Claims Management Strategies 2003: Competing Interests

What promised to be the “year of the rebound” in 2002 was anything but. Despite price hardening, claims have continued to grow, particularly with never-ending medical payouts on auto claims. And, this is just the tip of the iceberg facing claims managers. Added to the mix are the struggle to attract bright young adjusters, the challenge of technology and increasing customer expectations proportional to increasing rates. Thrown in for good measure is an increasingly unfriendly legal environment for insurers, including the rise of contingency fees and class action lawsuits. Claims managers say that the necessary response is a combination of flexibility in the face of change and sticking to the tried and true goals of claims management – efficient, fair adjusting.

After the property and casualty insurance industry’s dismal performance in 2001, the logical proposition for 2002 was “things couldn’t get any worse”. Certainly, 2001 can keep the title of “worst year on record”, but the expected turnaround in 2002 fell far short of the mark.

A large part of the problem continues to be Ontario’s auto system, although there is some light at the end of the tunnel in new legislation passed late last year, primarily aimed at fighting abuse of the medical benefits system. According to the Insurance Bureau of Canada (IBC), Ontario’s auto loss ratio for the first nine months of 2002 is a whopping 94.8%, even higher than long-troublesome Atlantic Canada provinces.

This is mainly the result of medical costs, which have risen dramatically since 1995 despite a decrease in the number of accidents. However, Ontario auto is just one piece of a very complex claims puzzle insurers have yet to master. While the claims experience seemed promising in the first quarter of 2002, by mid-year it was again outpacing the growth in premiums. Results for the first nine months of the year from the IBC have the loss ratio at 76.5%, on par with the same period in 2001. Litigation trends are also troubling, with the introduction of class action lawsuits and contingency fees. This also comes on the heels of the $1 million Whiten v. Pilot decision for bad faith, setting a frightening precedent for insurers.

Human resources is another area of concern for the industry as claims departments try to attract and retain qualified staff. Operations are an ongoing exercise in change management, particularly as they relate to the use of technology in claims, with many companies still struggling with implementation.

Finally, but most importantly claims managers say, are consumer expectations, at an all-time high with rising premiums. In an environment of loss cost pressures and trying technology, claims managers are striving to maintain the heretofore relatively high satisfaction level of claimants. CU asked company claims leaders to share their strategies for the coming year.

Claims divisions have faced two if not three very difficult years. Challenges have arisen from many venues:

The number of accident benefit and bodily injury claimants exceeding expectations;

A weak or (in some geographical areas) non-existent Ontario tort threshold; and

Significant price increases by manufacturers on targeted automobile crash repair parts, all of which culminated in prior year’s development exceeding expectations.

The claims-specific issues are compounded by declining investment income, decreasing equity portfolio values, reducing solvency margins, reduced capacity on a per risk and portfolio basis. We are all facing demands from our stakeholders to return to profitability.

To achieve a turnaround, the p&c insurance operating units are seeking new tactics or reviving old tactics from the last hard market to restore profitability.

During periods of rapid change from the distribution and underwriting disciplines, claims departments must integrate themselves into the change process to assure they have a congruent claims strategy. Clearly identify this strategy and how your tactics complement the strategies and actions being undertaken by the rest of the company. Additionally, examine your vendor relationships, use of IT and overall service expectations. Do your conclusions support the strategy and do you have plans for a successful execution?

As the directors of claims operations we must focus on our underlying strategies and tactics to meet our service, severity and expense control objectives. We are faced with change proposals virtually on a daily basis. Demands include not only internal explanations as to why claims trends have become so dismal and how future costs can be reduced, but also external demands for interpretation of proposed legislative changes. Daily we are faced with managing the demands of external vendors and service suppliers. Business partners, vendors and service providers have become more adept at penetrating traditional core structures which achieves efficiencies but adds more complexity from an IT and claims management perspective.

During market unrest, the key is to remain focused. Those that do not can easily be distracted by new-fangled notions as to how the claims pie should be ‘divided’, which frequently is not in their favor. Short-term gains will be achieved by some, but as in the past, the system, driven by the public’s demand to reduce insurance costs, will dictate which relationships survive. Fundamentally, we need to reassess who is to benefit from the insurance product. Is not the objective to fairly provide benefits and indemnity to the purchasers of the product while the manufacturer and distributor of the product generate profits at a level to ensure market health and shareholder longevity?

Keep your objectives in sight. Remain focused on your core values. Provide sustainable service levels to your business partners, brokers, underwriters and vendors. Do not forget who your customers and true business partners are. Guarantee that claims service strategies are aligned with changing distribution and underwriting strategies.

Profitability for the insurance sector has been driven to a new low and the challenges are plenty. This is particularly true on the injury side with escalating medical and disability claims costs (even in the face of a decreasing number of reported accidents), to increased litigation, and costly and complex dispute processes. The industry continues to explore and implement new strategies to contain these costs.

In the midst of this chaotic climate, Allstate Canada believes it has struck the right balance to reduce losses and expenses while maintaining “best of practice” product and service. Our claims department is a major player in achieving what we consider to be the critical balance: fulfilling claims commitments at a service level extraordinary to the customer, while containing overall loss costs.

To start, we do not view our claims department as a cost center. We know our claims representatives are part of our overall customer service team and play a key role in driving profitability. Their mandate includes strengthening the Allstate bond with the customer.

Our team, claims reps and agents, is charged not only with carrying out, but also initiating activities to contain severities. For example, if we can assure customers up front with the value of good service, we can dissuade them from calling for expensive third-party representation (including unregulated paralegals), and forcing an extra engagement that complicates and prolongs the claims process.

One of the initiatives we introduced this year to assist Ontario customers with the government prescribed “Accident Benefits Application Package” is an easy-to-understand visual guide. Our intent is to remove the complexity associated with completion of these mandated forms. Insurance is a tough product for some to understand and we see it as our role to help our customers, to educate them, and to remove any confusion.

Our operation is not just about loss report taking, our team builds our brand. So it is vital that our team is highly skilled. It is true, finding, recruiting and retaining talented claims staff dr ives up expenses in the short term, but over the long run, our skilled claims professionals will ensure we keep claims costs in check. This leads to our basic philosophy, “spend a nickel to save a dime”.

Another key focus is to ensure our claims staff work in concert with our sales team to monitor the ‘red flags’ for fraud. The industry stats on payout for fraud are unacceptable. Our claims employees are also involved in cross-functional teams working to enhance profitability through product development, marketing and risk analysis. While our industry waits for legislation to address third-party costs and other excesses and abuses in the system, our claims team is playing a central role in balancing expenses, while building customer loyalty.

Over the next few years insurers will continue to be faced with new and different challenges. Events like 9/11 have caused insurers to review their operations from the ground up. This includes the review of disaster recovery programs, premium pricing strategies, loss prevention programs, claims costs and litigation strategies. Through all of this, customer service and customer loyalty remain paramount.

Customer service and customer loyalty, however, come with a price. Managing competing interests like customer service and cost reduction can be a daunting task. Success depends on our ability to leverage our expertise together with creating operating efficiencies. In addition to providing superior customer service and reducing overall expenses, we must also satisfy our shareholders through our ability to be profitable. To accomplish this we must recognize our cornerstones of success and focus on continued education, loss prevention and teamwork.

At CNA, we work hard to provide our distribution partners and customers with the value-added services they need. From an underwriting perspective, we focus on building long-term relationships with brokers who share our philosophy and support the concepts of loss prevention, cost reduction and adequate premium pricing. Underwriters and managers must be receptive to working with technical experts such as engineers and loss analysts to prepare programs for loss prevention. It is important to also utilize legal resources in the development of product wordings, this will result in less ambiguity and uncertainty.

From a claims perspective, a team approach is critical to our success. The team must leverage internal and external resources. When the claims handler, external adjuster and legal advisor work together the result is a fair and timely response for the customer. In order to meet and measure service commitments we must utilize the capabilities technology brings to us. We must understand our business processes and identify relevant technologies to support them in creating overall efficiencies. The ability to image documents, store and send them electronically, aids in a timely and efficient response for our customers.

As we continue to develop and improve our operational strategies, employee education becomes even more critical. Today, employees are required to have knowledge in many areas including knowing what the client does, the nature of their business and their claim, the ability to assess and disseminate information and put in place the best team to manage the situation. No doubt 2003 will bring new opportunities and challenges to our industry. Our ability to adapt, manage risk and provide higher levels of customer service will help define our success.

Customer expectations continue to rise in direct response to the significant strides other service industries have made in raising the service bar. It is not unusual to have a policyholder tell us, “I know it isn’t covered but to ensure my satisfaction you should pay for it anyway”.

Add to that the substantially increased premium that people will be paying this year. Expectations for product quality and service increase with the cost of the product (why else would we spend that much money on golf clubs if we couldn’t hit it longer and straighter?). Last year the message to our claims staff focused on the challenge in delivering high quality service in a hardening insurance market. The message for 2003 is that this challenge will be even greater.

At The Dominion, we respond to this challenge in a variety of ways. We do not link service with the amount of indemnity. Service is the journey, indemnity is the destination. We work to provide outstanding service, a comfortable journey, in each customer interaction, however, we will not overpay a claim in the name of service. Those types of payments only satisfy a few, while further deteriorating loss costs at the expense of the rest of our policyholders.

To meet these ever increasing service expectations, over the past few years we have worked hard to create a department where quality service is valued and rewarded. Our claims culture reflects our philosophies toward service and continuous improvement. Part of that environment is one where people can have fun when delivering The Dominion service brand. We encourage people to choose a positive attitude and strive to make their customer’s day. Working hard and playing hard do go hand-in-hand. Acceptance of this approach has been important in our ability to deliver great service without compromising operating and loss costs.

Our partner vendors share our philosophy toward service. This is another important piece in meeting customer’s service expectations since these people deal face-to-face with the policyholder. Those who have failed to meet service expectations for our policyholders can attest to our zero tolerance. Those who deliver service and quality to the customers have seen our relationship grow.

The last step is to talk with the customer. We tell them what they should expect, not just once or twice but as many times as necessary for them to feel comfortable with the claims process. We forget most people do not know what happens when they have a claim, except of course for the horror stories they have from family and friends. Listening to their needs and keeping them informed has gone a long way in improving their trust and confidence in our ability to service their needs. Industry polling puts industry claims service satisfaction at greater than 80%. If we want to maintain these ratings in the coming years we must all raise our service bar.

Court rulings on whether you have insurance coverage and who pays for what when more than one policy covers the same damage have often been misinterpreted by lawyers, insurance companies and policyholders.

However, two recent Supreme Court of Canada decisions provide you with some clarity on how to resolve such disputes. The case of Derksen vs. 539938 Ontario Ltd. dealt with a loss that occurred resulting from two independent causes – neither of which would have been sufficient alone to cause the loss. One of Derksen’s two policies excluded one of the causes and the insurer assumed that the exclusion would allow them to deny coverage for the loss. The insurer based their position on a common interpretation of the case of Ford Motor Co. vs. Prudential. However, the Supreme Court of Canada stated that the insurer’s interpretation was flawed. The court clarified that if there are two causes, one excluded by your policy and one insured, an insurer must use specific wording to avoid liability in those situations.

Separately, the Supreme Court of Canada determined in the case of Family Insurance Corporation vs. Lombard Canada Ltd., that when two insurance policies that cover the same risk each contain excess coverage clauses, then each clause would cancel the other out. As such, liability should be divided equally between the two parties up to the lower of the two policy limits. The insurer with the higher policy limit should then pay any outstanding amount. The Supreme Court of Canada also confirmed that issues such as premium, limits of liability or number of subscribers on either policy are irrelevant.

These recent legal decisions provide insurers with a fairly clear road map on how to word their policies if they wish to avoid creatin g concurrent or overlapping coverage. Insurance companies that elect not to follow these guidelines are at risk. The courts may assume the insurer did not intend to avoid a situation where they would be a joint contributor to a loss.

Because these rulings differ from the way some insurers have traditionally approached these issues, underwriters and claims professionals should examine their policies more closely. You may have exposures you are not aware of.

The containment of claims costs is the most significant challenge facing a claims department. Inflation, court decisions, expanding coverage all drive loss costs. For many insurers the increases are most evident in the auto line, particularly for Ontario. With historic claims costs for this line at 13% for accident benefits, 9% for bodily injury and 7% for physical, the adjuster is hard pressed to contain costs much less reduce them. In addition, for physical injury, the number of accidents has lessened, however, the number of injury claims received has risen each year. This trend is not limited to Ontario but evident through Canada and the U.S.

How does one go about containing costs within this environment? Insurers must be innovative in claims settlement. Within most systems, there are provisions for negotiations or alternatives to payment. For property losses it is not always necessary to replace an item, the insured will often accept a cash value payment or an appearance allowance. Insurers may repair/replace at their option. Currently this option is not often utilized. However, significant savings in loss costs can be obtained by leveraging insurer discounts for replacement.

For medical services, the insurer can negotiate either directly with the insured or the medical service provider. Gore Mutual has been successful in consistently maintaining loss costs at 10-20% below industry by developing programs such as our “medical self management” and “quick pay” initiatives. The programs reduce costs by providing funds upfront and giving the insured control in the fund dispersal.

It is important to understand that in the claims industry the actual dollars paid to the insured or claimant are topped up by the expenses of managing the claim. This includes DAC assessments, legal fees, investigation fees, and adjusting fees, etc. These can account for in excess of 10% of the loss. The increase in this expense is most evident in Ontario accident benefits. For instance, the cost of an independent medical report ranges from $250 to $1000, with current DAC assessments ranging from $2,500 to $6,000. In addition, there is a significant internal processing cost for adjusters’ set up time.

To contain these expenses, appropriate decision-making is required at the adjuster level. Having guidelines for adjusters, indicating when to pay and when to defend is a strong aid in managing expenses. Other expenses, such as engineering reports, should have guidelines. Lest we forget, there are many other categories of expense, such as legal expense, independent adjusting fees, all of which must be leveraged in a way to provide maximum benefit towards the conclusion of a claim.

Many insurers underestimate the impact of process on costs. How things are does impact a claims department’s overhead: every action an adjuster takes has a cost associated with it. Doing appropriate cost benefit analysis on process change is one way a department can keep costs in line.

One should never underestimate the influence the passage of time has on the costs of personal injury claims. These costs can take many forms including interest, increased wage loss, increased pain and suffering awards, increased loss of capacity awards, legal costs, etc.

How can we effectively avoid allowing these costs to continue? Is there a way we can manage and mitigate these damages? Well, in many cases we have no choice but to sit back and “let time heal the wounds”. However, we can still take proactive control by doing our investigation as soon as possible. Do we allow property losses to take priority? By spending the time to investigate liability issues early, and by becoming involved with the plaintiff, we can easily mitigate damages. Investigations at an early stage can reveal issues involving credibility, contributory negligence and other responsible parties. Be thorough with your investigations immediately.

Relationship building is an important skill a claims adjuster must cultivate. Interview all interested parties, establish your exposure, build a relationship with the plaintiff, be honest with all involved parties and initiate open dialogue to avoid legal involvement. Explain your role in the claims settlement process. Make sure plaintiffs understand the process and the time table which they can expect. Be thorough: sometimes the photograph, statement, interview, or phone call that you did not think was important could have been the most effective cost control decision you made during the claims management process.

As I sit and read and re-read this commentary, I can not help but think how simple the message really is, yet somehow it

becomes true in the day-to-day process of our work. The simple fact is, it is much less expensive to do this work first than waiting two years for a statement of claim to be issued and then receive a legal report that recommends further investigation.

Liability claims investigations are certainly not as glamorous as large fire losses but when done promptly and properly they certainly have a greater impact on controlling our claims costs. Take these measures and we can control cost and settle claims early.

The landscape of the insurance industry is in a constant state of change and this was only too evident during 2002. The impact of Whiten vs. Pilot represented the first significant “punishment” on what the courts deemed as inappropriate claims handling practices and since this decision, plaintiff council now incorporate “bad faith” as a standard pleading in their actions against insurance companies.

The McNaughton vs. Co-operators decision challenged the long-standing interpretation and practice of charging deductibles on total losses and with this alongside the “aftermarket” parts issue, strong momentum has evolved for class action lawsuits in Canada. The new asbestos exposure has arisen in the form of “mold”, and while most companies have seen only a few claims flow through their doors, many believe this will become a bigger issue and challenge traditional claims handling practices going forward.

Notwithstanding these new exposures, we have seen the trend of increasing claims costs in the area of medical expenses continue at an unprecedented level. Moreover, while the frequency of automobile claims decreased in 2002, the industry experienced an increase in the frequency of bodily injury claims in most jurisdictions in Canada, suggesting a change in behavior in the propensity to claims for minor injuries.

Looking at 2003, we should not expect these issues to disappear. In fact, the expectation should be that these issues will grow in scope and claims operations need to employ strong strategies to manage and control these challenges going forward. Companies that sit back and wait for legislative change or successful court challenges to reverse the current environment should rethink their position. Now is the time to tackle it head on and ensure your operations are equipped with the expertise and action plans to proactively deal with the new reality.

With the hard market conditions, significant rate increases and strong underwriting action are taking place, we should also expect our customers to be more demanding when they present a claim. Customers will not tolerate waiting 24-hours for an adjuster to get back to them. The degree to which your claims operations provide immediate claims facilitation and “true” 24/7 service will go a long way to meeting the increasing demands of customers.

Considering the above, it is imperative that companies invest in their claims operations and properly allocate necessary dollars for technology, process change and resources to r espond to the new environment. The companies that invest and adapt to the new reality will be the ones that succeed in the long run.

Canadian insurers faced a devastating economic situation in 2001. However, as earnings fell 22% during the first nine months of 2002, a bad situation became even worse, according to the Insurance Bureau of Canada’s (IBC) chief economist, Paul Kovacs. Volatile investment markets and poor earnings coupled with five consecutive years of rapid and aggressive claims growth has left the industry wondering what can come next.

Insurers in Canada who write significant amounts of automobile business, particularly in Ontario, have seen their results weaken considerably in large part due to a rapidly deteriorating legal environment.

In Ontario, insurers are faced with the practical reality that the Bill-59 threshold has been steadily eroded by the courts. In the interpretation of the threshold contained within Bill-59, many courts have diluted the original intent of the threshold which was to preclude “tort feasors” from bringing claims for small, subjective injuries. The threshold has been eroded to the point that many counsel in Ontario opine that the threshold is for all practical purposes dead. As a result the volume of claims presented for compensation has been trending upwards.

For insurers who have been pricing their product throughout the late 1990s on the understanding that the Bill-59 threshold was in practice being applied to meet the legislative intent, adverse loss development on the auto book hit hard in 2002, contributing to the industry’s poor results. In addition to threshold issues, Ontario insurers are now faced with new heads of damages being presented by counsel. Where we used to see claims for loss of future potential income earning capacity being brought on an exceptional basis, we are now seeing these claims as a matter of course on all injury claims presented.

Insurers are also now dealing with a very sophisticated and organized plaintiff bar. And, in the recent Ontario Court of Appeal case of McIntrye vs. Ontario (Attorney General), the decision indicates that the courts condone “fair and reasonable” contingency fee arrangements in Ontario. As such, many insurers have a concern that this decision will bring more claims to the table and we will see an increase in our cost trend line.

While insurers have experienced significant distress as a result of a less than “insurer friendly” legal environment, it is within the scope of each insurer to craft strategies to steer them through these difficult times. If our cost of resolving claims is not controlled and we continue on the trend lines we have been seeing, premiums will inevitably continue to escalate. It is incumbent on all of us in the industry to communicate these issues to the consumer, to government and to the judiciary so that we can continue to offer affordable insurance coverage to our customers.

The advent of technology has become the savior of our industry, or so we are lead to believe. Company driven improvements on systems to track numbers and trends, independent adjusters selling and marketing claim management tools, PDA’s allowing you the ability never to be away from the job.

Yet, what was once a fairly sedate industry has become quite a tumultuous business of dramatic premium increases, the loss of market through mergers, loss of market capacity in certain lines of business, loss of companies, and the increase in claim costs. The demands on staff are tremendous, results are crucial from underwriting through to claims.

The pressures on claim personal today are phenomenal. Claim handlers are expected to maintain huge caseloads, control expense, maintain and monitor all vendors, keep indemnity in line, be aware of all regulatory issues and trends in litigation, and excel in customer service. These are the day-to-day expectations, and combined with corporate issues, vendor working arrangements, and the technology enhancements, we in claims management begin to recognize a serious issue in our business: the loss of staff.

Though technology is important, there is no question that the key to controlling claim costs is the claim staff. The demand for highly skilled staff is high, both in the company ranks and in the independent ranks. One might suggest this shortage of skilled claim personnel in the industry is a direct result of the industry. In Ontario alone, we witnessed a major change when auto coverage went from tort to no-fault. Accident benefits (AB) skills became the need, no-fault the trend, tort and the skills associated with that type of claim handling slowly disappeared. So, as a young claim handler, instead of being exposed to all aspects of the business, training concentrated on AB. As regulations changed, as did the no-fault system, we began to see people leaving AB claim handling and in fact in some cases leaving the industry. People were burned out, fed up, over worked, and underpaid. For those wanting to stay in the industry, a change in venue or a change in the type of claim handled was often difficult to obtain.

Today it is harder to find the right people to service the type of business the company is involved in. Years of experience are leaving the business, staff loyalty is at a low, and the ability to start at an entry-level position in an organization and work the way up through training is almost non-existent.

Technology makes our jobs easier, but at the end of the day, the key to success, cost savings, customer service, are the people. We need to invest in our people, maintain loyalty, provide training and advancement. Technology will take care of itself, let us look after our staff.The pressures on claim personal today are phenomenal. Claim handlers are expected to maintain huge caseloads, control expense, maintain and monitor all vendors, keep indemnity in line, be aware of all regulatory issues and trends in litigation, and excel in customer service. These are the day-to-day expectations, and combined with corporate issues, vendor working arrangements, and the technology enhancements, we in claims management begin to recognize a serious issue in our business: the loss of staff.Though technology is important, there is no question that the key to controlling claim costs is the claim staff. The demand for highly skilled staff is high, both in the company ranks and in the independent ranks. One might suggest this shortage of skilled claim personnel in the industry is a direct result of the industry. In Ontario alone, we witnessed a major change when auto coverage went from tort to no-fault. Accident benefits (AB) skills became the need, no-fault the trend, tort and the skills associated with that type of claim handling slowly disappeared. So, as a young claim handler, instead of being exposed to all aspects of the business, training concentrated on AB. As regulations changed, as did the no-fault system, we began to see people leaving AB claim handling and in fact in some cases leaving the industry. People were burned out, fed up, over worked, and underpaid. For those wanting to stay in the industry, a change in venue or a change in the type of claim handled was often difficult to obtain.Today it is harder to find the right people to service the type of business the company is involved in. Years of experience are leaving the business, staff loyalty is at a low, and the ability to start at an entry-level position in an organization and work the way up through training is almost non-existent.Technology makes our jobs easier, but at the end of the day, the key to success, cost savings, customer service, are the people. We need to invest in our people, maintain loyalty, provide training and advancement. Technology will take care of itself, let us look after our staff.