Claims is a core insurance function. After a policy is issued, the value of the insurance product for the policyholder largely depends on the insurer's ability to settle a claim promptly and fairly. Correspondingly for the insurer, its skills and execution in the claims process have a major impact on its financial results and on its reputation with customers, intermediaries, and regulators. Some of the best known insurance brands-State Farm as a good neighbor, Allstate's good hands- can be understood as giving assurance that customers suffering losses will be paid.New claims technologies and business practices are giving insurers the ability to increase underwriting profitability and policyholder value significantly. Effective utilization of these techniques will be an increasingly important way for insurers to differentiate themselves in terms of financial performance and market perception.
Today, insurers are facing two new kinds of claims issues: a wave of regulations and changing expectations. An alphabet soup of new regulations is affecting claims operations. For example, HIPAA (the Health Insurance Portability and Accountability Act) has major privacy and disclosure implications for medical, disability, and personal injury claims. SARBOX (the Sarbanes-Oxley Act) mandates accurate financial reports - which means accurate reserves based on correct claims information. And state laws addressing unfair claims settlement practices remain in place.
Expectations are also changing. Producers and claimants (and potentially their attorneys) see advertisements in which a claimant talking on a cell phone at an accident scene "receives (their) settlement in a snap." Business partners want communication and transactions to be fast and accurate. Investors do not like surprises measured in the hundreds of millions of dollars - whether for strengthening reserves or for punitive damages. And all these changes create increased reputation risk for insurers.
The good news is that current claims trends indicate insurers will meet these challenges. First, insurers are putting a much higher priority on claims technology initiatives. For example, a recent Celent survey found that two-thirds of property/casualty CIOs saw claims as one of their top three priorities.
Second, technologies are increasingly available to integrate information and processes among hundreds or thousands of business partners. In order to mitigate complexity and financial risks in these relationships, insurers are turning to new kinds of enterprise software such as business process management and to new contractor management solutions.
Third, open, standards-based, services-oriented technology solutions are becoming popular worldwide. Claims is a major beneficiary of this trend because of its inherent dependency on legacy systems and databases; and on its extensive set of external business partners. There has been steady growth in the availability and use of standards, platforms and protocols such as ACORD XML, .NET, J2EE and Web services.
As insurers consider claims processing initiatives, they should focus first on business drivers; then on initiatives and outcomes; and lastly on technology enablers. Too often claims technology initiatives are developed from an IT-centric perspective. A new application or solution promises to remedy a familiar pain-point or to improve a specific sub-process. A business sponsor is found, approval is obtained, and another claims IT project is underway. A best practice approach to building a business case for claims initiatives stands this sequence on its head. Business drivers create the need for business process initiatives, and technology enables those initiatives to achieve certain outcomes.
Business drivers are mission-type statements of how claims contributes to broad corporate goals. Key business drivers include improving financials (losses and expenses), building brand (using claims as a market differentiator), and being a good corporate citizen (dealing with the issues and trends discussed earlier).
Business process initiatives constitute the core of a business case. Examples include fast-tracking (STP) more claims, lowering repair costs or medical treatment, controlling legal expenses, and reducing fraud. Each initiative should tie directly to one or more key outcome measures, such as severity, loss adjustment expenses, or reserving accuracy.
The technology enablers for improving claims fall into three main categories: core claims solutions, components, and tools.
A core claims solution executes transactions and is the system of record. It covers the life cycle of each claim and interacts with other internal/external applications and data sources. It gives an individual adjuster a desktop that controls workflow, embeds decision rules, and controls workflow among each of the core claim processes.
Components include enterprise content management, which gives an insurer the ability to create, store, access, control and use documents, photographs, faxes, and even digital video and voice files; business process management , which allows an insurer to design and manage each adjustor's workflow; and business rules engines, which facilitate the creation, deployment and management of decisions within a claims process.
Tools include estimators, contractor management, litigation management, analytics/fraud, and Web portals. These analyze claims data and manage and facilitate the flow of information between the many parties in the claims process.
Celent research estimates that implementation of the best-practice claims business process and technology initiatives has the potential to reduce the property/casualty industry's combined ratio by up to 7 points. There is a broadly similar potential for improved profitability on the life/health side as well.
With insurers under pressure to demonstrate profitability in their core insurance businesses, reducing losses and loss adjustment expenses is critical. Careful application of existing technology can help insurers meet these goals. Donald Light is Senior Analyst, Celent Communications, a Boston, MA-based research and consulting firm.
