Property/casualty insurers are taking aggressive steps to reduce loss costs and loss-adjustment expenses, but they may be sidestepping other cost-saving opportunities. According to a Nolan survey, commercial and personal lines insurers are pouring resources into litigation management, claims analytics, fraud investigation and updated technology to drive down claims-related expenses. But the survey indicates that some insurers might not be fully tapping additional efficiencies they could draw from their customer service and claim-reserving practices.
In today’s marketplace, which is marked by stiff competition and meager investment earnings, an insurer’s ability to slice a few percentage points off its combined ratio can be critical to both remaining competitive and sustaining acceptable margins. To that end, more than 90 percent of the survey’s respondents report that their management’s primary objectives for claims operations are to reduce loss costs and LAE—a real challenge in the face of rising medical and vehicle repair costs.
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Insurers are attempting to reduce those costs in numerous ways, according to the survey respondents. Among the measures that insurers are turning to, the most prevalent are litigation management programs and claim analytics: 52 percent of respondents report that those two programs are underway at their companies.
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Legal costs are escalating for many reasons, including litigation cost increases. But fortunately for insurers, their main legal cost-cutting opportunities lie within their control in their own claims departments. For example, if inexperienced claims staff manages litigation claims, those staff members might rely on defense counsel to perform some tasks—such as settlement discussions—that the claims department can handle. In addition, excessive caseloads tend to hamper the ability of a claims department’s litigation handlers to manage claims efficiently and effectively. Often, as a result, defense counsel takes over litigation management, which then typically leads to case backlogs. Cases that are left pending too long have an adverse effect on incurred-but-not-reported losses.
Another key to reining in legal costs is instituting formal litigation management programs with defense counsel, and the survey’s results indicate that many insurers have done so. Not all such programs, however, are equally effective. For example, negotiating a relatively low hourly rate with a defense firm is not always the linchpin to low litigation costs. Higher rates can translate into overall lower legal bills if those rates mean the firm’s more experienced attorneys are working claims and quickly resolving them for appropriate values.
The equal attention that survey respondents are paying to claims analytics is not surprising given the tremendous efficiencies that predictive modeling can bring to fraud investigation, subrogation, litigation management, and recovery efforts. Many large and mid-tier insurers that have applied analytics have improved claims decision-making, adjuster performance, settlement outcomes and operational efficiency. Another benefit that insurers have realized from improved analytics is the ability to detect adverse claims development early. That gives insurers a forward-looking view of frequency, severity, claims duration, and LAE.
Many insurers also are redoubling their fraud prevention efforts. Forty percent of the survey respondents reported they are engaged in initiatives focusing on the effectiveness of their special investigations units. The significant attention that insurers are paying to their SIUs underscores the material monetary impact that fraudulent claims have on insurance industry results. According to the FBI, fraud costs property/casualty insurers more than $40 billion annually. In 2012, those losses exceeded the industry’s profits by about 20 percent.
Centralization, Technology Efficiencies
Notably, nearly one-third of the respondents—about 32 percent—reported that they plan to centralize claims operations in an effort to reduce claims-related expenditures. Centralizing marks a shift in management’s expectations of how such a reorganization will affect customer service. In those departmental restructurings, claims operations in various branch offices are consolidated, and desk adjusting replaces field adjusting. In the past, that consolidation was thought to harm customer service. But the survey’s results indicate a new viewpoint. The respondents now believe that, because of economies of scale and lower overhead costs, centralizing operations represents an opportunity to both reduce operational expense and meet customer expectations by improving consistency, quality, and transaction speed.
This change in attitude is likely due to advancements in mobile technology that give policyholders much greater contact with claims departments than ever before. Twenty-seven percent of the survey respondents are embracing mobile technology. For policyholders, this technology offers, among other things, first-notice of-loss applications, 24/7 access to claims information through website portals, personalized single-point-of-contact throughout the life of a claim and video communications.
A slightly larger number of survey respondents reported that their companies are turning to another technological advance to make claims operations more efficient: 28 percent report they are implementing new claims systems. In today’s complicated claims, legal and regulatory environment, outdated claims systems can adversely affect productivity and quality—and, therefore, overall results. Modern claims systems offer insurers increased capacity, improved service, process-improvement opportunities and financial benefits. Still, many insurers have not replaced legacy systems for a variety of reasons, including cost and perceived risk.
Missing Opportunities
The survey results also indicate that certain claims cost-reduction tactics are second-tier priorities for insurers.
One of those potentially effective tactics involves customer service. Survey respondents’ investment in mobile claims technology, for example, does more than mitigate the negative aspects of remote adjusting. It also creates an opportunity for insurers to significantly differentiate themselves from competitors at the critical touch point of a claim and create goodwill with policyholders.
Claim reserve management is another second-tier priority for many survey respondents. But implementing up-to-date practices that address core reserve management problems, such as reserving redundancies and deficiencies, would have a positive impact on balance sheets. Effective practices focus on the key underlying factors in establishing proper claim reserves, including injuries, disabilities, venues, and legal doctrines. Proper training and supervision also are critical to a successful reserve management process.
Conclusion
The dynamics of today’s property/casualty insurance marketplace compel carriers to examine their expense structure as part of their overall efforts to remain competitive and profitable. The Nolan Company found that claims departments are among the areas where insurers are implementing many measures that give them realistic opportunities to meaningfully reduce costs. Eyeing claim costs as well as loss-adjustment expenses, insurers are instituting litigation management programs, drilling down deeper into data to better understand what drives claims costs, intensifying fraud investigation, centralizing operations and investing in new technology. Yet some insurers are leaving money on the table by not taking steps to improve their claims service operations and claim-reserving practices.
Eugene Reagan is a principal consultant at The Nolan Company, a management consulting firm specializing in the insurance industry.
Readers are encouraged to respond to Eugene using the “Add Your Comments” box below. He can also be reached at eugene_reagan@renolan.com.
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