Turbo-Boost Your Claims Engine

An Incremental Approach to Claims Optimization

March 05, 2010 Photo
The Case for Claims Transformation
Recently, a significant amount of research has been done proving the business case for claims transformation. Celent stated that new claims technology can improve combined ratio up to seven points. Industry-wide, this would mean an increase in $25 billion in underwriting profits all while decreasing the claims cycle time by 40%-50%. A recent Insurance News Net survey showed that 80% of customers would file claims online if it would expedite the claims settlement process.

Most carriers understand the pain points of having archaic claims systems and, more important, outdated processes, but they haven’t been able to quantify how much it is costing them. For example:
  • Forty-five percent of all claims handlers’ time is spent on administrative activities (Gartner Research).
  • Five billion dollars is spent in overpayments on physical damage claims alone (PA Consulting Group).
  • Regulation and compliance cost carriers more than $100 million a year, consuming 10%-15% of senior management and board time (McKinsey).
  • Fraud accounts for 10% of the P&C insurance industry’s incurred losses and loss adjustment expenses, amounting to $30 billion a year (Insurance Information Institute).
Cost is not the only issue. Effective claims resolution has a major impact on customer satisfaction as well. According to a survey of North American insurers by Accenture, 75% of customers who leave their insurer do so because of the carrier’s unsatisfactory handling of their claim. Customer retention is affected not only by whether a customer’s claim has been paid but also by how fast it was paid. While the fair treatment of a claim might be debatable, customers expect a rapid, low-touch process from first notification to payment.

The high cost of inefficient claims systems and processes is evident. So why aren’t all carriers investing in claims transformation?
High Investment Costs
Although carriers understand the significant benefits of transforming claims, transformation requires significant investment from both a process and technology standpoint. According to a 2008 survey by Celent, claims ranks second behind policy administration for the highest budget allocations for new information technology projects among U.S. mid-sized P&C carriers. Therefore, many companies still have not transitioned away from legacy systems and manual processes. A recent survey by Accenture shows that:
  • Fewer than 50% of insurers have integrated their claims and first-notice-of-loss systems
  • More than 25% of insurers still rely on manual, paper-based claims systems.
In today’s difficult economic environment, many companies simply do not have the investment dollars to undertake a major process-reengineering effort or the replacement of their claims systems. Many are simply in survival mode. The focus has, therefore, turned broadly to retaining customers and reducing operating costs. Specifically, insurance carriers are trying to provide services at lower costs, reduce claims leakage and curb fraud, which tends to increase during tough economic times.

Carrier’s Choices
Similar to dealing with an aging car, carriers that still employ aging claims systems and manual processes have a couple of choices when it comes to claims transformation:
  1. Rip and Replace – Carriers can go through the expensive process of replacing their entire claims system with one integrated claims system.
  2. Tune-Up – They can replace small, inexpensive parts of the claims engine, making tactical enhancements to the balance of the system as necessary.
Replacing a company’s claims engine is costly in terms of both dollars and time. The problem with choosing to tune up your claims engine is that no monumental benefits are achieved. This is especially true for mid-sized carriers that are too large for off-the-shelf solutions and too small to afford large-scale, long-duration transformation efforts involving major reengineering of processes, replacement and customization of the claims systems.

Minor enhancements, though easy to implement and less costly and risky, may not solve the real issues and are typically best suited for point problems, such as addressing compliance changes.
Turbo-Boost Your Claims Engine
For companies that don’t want full replacement but do want to make significant improvements in their systems and claims processes, turbo-boosting their claims engine can be the answer—in effect making incremental, but significant, changes. This approach involves looking at the entire claims system holistically, systematically analyzing all the specific pieces in the systems and processes. The key is identifying the greatest hindrances to realizing business priorities and then implementing fixes that have the highest and quickest return on investment but are, at the same time, a less risky proposition.

For example, replacing a payments system that is shackled by too many touchpoints with an automated process may have a very quick payback. Adding fraud identification at first notice of loss may have a high underlying effect because the carrier can decide on appropriate handling approaches to deter or prevent fraud and/or investigate to prosecute and recover claims leakage. Building a Web-based claims processing system will allow the company to not only reduce loss adjustment expenses but also improve resource utilization. The key to this type of incremental optimization, or turbo-boost, is to:
  1. Keep the parts of the engine that are working well
  2. Replace obsolete or worn-out parts that may lead to damage of the entire engine
  3. Tune up parts of the engine where opportunities arise.
The goal is to choose the right approach for each part of the claims engine that balances replacement with improvement in an incremental fashion.

Benefits of Incremental Optimization
The goals of incremental optimization are effectively the same as claims transformation: rectify or minimize claims expenses; improve customer satisfaction; minimize fraudulent claims payments; and adhere to compliance rules in a cost-effective manner.

The difference is in the execution. In the incremental approach, carriers need to identify the largest pain points for the organization and prioritize these projects by return on investment. It is key not to bind the organization into a one-size-fits-all approach, as those are costly and many times require high amounts of customization. The turbo-boost approach has the following benefits:
  1. Protects existing investments in technology
  2. Provides a holistic solution for addressing claims challenges
  3. Incorporates new-generation technology with legacy systems
  4. Reduces the total cost of modernizing the claims system
  5. Minimizes disruption to the business.
For example, one Fortune 100 company reduced their maintenance costs by 30% and improved claims turnaround time by 25% through a recent incremental optimization effort. How? They focused on three major pain points for the company: reducing duplicate functionality across multiple legacy systems; enabling remote system accessibility; and consolidating platforms and processes inherited due to merger and acquisition activity. The solution involved developing a new platform based on a service-oriented architecture. This new architecture not only addressed business needs but provided the company with an analytical dashboard and reporting system, as well as claims correspondence and vendor integration. Fundamentally, they replaced multiple redundant applications under one system with an enhanced architecture.

Embarking on Incremental Transformation
When embarking on incremental transformation, it is important that the assessment phase is done with awareness of existing investments in people, processes and technology. Based on the study and the analysis of the “as is” state, a transformation roadmap from a people, process and technology perspective would be drawn up. This in turn would become a launch pad for the “to be” state. This assessment should be done by an external team not related or tied to any one solution provider or product to get a truly unbiased assessment. One of the major benefits of the incremental approach is that the right product or solution is picked for the particular situation rather than employing a one-size-fits-all solution pushed by many product vendors. The external team should have:
  1. A clear execution methodology and the tools to conduct an assessment
  2. Integrated technology and insurance domain skills needed to conduct assessment well
  3. Clear process frameworks
  4. Knowledge of best practices in the claims arena
  5. Solution accelerators and a ready components suite for key claims areas.
Once you have a qualified team in place, analyzing claims processes systematically is the most crucial step to maximizing optimization.
Ashwin Riswadkar is head of the Property & Casualty Practice for L&T Infotech. He may be reached at ashwin.riswadkar@Lntinfotech.com.
About The Authors
Ashwin Riswadkar

Ashwin Riswadkar is head of the Property & Casualty Practice for L&T Infotech. ashwin.riswadkar@Lntinfotech.com

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