions of dollars a year. Who does the risk industry think it is? Congress?

What other value can we learn from accurate data? Several recent studies have shown that using a cell phone while driving is as dangerous as drunk driving. But I've never heard that from my insurance company. It's like those Ford Explorer/Firestone tire rollover claims — we had to learn about it from a foreign government. Venezuela, no less!

Where was the "value add" in the investigation of all of those rollover claims if there was no connection between tires and flips? Somebody was just processing the claims with no thought of determining causation, let alone subrogation (a real value that can be added).

In case the reader says, "Hey, I don't process auto claims. This doesn't apply to me," let's take a look at workers' comp data. Good investigations will determine causation; knowledge of causation will lead to prevention. Prevention is going to lead to less loss, hence lower premiums. Oops! Golly, insurers don't want that, for goodness sake! And what about product-liability or construction-defect claims? Or medical-malpractice losses, E&O, surety bonding, and all of those lines of loss? Any benefits from adding value there?

Take any one of those coverage lines and the answers are clear. It was immediately evident in a review of one county's hospital claims where the problems lay — it was not so much gross negligence as simply bad communication. That includes foreign patients who are unable to communicate in English or foreign residents giving instructions that nurses couldn't clearly understand, not to mention handwritten medical notes and prescriptions that Sherlock Holmes couldn't have deciphered. It was all there in the data, but by looking only at one loss claim at a time, none of it became evident. Nobody saw the big picture.

This column has cited one example of causation data before. It involved a railroad that had a high number of accidents and injuries in its locomotive-servicing unit. When a detailed study was made of each accident — some major, some minor — a pattern became evident. Many of the accidents were occurring around 10:00 a.m. on the shift that started work at 7:00 a.m. Why? What could be done to reduce the loss? Interviews with the parties involved, injured employees, or those whose mistakes had caused damage or delay, found that they had almost all skipped breakfast. By 9:30 a.m., their blood sugar levels had dropped and they became careless. The solution was to open the company cafeteria at 6:00 a.m. for breakfast and offer it for free. The accident rate dropped immediately and the savings more than covered the slight cost of breakfast.

Help from Congress?

A number of crucial issues face Americans in this election. Many directly impact the risk industry. Terrorism is a true risk issue, but one wonders if our Homeland Security Department is putting emphasis in the right places. But an even greater problem is the combination of global warming and energy usage. So far, Congress has done diddly-squat about that. Rather, they have spent their time and energy taking junkets and debating what a tragedy it would be if two women got married and burned a flag or, worse yet, that a teenaged girl might practice preventive birth control. If they would take a look, our population growth is part of the global warming/energy-addiction problem.

All of these become insurance issues. While the impact of global warming on ocean temperatures and hurricane creation is subject to further research, currently it looks a bit like that old saying, "If it looks like a duck, waddles like a duck, and quacks like a duck, chances are it may lay a duck egg!" So why is the insurance industry not pushing for less carbon dioxide in the atmosphere? Is our industry, like Congress, being "lobbied" to leave it alone? What value does that add for Americans? (Be sure to see the movie Who Killed the Electric Car? It's on par with An Inconvenient Truth.)

America is part of the global economy. Like it or not, we can't change that. Now we learn from some economists that one reason our borders have been left open is that there is a strong push by multi-national corporations for a North American Union, comparable to the European Union, with free travel and commerce between Canada, Mexico, and the U.S. Perhaps that is why Congress is reluctant to raise the $5.25 minimum wage — cheap labor makes international commerce easier for foreign-owned corporations! Consider that in your election choice this year. Next time an insured calls your employer's claims hot line, he shouldn't be surprised to hear someone speaking with a Spanish accent because they're actually located in Mexico City. Now, what sort of on-the-scene investigation do you suppose Pedro is going to do to add value to that claim?

A lot of questions. A lot of issues. The Iconoclast does not have all the answers, but whomever we elect to Congress should have at least some interest in asking the right questions. Our future as adjusters, as an insurance industry, and as a nation — perhaps even as humans on an ever-changing globe — could depend on it. Antarctica already is melting away. When Greenland turns green, New York City will be under 10 feet of water and my old home in Miami will be submerged. We won't have to worry about a Mexican border; the Rio Grande will be a salt-water lake probably as far west as Del Rio. The Southwest will be like the uninhabitable Sahara. Now is the time to add some value and prevent all of this.

Ken Brownlee, CPCU, is a former adjuster and risk manager, based in Atlanta. He now authors and edits claim-adjusting textbooks.