Competence: A Blend of Knowledge, Skill and Will

For most of my years as a Chief Claims Officer, I carried a notebook with me constantly. I used it as a journal, capturing meeting notes, assignments, commitments, requests, details of conversations, lists of people I had to see, and tasks that needed to be accomplished. I also logged ideas or topics or quotes that struck me as interesting or potentially useful. Each weekend I would review my notes, then categorize and prioritize the items into action lists for the coming week, month, quarter and year. A notebook would last me about three months, except in very busy times, and I still have most of those notebooks. This past weekend I was flipping through an old one, and I came across a quote I had written in block letters, attributed to German writer and politician Johann Wolfgang von Goethe:

“Knowing is not enough; we must apply. Willing is not enough; we must do.”

Funny how a simple quote in a notebook can provoke vivid memories. I was immediately able to recall the situation I was facing when I scribbled that note. I had been in place as the Chief Claims Officer for a large, troubled insurance company for a little more than a year. One of the premier US management consulting firms had been in residence the entire time, helping to do a baseline loss cost leakage study. It was a very tense situation. Just to be clear, there are some inconsistent definitions out there now, but when I use the term "leakage" I am referring to the amount paid on a claim above and beyond what should have been paid. Leakage is generally reported as a rate, 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 rate would be the amount overpaid ($1,000) divided by the total paid ($10,000) or 10%. Leakage rates under 5% were considered acceptable back then, but the baseline numbers I was seeing were at least three times that number, across all lines of business, so I knew I had a problem.

While a properly executed baseline leakage review reveals, by line of business, where in the claims handling process leakage is happening, it's the root cause analysis that pinpoints why it is happening. The only good news about leakage is that it is easy to eliminate if you have access to a candid and dependable root cause analysis.

I remember being disappointed with the original root cause analysis because it concluded that training was the remedy for the leakage problem. In other words, claim handlers were making poor loss cost management decisions because they hadn't been trained appropriately--they didn't have the level of knowledge necessary to handle claims properly.

I knew it couldn't be that simple. I had looked at closed files myself and I had seen breakdowns in core claim handling that couldn't be fully explained by lack of knowledge. Best practices were being ignored by claims handlers and their managers, file documentation was substandard, the prevailing claims management focus was passive and tactical (process based) rather than active and strategic (resolution based), and there was an alarming lack of urgency evident in the files. Something else was going on.

We dug a bit deeper, and it didn't take long to conclude that our primary leakage root cause did indeed involve a competence gap, but the gap had three different components: knowledge, skill and will. Think of knowledge as the process of learning and understanding how to do something. Skill involves applying that knowledge in a practical setting to produce desired results. And will, as we considered it, was all about attitude, character, determination, discipline, and the desire and willingness to work to produce the best outcomes. Competence requires all three--knowledge, skill and will. In claim handling, that means the claim handler has to know how to handle claims, be skilled at applying that knowledge, and be willing to diligently work at producing the best results.

While training can close a knowledge gap, and hands-on training, guided practice and mentoring can help improve skills, will is a "hearts and minds" challenge--it involves determination and choice. People decide the degree to which they are willing to apply their knowledge and skills and efforts in any given situation based upon well known motivators. Of course today we tend to talk about employee engagement (the extent to which employees feel passionate about their jobs, are committed to the organization, and put discretionary effort into their work), not will, although the concepts are basically the same.

It turned out our most significant competence gap component back then was will, not knowledge and skill, so additional training on its own would never would have solved that leakage problem. Once we understood that and knew where else to focus in order to create an operating environment conducive to producing better outcomes, we managed the leakage number below 5% within about 12 months.

Many thanks to Johann Wolfgang von Goethe, who according to my notebook played at least a supporting role in illuminating the true nature and breadth of the root cause problem we were facing!

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@theclm.org or through LinkedIn or Twitter.

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.

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 through www.linkedin.com/in/deanharring/