Insurance is a lot like football. A team has to play well on both offense (sales) and defense (claims) to win the game and send their fans (clients and investors) home with a victory.
The coaching staff members (department managers) design the offensive plays (product development) and drills the team in executing the game plan (underwriting guidelines). If the offensive line (underwriters) does their job blocking bad risks, they create opportunities for the quarterback (head of marketing and sales) to get the ball to the running backs and receivers (agents and brokers), where they can score new business.
But if the insurer’s defensive line (adjusters), linebackers (claims managers), and secondary (investigators and litigators) cannot stop fraud-committing criminals from scoring points they haven’t earned under the rules (the terms and conditions in their insurance policies), the carrier will lose the game for sure.
A good insurance defense must therefore be able to bend when it needs to by facilitating payment of legitimate claims with a minimum of aggravation, without becoming so soft it lets those with bogus claims score at will.
This is a tough balancing act for both sides. Consumers can’t test-drive insurance, which means buying a policy from a new carrier is really a leap of faith. The biggest question is whether the insurer will come through for them when the worst-case scenario occurs or if they forked over their hard-earned premium dollars merely for the right to sue.
Carriers take a similar leap, although theirs is a more calculated risk. Underwriters assess submissions and charge what they believe to be a rational premium given the potential frequency and severity of the exposures they assume. They base these critical decisions on actuarial science, advanced models, competitive considerations, and yes—even in today’s high-tech world—gut instinct at times.
If no loss events take place during a policy year, theoretically everyone should be happy. No harm, no foul.
A claim, however, is where theory becomes reality. There is nothing theoretical about a home or business destroyed in a fire or natural disaster, a worker killed or injured on the job, a consumer harmed by a defective product or professional service, or any of the other thousands of potential property and liability events that trigger a claim.
It’s also where perception becomes reality in terms of delivering the primary benefit offered by insurance—providing the money required to rebuild and/or compensate those suffering a loss. Despite the necessary legal jargon, an insurance policy is really just a commitment to pay if something bad happens to the buyer. Will the carrier live up to this solemn obligation? It’s a risk manager’s worst nightmare if they fail to do so.
Buyer integrity is put to the test as well when a loss is reported. Is their claim honest, or is there big-time fraud involved—the kind that results in wrongdoers being led away in handcuffs? More frequently, little white lies are told—the “soft” fraud in which claimants pad their losses to offset the deductible or perhaps to “make up” for the years of paying premiums “for nothing” because there were no claims.
This is why I’ve dubbed this column “Reality Check.” I’m going to offer some perspective on the real problems facing those dealing with claims today—whether you are an insurance seller or buyer, claims manager or adjuster, fraud investigator or litigator. I’ll also explore opportunities to make claims management easier and more cost-effective, in part by integrating new technologies or advanced analytics into a carrier’s standard operating procedure.
But I’ll also look at the human side of the equation, including how to deal with the stress that claims handlers face (particularly in a catastrophe situation) while also examining the critical reputational risk management role claims personnel play in influencing how consumers perceive not just a particular insurance company but the industry as a whole.
I would go so far as to say that there is nothing more essential today than proactive, creative, and persistent claims management. In case you haven’t noticed, the economy is still struggling to make a comeback, with exposure growth in the U.S. and European markets likely to grow slowly and unsteadily in 2012 and perhaps for a number of years beyond. With the stock market lurching up and down like a roller coaster and interest rates for U.S. securities at historic lows, investment income will be similarly unreliable.
That means even though the soft market in commercial insurance appears to finally be at an end, with prices stabilizing for most risks and on the rise for many accounts, insurers are still going to have to maintain their focus on controlling the expense side of the ledger to bolster their bottom lines.
In the end, it really comes down to claims, which is the biggest single expense for any property and casualty insurer. No matter how innovative a carrier might be in terms of introducing new and improved products, or how well they underwrite and price coverage, or how effectively they market and transact business, if an insurer comes up short in claims management, it will leave itself at a competitive disadvantage.
Unlike in football, both teams—insurer and policyholder—can be a winner with insurance. Carriers need to pay claims in a timely, relatively painless manner to maintain their reputations and hold onto their prime clients. But they also need to tackle those trying to game the system, because failing to do so makes everyone a loser since fraud drives prices higher across the board.
Let the game begin!
Sam Friedman is an insurance leader with Deloitte Research, part of Deloitte Services LP in the U.S. He has been a fellow with CLM since 2011, and can be reached at samfriedman@deloitte.com.