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Is self-administering claims right for you?

Ever more self-insured companies are evaluating the pros and cons of installing an in-house self-administered unit to process their workers' compensation claims. The potential benefits and costs of doing so need to be compared with the advantages - and disadvantages - of continuing with traditional third-party claims administrators (TPAs). While this process involves a review of various factors, the final decision to internalize the function most often will be based on a philosophical view: the degree of autonomy that a company wishes to retain in processing claims.

Companies that have implemented self-administered units within their organizations report several advantages. For instance, in-house claims managers tend to better understand the company's operations, and senior management is afforded a closer view of claims management functions. Additionally, an in-house claims administration unit improves communications between manufacturing and management, which fosters not only a team effort but also, more importantly, quicker resolution of claims and a reduction of claims costs.

Through salary and benefits incentives, an in-house arrangement may help stabilize turnover of claims personnel. Conversely, TPA claims examiners may change companies as often as every six to 18 months, usually under the pretext of "professional advancement." This high turnover rate in the claims industry can cause serious problems that increase expenses. Complex claims can be voluminous, and an examiner may spend months just trying to understand a newly assigned case.

Self-administration also provides greater accountability. Both an in-house unit and TPA understand that the goal of an effective workers' compensation delivery system is to distribute benefits efficiently and humanely. But an in-house unit better recognizes a company's goals and objectives in protecting itself from claims that are not warranted.


Although self-administration generally offers a variety of advantages over a TPA, it also carries with it some disadvantages. In the decision to self-administer claims, the question arises as to where the function should reside within the organization. Manufacturing may argue that it is best to place claims under its management since the losses are a direct component of the production process and reflect productivity levels. At the same time, the human resources people may believe that the administration of benefits falls within their area of responsibility. The legal department may assert that the statutory nature of claims administration and the delivery of benefits, a process that in the case of workers' compensation may be extremely litigious, can impact the corporation's assets and therefore should be subject to careful legal scrutiny. Meanwhile, those in charge of the treasury and finance functions may deem that the claims administration role is primarily financial in nature; after all, this role involves the delivery and reserving of large sums of the corporation's working capital and should be monitored as would any fiduciary responsibility.

Regardless of where the claims function is ultimately housed, a degree of care must be taken by the organization to adequately insulate the claims role in fulfilling its reserving responsibility. Reserving should be performed by experienced professionals most familiar with the various components associated with the particular insurance coverages, the issues of liability, damage estimates and expenses associated with adjusting the claim. Although the claims examiner should not operate in a vacuum, the process should remain objective. Without adequate insulation from other management functions, the claims department may be subject to pressure from various contingents whose own performance may be adversely affected by the reserving process.

In order to preserve actuarial soundness in reserving practices, a separation of manufacturing, legal, finance and accounting pressures in claims reserving disciplines must be maintained. Otherwise, if, for example, the cost of loss is directly allocated within the organization to the production level, the manufacturing section may then find it advantageous to minimize any adverse experience that may develop as a result of poor loss control efforts or inadequate cost containment. Since reserves are a direct reflection of the projected ultimate costs on a claim, the corporation is best served by developing a timely and accurate projection of its liabilities, both insured and uninsured.

Furthermore, proper funding for a self-administered unit can be costly. Expense categories to consider when establishing an in-house claims unit are personnel, furniture, office equipment and supplies, and management information systems (MIS). It would not be unusual for the costs of installing an in-house unit for a [manufacturing] company with more than 4,000 employees to total $500,000.


The approach most appropriate for a company - the traditional TPA or an in-house self-administered unit - will depend on how much control that company wants to retain and how it wants to process its independent claims. A company interested in developing and installing a self-administered unit needs to consider various factors, including the unit's fit within a company, its volume of claims, the company's geographic spread, regulatory requirements and start-up costs. Moreover, when considering the self-administration of claims, it is imperative that the self-insured have senior management's total commitment. Companies that installed self-administered units without this commitment report that their programs failed.

The volume of claims has a direct bearing on their effective handling. For example, a TPA examiner in California may handle no more than 175 open lost-time claims in one year. Using California's mandated claims limit and applying the industry average of a 20 percent indemnity to 80 percent medical-only ratio of received claims, a company would need to receive at least 500 claims per year to economically support a unit. If a company does not receive this volume of claims annually, establishing a self-administered claims unit may not be appropriate.

In states with no limits, TPA examiners each typically handle between 225 and 275 claims per year. Performance audit findings indicate that with this caseload volume, examiners are unable to give proper attention to individual cases, and their overflow claims are turned over to attorneys for adjustment. The result is an overall increase in loss adjustment expense as well as a loss of control over indemnity and medical claims costs.

Another important consideration is the geographic spread of a company's claims. For example, operations in various states will require claims processors to be familiar with laws of several jurisdictions. If practical and statutorily permissible, a company may want to centralize its claims management unit to achieve the volume it needs for economic viability.


Unlike accounting and other fiduciary areas, the adjusting industry is not highly regulated by the government. California is one of the few states that require licensing for the workers' compensation adjusting industry. However, many states do audit claims administrators. Califomia's Office of Benefits Assistance and Enforcement (OBAE) is the benefits policing arm of the state's self-insurance plans. It initiates audits of all insurers, self-insured TPAs and self-administered claims operations in the state to ensure compliance with workers' compensation rules and regulations for administering compensation benefits. OBAE conducts company audits and assesses penalties that range from $100 to $5,000 for each item of noncompliance per claim. With a 10 percent sampling per client, substantial fines are being imposed on the claims industry as a whole. Unlike a TPA-managed claim, the self-insured/self-administered employer under this scenario is without question fully responsible for its own administrative errors and omissions. While California is unique to this extent, it should be viewed as a bellwether of what other states may institute in the future.


A newly established self-administered unit is a unique concept in an organization. For most companies, self-administered claims processing is an entirely new discipline - it is neither accounting, manufacturing nor finance. Once established, a unit will require ongoing funding and dedicated support. It is an unfortunate reality that the number of received claims rarely equals claims closed in any given period. As a result, corporate responsibility for financial support of an in-house unit gradually expands.

Are the costs for establishing an in-house self-administered unit justified? Will the unit allow the company to increase its rate of claim closures per received claims in a given year? An axiom within the claims industry declares that the faster a claim is closed, the less expensive the claim will be. It doesn't take many expedited claims closures to justify a self-administered unit's expense. In addition, self-administration may reduce a company's litigation costs by 12 percent to 35 percent. Because of enormous caseloads, TPA adjusters typically defer to attorneys, whose fees for handling routine claims are excessive.

While initial start-up costs may seem high, after the first year of operation a company may realize cost savings in the area of initial equipment capitalization, expense budget decreases and a leveling of expenses for MIS. On the other hand, increased open claims inventories may cause personnel costs to increase slightly.

How do expenses of a self-administered unit compare with the costs associated with TPAs? In addition to comparing actual dollar amounts, a company may want to evaluate less tangible but equally valuable improvements in medical management, litigation management, claims investigations and distribution of claims payments.

The decision to become self-administered is largely a corporate philosophy issue. A company's decision should be based on autonomy, control and cost savings. The chief benefit to a company is the control it gains in handling claims: it is able to design and implement what it wants at the local level, often resulting in a reduction of its overall claims costs.

Michael Flaharty is the director of casualty claims consulting within Coopers & Lybrand's casualty actuarial/risk management group in New York.
COPYRIGHT 1993 Risk Management Society Publishing, Inc.
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Author:Flaharty, Michael
Publication:Risk Management
Date:May 1, 1993
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