CLAIMS MANAGEMENT:
AN IMPORTANT PART OF A SUCCESSFUL INSURANCE PROGRAM
by Elizabeth Shaw, CPCU
This writing is based on one simple premise: The integration of claims management into a commercial insurance product during the early stages will improve the results of the insurance program. Just as a marketing plan defines the distribution process and an underwriting plan defines the risk selection and rating processes, a claims management plan to define the response process is the logical third piece, and is just as important to the success of the insurance program. To begin the discussion, let's interpret the insurance product from the perspective of an insured or affinity group of insureds. The insurance product is:
- a coverage contract providing protection from the financial results of accidental loss
- service and advice from an agent/broker and the carrier, at times critical to the insured
Next let's analyze what an insured or a group of insureds expects from an insurance program. They expect:
- the coverage they need as defined by the law and/or the group or organization's risk philosophy, at a price that they believe is fair and in line with the organization's financial goals
- the service they want for maintaining the coverage they need. This service might include having all their questions answered, getting proactive advice as business conditions or market opportunities change, and getting professional assistance leading to prompt resolution when claims occur
Traditionally, all parties involved with providing insurance have recognized the significant impact of claims considerations only after losses have occurred. The importance of proper reserving for the rating process and timely, accurate reports on actual losses for strategic decision-making and loss-control activities is undeniable. More directly, the claims process delivers the promises called for in the insurance contract, and therefore plays an integral part in the program.
But what about before the fact? To be most effective, claims management should be discussed before the losses have occurred and even before the coverage has been decided upon and bound.
As the continuing soft market for commercial casualty business attests, the days of the insurance market alone determining the availability of coverages and the rates charged for those coverages are gone, probably never to return. A commercial insured today insists on having more control over its own financial destiny. Accidental losses leading to claims are obviously an important part of that financial destiny. The commercial insured today is more sophisticated and has many more options for exercising control than ever before. Some of the control is achieved by implementing loss-control measures. Other options relate to risk financing, each of which may create important claims ramifications. The risk-financing options now available include:
- new and/or larger retentions through deductibles, self-insurance, and captive reinsurance
- increased bargaining power through association sponsorship of insurance programs, purchasing groups and risk retention groups, and specialty niche programs customized for particular affinity groups
Most critical for this discussion is another important benefit that insureds are also coming to expect in their insurance programs: understanding how their claims will be handled and having some input into the process so as to address their insurance requirements and support their financial and business goals better.
Doesn't it then seem logical to integrate a program or account-specific claims management understanding into the overall insurance program at the outset, rather than assuming that the claims will simply take care of themselves as long as there are adjusters handling them?
Line claims people, including those in management positions, do operate under a claims management plan. Every insurance carrier with any kind of claims staff has documented general procedures and standards for its claims department that it uses for dealing with common, and even not so common, claims issues. These procedures and standards are applied across the board for all policies and all insureds, and they are needed for fairness, consistent contract compliance, and ease of internal management. Authority levels for loss reserves and settlements, geographical and organizational work distributions and adjuster caseloads, and philosophies for establishing reserves and providing a defense are among the issues usually addressed by these standards.
Unfortunately, because of the carriers' size and organizational concerns and the carrier's own financial interests, these standards are generic and often fairly inflexible, especially when specific claims concerns are not considered during the account or program planning process. Individual account or program issues are not particularly weighed when the procedures are established, and often account and program issues are not considered when the procedures are practiced. Claims veterans are even heard to say that 'a claim is a claim is a claim is a claim.' Insureds, as they become more knowledgeable and more assertive in their efforts to control their financial destiny, are not likely to concur with this characterization, especially when the claim in question is theirs.
Furthermore, when claims standards and philosophies are not discussed with insureds until losses have occurred, they are likely to come to light as apparent conflicts. Through market opportunities becoming available to them, insureds are able to participate to some degree in planning the coverage to be provided and the rates to be charged, and the way the coverage will be coordinated with the methods and levels they have chosen for retention and risk financing. Why should they not expect to have some initial understanding of who will handle their claims, how and by whom and within what legal and ethical parameters their claims will be defended, or some input into when and for how much their claims are settled?
This is not to advocate that insurance carriers should abandon the claims discipline to their insureds, any more than they similarly abandon the underwriting discipline. However, as proper underwriting criteria for risk selection and rating differ under the circumstances of different programs or accounts, different market conditions, and different carrier appetites, the procedures and standards that dictate claims practices can also differ and still be proper legally and actuarially.
For instance, good claims practice dictates that subrogation from a viable third party, once identified, should always be pursued because the policy provides the carrier that right. But what if the viable third party happens to be an important client of the insured and an attempt to recoup a claim expenditure could interfere with the insured's continuing relationship with that client in the long run? Especially when the insured participates in the ultimate financial exposure for the loss, whether to subrogate becomes not only a claim decision but also a business decision.
As another example, cost-effective claims philosophy dictates that small claims even if somewhat questionable, usually be settled early at a nominal cost (commonly called nuisance value) to prevent the need for incurring further investigative and defense expenses. But what if the insured believes that such a settlement in a particular case will encourage more claims of the same type and feels that a stronger defense posture in that case, though not individually cost effective, could prevent a proliferation of similar claims?
There is no definitive answer to these situations. But an early claims management discussion, inviting input from the insured, can provide additional guidance to the claims adjuster and acceptance from the insured before they act as general procedures dictate.
But claims practices that are within the legal and actuarial requirements of the carrier AND that best meet the an individual account's expectations are unlikely to occur by chance. Moreover, the time after the loss or period of losses is clearly not the best time to discover general procedures conflicting with the insured's or group's expectations or needs. Unfortunately, that is when the discovery is most likely to take place. The best time is upfront, while the program is being designed and the deal negotiated. That is when the communication lines are uncluttered by losses that have already occurred and by the potential frustration of unmet expectations. In direct contrast to abandonment of the claims discipline, I recommend taking the time to explain and agree to a claims strategy that takes into account the insured's goals and the carrier's responsibilities.
The specific advantages of having a program-focused claims management strategy include:
- Establishing communication lines to discuss routine and non-routine matters and to encourage a meaningful exchange to anticipate and provide for claims concerns
- Defining a role in the claims process for the insured or group that adds value to the claims-management process
- Determining useful measurement tools for the insurance program in relation to claims.
Communication is the exchange of ideas and information. Effective communication is essential to a successful relationship and is the first step toward meeting the goals of all parties. Establishing and practicing meaningful, consistent communication procedures should occur from the outset of the relationship to prevent confusion or surprises later on. Exchanges regarding claims during the planning stages can encourage meaningful communication later on about claims matters. The successful use of such lines of communication for nonadversarial problem-solving and general reassurances could be as critical to an insured as premium cost.
Part of the communication process is providing information, but the other part is receiving and understanding the information provided, including the attitudes and philosophies it reflects. Claims discussions should take into account the level of satisfaction of the insured's organization, with claim methods and results from the past and the reasons behind those opinions. Claims situations intrinsic to the particular type of business and to certain functions within the organizations should be considered. All concerns relating directly to claims handling should be identified and analyzed. But these claims issues cannot be meaningfully considered if they are not even mentioned during the planning process. If they are simply presumed to be addressed by generic claims practices designed to be consistent and meet the carrier's organizational management system, disappointment or conflict is likely to arise.
The key is to establish the relationship in the earliest stages of the insurance program as a means for routine communication, not exchanges that take place only when a problem has developed or has escalated to potentially serious proportions. Meaningful communication requires an ongoing relationship between the parties, which is difficult to establish under the duress of frustration on both sides. Communication leads to smoother claims handling and a more satisfied insured.
The second advantage of a claims management understanding is that it can specifically provide a means for the insured's input. The role of the insured or the group in the claims management process should be designed around the goal of advancing the appropriate and effective management of the losses under the program. Some of the obvious activities in that role are delineated in the Conditions sections of a standard insurance policy, such as reporting losses promptly to allow the investigation process to begin within the earliest possible time frame. Although especially important in Workers Compensation claims because of statutory time frames imposed on those responsible for paying benefits to injured employees, prompt reporting is important in every line of coverage. Another activity is to cooperate fully with the investigation efforts, including relaying all the facts as they are known, allowing access to knowledgeable personnel, and encouraging an open interchange of information as claim facts develop. An insured attempting to control the scope of the investigation by withholding pertinent information, regardless of the motivation, could limit the ability of the claims person to structure a competent defense.
Claims people make their living investigating, evaluating, and resolving losses and complying with statutory requirements and court procedures. The insured person or group is rightfully concerned with the challenges, opportunities, and limitations for furthering the business purpose of their organization and the impact of claims on that business. Claims people welcome input and cooperation within areas of the insured's expertise. This vital contribution, based upon the insured's area of greatest knowledge and experience, adds value to the process and imparts an insight into the organization or business, the products or services, and the political and philosophical workings within the organization or profession.
A subtle balance must be maintained between desirable input and inadvertent interference in the claims-management process. An agreement about the insured's involvement in the claims process, balanced with the available professional claims expertise, best promotes the basic purposes behind the insurance program of real savings in loss costs with long-term strategies (not short-term tactics).
The third advantage of a focused claims-management strategy is to establish a set of claims ground rules and expectations against which actual results can be measured. As business and market conditions evolve, measurement tools are essential to enable the insured as well as the insurance professionals to evaluate the current insurance program and make necessary modifications over time. Taking the time during the planning stages to establish claims-measurement tools that are consistent with the goals of the insured and the insurer is well worth the effort.
In conclusion, the basic premise of this piece was that integration of claims management in the commercial insurance product will contribute to improved results from the program. The insurance broker or agent achieves program success through binding the insurance program and expanding it over time. The insured or group achieves program success by promoting its own favorable financial results and having its insurance program meet its expectations. The insurer achieves program success through profitable underwriting results and retention of a profitable account. Encouraging discussions to anticipate and provide for claims concerns and establishing communication lines for nonadversarial problem-solving, defining a meaningful role for the insured or group in the claims-management process, and determining effective claims measurement tools, enhance the chances for success in all these areas.