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I was driving home from Pennsylvania recently listening to an NPR program about historical misconceptions (http://www.npr.org/2013/11/05/243293489/misconceptions) and I started musing about some of the persistent fallacies concerning claims management that I encountered during my years as a Claims officer. Here are just a few of my favorites:
1. A claim is a claim is a claim
No doubt lifted and adapted from Gertrude Stein’s famous quote about roses, this identity platitude asserts that claims always have been and always will be claims, and nothing more. In other words, claims don’t vary much from period to period so neither should claim costs or resolution approaches. This chestnut regularly surfaces when the Claims department observes that claims of unusual or unexpected frequency or severity are adversely impacting productivity, case reserves, loss payments, and expenses. If the loss ratio is trending higher than projected (see fallacy 5), this slogan is often used to attempt to redirect the responsibility spotlight from underwriting to claims.
2. The best claim is a closed claim
Since insurance company claims handler productivity is measured by closed claims, and TPAs usually don’t fully earn their fees until a claim is closed, it’s easy to understand why this one persists. Of course a claim closed too soon (without proper coverage verification, damage investigation, analysis and evaluation) probably won’t result in the best claim outcome. Most claims people understand that the objective is a bit more complicated, i.e., claims should be closed as promptly as possible consistent with claim handling best practices and regulations. Yet I still remember standing in a TPA office in New Jersey a few years ago at the end of a month, listening to a manager imploring claims handlers to “close claims now” so they could increase that month’s revenue.
3. It’s all about claims cycle time
Cycle time refers to the amount of time it takes to resolve a claim, so this assertion is closely related to fallacy 2. Cycle time is a great example of a performance measure that appears to be valid, yet encourages the wrong behavior if it isn’t balanced appropriately by other objectives. So while cycle time may be important from a productivity and customer service perspective, it is only one of many claim quality control objectives that are critical to producing the best outcome. Others include paying the right amount on a claim at the right time, resisting fraudulent claims, denying claims that aren’t covered, managing allocated expenses, pursuing subrogation recovery, complying with regulations and communicating with stakeholders.
4. Just listen to the voice of the customer
I always get a kick out of this cliché since it sounds so easy and obvious that most people nod in agreement when they hear it. And in terms of apparent applicability, it transfers effortlessly from industry to industry so even a neophyte COO can feel comfortably righteous when uttering it. But what on earth does it mean when it is applied to a claims organization? Which customer’s voice is controlling? Claims departments have lots of different customers, although they are commonly called stakeholders. A stakeholder is any individual or group who has a vested interest in or dependency upon how well the claims operation performs, and stakeholders often help define and influence programs, products, and services offered. Claims’ stakeholders include business units, underwriters, insureds (premium paying customers), distribution partners, actuaries, employees, investors, and regulators. Their wants and needs are extensive and varied and sometimes in conflict, so they don’t speak with a single voice. It takes a full-blown stakeholder needs analysis to record all those voices and successfully harmonize them into a balanced plan. Note to self: not easy, not obvious, but necessary.
5. The loss ratio is the best measure of Claims’ effectiveness
The loss ratio, as the term implies, represents the ratio of net claims incurred (reserves, payments, claims expenses) to net earned premium. Claims certainly is responsible for the numerator of the loss ratio, but the denominator (net earned premium) is determined by other factors that are not managed by Claims, such as rate levels, policy terms, and risk selection criteria. The two parts of the ratio are basically independent. So if Claims does a fantastic job of managing payments and reserves, but underwriting chooses the wrong risks, at the wrong rates, and with the wrong policy terms, the loss ratio will explode. It makes no sense, however, to hold Claims solely responsible for the entire loss ratio when it is only responsible for the numerator of that ratio. That’s not to say that Claims shouldn’t have to demonstrate its effectiveness in managing the magnitude of that numerator, but that’s a story for another day.
Dean K. Harring, CPCU, CIC is a retired Chief Claims Officer and an expert and advisor on Property Casualty insurance claims and operations. He can be reached at dean.harring@gmail.com or throughwww.linkedin.com/in/deanharring/
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