Creating a High Performance Claim Organization

Capturing the value in claim procurement requires either reducing the amount of loss paid or reducing the cost to process the claim. Ideally, both can be achieved. A closer examination of these areas yields some interesting opportunities:

• For the typical insurer, claim payments represent payments to insureds, claimants, or third parties in order to replace, repair, or purchase a discrete set of goods or services to restore claimants to their pre-loss condition. The categories of goods and services tend to be fairly consistent across the claim portfolio and even from market to market, which offers significant opportunity to leverage volume purchase agreements.
• On the processing side, nearly half of the administrative time spent by a typical claim professional is consumed by interacting with the appropriate parties to settle the claim. Some of this administration is avoidable via streamlined claim procurement.

The insurance claim process is ripe for the application of procurement disciplines to drive value — both by lowering indemnity spend through discounts and by lowering the processing cost of claims through streamlined interaction with the supply chain. Analysis suggests that leading-edge claim procurement practices can yield five-10 percent savings on loss costs and upwards of 25 percent on processing costs for the average personal lines insurer.

The challenge becomes how to effectively put these procurement disciplines into operation in an environment where the claim professional essentially acts as the procurement manager on a transaction-by-transaction basis while dealing with an extremely diverse supplier landscape.

Claim Procurement Capabilities

To begin transforming claim procurement, it's necessary to first understand the four foundational capabilities the function requires:

1. Strategic sourcing involves investigating a broad selection of suppliers for each of the goods and service categories procured, and then negotiating volume purchase contracts with those suppliers that offer the best combination of price, delivery speed, reliability, and processing integration.
2. Catalog management is the ongoing management of an online catalog that displays the universe of goods and services available from suppliers. This activity requires continuous update and review of what is available and by whom, so that claim professionals can rapidly match a service request to a supplier.
3. Claim fulfillment management includes the timely and cost-effective selection of a good or service, planning and scheduling of the suppliers, and efficient coordination of the goods or services delivery.
4. Financial management is the "back office" of claim procurement involving the execution and reconciliation of the financial activities related to the transactions with the supplier base. This requires effective budgeting and ongoing measuring, analyzing, and improving cost of operations, as well as the processing of timely payment reconciliation.

Successfully incorporating these capabilities into the claim environment entails overcoming two major obstacles: legacy systems that are not necessarily equipped for the job, and gaining the mindshare of the typical claim professional for whom claim procurement is not a top priority.

Research has shown that the typical claim application is far from being a leading-edge, open, web-based platform that captures detailed data and manages a supplier interaction effectively. In many cases, existing claim systems are largely financial transaction processors that support reserves, payment processing, and statistical coding.

Overcoming legacy system deficiencies may require a significant upgrade to claim technology to provide for:

• Complete, accurate, and granular data capture across the full claim life cycle.
• The ability to distribute work outside the four walls of the insurer to incorporate suppliers into the claim transaction.
• The ability to effectively match the claim type to the relevant goods and services for that given claim.

At the center of the claim process is the claim professional, without whose compliance it becomes nearly impossible to consistently execute on the promise of claim procurement. To achieve high performance in claim procurement, claim professionals must fully embrace the concept, understand where and how it can improve their performance, and most importantly, they must quickly become proficient in how to use the new procedures in the course of a transaction.

Build, Borrow, or Outsource

How can insurers overcome the challenges to improving claim procurement? Depending on the relative size of the insurer, there are three possible ways to achieve leading edge claims procurement capabilities:

1. Build. The most capital-intensive approach is for an insurer to construct its own proprietary supply network. However, the "build" approach is limited to the few insurers with sufficient scale and corresponding operational budgets to fund the substantial investments required. Only the biggest insurers in the world have a large enough spend in claims (and, consequently, large enough potential savings) to justify the costs associated with building the required systems and hiring the in-demand expert personnel.
2. Borrow. Another route is to collaborate with other insurers to aggregate claim volumes across a shared supplier base. This approach is more suitable for middle-tier insurers that lack the savings potential or investment capital to justify building supply networks and procurement capabilities on their own. Insurers following the "borrow" path can effectively aggregate transaction volumes into the same supplier base to achieve the economies reserved for the larger players in the market. However, this may entail the sharing of contracts, employees, and technology infrastructure to be fully effective.
3. Outsource. A third way to improve claim procurement is by outsourcing the management of the claim supply chain to a third party. This approach generally requires a lower investment from the insurer because some of the foundational investments, such as legacy system overhaul, may not be fully required. The most common example of such outsourcing arrangements to date has been the use of an external loss adjuster organization, which can provide insurers with access to its preferred supplier networks.

However, while such arrangements can optimize the direction of the claim, they do little to improve the overall process of claim management and compliance. The insurer still must match the hundreds of invoices it receives from suppliers to the appropriate claims so they can be correctly accounted for and paid, a process that can take considerable time and effort. Instead, by outsourcing the entire claim process, the insurer not only gains access to a large supplier network (and, thus, better discounts on products and services), but it also receives a consolidated invoice from the managed service provider for each claim settlement. This enables the insurer to dramatically reduce the time and effort it takes to fulfill each claim and, consequently, improve customer satisfaction.

The Path Forward

The insurance claim process can benefit from the same efficiencies, controls, and technological breakthroughs that have transformed the supply chains of manufacturers and retailers around the world. While the claim supply chain of an insurer is quite different from those of Nokia, Peugeot, and Wal-Mart, the principles of effective supply chain management apply nonetheless. But for this transformation to occur, insurers and their suppliers must throw off the weight of tradition. The benefits of claim procurement are real. Insurers should take note of those early adopters who are already realizing substantial savings and are taking major strides toward achieving high performance in claim procurement.

Michael A. Costonis is managing director of claim services for Accenture.