Rethinking the Claims Value Chain

As a claims advisor, I specialize in helping to optimize property casualty claims management operations, so I spend a lot of time thinking about claims business processes, activities, dependencies, and the value chains that are commonly used to structure and refine them.  Lately I have been focusing on the claims management supply chain---the vendors who provide products and perform services that are critical inputs into the claims management and fulfillment process. 

In a traditional manufacturing model, the supply chain and the value chain are typically separate and distinct--the supply chain provides raw materials, and the value chain connects a series of activities to transform the raw materials into something valuable to customers. In a claims service delivery model, the value chain and the supply chain are increasingly overlapping, to the point where it is becoming hard to argue that any component of the claims value chain couldn’t be handled directly by the supply chain network.

Which creates an intriguing possibility for an insurance company—an alternative to bricks and mortar and company cars and salaries--a virtual claims operation! Of course there are TPAs that are large and well developed enough to offer complete, end to end claims management and fulfillment services to an insurance company through an outsourced arrangement. That would be the one stop shopping solution---hiring a TPA to replace your claims operation.  But try to envision an end to end process in which you invite vendors/partners/service providers to compete to handle each component in your claims value chain (including processing handoffs to each other.) You select the best, negotiate attractive rates, lock in service guarantees, and manage the whole process simply by monitoring a performance dashboard that displays real time data on effectiveness, efficiency, data quality, regulatory compliance and customer satisfaction. You would need a system to integrate the inputs from the different suppliers in order to feed the dashboard, and you would also need to make certain the suppliers all worked together well enough to provide the ultimate customer with a seamless, pain free experience, but you are probably already doing some of that now if you use vendors. You would still want to do quality and compliance and leakage audits, of course, but you could always hire a different vendor to do that for you or keep a small team to do it yourself.  Your ULAE costs would become variable, tied directly to claim volume, and your main operating challenge would be to manage your supply/value chain to produce the most desirable cost and experience outcomes. Improved cycle time, efficiency, effectiveness, data accuracy, and the quality of the customer experience would be your value propositions.    You could even monitor the dashboard from your beach house or boat—no more staff meetings, performance reviews, training sessions—and intervene only when needed in response to pre-defined operational exceptions. Sounds like a no-brainer. Insurance companies have been outsourcing portions of their value chain to vendors for years, so why haven’t they virtualized their claims operations?

If you are running an insurance company claims operation, you probably know why.  Many (probably most) claims executives are proud of and comfortable with their claims operations just the way they are.  They believe they are performing their value chain processes more effectively than anyone else could, or that their processes are “core” (so critical or so closely related to their value proposition they cannot be performed by anyone else) and thus sacrosanct, or that they have already achieved an optimal balance between in-house and outsourced services so they don’t need to push it any further. Others don’t like the loss of control associated with outsourcing, or they don’t want to consider disruptive change.  Still others think it might be worth exploring, but they don’t believe they can make a successful business case for the investment in systems and change costs. Unfortunately, this may help explain why claims executives are often accused of being stubbornly change averse and overly comfortable with the status quo, but I think it is a bit more complicated than that—it all begins with the figurative “goggles” we use to self-evaluate claims operations.

If you are running a claims operation, you have an entire collection of evaluation goggles—the more claims experience you have, the larger your collection. When you have your “experience” goggles on, you compare your operation to others you have read about, or seen in prior jobs, or at competitors, to make sure your activities and results benchmark well and that you are staying up to date with best practices. At least once a year, someone outside of claims probably demands that you put your “budget” goggles on in order to look for opportunities to reduce ULAE costs. or legal costs, or fines and penalties, or whatever.  You probably look through your “customer satisfaction” goggles quite a bit, particularly when complaints are up, or you are getting bad press because of your CAT response, or a satisfaction survey has come out and you don’t look good.  Your “stakeholder” goggles help you assess how successful you have been at identifying those who have a vested interest in how well you perform, determining what it is they need from you to succeed, and delivering it. You use your “legal and regulatory compliance” goggles to identify problems before they turn into fines, bad publicity, or litigation, much as you use your “no surprises” goggles to continually scan for operational breakdowns that might cause reputational or financial pain, finger pointing and second guessing. Then there are the goggles for “management”—litigation, disability, medical, vendor—and for “fraud mitigation” and “recovery” and “employee engagement.”  Let’s not forget the “efficiency” goggles, which help you assess unit costs and productivity, and the “effectiveness” and “quality control” goggles, which permit you to see whether your processes are producing intended and expected results.  And of course your “loss cost management” goggles give you a good read on how well you are managing all three components of your loss cost triangle, i.e., whether you are deploying and incurring the most effective combination of allocated and unallocated expenses to produce the most appropriate level of loss payments.

Are all those goggles necessary? You bet. Claims management involves complex processes and inputs and a convoluted web of variables and dependencies and contingencies. Most claims executives would probably agree it makes sense to regularly evaluate a claims operation from many different angles in order to get a good read on what’s working well , what isn’t, and where there is opportunity for improvement. The multiple perspectives provided by your goggles help you triangulate causes, understand dependencies and impacts, and intelligently balance operations to produce the best outcomes. So even if you do have a strong bias that your organization design is world-class, your people are the best, and all processes and outcomes are optimal, the evaluation should give you plenty of evidence-based information with which to test that bias and identify enhancement opportunities--as long as you keep an open mind.

No matter what you do, however, there will always be others in your organization who enjoy evaluating your claims operation, and they usually aren’t encumbered by such an extensive collection of goggles. They may have only one set that is tuned to budget, or customer experience, or compliance, or they may be under the influence of consultants whose expensive goggles are tuned to detect opportunities for large scale disruptive/destructive process innovation or transformation in your operation.  On the basis of that narrow view they just might conclude that things need to change, that new operating models need to be explored. Whether you agree or disagree, hopefully your evidence-based information will be of some value in framing and joining the debate.

Will we ever see virtualized claims operations?  Sure.  There are many specialized claims service providers operating in the marketplace right now that can perform claims value chain processes faster, cheaper and better than many insurance companies can perform them. The technology exists to integrate multiple provider data inputs and create a performance dashboard. And there are a few large insurance company claims organizations pursuing this angle vigorously right now.  I fully expect the companies who rethink and retool their claims value chains to take full advantage of integration of supply chain capabilities will begin to generate improved performance metrics and claim outcomes, ultimately creating competitive advantage for themselves.  Does that mean it is time for you to rethink your claims value chain?  I think the best way to find out is to put on your “innovation” goggles and take a look!

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 www.linkedin.com/in/deanharring/

Innovate or Die. Really?

I have been thinking and reading about innovation recently, and I must say there certainly is no shortage of material on the topic—much of it with a critical slant.  That may surprise you, since no matter where you work I am sure your organization talks about innovation, believes it is already innovative, or at least plans to become innovative. Why?  Innovation is a trendy concept, it sounds cool, cutting-edge and entrepreneurial. Business schools have embraced it, and consultants have built practices around it. More importantly, many people believe the phrase “innovate or die” is absolutely true and that it applies to all businesses. So, as Dennis Berman points out in the Wall Street Journal: “Most CEOs now spray the word "innovation" as if it were an air freshener.”

William Taylor, co-founder of Fast Company magazine and blogger on the Harvard Business Review Blog Network, described it this way in his 12/6/13 blog Stop Me Before I “Innovate” Again:

“Words matter — in business and in life. I’ve always found that companies that aspire to do extraordinary things, leaders who aim to challenge the limits of what’s possible in their fields, develop a “vocabulary of competition” that captures the impact they’re trying to have, the difference they’re trying to make, the future they’re hoping to create. Almost none of these companies and leaders use the word “innovation” to describe their strategy — implicitly or explicitly, they understand that it has been sapped of all substance. Instead, they offer rich and vivid descriptions of what they hope to do, where they hope to get, and why it matters.”

Ginanpiero Pteriglieri, an associate professor of organizational behavior at Insead, puts an even sharper point on it in remarks quoted in The Experts blog in the Wall Street Journal:

“Innovation is a strong contender for the crown of business buzzword of the decade. The term has all it takes. It is ubiquitous, mysterious and, like its acolyte "leadership," it works alone and pairs well with many adjectives. Is there a problem that transformational leadership and disruptive innovation aren't invoked to solve? Is there a company whose failure is not explained by a lack of both?”

Business buzzword of the decade? Wow. In that race, the competition is steep, and the contenders are many.  By the way, a great place to check out a good collection of the “jargon monoxide” (a term coined by Polly LaBarre) contenders is The Ridiculous Business Jargon Dictionary where you can browse terms ranging from “above board” to “zero-zero split.” 

Whether or not you believe it is appropriate or well deserved, the property-casualty insurance industry isn’t often described as innovative.  Complacent and risk-averse, stolid, stodgy, and conservative are descriptors more commonly used. But let’s step back a minute—what is innovation, and how critical is it to the success of a property-casualty insurance company?

Innovation is often described as the implementation of something new—a product, a service, a process, an alliance, a market, or an experience—that creates value. So while the innovation process may begin with big ideas, it takes execution and results before it qualifies as innovation. Or, as Dr. Lewis Duncan, president of Rollins College, put it: “Innovation is the ability to convert ideas into invoices.” 

Of course, there are also other flavors of value out there to be harvested through innovation—lower costs, higher margins, new or more attractive products or services, more engaged employees, new customers, new distribution channels, happier customers, more loyal customers, enhanced reputation, etc.  Yet for property-casualty insurers who believe they are operating in essentially closed markets characterized by a high level of maturity and stability, the decision about innovating often turns on their competitive situation.  If they believe they are competing successfully (however they define that term), they may elect to avoid the costs of innovation and to focus instead on engineering incremental operating improvements, tweaking their products and operations and processes so they can continue to function competitively.

But if a company is not competing successfully, or if they aspire to grow and be profitable but that just isn’t happening, they need to step back and analyze what isn’t working, why, and what needs to be done to improve results. That’s an opportunity for innovation, for sure, but it also offers a convenient excuse to avoid or abandon any initiative or process that is new (or unwelcome or costly) and to “get back to basics.”  Getting back to basics means different things to different people, of course, but it usually involves a return to a time-tested and proven method of doing something, like implementation of well-established and widely understood industry methods and best practices. You might characterize it as the converse of innovation. Truth be told--it is much easier and more comfortable to get back to basics than it is to get innovative and develop something new to create value. And it just might be enough for an insurance company to get things back on track if their inability to compete had its roots in substandard or underperforming products, practices, services, or operations.

I do always wonder, when an insurance company goes public with its plans to embark upon an ambitious, multi-year program of operational transformation (first cousin of innovation), just how long it will take before they lose their nerve and push the “back to basics” button. I have experienced it, and I have watched others go through it, and it isn’t really that unexpected.  Innovation is often a costly undertaking that generates uncomfortable, disruptive change with no guarantee of success,  That is particularly true when the “value” that is expected to result is difficult to measure and demonstrate convincingly since it arises from something other than “invoices.”  If you have lived through any type of claims-related transformation or innovation, you know exactly what I mean.

Still, I am not convinced that all property-casualty insurance companies are necessarily entangled in an “innovate or die” predicament, at least not yet. Plenty of companies manage to stick to the basics, focus on execution, play around the edges with incremental improvements, and the market allows them to survive and sometimes even prosper.  Yet we all know there are insurance companies out there who are constantly pushing the envelope and doing whatever it takes to create value—they just don’t spend a lot of time bragging about how innovative they are or broadcasting what they are doing. Instead, they are busy trying to create distinctive marketplace advantages that resonate with customers and to give themselves an edge in pricing, costs, products or services.  Why? So they can operate with higher profit margins and grow by attracting customers away from their competitors. So even though innovation for property casualty insurers probably isn’t really a matter of life and death today, it can impact an insurer’s quality of life and general well being. Kind of like diet and exercise can for humans, I suppose.

Narrow the focus to property casualty claims operations, however, and I think the “innovate or die” predicament becomes a bit more pressing and complicated; but that’s a tale 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@theclm.org or through www.linkedin.com/in/deanharring/

 
 

 
 
 
 
 

Leadership Toxicity

I was reminiscing with some former colleagues over the holidays and, as often happens in such situations, we were laughing it up as we shared anecdotes about some of the highly placed, handsomely paid, sometimes incompetent and occasionally "toxic" leaders we had worked with over the years.  Of course it's easy and maybe even therapeutic to laugh about such people once they are in your past and no longer part of your daily life experiences, but I think it is fair to say that the truly toxic leaders weren't ever really funny--they were dysfunctional and destructive.  If you have worked with one, you know what I mean.

What is a toxic leader?  Toxicity, like beauty, may be in the eye of the beholder, but when Dr. Marcia Lynn Whicker (Toxic Leaders: When Organizations Go Bad) classified leaders by type, she used three categories:  trustworthy, transitional and toxic. The toxic leaders were described as maladjusted, malcontent, malevolent and malicious enforcers, street fighters and bullies who destroy productivity, operate with a sense of personal inadequacy, and who are selfish and clever at concealing deceit.  It gets worse:  according to Col. George E. Reed, US Army, toxic leaders are viewed as "arrogant, self-serving, inflexible and petty" and they "rise to their stations in life over the carcasses of those who work for them." Andrew Schmidt has even developed a Toxic Leadership Scale that considers five dimensions of toxic leadership:  abusive supervision, authoritarian leadership, narcissism, self-promotion, and unpredictability.

One of my favorite books on this topic is Bad Leadership: What It Is, How It Happens, Why It Matters by Barbara Kellerman.  She describes seven types of bad leadership that are most prevalent--incompetent, rigid, intemperate, callous, corrupt, insular and evil--and illustrates them with stories about public figures from business and politics.  Several years ago, I worked with a group that used Kellerman's categories as a framework to try to articulate what bad leadership looked like in their workplace so they could root it out and eliminate it.  The finished product looked something like this:

 

Incompetent	Lacks knowledge, skill or will to sustain effective action Oblivious to his/her lack of knowledge, skill or will  Focuses on peripheral or unimportant items Gets in the way of direct reports (trips the players on their way out of the dugout) Foolishly and inappropriately confident and arrogant High maintenance
Rigid	Stiff, unyielding, smug Unwilling to consider and adapt to new ideas, new information or changing times Believes he/she has superior knowledge (smartest person in the room) Gets trapped by bad decisions (unwilling to admit mistakes)
Intemperate	Lacks discipline and self control in professional or personal habits and behaviors Has tantrums, screams, throws things, slaps the table, slams the door Substance and/or people abuser Uses inappropriate language or makes unprofessional comments Needlessly hostile and provocative
Callous	Uncaring and/or unkind Ignores or discounts needs, wants and wishes of others Acts without respect Bullies subordinates and/or treats them with contempt Makes disparaging comments about employees to other employees
Corrupt	Lies, cheats, misrepresents, or steals  Takes the credit, avoids the blame Conspires against, demeans and marginalizes others  Deals dishonestly or disingenuously with others Says one thing, does another
Insular	Disregards the health and welfare of others  Fails to listen, or listens to the wrong sources Micromanages Intolerant of alternate viewpoints Ridicules opposing opinions
Evil	Vindictive Intimidates and demoralizes others Hurtful and mean-spirited Uses pain and fear as an instrument of power

Sadly, the CEO at that company was the person exhibiting most of these behaviors, but he was a "kick down, kiss up" kind of guy and the board that had hired him apparently believed he was an outstanding executive.  I have always wondered how people who behave this way ever landed a leadership position, never mind kept it, but I suppose the more interesting question is how and why  such "leaders"  have any followers at all.  Jean Lipman-Blumen, in her book The Allure of Toxic Leaders, points out that people exposed to a toxic leader often come up with excuses to tolerate the abuse--job security, paycheck, prestige--thus the behavior goes unchallenged. So while we usually have three choices when we are facing something we don't like--(1) grin and bear it, (2) change it, or (3) leave it behind--most of us either find a way to put up with it, or we leave it behind, so we generate little or no pressure for change.  Unfortunately, this emboldens toxic leaders and encourages them to stay the course.

Then this week when I read an article in Strategy and Business entitled Are You Your Employees’ Worst Enemy? I realized that while toxic leaders are a problem, a more insidious and prevalent leadership problem might be this:  according to the article, a majority of employees surveyed, even in successful companies, viewed their leaders as an obstacle to their effectiveness.  Apparently many well-intentioned leaders get caught in a "hindrance trap", described as "a cognitive bubble in which leaders erroneously conclude that the success of their teams is a reflection of their good leadership", so they inadvertently derail their employees by:

• communicating purpose and direction poorly
• not considering organizational capacity when rolling out new initiatives
• failing to set policies to help the organization achieve superior performance

Sounds a bit like early stage leadership toxicity to me.  Is it any wonder that leadership consulting, training and coaching have emerged as high profile growth businesses?

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 www.linkedin.com/in/deanharring/

Claims Success Vision

Many Claims leaders get uncomfortable and move toward the exits when they are asked to contemplate and discuss their "vision", as in the vision statement of a strategic plan.  For most of us, that discomfort originated from participation in ritualized annual strategic planning events, where our company's leadership team got together to participate in intense wordsmithing exercises designed to produce a strategic plan document.  Vision, Mission, Values, Strengths, Weaknesses, Threats, Opportunities, Critical Success Factors, Objectives, Key Performance Indicators--all of these topics were tossed onto the table, to be debated and scrutinized with the assistance of a cadre of skilled facilitators.  I remember these planning events as contentious and dramatic, featuring break-out sessions, flip charts, storyboards, critiques, soliloquies, and of course mandatory camaraderie, all of which culminated in team solidarity and consensus on a newly minted strategic plan. Whew!

While I am an unapologetic strategy fan (I believe it takes both planning and execution to achieve the best result) I am not a fan of the strategic planning process used by many insurance companies.  I think the process itself has become more important than the plan it produces. In other words, getting through the strategic planning ritual and producing a plan that complies with the company's prescribed format/template has become the primary goal--the quality and utility of the plan is secondary.  Which is too bad, but it does help explain why strategic plans at many companies are so irrelevant.  Once completed, they are tucked away like sacred scrolls, not to be seen again until the next year's strategic planning event. So while most insurers have strategic plans, many of those plans have nothing to do with their day to day operations or decision making.

Google the question "Why do strategic plans fail?" and you'll get over 7 million results, although they sort down into a familiar handful of reasons:

·         plan was not communicated effectively

·         company vision, mission, values and value proposition were poorly defined

·         unrealistic goals

·         disconnect between strategic plan, operating plan, individual performance plans

·         invalid assumptions about internal and external environments

·         lack of resources and commitment to implement plan

·         lack of accountability and ownership

·         lack of meaningful performance metrics to track execution

But don't despair. Even if your company's strategic plan is nothing but fluff, you can still use proven planning techniques to help keep your Claims operation focused on what's important.

Years ago I was doing planning work with a motivational expert from the UK.  She told me about a process called "success visioning" in which leaders visualize what success would look like in their operation and then make a list of 8 to 10 things that, if true, would signal success. The concept was familiar to me, as I enjoy Stephen Covey's books and I’ve read my copy of The Seven Habits of Highly Effective People so many times it is falling apart. What she was describing was essentially Covey’s second habit:  Begin with the end in mind. If you are setting out to do something, it helps to start with a clear visualization of your objective: an image, a picture, or a description that can serve as a touchstone and frame of reference as you move forward.  And if you keep that visualization in mind, you’ll have a better chance of achieving it.

So I prepared a Claims “success vision” document and adapted it over the years to address challenges at the different companies where I worked.  My final version, prepared about five years ago, looks like this:

1.    Effective, efficient claims management operation producing the best claims outcomes

2.    In control: creating and maintaining a “no surprises” claims operating environment

3.    Known for providing industry leading claims service and expertise

4.    Attentive and responsive to stakeholder needs and concerns

5.    Reliable and consistent in setting accurate and adequate case level loss cost reserves

6.    Sought after source of claims thought leadership and timely, actionable, loss-related      information

7.    Seamless operations, utilizing a single claims system and a shared services operating  environment

8.    Skilled at integrating acquisitions and new programs

9.    Viewed as an employer of choice and a developer of people.

To make the list actionable, I included bullet points to provide details and specifics, and developed metrics to track performance. I used to look at the list every month, and think about what had been done and what else needed to be done to make these statements come true.  Why? Because I knew if we could turn these aspirations into reality, and if we could support improved performance with objective metrics (evidence), and if our stakeholders (individuals or groups who have a vested interest in or dependency upon how well the Claims operation performs) were saying and believing these things, then our Claims operation would be a success.

Give it a try.  It's easier, more useful and considerably less painful than strategic planning, and it will give you most of the raw material you need to talk about your vision at your next strategic planning event.

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/

Bashing the Claims Department

As I was sorting through some old reference materials a few weeks ago I came across an article I had written for Best's Review Property Casualty edition way back in February, 1990.  At that time I had been in the Claims business for about sixteen years, and I was in my third year as the Chief Claims Officer at Providence Washington Insurance Company in Providence, RI. Unfortunately, Providence Washington was destined to cease operations and head into runoff mode in 2004, after 205 years in business.  I would be long gone by then, but I wasn't terribly surprised it worked out that way.  We had a CEO who had been a university professor--he was smart and entertaining and engaging, but he had some blind spots about certain parts of the insurance business.  I still remember the time one of our managing directors presented to the executive team a potential MGA program deal involving waste haulers in New York city.  Following the presentation, the CEO went around the table, asking each of us to comment.  The Chief Underwriting Officer was against it, and I was against it, but everyone else thought it was a great opportunity.  Without missing a beat, the CEO announced: "Excellent.  Let's do it."  That deal, and the many others like it that followed, helped seal Providence Washington's fate.

I had written the original draft of the article, "Bashing the Claims Department", in early 1987 when I was working for Commercial Union Insurance Company (CU) in Boston.  Years later CU merged with General Accident (1998) to form CGU Corporation, then White Mountains Insurance Group, Ltd. acquired CGU Corporation in 2001 and changed its name to OneBeacon Insurance Group.  But two things happened in 1987 that influenced the final draft of the article.  First, as a newly minted CPCU I was pondering my career options so I asked our CEO for advice on how I might begin to shift my career path from Claims to general management in a profit center.  His response was that there had never been a claims person born who could run a profit center.  Second, I had to get the article approved by someone in HR or Legal, but it didn't get approved because of the concern that readers might misinterpret it as critical of CU.  So, with the benefit of fresh and vivid clarity on my career path options,  I accepted my first Chief Claims Officer position at Providence Washington Insurance Company a few months later and filed the article away.

I pulled out the article again in 1989 and rewrote it, this time with the full support of my new employer.  It is fascinating for me to re-read it after all these years, because even though it strikes me now as a bit idealistic and shrill, I still remember the angst I felt while writing it.  I was trying to describe situations that didn't seem fair or right, but I really did believe they could be remedied with positive results.  One of the early paragraphs helped set the tone:

Like most people I know in this business, I stumbled out of college and into the employ of a major insurance carrier purely by chance.  Given the opportunity to get involved in either claims or underwriting, I chose claims because it sounded more interesting and, if the truth be known, it included a company car.  It took me only a few years to realize that I had inadvertently become part of what seemed to be a disadvantaged (and frequently maligned) class of insurance company employees.  It took about the same amount of time for me to get promoted to an inside position, at which time I had to turn in the company car.

Denise Gordon at AM Best was kind enough to provide me with a scanned version of the original article, so I hope you enjoy this glimpse into my own personal 1990 Claims time-capsule:  Bashing the Claims Department

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/

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.

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/