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ACE 1999 REVIEW: SEEING BEYOND THE CLAIMS ADJUSTING HORIZON.

At the third Annual Claims Exposition & Conference (ACE), held last month in Baltimore. Terrie Troxel, president and CEO of the Insurance Institute of America and the American Institute for CPCU, launched the show on Nov. 4 with an informative keynote address on the state of claims adjusting at the close of the millennium.

Sharing some of his encyclopedic knowledge of the property/casualty industry from his years in the Institutes, the Insurance Research Counsel and the National Association of Independent Insurers, Mr. Troxel analysed the latest claims data and raised some pertinent questions about how claims management may change in coming years.

The following are excerpts from Mr. Troxel's speech. The full text of the keynote is available on Claims' web site, www.claimsmag.com.

I want to spend a little time this morning looking at the environment within which the insurance industry settles claims, and talk a little bit about some of the things that perhaps are on the horizon that will affect your immediate future, and maybe your longer-term future...

I think one of the first things a student of insurance learns is what the basic insuring agreement is: "In the event of an insured loss the company will pay." That's really the essence of insurance - fulfilling that promise. In 1998, that promise was fulfilled by the industry paying out $177.4 billion in losses. The industry also paid out $36.9 billion in loss adjustment expenses associated with paying those losses. The expense associated with the payments was about 20 percent of the payments themselves. In total, loss payments were some-things in excess of $214 billion this last year. In some sense, that's what insurance is all about...

Auto & home snapshot

The big news this past summer was that, for the first time in 25 years, auto insurance rates actually fell. After large annual rate increases during the first three years of the decade, there have been more or less, steady moderation of rates in personal auto insurance...

Why have rates changed in auto insurance? Why have they moderated throughout the decade? Well, one of the driving forces has been the underlying trend in claims frequency and claims severity. According to the [National Association of Insurance Commissioners'] Fast-Track monitoring system, prepared quarterly by their three statistical agents, there's been a general, overall improvement in claim frequency of about 11 percent in the past five years. Bodily injury claims per 100 car years insured were running at about 1.32 per 100 in the first quarter of the current year, down from 1.48 in the first quarter of 1994.

Severity trends during the same period haven't decreased uniformly, but nevertheless, they're down. Here, too, be five-year trend has been favorable for auto insurers. Bodily injury liability severity claims have tended downward from an average of about $8,566 per claims in early 1994, to just under $8,000 per claim earlier this year. That's an improvement of about 6 percent. Since frequency and severity combine to form the average loss costs, these combined trends have reduced the pure premiums by about 16 percent in the last five years. Are we at the bottom of the cycle? I think some of the things we'll look at probably indicate that we are...

While the 1990s have been a pretty good decade to be in the personal auto insurance business, it's been another - how should we characterize it? - terrible decade for the average insurer of homes...Unfortunately, the sum of the insured losses, plus loss adjustment expenses, has been high in almost every year in the decade, leaving less margin to cover other under-writing expenses and policyholder dividends. In 1992, incurred losses, plus loss adjustment expenses, actually exceeded premiums by about $5.3 billion, or 27 percent.

Eight out of the 10 most costly catastrophes in history occurred in the most recent decade. In 1998, Hurricane Georges and the unprecedented wind and hail storms in Minnesota, and other catastrophes, added 3.6 points to the industry's overall combined ratio. That's close to $10 billion. There were six states this last year that had loss ratios in homeowners that exceeded 100, and the loss ratio in Minnesota was 295.5 -- tough state to do homeowners insurance business in in 1998.

[ISO's] Property Claims Service ... estimates for 1998 insured catastrophe losses [were] $10.07 billion -- the third-worst in the past 10 years. The total cat losses insured so far through the 1990s equal about $81.5 billion. To put that into context, $81.5 billion is about three times the total homeowners premium revenue for 1998. So, not a real winning line of business this decade, or several before that...

Loss control under fire

One of the other factors shaping the business is going to be loss control... One of the most successful [loss control] campaigns in recent years has been the concerted efforts of special interest groups, such as MADD and SADD, together with the auto insurers and their trade associations to try to get drunk drivers from out behind the wheel. Many states have adopted lower blood-alcohol limits for defining when drivers are legally impaired. The more rigorous enforcement of the existing drunk-driving laws, together with the shift in demographics, has resulted in about 11 percent fewer traffic deaths being attributed to drunk drivers over the past 10 years.

Of course, individual insurers have a lot of programs for loss control, as well. We can probably categorize [them] as "those that are being challenged by the trial bar." The most notorious example recently [is] competitive replacement parts... It seems to be the current topic du jour. As you know, State Farm was held to have breached its contractual relationship with its policyholders and had a jury verdict of $456 million levied against it in Marion, Ill., earlier this year. A few days later the judge decided that punitive damages of $730 million should be added to that for a fraud count...

Attorneys are also challenging the loss control device that insurers use that has become known as "utilization review" or "medical bill audit" forms. Again, State Farm was stung in a case for failure to objectively review medical records and using a medical bill audit forms to "prepare cookie-cutter reports using stock phrases assembled by a computer to support the denial of claims."...

The trial bar is also actively out competing against early intervention efforts by some of the leading auto insurers. The Connecticut, Pennsylvania and perhaps some other states' attorneys general have challenged Allstate's campaign for early intervention in the claims settlement process and, in Connecticut's case, had them rewrite a communication to claimants asking the question, "Do you need an attorney?"...

In Alabama, there are 50 insurers out of about 1,200 that are licensed in the state that have inserted binding arbitration clauses in their insurance policies, and a case is now in the Alabama Supreme Court [to determine] whether these binding arbitration clauses are, in fact, valid. That will be settled hopefully later [in November].

There are also challenges being made, again in a State Farm case in Oregon, to seal documents in cases that are settled out of court. State Farm's attorneys are quick to say that sealing documents in settlements is an appropriate thing to do because the trial bar has the habit of taking documents discovered in one case and putting them on the Internet to all their brethren around the nation...

Outsourcing technology

Why is it especially advantageous to be a low-cost underwriter? Because technology, automation [and] the Internet [are] driving expense levels and prices down. Financial services, in general, and auto insurance, specifically, is highly susceptible to intense price competition as information regarding price and quality and service become freely available via home computers. [Of the] 102 million households we currently have in the United States, slightly less than 40 percent are equipped with personal computers today, with modem access. A little bit less than 30 percent have an online service, such as AOL....

So, is expense savings really possible in the insurance business? There was an article earlier this week on outsourcing information technology [which] forecast that insurers will outsource business processing to the tune of $4.9 billion by the year 2003. That's an average annual increase between now and then of about 7.1 percent...

I was sitting at a dinner we had at the Institutes last week, and the lady next to me, who was formerly with Cigna and currently is with Ace [Ltd.], and next week would be out of a job. She mentioned that Ace has made the decision that they are not in the information processing business; that's something that IBM can do for them...

Interestingly, CNA did that about three years ago. I think their outsourcing vendor was EDS, and there was a little news blurb earlier this year saying that those employees that had gone from CNA to EDS were now going to be hired back by CNA. They weren't finding it worked so well. So it's kind of an interesting circular phenomenon to see whether outsourcing IT actually works.

There was another blurb earlier this week -- I think all of you are probably more familiar with this organization that I am -- but there's something called CyberSettle that has more than 4,000 claims in its system and receives, they say, 20 to 50 e-mails every day from insurance companies interested in this form of dispute resolution via the Internet. The chairman of CyberSettle was at a conference, I think here in Baltimore a week or so ago, and was quoted as saying: "If you are in any capacity within the insurance industry and you do not consider the Internet as a way of making business batter, cheaper, faster, easier, you're not doing your job." I always like it when somebody tells you you're not doing your job -- gets your attention!

Demographics don't lie

What do the shifting demographics of the country tell us about the insurance business?... Over the next five or six years, America's population will continue to shift into the older-age cohorts. The under 25-years-of-age class will be relatively level, and actually decline a little bit. The two cohorts between 25 and 45 will have relatively fewer members -- these are the people who were born between 1960 and 1980, the "Baby Bust" years. The largest growth will be in the ages 45 to 65. Also note that elderly drivers -- those over the age of 74 -- will show a slight increase in their numbers.

There was an article in USA Today a few months ago that said that although the number of drivers involved in fatal accidents decreased by 9 percent between 1988 and 1998, the number of drivers aged 70 and over in fatal crashes increased by 33 percent. Over the next two decades, the number of drivers over age 75, a group that's involved in more fatal accidents than any other group, except teenagers, will jump from 17 million to 50 million.

You may know that the Insurance Research Council, for about the last 18 years, does an annual survey research project, called the "Public Attitude Monitor" (PAM). One of the questions they asked was, "How should we deal with the aged driver phenomenon?" Surprisingly, they got pretty positive responses from all age groups. The suggestions were mandatory driver license tests for those over age 70; larger signs; easier-to-read signs; more left-hand turn lanes at left-band turn signals at intersections; and driver training classes for older drivers...

Need for fraud fighting

While almost every high school in the United States has a MADD or a SADD chapter to discourage drinking and driving, unfortunately we don't have a similar type of activity that teaches ethics and values and honesty.

One of the questions that is asked in the PAM surveys has to do with insurance fraud. In 1997, 35 percent of those surveyed said that it was acceptable to exaggerate, to overstate a claim filed with an insurance company in order to recover premiums that were paid in prior years, when no losses were incurred. Forty percent said they approved of this type of fraudulent behavior in order to recover deductibles that might otherwise have to he paid. I think this finding, alone, tells you that anti-fraud activities have to continue among auto insurers...

The IRC took a look at claims fraud in depth in 1996 in a publication that documented the pervasiveness of fraud and buildup in personal auto insurance. Some of the findings from that study, which examined 15,000 closed bodily injury claims in nine states scattered around the country, show that about 36 percent of all bodily injury claims, in personal auto insurance, had some element of fraud...

Hard fraud -- staged accidents or caused accidents -- was only found in 1 to 2 percent of the 15,000 files that were examined. Opportunistic fraud -- fictitious injuries -- accounted for 8 percent of the files reviewed... The largest group of suspicious claims were those that involved buildup only, that is, the legal fees, lost wages or other out-of-pocket costs were enlarged to inflate the claim settlement... So, as egregious as these staged or caused accidents are, it's really more costly that we have this ubiquitous overclaiming by attorneys, claimants and medical providers...

Better settlement practices

The most recently published IRC report on auto insurance updates a study that ... looks at a large, countrywide sample of closed claims for injuries under personal auto insurance.... One of the major findings of that study is that insurers are doing a better job in settling claims for amounts that are closer to the economic value of the loss incurred. In 1977, the research found that insurers were paying about $2.29 for each dollar of economic loss incurred. Over the next 10 years, that dropped by an average annual rate of about 0.8 percent, to $2.11 for each dollar of lost wages, medical expenses and other direct costs. Finally, in 1997, we found that insurers are paying about $1.68 for every one dollar of economic loss...

But neither the payments or losses exceeded the growth of the medical component of the consumer price index. One of the big factors in this flattening out was that attorney involvement in injury claims under all the injury coverages combined, decreased by five points, from 46 percent to 41 percent between '92 and '97. Attorney representation decreased for each type of coverage...

There may be several causative factors in the decrease, but certainly one of the reasons is the more aggressive intervention in claims settlement practice by Allstate, Progressive, Liberty Mutual and others. That's now being challenged by the trial bar and attorneys general in several states.

The impact of the more assertive action in settling injury claims can be seen in [IRC's figures]. In the case of persons suffering stain and sprain injuries only, which is the most frequent type of loss settled under personal auto insurance, those who settled their claim without the intervention of an attorney came out ahead of those who were represented.... Obviously claims with an attorney involved tend to be larger, more serious claims. They tend to have more medical payments involved; they run up the economic loss. But after you net-out the payments to the medical providers and the attorneys ... you'll see that the settlement to the claimant is $466 compared with $635 to the non-represented claimants.

Certainly something to think about as we move forward to the next millennium.
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Publication:Claims
Geographic Code:1USA
Date:Dec 1, 1999
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