Black Swan Hunt or Wild Goose Chase?

As claim leaders, we spend considerable time working on our companies’ enterprise risk management (ERM) documents, whether in designing the ERM function or in providing operational support to implement directives from executive management or the board of directors. Total claims spend is the largest single outflow of cash from virtually every organization, but, historically, little has been done to ensure that correct coverage and litigation decisions are made or that we have fulfilled our contractual promise to our policyholders without either under or overpaying claims.

From an ERM standpoint, an ineffective claims audit and review process is more likely to significantly impact the insurance organization over the short- and long-term than a so-called “black swan” event. Management often emphasizes the need to protect against the exotic, unusual, “one-off” event over basic claims blocking and tackling because, well, if routine claims handling was that important, then we’d already be doing something about it.

Thus, the challenge is how to create a claims department that is proficient in delivering the insurance promise, engaging claims professionals in continuous improvement, effectively managing settlement and loss adjustment expenses, encouraging hands-on supervision and quality, and promoting leadership skills.

To our fellow claims executives and managers, we remind you of the spot-on observation of Walt Kelly’s classic cartoon character Pogo: “We have met the enemy, and he is us!” A WillisTowersWatson claims management white paper, “How to Become a Triple-Threat P&C Claims Department,” finds a huge discrepancy between the actual time spent on real value-added claims handling activities and the amount of time claims handlers should be spending on the core activities of claims management. The study also finds a sizable gap between the amount of time actually spent by supervisors in reviewing files of their direct reports and providing feedback, compared to the amount of time claims executives agreed was ideal.

As an industry, we have a significant disconnect between what we know we should be doing and what we actually do in claims operations. Even when we recognize and understand the nature and extent of this disparity, most organizations do precious little to correct the imbalance. We continue to turn a blind eye toward our misplaced priorities and missed opportunities, and, in the long run, we choose this path at our peril.

The WillisTowersWatson white paper also discusses the overreliance on quality assurance and claims analytics in the abstract, without meaningful supervisory input. In claims organizations where elements of compensation are tied to quality assurance scores, claims professionals begin managing their claims inventories to achieve the best possible quality assurance outcome regardless of whether the proper claims coverage or payment decisions have been made. More regrettably, supervisors not only spend an insufficient amount of time reviewing their direct reports’ files and mentoring less experienced claims professionals, but also they are often excluded from the quality assurance process altogether.

We observed one extreme example of this recently. A large regional carrier assembled a quality assurance team, independent of file handlers and supervisors, which identified 128 elements of claims file management related to timeliness, accuracy, and regulatory compliance. The team reviewed a substantial portion of each claims professional’s file inventory and shared the scores with the claims professionals and their supervisors. While the claims professional’s compliance with the quality assurance criteria improved substantially over the course of a few years, the median cost per claim, both loss and expense, continued to rise. The quality assurance team was reportedly puzzled, as it had assured executive management that better quality control scores would lead to better managed claims and, therefore, lower costs.

During the course of a consultation engagement, it was discovered that the claims professionals’ salary increases and bonuses were both tied to high quality scores. We also determined that the amount of time required for claims professionals to comply with every one of the 128 quality metrics essentially precluded them from spending any time on analysis or effective communication with the policyholder. It also meant that claims were taking a little longer to conclude, given the amount of documentation required. Studies show a key to reducing loss payments is reducing claims cycle time from first report to final payment. As one of our colleagues observed, “When everything’s important, nothing’s important.”

The current state of the industry relies primarily on quantitative measures of quality assurance. These measures are often based on regulatory compliance guidelines or generally accepted claims service standards. Compliance with these standards should be a goal (and should be measured), but they should serve only as a non-negotiable, basic standard of acceptable claims behavior. Qualitative measures, on the other hand, evaluate a claims professional’s real impact on financial results and customer satisfaction.

Stop focusing on the “black swan” events that are largely out of your control. Start concentrating on opportunities missed to minimize financial risk and increase customer retention. Your ERM program should focus more on qualitative file handling; increased, substantial, and meaningful supervisory involvement in claims files; mentoring claims professionals; and identification by senior management of leadership skills at all levels in the organization. At that point, through real leadership and vision, you will have transformed your claims organizations into true quality operations that favorably impact bottom lines and customers’ experiences.