Monday, December 9, 2013

Five Troublesome Truisms About Claims Management

Originally posted on November 20, 2013

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/

Loss Cost Management in Claims

Originally posted on November 21, 2013

Years ago I joined a large, troubled insurance company and the CEO asked me to do just one thing—fix the Claims department. He wasn’t sure what was wrong with it, but he knew it needed work.

I called the claims management team to a meeting and asked one question: How does Claims contribute to profitability here? I wrote their answers on a flip chart, dozens of them. After about 15 minutes, I told them they were describing important things that Claims did, but they hadn’t mentioned the most important contribution Claims makes to profitability: loss cost management. Claims organizations exist to manage loss costs. The puzzled faces looking back at me told me what needed to be done to fix that Claims department.

Loss Cost Management is nothing more than the ability to consistently generate superior claims results and outcomes while nurturing stakeholder relationships and complying with applicable laws and regulations

Loss costs have three components:

ULAE–unallocated expenses (salaries, rent, etc.)
ALAE–allocated expenses (outside attorneys, independent adjusters, TPAs, appraisers, etc.)
Loss–loss dollars paid to insureds or third parties.

At most companies, graphically stacking these three components by dollars spent yields a triangle with ULAE at the top, ALAE in the middle and Loss at the base. This is often called the loss cost triangle.

Managing loss costs means managing all three components of the loss cost triangle. The costs are interrelated, so fewer dollars spent on ULAE may translate into more dollars in ALAE or Loss, while fewer dollars spent on legal expense may increase Loss dollars paid to third parties, and so on.

The challenge for Claims managers is straightforward: understand how the loss cost components interact, then deploy and incur the most effective combination of allocated and unallocated expenses to produce the most appropriate level of loss payments.

Although as a concept it is often misunderstood, the best gauge of loss cost management effectiveness is the level of loss cost leakage (loss dollars paid in error due to breakdowns in claim handling) identified through closed file reviews. World class claims operations operate with leakage of less than 5% (percentage of loss dollars paid that shouldn’t have been paid.) As it turned out, the troubled insurance company I mentioned earlier was operating with a leakage rate above 20%.

Here’s a quick primer on loss cost leakage:

What is loss cost leakage?

Leakage is the amount paid on a claim above and beyond what should have been paid.
Leakage is reported as a % of the total amount paid on a claim (or sample of claims), so if $10,000 was paid on a claim that should have been resolved for $9,000, the leakage % is the amount overpaid ($1,000) divided by the total paid ($10,000) or 10%.

How is leakage measured?

Usually a calibrated team of claims experts reviews a sample of closed files periodically. They analyze claim handling decisions and track compliance with best practices, ultimately estimating the amount of loss cost leakage on each claim.

What causes leakage?

There are dozens of root causes, but some of the most common involve failure to apply best practices in investigation, evaluation and resolution.
Coverage errors, inadequate subrogation investigations, evaluation based upon unverified damages—these are examples of breakdowns that can inflate claims payments.

How can leakage be reduced?

Since the closed file review process reveals, by line of business, where in the claims handling process leakage is happening and the root cause analysis reveals why it is happening, it is actually fairly easy to identify what needs to be done to eliminate causes of leakage.
Training, decision support and process improvement aimed at the root causes of leakage usually produce rapid improvement.

Do leakage reductions improve loss ratios?

Since leakage reductions imply that overpayments on claims are being reduced, they certainly have a favorable impact on the numerator of the loss ratio (losses.) The denominator of the loss ratio (earned premium) is influenced by other factors, however, including rates charged and policy terms, so there may not always be a direct cause-and-effect relationship between leakage and loss ratios. The leakage number is a useful indicator of the loss cost management effectiveness of the claims operation since it reveals the extent to which claims are being overpaid.

Faster Horses

Originally Posted on November 30, 2013

I read a Capgemini whitepaper a while back which declared that in property casualty insurance, the claims experience is often the “defining moment” in a customer relationship. Although that sounded a bit dramatic to me, I found a couple of reinforcing definitions in the dictionary:

defining moment (noun)

1) the point at which the essential nature or character of a person, group, etc., is revealed or identified

2) an occurrence that typifies or determines all related events that follow

Considering these definitions in the insurance context, it seems reasonable to argue that a customer learns about the nature and character of their insurance company when they file a claim, and that their claim experience influences all related events that follow, including customer satisfaction and retention. Of course many customers never file a claim, so their defining moment comes second-hand, when they listen to a family member or friend or even their agent or broker describe a claim experience. The problem with that, of course, is that people are twice as likely to share negative (versus positive) customer experiences with others, and resources such as Facebook, Twitter and company or industry-specific on-line discussion boards have made it easier to share those comments with a much larger audience.

But even if insurance companies do have customer relationship “reputations” that are largely driven by customer claims experiences, what’s the impact? According to that Capgemini paper, reputation matters: one out of five customers switches insurers after a negative claim experience, and it costs an insurer five to seven times more to attract new customers than it does to keep existing customers.

I recently reviewed a 2012 Global Insurance Survey report from Ernst and Young (Voice of the Customer: Time for Insurers to Rethink Their Relationships–accessible here) and I started thinking about that old story about Henry Ford, founder of Ford Motor Company. As the story goes, when Ford was asked about the customer research he had done before he began production of the Model T automobile, he allegedly harrumphed: ”If I had asked people what they wanted, they would have said faster horses.” While it’s unclear whether Ford actually said those words, that quote is often used to support the argument that customers really don’t know what they want.

The message about customers in the Ernst and Young paper, however, was quite the contrary. According to their research, property casualty insurance consumers in 2012 reported very definite expectations about price, product, brand, communication preferences, ease of doing business, accessibility and personal contact. While price was still cited as the primary determining factor when buying an insurance policy, brand and customer service were right up there with price.

Historically, customers who filed claims (including me, and perhaps you…) tended to approach the claims process with low expectations, bracing themselves for a claim “defining moment” experience that would likely involve trepidation, conflict and disappointment. They didn’t expect or demand an excellent claims experience, and they were so forgiving: if the experience didn’t turn out to be as bad as they thought it might be, they reported they were satisfied. In other words, low expectations, exceeded, resulted in satisfied customers! Not exactly a situation that cried out for transformational change.

But customer attitudes and expectations concerning the claims experience are shifting dramatically. According to Ernst and Young, in the US excellent claims service is now nothing more than marketplace table stakes, a minimum requirement to compete. Consumers expect excellent claims service—anything less will likely drive them to another insurance carrier—yet excellent claims service doesn’t guarantee customer retention. Half the consumers who reported a poor claims experience indicated they were likely to switch carriers, but so did a third of those who had a good claims experience! What did the respondents say would have improved their claim experience? Speeding up the claims process, and communicating more effectively.

As shifting customer expectations reshape how customers approach their claim “defining moment”, I think it will be intriguing to watch how insurers deal with customers who know what they want and are willing to change carriers to get it.

A Bias for Action

You have probably seen at least one variation of this quote about people, often attributed to Mary Kay Ash:

"There are four types of people in this world. There are people that make things happen. There are people that watch things happen. There are people that wonder what happened. And there are people that don’t know anything happened.”

While most people chuckle when they read it, they tend to do so while mentally slotting themselves into the “people who make things happen” group, not into the watcher, wonderer or clueless groups. Nothing surprising about that, I suppose. It reflects our ideal of American ingenuity: clever and decisive and achievement oriented, where deeds matter more than intentions or plans. But let’s be practical for a minute–if everyone in an organization is busy making things happen all the time, a few people should probably be watching what is happening to make sure it is constructive and coordinated.

I worked with a company a while back that prided itself on its behavior-based culture, a culture in which people who made things happen were the most rewarded and valued employees. While certain other management behaviors were encouraged, everybody knew the most important behavior involved taking action and making things happen. Action was more important than outcomes or impact since the evaluation lens was focused on activity, not results. So inevitably some people did things that never should have been done just to demonstrate their decisiveness and propensity for taking action, and that created an uncomfortable dynamic within the organization. At one extreme we had the “just do it” people–who had no patience (or aptitude) for planning or analysis. They loved to invoke Herb Kelleher, the founder of Southwest Airlines (“We have a strategic plan. It’s called doing things.”) and Tom Peters (“Good managers have a bias for action.”) At the other extreme we had the risk management purists, people who were unwilling to move forward with anything until all risk scenarios and potential outcomes had been thoroughly analyzed. This group jubilantly broadcasted the details of failed “just do it” projects so everyone could understand that they cost more than advertised and/or failed to produce the benefits expected. It was a distracting, conflict-ridden muddle.

Around that time I was reading a biography of Napoleon Bonaparte and came across this quote attributed to him:

“Take time to deliberate; but when the time for action arrives, stop thinking and go in.”

Napoleon was a writer, a thinker, a planner and a reformer, but he is remembered chiefly as one of the greatest military commanders of all time. He believed in preparation and planning, of course, but he was an action-oriented leader with a solid track record of defeating armies larger and better resourced than his own. What fascinated me about this provocative quote was Napoleon’s implication that in decision making there is an explicit time for action, and that when that time arrives it is recognizable.

So I started talking with managers about the relationship between planning (preparing to act) and acting (taking action). Those prone to taking action relied on instinct and gut feelings, sometimes informed and sometimes uninformed. Those who were reluctant to act struggled to determine when it was time to shift from preparation to action. Unlike Napoleon, they didn’t trust their instincts so they weren’t confident they would be able to recognize when the time for action had arrived. Since they were reluctant to launch until they reached that optimal action date, it was just easier and safer to continue fine-tuning their plans instead.

I think claims managers produce better outcomes when they operate with a bias for action. Teaching managers to plan more effectively may be easier than teaching them to stop procrastinating and take action, but both are doable. What’s critical is a shift in attitude and perception so that the manager is able to view planning and preparation as valuable only to the extent they enable actions and results. In other words, it’s not all about planning, or all about taking action, it’s about planning well enough to take action to produce the desired results.

Making decisions with a bias for action can be transformational, but it requires preparation, courage and a willingness to take risks. And if things don’t work out as planned? Do an after-action review and learn something from it. Actions, not intentions, produce results, so sooner or later you have to take a shot. Hockey great Wayne Gretzky, a player who had an obvious bias for action, said it well: “You miss 100% of the shots you don’t take.”

Dean K. Harring, CPCU, CIC is a retired Chief Claims Officer and an expert and advisor on Property Casualty claims and operations. He can be reached at dean.harring@gmail.com or through www.linkedin.com/in/deanharring/