HNC is widely recognized as a leading developer of analytic and decision-management tools. But are carriers ready to turn their important underwriting and claims decisions over to machines?The similarities between fighting terrorism and combating insurance or credit card fraud are not very obvious. However, the Bush Administration's Homeland Security initiative is considering using some of the same technology that's now being applied to identify fraudulent transactions for more than 300 million credit cards worldwide, and by nine of the 10 largest insurance companies.

The technology is analytical and decision management software provided by HNC Software, a San Diego-based firm that counts among its clients more than 400 financial services firms on six continents, 15 state workers' compensation funds and more than 80 telecommunications firms. These organizations and government agencies share the common goal of converting structured and unstructured data into useful information that can be used to automate routine business decisions.

HNC has built a solid reputation in the credit card industry, where its technology is being used by 23 of the top 25 credit card issuers in the United States to speed application processing and detect fraudulent transactions. HNC's risk analysis and decision-management tools also are being used extensively in the insurance industry, which accounts for 42% of HNC's annual revenues ($81 million in annual sales).

However, big changes are underway at HNC. The company is moving away from developing products for a specific function. Instead, it is positioning itself as a provider of "enterprisewide" analytic and decision-management solutions.

"HNC's move toward enterprise analytics and decision management is a logical progression," asserts John Mutch, HNC's president and CEO. "It allows us to use the same domain expertise and proven technologies that have been effective as point solutions to solve problems on an enterprise scale."

The success of HNC's new strategy for the insurance market will depend not only on carriers' acceptance of the company's newer products, but, more importantly, on the implications of its pending merger with rival Fair, Isaac and Co. Inc. (see related story, page 41).

"Fair, Isaac and HNC have similar analytical technologies-neural networks and algorithms that are integrated into clients' business processes," writes Brad Eichler, a research analyst with Stephens Inc., Little Rock, Ark. "Both companies have built their businesses selling into financial services and insurance, and both have made recent efforts to expand their value proposition with broader decisioning solutions."

Brains And Bytes

Although you won't find it in the company's product literature, HNC's products are built on what is commonly called artificial intelligence. HNC's version of neural network technology actually can "learn" by creating relationships between data and all similar pieces of information that are fed into the system.

Neural network technology searches large data sets for combinations of characteristics, patterns and trends that can apply to individuals or groups of customers. HNC uses neural networks in conjunction with other technologies, such as context vectoring, which can read and analyze unstructured data.

In theory, artificial intelligence can automate routine insurance transactions, such as underwriting decisions and claims settlement, enabling carriers to assign their best claims adjusters and underwriters to more difficult cases, says James Bisker, director of the insurance practice at TowerGroup, Needham, Mass.

"Companies that are bottom-line driven need this type of technology because it helps expedite product and procedures, and it helps people work faster and smarter, not harder," he says. "Companies need to automate how decisions are made. People shouldn't be sitting around with a stack of papers making sure that the correct box is checked."

Integrated Approach

From its inception, HNC has been focused on developing software that automates time-consuming business processes. For example, its Claims Advisor product uses predictive analytics and pattern recognition technology to analyze complex data relationships and identify claims exceptions in a fraction of a second.

Through a series of acquisitions, HNC added technology components that now are integrated across its product line. HNC's medical bill review software is a core technology, representing about 50% of the company's revenues from carriers. HNC markets the products under the names CompAdvisor for workers' compensation claims, and AutoAdvisor for automobile medical injury claims.

Both products support EDI connectivity (provided by HNC's Solarity technology) between, providers, employers and third-party administrators, and both products have optical scanning readers on their front ends, enabling carriers to automatically enter medical bills directly into their systems.

"It means that a claims adjuster and case manager can view a claim at the same time, and that helps speed up the process," says Doreen Mancini, associate director, claims vendor management, for Fireman's Fund. The carrier selected HNC's outsource bill review service in July 1999 to handle workers' compensation claims.

"The goal is to automatically adjudicate, cut turnaround time, cut down on clerical errors and pay the provider quicker," she says.

Using HNC's Decision Manager technology, the software automatically assigns bills to adjusters based on their skill sets, assigns proper fee schedules and flags incoming claims if it detects a problem. Mancini estimates that the technology has enabled the carrier to cut $10 in processing costs for each bill. "We now have more consistency processing the bills, because our reviewers are always using the same criteria."

Complex Solutions

The most recent example of HNC's strategy of developing more complex solutions is its release of Decision Manager for Claims, a product designed specifically for processing workers' compensation claims.

The product incorporates the Vera-Comp anti-fraud product, VeraComp Subro, which uses context vectoring to identify subrogational potential, and ECM Case Prospector, software that identifies the need to assign a nurse case manager. The solution also includes MIRA Claims Advisor for Reserving, a tool that reviews claims and provides a consistent method of setting loss reserves.

"Workers' comp premiums total $40 billion a year, and the loss ratio is at 135. We believe that the science we bring to handling claims can reduce carriers' expenses by 15%," says John D'Alusio, HNC's senior vice president of strategic relations and the person responsible for the development of Decision Manager for Claims.

Technology alone won't accomplish that goal, D'Alusio explains. "Carriers need to re-engineer how they process claims, and unless they're willing to revolutionize claims handling, then our technology is useless. If the commitment is in the hearts and minds of carriers, then the results can occur."

HNC's Decision Manager for Claims "lowers risk exposure through automated scoring, routing and escalation," according to a report by Allen Bonde Group, a market research and management consulting firm based in Wellesley Hills, Mass. "In many ways, it allows staff to focus on the biggest problems, and what they do best: make decisions based on factual developments."

A measure of consistency

Indeed, HNC executives say the company's combination of decision management and enterprise analytics is particularly suited for ensuring that decisions made by underwriters and adjusters are consistent.

"With insurers, so many decisions are made on a daily basis where you have to weigh and measure vast amounts of information, and yet there is a lack of consistency in how decisions are made," says Jim Crobiak, HNC's insurance segment leader.

For example, HNC's Decision Manager for Underwriting will review applications data and automatically rate the risk for a majority of applications, based on business rules programmed into the system.

If the application isn't complete or doesn't configure to the systems rules, the system will order the necessary reports-motor vehicle and police records for example-and route the application to an underwriter for review.

"Insurance companies need to save their people with the highest skill sets and expertise to deal with the most complicated decisions, and have 'expert' systems handle routine decisions," says TowerGroup's Bisker. "This is the type of software that's essential for carriers to become more efficient, whether they get it from HNC, or Fair, Isaac or IBM."

Several industry experts say that HNC's recent incorporation of Blaze Advisor, which is business rules management technology, will strengthen the company's offerings. The company acquired Blaze in 2001 from Germany-based Brokat Technologies.

"Blaze is an inference-driven rules engine, which you can actually train to make decisions, and that is the future," says Kimberly Harris, research director with Gartner Inc., Stamford, Conn.

"Large companies are implementing straight-through processing projects where you have exceptions-based processing for underwriting and claims handling. But carriers haven't gotten to the point where they're reducing their workforce," she adds. "They're talking about reducing the amount of paperwork, improving efficiencies, productivity and customer service."

Is The Market Ready?

HNC has a stellar reputation among industry observers who track technology trends. "This company knows what it's doing, and it knows where the industry is going," says TowerGroup's Bisker.

Whether carriers share that opinion is hard to judge. It's becoming evident that insurance companies are focusing their IT expenditures on smaller projects that have quick return-on-investment potential, a trend that could hurt sales of HNC's larger systems, such as Decision Manager for Claims.

HNC is charging $1.5 million for a five-year contract to license the product, a price that includes maintenance. HNC also charges $40 per indemnity file, and $1.50 per month that a file remains open. Customization fees run $250 per hour, and 1,000 hours of customization work "is typical," says HNC's D'Alusio. "The total five-year cost that I see is about $10 million, but the first adopter will have a significantly lower price.

"But no one is knocking our doors down to say 'you have this great technology, and we would like to take decisioning technology and apply it to claims,'" he adds.

That may be more a reflection of the current market for technology and not an indication of carriers' lack of interest in the product, Gartner's Harris says. "In this economy, most insurance companies that are looking at purchasing technology are more interested in technologies that they need to survive, and this fits under the group of technologies that are nice but not necessary for survival," she adds.

Others, including TowerGrouop's Bisker, believe that the investment in Decision Manager for Claims will pay off quickly for carriers.

"Insurers who make the investment and stay with it will come out on top, and if they want to be profitable with workers' comp, then this is the type of software they need," he says.

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