We Could Use a Little ‘Nudge’

Changing our environment to drive more effective and efficient decisions

September 18, 2023 Photo

The system of processing and handling insurance claims is fraught with inefficiencies. That is not to say it is entirely flawed, but, if we are being honest, we have all heard the same refrains for years:

•     Too many claims and not enough hours in the day.

•     Unresponsive counsel.

•     Perpetual extensions.

•     Time limit demands and no time to think through the issues properly.

•     Unhelpful and unproductive mediations.

•     The ever-looming threat of Medicare compliance.

•     Tort reform legislation.

•     Low rates.

In considerable measure, the game is rigged against industry efficiency, and the economics of change are too daunting to undertake. For example, insurance companies cannot simply hire enough help to relieve overworked examiners, and there are only so many billable hours in a day. However, while the business’ economics is a source of the problem, it may also be the source of the solution.

What Is Nudge Theory?

Popularized by University of Chicago economist Richard Thaler and Harvard Law School professor Cass Sunstein, Nudge Theory involves the idea that properly setting up one’s environment can “nudge” us, for the better, in our decision-making process. How do we do this? Through choice architecture. Thaler won the Nobel Prize in Economics in 2017 for his work in this area, specifically his research and incorporation of “psychologically realistic assumptions into analyses of economic decision-making.”

Choice architecture sounds complicated, but, at its core, it is a way of setting yourself up for success—or, in Thaler and Sunstein’s words, “[O]rganizing the context in which people make decisions.”

Let’s look at it another way. Take one of the myriad house-renovation shows that permeate every corner of weekend television consumption. Unfortunately, our current claims system is like a house before the renovation occurs: The rooms are tightly packed, the layout is awkward, and the homeowners are doing laundry in the kitchen while putting their kids to bed. Everything needs to be more organized.

Applying choice architecture would be like the home’s appearance after the renovation: It’s beautiful, and there is space and flexibility. The structural footprint is likely the same, but now the laundry is done in the laundry room, dinner is cooked in the kitchen, and the kids have their own space. The house has been redesigned for optimal functionality.

But that is only part of the story. Choice architecture should be applied to give the person living in a house a nudge to make better decisions. For example, if you have a mud room directly connected to your garage, you will likely remove your wet, disgusting, smelly sneakers before you track dirt all over the house. Of course, the mud room does not make you do anything. But its presence, immediately when you walk in the door, serves as that vital nudge, offering you a subtle choice to slip off those dirty shoes before your spouse sees you and you are sleeping on the couch.

Another classic example of effective choice architecture is automatic employee enrollment in company 401K plans. A company’s decision to automatically enroll new employees (or, at the very least, make enrollment incredibly easy) “nudges” employees to participate in the plan. They can opt-out by clicking a few buttons, but it is extra effort. It is easier to do the smarter thing, and more time-consuming to make the more irresponsible decision. Studies have shown that participation in these automatic structures substantially increases compared to scenarios where someone must elect to participate.

Relevance for Our Profession

Choice architecture and nudges have the potential to improve the claims-handling process substantially. Yes, claims handling software purports to solve these problems: Features like dashboards and organized case repositories provide a more transparent and methodical claims process and framework for analysis, but the software exists merely to collect and collate information; not to make decisions. It is a tool that can be used in the decision-making process, but it is not the decision itself.

To implement a solution, an honest accounting is needed. The general theme of claims is risk management, i.e., managing exposure to the insureds and protecting the insurance limits whenever possible. How do we get started? By keeping the following three points in mind, which will be explored in depth below:

•     Map the claims environment that the claims examiners and defense counsel encounter daily.

•     Know where and when defaults might be helpful.

•     Understand the economic and policy implications of the claims themselves.

Mapping Out the Claims

The number of claims an individual examiner must handle varies depending on the insurer. The same is true with respect to the subject matter that each examiner is expected to manage—i.e., property, environmental, liability, etc. The goal is to develop subject matter expertise with specialization and by region. For example, it may be easier to handle claims in certain parts of the country when specific legal issues rear their heads repeatedly as opposed to other areas with separate issues. The vulnerabilities often hide in the details of each claim.

With respect to challenges, Thaler, Sunstein, and others explore decision-making problems that are relevant to our industry, including anchoring, status-quo bias, and herd mentality:

•     Anchoring involves making decisions because of specific past experiences. For example, assume you resolved your first torn rotator cuff case for a low number. Your evaluation of a subsequent torn rotator cuff claim will be “anchored” to that experience. The benefit of anchoring is that it gives you a frame of reference that you can use to evaluate your decisions in a professional context. The problem with anchoring, however, is that you risk making decisions on the cases you had in the past; not the ones you have in the present.

•     Status-quo bias is where your cognitive bias (consciously or unconsciously) favors the present type of thinking. Status-quo bias can work, until it doesn’t. Then, the risk is that you will make decisions and errors based on the tired cliché, “It is what it is.”

•    Herd mentality is where we get caught up in our surroundings and blindly follow the seemingly leaderless pack. Think of the Bedford Falls townspeople as they make a run on the Building and Loan in “It’s a Wonderful Life,” or the proverbial angry villagers chasing the monster with lanterns and pitchforks. Herd mentality exists when we are not even thinking about what we are doing, but, instead, we do it because that is what everyone else seems to be doing.

If left unchecked, herd mentality can quickly spread to social contagion, which, according to the American Psychological Association dictionary, is “the spread of behaviors, attitudes, and affect through crowds and other types of social aggregates from one member to another. Early analyses of social contagion suggested that it resulted from the heightened suggestibility of members and likened the process to the spread of contagious diseases.”

Every decision we make on a case or claim has the potential to impact our industry. It may not feel like this on the front lines of claims management, but too many wrong decisions and blind biases have the potential to spread. What we are left with is a host of inefficiencies, burned-out examiners, and disaffected attorneys.

Default Mode

How do we make sense of the challenges we face? We can apply economic and psychological principles and offer example after example of what we do wrong, but that is not very helpful. The truth is there is not a one-size-fits-all solution.

Instead, it is critical to examine the systemic vulnerabilities in our line of work and what decisions, however small, we can put in place to achieve better results. It is similar to dieting: If we fill our weekly grocery order with Oreos and soda, and the pantry explodes with unhealthy options, it will be much more challenging to make healthy eating choices.

AI and software solutions can only blunt the impact of hundreds of daily claims decisions. It does not matter how well things are organized if the claims are too voluminous to handle correctly. Yet, decisions still need to be made, and we need to get them right.

The first step is to develop systems of defaults, however we need to be mindful that these defaults are not based on our biases. The opportunity for default decisions could be in the problem areas of a case (i.e., where we routinely get that heartburn feeling), such as assigning the proper defense counsel, setting reserve limits, preventing bad faith investigation claims, or Medicare/Medicaid compliance automation.

Think about what decisions you hate and where you have gone wrong. Now think about where you have gone right and build your environment to support those correct decisions automatically. This will further prevent procrastination, which results from our natural avoidance of the uncomfortable aspects of our professional existence.

Follow the Money

Understanding every claim decision’s economic and financial repercussions is vitally important. Too often, examiners and lawyers are in the dark (intentionally or unintentionally), making case decisions without fully appreciating the financial consequences for the insurer and the insured.

The goal should be to process the claims through the insurance pipeline as efficiently as possible, at least on the microeconomic level, but, at the same time, we must be aware of the macroeconomic implications of our decisions. This is similar to balancing our bank accounts: If we know where we are spending and we have a plan, we can avoid disaster and make better decisions. Identify what nudges you can give yourself to stay ahead of your balance sheets.

Data, Data, Data

Finally, the cornerstone of any good decision is information. What does the data tell you? There are plenty of technology solutions available that will mine your company’s data and provide recommended case values based on past results, and that is a step in the right direction. But it is only part of the picture.

Data can also contain hidden biases and be used to further our own or others’ agendas. For example, settlement figures across the insurance spectrum need to be improved in our industries. Yes, we can search verdicts, but that information is limited and highly variable. It also reflects cases that proceed through trial, ignoring the remaining 90%+ that otherwise settle or resolve through motion practice.

Our industry needs a clearinghouse of information on case resolution, wherein insurers submit their data into the database after settlement. If a virtual library is built, we could gain valuable insights across the litigation spectrum. That would tell us if we are on the wrong track, or if we have yet to even find the track.

This utopian vision of honestly—and I stress the word honestly— sharing information across the industry is not likely or practical in the short term. Until then, we can spend quality time building our professional choice architecture systems as a necessary, and long overdue, step forward. 


About The Authors
Matthew Cianflone

Matthew Cianflone is general counsel at Gold Medal Bakery, Inc.  mcianflone@goldmedalbakery.com

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