Claims Management Strategies 2002: A Delicate Balance

Third-quarter insurer results tell a sad but accurate tale of the industry’s state, and the need for change in the claims field. While the industry’s written premium growth showed an 11% rebound in the final stretch of the year, this gain was overrun by a 12% jump in claims costs, according to the latest Insurance Bureau of Canada (IBC) financial results.

Notably, companies are continuing to boost claims reserves in response to long-tail liability exposures as well in response to the persistent rise in general claims costs. In particular, the offloading of healthcare costs to insurers has become a bone of contention for the IBC. Losses in this respect have been particularly heavy in Canada’s largest market, Ontario, and in the Atlantic region with New Brunswick producing a 108% loss ratio for the first three quarters of 2001.

At the same time, on a global scale, insurers have begun to pay out claims from the largest loss event in history. The September 11 terrorist attacks on the World Trade Center and Pentagon are putting more pressure on insurers, particularly as they face increasing costs and scarcity of coverage in the reinsurance market. For claims departments, the crunch is on as never before. Companies are looking for leaner, perhaps meaner claims operations, at the same time that there is increasing pressure to make customers happy and implement large-scale technology programs. How do some of the industry’s top claims managers expect to handle this changing environment?

Bob Jewett, senior vice president claims at Allianz Canada

Virtually all claims departments have been faced with demands to embrace and utilize new advancements in technology. Customers are demanding electronic communication, while declining margins are placing additional pressure on claims expenses.

Most claims operations have accepted the use of electronic automobile and property estimating. Some claims operations have integrated the use of database SQL mining tools and many are using the Internet to acquire information and transmit mail. A number of application vendors have entered the market to provide various services, however, many of these services are “stand alone”, which require expensive systems integration to gain claims processing efficiencies.

The next step in the evolution of claims adjusting is to re-think the claims adjustment process. Opportunities must be sought to remove all process duplication, allow customers to transmit claims information directly to their insurer or broker and provide direct customer access to claim “status” information. A new claims management skill is required, to manage the efficiency gains, while not stifling adjuster involvement, imagination and assessment in the adjustment process. To achieve success, claims management will need to develop a close relationship with their information technology (IT) resources. IT has delivered many excellent tools, such as database mining subsystems, which make available vast quantities of information within minutes. Many of these processes historically took days if not weeks.

IT can also add value by integrating vendor systems, through the use of mapping tools or document attachment. Technology tools today can provide this functionality, eliminating the need for expensive duplication of information or double entry. Claims management can benefit from embracing web enabled technology tools, study their use, and incorporate them in the development of claims processing systems. Easier access to the claims process will benefit customers, not only because of enhanced communication but also by removing duplication, thereby reducing costs.

Claims management will see increasing demand to understand technology, its abilities, limitations, and potential gains. For claims departments to meet the technology challenges and use the tool sets available, their decision-makers will need to enter strategic discussions with IT and form development partnerships.

John Greb, vice president claims at Allstate Canada

Tackling the rising cost of medical and disability claims must be a priority for all p&c insurers, but long-term thinking is also important to having efficient and focused claims service. It is critical that we actively support IBC lobbying to change Bill-59 (Ontario’s auto insurance legislation). We need all hands on the table to keep this a priority on the government’s agenda in Ontario. We need reform now, not sometime in the future. We are looking for a number of reforms, including immediate stability and predictability in the fees currently charged by unregulated providers.

It is not the industry alone suffering from skyrocketing costs that could be rectified by Bill-59. I do not think the insurance-paying customer would be happy to know their premium is escalating due to increasing need to cover the costs of medical reports and assessments. We need to keep focused on reasonable access to fairly priced treatment for those in need. We also welcome the “auto insurance standard invoice” for accident benefit health claims and require that all healthcare providers who bill Allstate directly use it. I am encouraging the IBC to advance programs for standardized billing and accelerated development of electronic submission of data.

Internally, we are concentrating on advanced training of adjusters and quick involvement of special investigations unit (SIU) investigators where necessary. SIU works closely with frontline telephone adjusters to spot potential unnecessary escalations early in the claim. Communication with brokers, agents and customers is key to success of these programs.

We are also streamlining processes with additional electronic form templates and specialized staff to set up IMEs and DACs while freeing adjusters for their work. It is imperative, in this climate, to carefully track claim costs and quality. We need to know that the greatest portion of every claim dollar spent is focused on those things that have the most customer impact. This means adding staff to reduce the average number of claims assigned to each adjuster and looking at new technologies to help contain severity and increase efficiencies to pay for customer service initiatives. And, while Ontario’s escalating medical costs are top of mind, not all the attention is on Bill-59. Yes, we have a pressing need to adapt our processes to alarming escalations in specific markets, but it is important to keep long-term thinking in our planning. The growing trend for class action suits brought against insurers — like the McNaughton vs Co-operators case — has significant ramifications for the industry and consumers. It will not be long until these suits become serious and public headaches for all within the industry.

Sebby Fernandez, assistant vice president claims at CNA Canadian Operations

To survive and succeed in the new millennium, CNA and other insurers must take a fresh approach in how we manage our claims handling. Insurers must reduce and manage claims costs effectively, meet the challenges and opportunities that come with technology, be sensitive and react quickly to litigation trends and raise the bar on customer service.

One option to consider in reducing claims costs and to manage expenses is selecting a panel of “vendors” including adjusters, lawyers and technical experts that have a strong track record in providing claims support. Vendors would be provided with guidelines for cost savings, service and customer satisfaction. The result is cost and time efficiency and customer satisfaction. Technology has presented opportunities and challenges for all us. It has changed the way we communicate and increased customer expectations and demands. This has resulted in a significantly reduced turnaround time.

We must implement service commitments that include 48-hour cheque issuance (subject to receipt of proper documentation). Vendors need to be encouraged to send photographs, reports and information via the Internet, which will also result in reduced time lags. Access to vendor Internet secure sites to view progress of ongoing investigation s allows us to provide the customer with real-time information. This enables faster and more accurate reporting to customers.

On the litigation front, most courts in Canada are moving towards civil case management. Cases that once took five years or more to reach trial, resulting in large legal costs, are becoming a thing of the past. CNA has embraced alternative dispute resolution options such as mediation and has encouraged its legal counsel to make full use of case management and early negotiation settlement conferences. With case management, the court establishes litigation timetables. Although this process is new and is therefore going through a transition period, the end result to all of us is significant cost savings.

Customer service continues to be a top priority for all of us. To achieve superior customer service we must reduce costs, access current business processes, embrace technology and continue to move toward a more responsive litigation system. All of this, while still ensuring we continue our efforts in training and education. As claims handlers, we will need to be well versed in many areas including the psychology of dealing with people effectively, understanding our products and their coverages, continually evolving our cost saving investigative methods and being on top of the legal environment in Canada. That is why continuing education and providing superior customer service is critical to our success.

Sharon Bros, vice president claims at Co-operators General Insurance Co.

The p&c industry has suffered a disappointing year in 2001. Investment income is down, claims inflation is a reality, and the auto product is under priced. In 2002, it will be important to maintain discipline and do what we know is right, even if it hurts. For major auto writers, the cost of injuries is a concern. Primarily three things are making injury costs soar. First, more people are surviving catastrophic injuries, which cost millions. Second, the courts are finding ways to pay people significant dollars for future loss claims that often have little or no merit. Third, medical costs are rising as all provinces off-load costs onto auto insurers.

We can fight unreasonable claims. We can lobby government for change, but we must also set aside adequate reserves for what we know is our real exposure. Healthy investment returns have allowed the industry to price their product artificially low. Rate increases can correct this reasonably quickly. Failure to reserve losses to potential exposure takes years to overcome. Industry run-off figures will show us who lacked the discipline to reserve realistically. Those who yield to temptation not to reserve strongly will continue to suffer into the future, as old losses require new money. We must also continue to invest in our staff. When ROE is below expectations, the quick answer is to downsize. Savings realized from staff downsizing in claims are often offset by increased indemnity costs or external expenses. We can realize some productivity gains through improved technology, but there is no substitute for good technical staff in the core functions. Striking balance is always a challenge, but it takes more discipline in the lean years.

Jerry Dalla Corte, vice president claims at The Dominion of Canada General Insurance Co

We enter 2002 with many new challenges and opportunities, and I do not mean loss cost trends and new exposures such as toxic mould. Customer expectations, technology and vendor relationships are changing as never before. Achieving success in the years to come will be defined by our ability to adapt and accept change.

Six years ago at The Dominion we initiated a re-engineering effort. Our focus was to improve customer service while also improving loss cost management, knowing each goes hand in hand. While the actions we took were effective, more importantly, our employees were motivated to embrace change. Today, they recognize that improvement on an ongoing basis is a requirement, even when business targets and objectives are being met. Customers are expecting more, particularly now as their premiums increase.

Earlier change opportunities were developed from data collected in our annual national polling. Today, many of our changes are ideas generated from the folks on the front line. They are closest to the action and often provide the clearest insight into how to remedy a problem. There is great satisfaction from seeing ideas coming from our claims service representatives.

The next opportunities will involve our service providers. Gains in the delivery of service and cost management can be achieved by innovative approaches to partnership with our network of vendors. Our partner vendors were selected in part because we share the same service vision. Working together, with the same approach to change management we have developed internally, we are confident we can continue to refine solutions that create wins for all parties, including and most importantly, the customer.

Joe Turcotte, claims manager (Toronto) at FM Global

In today’s business environment, can technology help claims managers improve client service and satisfaction as well as save money on the handling of their claims? Yes, but making it work is not easy. Technology can lead claims managers astray if they do not determine from the beginning what direction they want to head in, build their business model and then find the tools to support their needs.

There is a misconception that technology and the use of computers provides cost savings through efficiency gains. Truth be told, the efficiency gains are minor. While the latest claims management software can reduce the number of support staff needed, such personnel reductions can push the handling of lower-level tasks, like typing letters and filing, to higher-skilled employees. If you are a claims manager, before deciding on a technological solution, first step back and reexamine your claims management model. This is not a trivial task. It can require a major investment of time and resources. New technology can make claims information even more valuable if you determine beforehand the business needs that call for leveraging that data. Major software manufacturers have introduced “groupware” products that can create a very powerful collaborative environment based on that information. In addition, web-based search engine providers are getting into the act with new product offerings.

A good command of information can help you determine what to focus on, make quicker decisions when handling a claim, mitigating a loss, managing consultants and dealing with subrogation. Above all, it can help the claims process go smoothly. However, do not take what technology you can find and try to make it fit. Make your information work for you.

Ian Alexander, manager of claims & loss prevention at Grain Insurance & Guarantee Co.

Think of who is the best adjuster you have ever met. What makes that adjuster really good? The best adjuster I have ever known has great diversity in his life experiences. One minute he was building a house, the next minute rebuilding a truck. He had great communication skills. He was equally at ease talking to a farmer or the CEO of a large corporation. His ability to build rapport and be empathetic provided a great platform for him to handle tough negotiations.

Sometimes we lose sight of the purpose of today’s technology. The use of computers as a tool can be valuable in the claims business as a method of communication, source of information, or to help one organize their contacts, phone numbers and schedules. Too often, however, we allow the tail to wag the dog. Ask yourself as you sit down to a task if the use of technology is a help or a hindrance. Does the IT craze force the use of technology where it really is not necessary? Why take 45 minutes to do a CAD drawing when it does not give more information that a five-minute pen and ruler drawing?

When planning a training program for adjusters we should keep in mind technology is a utensil. Practical experience is a critical ingredient to the success of any claims person. To gain this practical experience, you might consider a “ride-a-long” program where the adjuster can attend property loss sites with an experienced adjuster or contractor. The program could also extend itself to visiting auto body repair shops. Consider how you might accelerate the learning curve for your adjusters. Encourage adjusters to make visits to view the repair process first hand, sit in on examination for discovery instead of waiting for the lawyer’s summary report. Supplement first hand experience with the wonderful technology we have available to us today.

Carol Jardine, vice president of claims at Royal & SunAlliance Insurance Co. of Canada

One of the major topics of discussion within the industry is the impact of September 11 on the price of insurance. While the terrorism issue has fundamentally changed our perception of risk, it is important to note that the insurance industry already needed to increase rates prior to the terrorist attacks.

According to the IBC, claims inflation is now more than 12% compared to the average increase of 5% we have typically seen since 1994. At the same time, the consumer price index has only increased 2.7% per year on average. This raises the question, what is driving claims inflation and the need for increased rates? Claims inflation is being driven by litigation, fraud and damage costs. Auto parts prices increased 9.9% last year. Insurance fraud now amounts to more than $1.3 billion per year in Canada. Litigation costs, and the frequency of bodily injury claims, have doubled since 1994. Medical and rehabilitation costs in Ontario are $1 billion a year. General damages are increasing, most notably in the Atlantic provinces and Ontario. Furthermore, new and creative types of damage claims are being validated in the courtrooms.

In addition to managing claims inflation, insurance companies must invest more than ever in customer service operations to meet the expectations of today’s insureds. Inhouse costs are rising as we make investments to speed up the flow of information and deliver 24/7customer service. We are being impacted from all directions and there is no relief in sight but steps can be taken to mitigate the impact of these rising costs. To address these challenges, claims people have to be strategic and proactive. It is not enough to just manage expenses. We need to control the true inflationary factors that are increasing the cost to indemnify our policyholders.

We must focus on prevention and at the same time influence government policies on insurance and provision of healthcare. We need innovative defense strategies for our counsel, to give them the ability to impact court decisions. If we do not convince the court system to restrict or be more conservative in its awards, insurers will have no choice but to continue to increase rates. This will impact the affordability for consumers, restrict the availability of coverage and lead to reduced limits. There will be a limit as to how much the consumer is prepared to pay. Reducing inflation is not just about controlling costs, it is about being able to offer affordable insurance to our customers in the future.

Eric Gunnell, assistant vice president of claims at St. Paul Canada

It is no secret within the industry there is tremendous pressure on expense control, which is often directed at the claims operation. One could suggest this is often misdirected at the unallocated claim expense. If we look at the total claim cost (TCC), the components are, ALE (external costs, legal adjusting), ULE (claim staff), and indemnity. Historically we have looked at attempting to save on the ALE. Working out flat-fee agreements, arguing on hourly rates, promising volume work for discounted costs, so on paper and on the bottom-line, we can knock points off the ALE and address the overall expense issue. In the TCC picture, this looks good, we are doing our job, but as time progresses, our average indemnity payment increases, which counters the savings on the ALE. When you demand more for less, something has to give, and if we cut on ALE, then indemnity has to suffer. We end up with overworked claim handlers.

By tracking average paid on claims by line of business, closing ratios, case load numbers, and claim cycle times, it is evident the most important component to control expense in the TCC model is ULE. The ULE component in the TCC model is minimal when one looks at the combined numbers, so does it not make sense to target ULE in a positive way? So instead of having an undermanned claims department and staff with unmanageable case loads, we look to have manageable case loads, ensure we have the right staff, the training, the experience in the line of business we write, and the understanding they have the ownership in the file. We still have an ALE component, but the ULE controls both it and the indemnity, and that is where the savings come in. The vendor needs to make a profit, why handcuff them and force the work to be done at a cut-rate price?

Our organization believes claims is the most important department in the company. When you look at the huge fiduciary duties claims has, reserving exposures, settling the losses, does it not make sense to make certain this number is correct, not be understaffed, and not be afraid to add staff? Remember, at the end of the day, you have to spend a little to save a lot. Where better is it to spend, than within your own organization?

R.G. (Bob) La Page, vice president of claims at The Wawanesa Mutual Insurance Co.

“This claimant is being difficult, demanding, irrational, and unreasonable.” These words are commonly used when encountering a clash between consumer expectations and contractual reality. Some have a tendency to classify this individual’s behavior as coming from complainers or whiners. The reality is that it is much more likely that these symptoms stem from unresolved concerns or poor communication.

These situations often trigger our defense mechanisms and can cloud impartial and equitable claims settlement. They can distort our perception. Human nature is to fight back and “meet them on the same turf”. There may be a tendency to get mad, or get even.

I suggest a better alternative when faced with this situation — get real. Consumers are constantly bombarded with one-dimensional automated and mechanical responses to consumer inquiries (i.e. voicemail, email, snail-mail). Whatever method of delivery is chosen, the best antidote to a claims complaint is to provide sound, efficient and prompt claims service that combines another dimension: “the human touch”. As consumers, we expect good service in return for laying out our hard-earned dollars. Many in the insurance buying public have the view that as they have paid premiums for many years they have a right to payment when filing a claim. If a claim is not accepted the reaction is, “what’s the use in having insurance”. The insurance industry should be ready and able to answer that question by providing top-notch claim service.

Because of dismal industry results worsened by recent tragic events, consumers may be faced with greatly escalating premiums and may sometimes even face a challenge to obtain necessary insurance products. As a result, the insuring public will be more sensitive and reactive to perceived poor claims service. In short, we now more than ever have to prove the value of our claim service and must correctly diagnose symptoms and treat the cause of any claim service dissatisfaction. We should constantly remind ourselves that as claims professionals our job is to find ways to settle claims. This approach does not just benefit the consumer. It is in fact one of the best tools for insurers to improve claims costs. The alternative has proven over time to be very costly indeed. Robin Williams once said “reality…what a concept”. In these times of virtual reality, the true claims professional will focus on real life solutions to real life concerns delivered with the right degree of empathy.