Calculating The Value of Pain.
How much money should a victim whose arm is broken in an auto mobile accident be awarded to compensate for pain and suffering? Depending on who's adjusting the insurance claim, it could be $2,000 or $4,000 or almost any amount. That's not necessarily inaccurate adjusting--it's human nature.
Evaluating general damages has been one of the most subjective aspects of settling bodily injury claims. General damages are awarded to compensate the claimant for the pain, suffering, permanent impairment and lifestyle changes--including loss of companionship and consortium--caused by traumatic injury.
To determine the right amount, adjusters have drawn on a variety of mathematical formulas, claims experience if they have it, intuition and, sometimes, personal experience. "If I as a claims adjuster am a person who has had back trouble, I am a lot more sympathetic to people who have back problems," said Lillie Radmer, casualty claims director, American Family Insurance, Madison, Wis. "If I have no [claims] experience, but have been trained by somebody who uses the 10-times formula, then I am going to use the 10-times formula." Emotional issues could even include how difficult it was for the claims adjuster to settle the last case. No matter how hard adjusters try to be fair and equitable for particular injury claims, there's a lot of room for variation.
Today, new technology products are helping solve the problem of inconsistency. Using one of several software products on the market, some claims adjusters are taking a more objective approach to determining general damage awards. "Consistency is key," said Lee E. Fogle, vice president of ISO Claim Services, a unit of Insurance Services Office Inc., which offers the ISO Claims Outcome Advisor to determine general damages in these cases. "Any two adjusters, no matter how much experience they have, will take the same data about a claim, and 60% of the time, they will return an estimate that's 100% or more apart," Fogle said.
Consistency is important, because insurers want to make sure they're not underpaying or overpaying anybody, said Dennis J. Smith, director of claims, Eastern Division, for American National Property & Casualty Insurance Cos., Springfield, Mo. "And the departments of insurance do not want us to do either," he said.
American National uses Colossus from Computer Sciences Corp. to evaluate general damages for its bodily injury claims. The software products are used most frequently with bodily injury claims arising from auto accidents, but they can be used for injuries from other sources, including those that involve homeowners or small commercial policies. Some injuries, such as psychological damages or scarring, can't be evaluated by the software.
Although saving money is not the main purpose of this approach to determining damages, there are aspects of it that can become cost savers. If an insurer has overpaid on a large number of bodily injury claims, the new system will prevent that from happening in the future. The new approach also may save insurers money because it does not tie general damage awards to special damages, which include actual medical expenses. Claimants, therefore, do not have the opportunity to inflate general damages by adding treatments and increasing special damages.
Improving on the Old Ways
The most significant difference between using the software and adhering to damage-award formulas is that the software recommends an award based on the circumstances of a particular injury; Radmer said. For example, a person claiming a back injury could have $5,000 worth of diagnostic tests run only to find that there is no injury and no treatment is needed. Another person with a broken leg could go to the hospital, have the leg casted and receive physical therapy, all of which could total $5,000. Under one of the old systems, both people would receive the same award for pain and suffering. "Do you think those claims have the same value?" Radmer said. "Not in pain and suffering."
Another method that sometimes was used was the jury verdict award system. In those cases, adjusters figured out values derived through jury verdicts in the area. "The problem with that is that only the big cases go to jury in some areas. That can skew the numbers, particularly for little claims," Smith said.
Relying solely on adjusters' experience in settling claims not only created problems because of personal biases, but also made the task almost impossible for new adjusters. "They needed a lot of hands-on guidance from their supervisors and senior adjusters," Smith said. The new software reduces training time for new adjusters, and by eliminating many of the manual processes, reduces the time an adjuster takes to work through a claim, said Elizabeth Blair, director of product management, Auto Casualty, for ADP Integrated Medical Solutions. ADP offers Injury Claims Evaluation software, or ICE.
The new software products help adjusters by recommending ranges of settlement amounts or providing ranges of settlements for similar claims, based on specific information about the injury, the claimant and the jurisdiction where the injury occurred. Colossus, for example, will give a 20% range of value--such as $10,000 to $12,000--for a particular person with a particular injury in a particular location and a policy with a particular company. ISO Claims Outcome Advisor also provides a range, and ADP's ICE will tell the adjuster what percentage of similar claims settled for certain amounts.
With ICE, the adjuster can see, for example, that 25% of similar cases settled at or below $5,000, 50% settled at or below $7,000 and 75% settled at or below $8,000, Blair said. "If I value my claim at $10,000, and the 75th percentile is $8,000, then I need to take another look at the claim," she said. "There may be good reasons for setting a higher value, but I should take another look at the claim as a whole before proceeding."
An important feature of these types of software is that they are tailored for each insurance company that uses them." They call it 'tuning' the system," Smith said. Each company must supply its own information about regional differences. In most cases, the company can set up as many different tunings as it wants--one for each city or one per state or three that cover the United States. The reason for the regional differences is that "the true evaluation of any injury claim comes down to what would a jury give," Smith said. "Juries in New York with higher wages and high dollar amounts in mind might give a lot more than a jury in Illinois. It's not that your broken arm hurts more; it's worth more."
Setting up the regional differences is where experience pays off. "We involved the people we felt were our best evaluators--our best negotiators--in the process as we set up our regional numbers," Radmer said. "That gives us an enormous benefit. You can't have your experienced people help you out on every case."
Companies must supply a representative sample of their claim-settlement history to the new system. "We use a sample of closed claims to set the model up, and then, moving forward, it's basically a computation of the severity of the claim and how that severity has tracked historically," said Tony Mattioli, national sales manager for ISO Claim Services. "As they add more claims to the database, we can make the computation model get smarter and more accurate."
Companies want to use their own settlement figures, not what any other companies are awarding, American National's Smith said. "We don't want to be like State Farm. We want to be like us. And we don't want to use their numbers, because we don't want to get into a situation where we can be accused of fixing the market to a certain dollar amount," he said.
The software can be retuned as often as the insurer wants. The most likely reasons for doing so are tort reform or a change in the cost of living in a region, said Steve Hancock, director, Cost Containment Solutions Group, Computer Sciences Corp.
Once the system is tuned, it's ready to help the adjuster, who begins by entering basic information about the injury, the claimant and the location. At that point, the software may prompt the adjuster by asking questions. With Colossus, for example, "if you have a neck injury, it will ask if there is any residual pain in the arm or hand that might be a nerve impairment," Smith said. "If you respond, 'yes,' it will ask more detailed questions, such as, 'which is the injured person's dominant hand?'"
With the ISO software, the adjuster can view a model of the human body. "If you point and click on an arm, you'll see all the things that can happen to an arm. Then the system wants to know age, gender and what injuries have occurred to the person," Fogle said. An important aspect of some of the general damages software products is that they present information about injuries, diagnoses and treatments in terms of industry standard medical codes established by the American Medical Association.
The ICE software pulls medical data and specific circumstances of the claim from other software systems. These objective data sets are the basis for the individual claim evaluation, but adjusters also can enter claim strengths and weaknesses to assist with negotiation strategy, Blair said.
This type of software forces adjusters to be fully knowledgeable about the injury, Smith said. It also requires them to fully document the file, which is a benefit if the claim ends up in litigation. And Smith disputes the speculation that using general damages software will increase the number of claims that go into litigation.
Consistent settlement of claims is the biggest advantage of the new software products, but the reporting functions also are valuable to insurers. Managers can look at large volumes of claims and see trends. They also can identify adjusters who may need more training. ICE provides reports about a particular state, including negligence laws, statutes of limitations and punitive-damage awards. Reports from the ISO Claims Outcome Advisor can show the effect of a claims initiative--such as settling all whiplash claims within 30 days--in a very short time frame.
Some insurers may use reports from the system to analyze liabilities and make decisions about reserving, but that's not the purpose of the software and may be controversial. "The problem with using it for reserving is that by the time you have the medical information, the claim should have been reserved a long time ago," Smith said. In fact, the tendency to put off reserving could be considered a disadvantage of the software. Some adjusters don't try to evaluate the claim until they have the documentation and put it through the system, which could take two years. "Until then, they're not as aggressive as they may have been in trying to find out what the injury is for reserving purposes," Smith said.
Another downside of the software could be the expense, but vendors are offering their products in ways that try to make them accessible for large and small insurers. Licensing fees based on the size of the insurance company, Internet access with the vendor hosting the software and service on a per-claim basis are options being offered.
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|Title Annotation:||new computer technology aids insurance companies in claims valuation|
|Comment:||Calculating The Value of Pain.(new computer technology aids insurance companies in claims valuation)|
|Article Type:||Statistical Data Included|
|Date:||Nov 1, 2001|
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