Plugging the leak: insurers are spending too much of their premium dollars on inefficient claims adjusting, but they can improve the process and their profitability.

Suppose you inserted a $10 bill into a change machine with reasonable expectation of being returned that same amount in coins. How would you feel if $5 in quarters dropped out and the other $5 was lost to administrative fees?

The property/casualty insurance industry has been accepting a similar deal far too long. Given an industry average loss ratio of approximately 75, that equals $340 billion of the roughly $450 billion the Insurance Information Institute reports is transacted annually in net written premiums in the U.S. domestic property/casualty line of business. About $225 billion accounts for pure loss, and $115 billion for loss adjustment expense (using pure loss ratio of 50 and loss adjustment ratio of 25). Every loss dollar processed by the claims apparatus consumes 50 cents in administrative fees. Here is a change machine that consumes more than a few quarters in inefficiencies and unnecessary expense.

So, what can be done about it? Any time a claims-related activity is conducted and does not address directly paying the claimant, money is leaked. The following initiatives are designed to decrease claims leakage, thereby feeding the proverbial claims change machine a little less in administrative fees. Using the framework shown on page 92 to rank the initiatives, executives also can make educated decisions about achieving the biggest bang for the buck.

Improving claims work flow. Claims are traditionally handled by multiple parties in disparate locations. Managing work flow and communication across multiple parties is commonly done using paper-based systems. Automation of these processes is bound to reap tremendous benefits. For example, a claims system that is capable of storing relevant images and forwarding them digitally instead of via paper and, better yet, providing secure access to the relevant parties, is bound to be a big win. Of course, changing technology is no easy task and as beneficial as this initiative may be, this is not a quick fix.

Ordering police reports. In some lines of business such as personal automobile liability, ordering police reports consumes resources. The accounting

Ranking the Initiatives

The framework below shows which claims handling initiatives require the most effort and which offer the greatest rewards. team may divide the salaries of the staff members dedicated to requesting the reports by the number of claims processed per year to arrive at a simple 50 cents per claim. This hardly sounds significant but, the devil is in the details. Cutting checks alone consumes the time and resources of many employees in the accounting department. On average, carriers spend $7 to cut a single check, even if the check amount is only 45 cents, as is the case for many police reports. Once these checks are ordered, there is wait time and following that, more collating and organizing, feeding that claims change machine more and more in administrative fees. There are simpler approaches to ordering police reports, which involve payment of a single check per month and obtaining digitally scanned images incorporated into your claims system with a diary to the adjuster. That is a process worth investigating.

Electronic communication. Some states require Workers' Compensation First Reports of Injury to be Filed via Electronic Data Interchange, while others accept faxes. Regardless of the transmission method, your organization can avoid the human intervention required to create a fax or an EDI record. Similarly, notices to employers can be sent via system-generated faxes and e-mails without human intervention. Several automated systems can chip away at this specific task to create vastly improved efficiencies.

Third-party administrator interaction automation. Carriers waste millions of dollars annually trying to exchange information with their TPAs and vice versa. In exchange for winning new business, TPAs support dozens of systems in an effort to appease their customers. Simple technologies exist that can synchronize carrier and TPA systems. These technologies do not require massive changes to systems and are point-based solutions. Investigating these interfaces holds the promise to save carriers tremendous expense associated with administration leakage.

The right mobile technologies. The story goes that when American astronauts found it impossible to use a traditional pen in space, the United States spent millions of dollars inventing a pen that would write in orbit. On the other hand, the Russian cosmonauts write in space with a pencil. Using the right technology to solve the right business problem is a very important element of success.

The age of mobile computing is here to stay. However, even as many claims administrators rush toward hand-held mobile solutions, several reasonability questions arise. What specific actions make sense to be executed remotely? What is the exact remote device that is right for the adjuster? Can the adjuster complete a simple e-mail form with notes and diaries offline and when later connected via a wireless network, can the e-mail form serve as the mode for keeping the adjuster in sync with the main system? How effective is a full-blown claims administration system on a 3-by-3-inch screen? Executives need to ask fundamental questions and consider the answers to those questions before selecting the appropriate mobile technology. Implementing a well-considered, easy-to-use and simple solution is not complicated and will deliver huge benefits and paybacks, but as with many things worth doing well, preparation and good design are key factors for ultimate success.

Supply chain backbones. Particularly evident in personal lines and in the physician network arena in workers' compensation claims, the ability to connect to a network of service providers is of key importance. Without this connectivity, carriers perform repeated operations that incur tremendous amounts of unnecessary waste. Interfaces to medical bill repricing systems for workers' comp or to auto body shops and glass repair shops are pivotal in reducing leakage costs. Finding the right provider at the right price and exchanging the appropriate information to decrease leakage are of vital importance.

Litigation expense control. Another simple and effective activity is to provide the legal and claims department a common view of a case file. Today, many claims departments do not know the latest status of litigation involving the claims for which they are responsible. Providing the ability for an adjuster and attorney to work together is a simple, yet effective way to decrease leakage.

Fraud detection. Fraud is present in every line of business. Detecting fraud was once a very involved process, requiring immense involvement of claims personnel, the Special Investigations Unit and many others. Today, several detached systems enable fraud detection in a way that makes it easier for companies not to burden day-to-day operations and yet effectively manage fraud.

The dashboard. Pilots today fly jumbo jets with zero visibility because they have an effective dashboard that tells them what to focus on and how to proceed. A powerful claims dashboard that helps claims personnel visualize the entire book of business, run reports, identify bottlenecks, create catastrophe response plans and so on is another key step in avoiding claims and administrative leakage. For example, can a dashboard quickly paint a picture of where claims are occurring with respect to the book of business, flood plains and the path of a hurricane? With this picture, you can now plan your response, adjusting plans, etc.

Plain old common sense. The simplest way to get started is to create a culture of process improvement in the claims department. As the claims leader shares more and more of the pain of the carrier due to inefficient claims handling, best practices must be well developed. Best practices can revolve around avoiding compliance fines by identifying and sending forms promptly or working early with the parties to a claim to avoid litigation, and implementing fast-track claims. Whatever the approach, effective communication, great leadership and a process improvement mindset are fundamental necessities for any of the foregoing initiatives to succeed.

The process of managing claims has evolved over the years. Continuous pressure on getting the job done has sometimes led insurers to building processes that may be the best suited for that time, but not necessarily adaptable as time changes. The industry should take the time in 2006 to stop and rethink areas of its business process that can be improved. The proverbial change machine that charges a 50% administration fee can be fixed, and there is no better time than today to start.

Key Points

* Every loss dollar processed by the claims apparatus consumes approximately 50 cents in administrative fees.

* Any time a claims-related activity is conducted and does not address directly paying the claimant, money is leaked.

* Effective communication, great leadership and a process improvement mindset are fundamental necessities for reducing administrative costs.

Contributor Badri Narasimhan is vice president of claims strategy and business development at Insurity Inc. (a ChoicePoint company). He may be reached at [e-mail].