Extreme Makeover was an ABC television series that depicted ordinary men and women undergoing drastic physical changes in diet, hairstyle, and wardrobe. At the show's conclusion, the "subjects" were reintroduced to their families, most of whom were astonished by the physical transformation. Insurance and claim departments may never be featured on TV, but many may be due for some version of an extreme makeover. As one indicator, a recent study by Wolters Kluwer Financial Services lists the top 10 reasons that property and casualty insurers fail to achieve market conduct compliance. What is striking is that half of the top 10 transgressions involve claim-handling lapses. The five claim-related market conduct violations are:
- Failure to acknowledge, pay, or deny claims within specified time frames.
- Failure to pay claims properly (sales, tax, loss of use).
- Improper claim file documentation.
- Failure to communicate in writing a delay in a claim settlement.
- Using unlicensed claim adjusters or appraisers.
One positive emerges from the Wolters Kluwer study: it offers a template for building a compliance culture within an insurance company and claim department. Staying off the radar screens of state insurance departments may be as straightforward as embracing good-faith claim practices, avoiding bad-faith hot spots, training staff, keeping customers happy, and complying with the areas state regulators see as claim-handling targets. These steps will not guarantee immunity from market conduct audits, but they heighten the odds of passing muster in such examinations.
Compliance Culture
Building a compliance culture is a claim management challenge, not a flavor-of-the-month initiative. Lip service does not work. There must be an ongoing, recurring, and sustained commitment from top management all the way through the organization. One way to reinforce market conduct compliance is to incorporate key criteria into annual and interim performance evaluations. Stronger still is to link compliance with sound practices to compensation. As management guru Tom Peters says, "That which gets measured gets done." If hitting or not hitting targets tied to good claim practices has no impact on adjuster raises or bonuses, then adjusters may be indifferent to best-practice criteria.
Another way to build a compliance culture is to periodically audit for compliance. This may involve monthly, quarterly, or semiannual assessments of randomly pulled files — both open and closed — to gauge or "grade" conformity to sound adjusting processes.
A culture of good faith and market conduct compliance is not accomplished with motivational speeches, posters, and coffee mugs, which soon hold spare pencils. It is not a one-and-done, check-it-off-a-list phenomenon. It is an ongoing commitment, from the vice president of claims in the home office down to the newbie adjuster.
A commitment to a good faith, market-compliant culture starts with but does not end at an organization's tippy-top. Certainly the "C-suite" officers must buy into good-faith practices and market conduct compliance. They must do this in both verbal and visible ways that go beyond a one-shot campaign. Top claim management and leadership must not only "talk the talk," but also "walk the walk," when it comes to good-faith claim handling and adherence to market conduct standards. This commitment must filter down throughout the organization, claim department, and work team.
With this commitment may come a decision to appoint an ethics ombudsman and to draft an organizational credo. The latter should reflect a commitment to good-faith claim practices and to ethical behavior. However, merely naming someone to a post and spouting grandiose credos will, by themselves, gain a claim operation zilch. These are necessary but not sufficient conditions. The risk is that the commitment to good faith and market-conduct compliance becomes a "paper" program, existing to placate internal and external constituencies but observed more in the breach than in practice. Some organizations, for example, offer an anonymous toll-free number that "whistleblower" employees can use to report deviations from ethical behavior. This could be an early warning sign to flag bad-faith claim practices or deviations from market conduct standards.
Action Plans
Claim offices should establish standards for prompt acknowledgement, payment, or denial of claims. Timeliness standards should start with examining the local state's fair/unfair claim practices statutes. Many of these will contain deadlines for an insurance company to acknowledge, pay, or deny claims.
Claim file documentation is another area of focus by state insurance market conduct examiners. These examiners want to see the adjuster's notes and generally trace the narrative of a claim's life cycle. When sifting through claim file notes, auditors seek a sense of the adjuster's thought processes. This helps shed light on claim practices, reserve practices, settlement offers, and case evaluations. Of course, claim file notes can also provide evidence of bad faith, especially if they reflect dubious claim practices or derogatory comments about a policyholder, claimant, lawyer, and so on.
Failure to communicate in writing a delay for claim payment is a sore point. Many legitimate reasons exist as to why a claim payment may be delayed. Perhaps the insured has not submitted a proof of loss. Maybe a question exists about the extent of damage, or whether property can be fixed versus requiring replacement. Or maybe — through no fault of the adjuster — an investigation is stalled because of the unavailability of a key witness or an official report. Adjusters must be meticulous in keeping policyholders "in the loop" of communications. That communication needs to take a written form.
Management can likewise address emphatically the challenge of adjuster licensing. In some organizations and departments, this responsibility may fall to the claim manager or supervisor. In other firms, it may fall to the legal/regulatory department. The point is that management must task someone with tracking the claim staff's license status.
Using unlicensed adjusters does not by itself mean that the adjuster is unqualified to handle a loss. Nevertheless, keeping an adjuster's licensing current is sound practice. First, it avoids market conduct penalties that a state insurance department can levy. Second, using unlicensed adjusters can reflect poorly on the company in the event of E&O or bad-faith litigation.
Investing and Divesting
Maria Lopez, a claim professional from the Cleveland, Ohio-area, says that two keys to building a good faith and market-compliant culture are to invest and divest. First, she says companies should "send a message by investing in people." By this, Lopez means training them for at least a week the moment employment commences, using a dedicated training department. Suggested topics include the history of insurance and the company; the image of the insurance industry; and why customer service is crucial, along with how it can be accomplished. "Then," she says, "offer good-faith training." Lopez also thinks claim units should keep a close eye on caseloads so that employees can focus on good-faith handling.
The second aspect is to divest. "Companies should divest themselves of leaders who cannot embrace a good-faith/compliance path," she adds.
Transforming "ordinary" claim departments from being good to great will not depend on crash diets, Botox, or a new Versace wardrobe. Building a good faith, market conduct-compliant culture will, however, position claim teams for an extreme makeover in a positive direction and propel them to the claims equivalent of prime time.
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