Railroads have been a vital part of America’s growth and a mainstay of its economic development, providing a means to transport goods and people and open up a developing nation. Starting with steam locomotives in the mid-1800s, progress paralleled technology; innovations were few and far between. In order for steam locomotives to pull more or go faster, engine designs were simply enlarged. Heavier engines required strong bridges and gentle curves, and inflicted more damage to tracks. Despite these limitations, steam locomotives remained functional so change wasn’t sought.
What does all this have to do with property/casualty claims systems? The situations are similar when you think of steam locomotives as the “legacy” workhorses of their day and liken them to the legacy claims systems found in the claims departments of many insurers—a bit of a leap admittedly, but not completely far-fetched. Both “systems” were revolutionary in their day and remained functional for years beyond their technological primes—and there was reluctance to change even in the face of necessity.
Rising competition from auto and air travel, coupled with government restrictions forbidding the abandonment of unprofitable businesses, drove railroads to pursue the one option left open to them to improve efficiency—technological innovation. Along came diesel engines, which offered a cleaner alternative to steam. They also reduced the need for costly repairs and refueling intervals, and provided more pulling power than the legacy steam engines. All were significant cost savings and productivity gains for the railroads.
Claims management has taken on a similar urgency for P&C carriers in today’s soft market. With revenue growth flat or shrinking, investment returns uncertain, and a majority of an insurer’s expenditures flowing out of the claims area, carriers are very aware of the importance their claims departments have in delivering operational profitability and impacting the carrier’s overall financial performance.
Carriers also recognize that the area of claims may provide the only personal interaction with some policyholders. Delays and unsatisfactory claim settlements can quickly erode the relationship between the two parties. It is the all-important moment of truth, with poor performance very likely leading to policyholder dissatisfaction, defections, or even lawsuits.
Steam locomotives were custom made for specific railway routes and lines, so economies of scale were difficult to achieve—similar to the majority of “home grown” and technologically out-of-datelegacy P&C claims systems in use today. Many of these legacy systems were never intended to be claims-adjusting applications in the first place, and are not up to the most basic of tasks. Like their hard performing steam train counterparts from a bygone era, their days of efficient performance are behind them.
Legacy systems are not only cumbersome, but may be impossible to modify to any great extent—thus limiting what a carrier can do as business requires newer, faster and more cost effective approaches to remain competitive. Instead of having claims technology flexible enough to support the way they want to do business, carriers find themselves adjusting their processes to accommodate the limitations of their legacy claims technology. New regulatory requirements, changing business needs and FNOL reporting are just a sampling of where legacy systems consistently come up short. Over the years carriers have added siloed third party applications or built their own to fill specific functionality gaps, resulting in a patchwork of disjointed systems.
The siloed applications typically offer limited integration and limited data exchange, adding to the administrative burden and chance for leakage. Reporting and operational visibility with such cobbled together systems provides at best a delayed glimpse into claim operations, and in many cases no insight at all.
Claims representatives frequently find themselves bogged down in manual activities to retrieve archived property and inspection information as well as insurance-to-value data. In addition, legacy systems often operate in batch mode, adding to the delay in acquiring the most recent claims information—assuming it’s even available in the system. Legacy systems are so limiting that some studies estimate at least 40 percent of an adjuster’s time is spent on activities that don’t bring claims to a quick and just settlement. Such outdated systems are not simply inconveniences or a fact of life; they now threaten a carrier’s competitive position and financial health.
What’s Holding up Progress?
When it came to the railroads, even with the advent of newer diesel technology there was hesitancy by some locomotive manufacturers to change. Many thought the status quo was good enough, while others preferred to let the technology develop or let others take the risks associated with early adoption. Many locomotive manufacturers who took the wait-and-see approach suffered competitively as a result, with some going out of business altogether.
Carriers with outdated claims systems often find themselves in a situation similar to that of steam locomotive builders in the early1920s who saw the benefits of the more powerful, more efficient diesel locomotives, but couldn’t readily respond to the market shift. Encumbered by their massive investments in steam engine production, including previous investments in factories, manufacturers assumed they would slowly transition to diesel locomotives as that technology further developed. Unfortunately, many P&C insurers today remain content to luxuriate with the steam train equivalent of claims systems. They seem blissfully unaware that other options are available to them and are indeed being adopted.
The Engine is Running
Legacy systems—whether running on a mainframe or a client server environment—have rightfully earned the moniker of legacy. They have survived countless upgrades and upheavals over the years, and have been carefully maintained and fine-tuned by programmers and administrators. System workarounds are well known and understood by those who work with and maintain them. They may have ugly interfaces, but they continue to limp along to get the basic job done.
The cost of maintaining legacy systems continues to grow, and these costs are increasingly at the expense of other critical and strategic IT investments. By one estimate, 80 percent of application-related IT costs are tied to legacy maintenance. Large investments to maintain the status quo flies in the face of investing in innovation and the future. Moreover, it’s getting harder to find the people skills to work on the antiquated systems. Many COBOL developers—the language of choice for mainframes—are now eyeing the golden years of retirement. This computer language has virtually disappeared from the curriculum of today’s universities, meaning there will be very few new candidates to replace the vanishing breed of COBOL programmers.
Further complicating matters is the daunting reality that up to 70 percent of current claims adjusters are also approaching retirement. With an acute need to bring more talent into the profession, fewer young people are coming aboard. Deloitte Consulting predicts a shortage of 84,000 adjusters by 2014. Unless carriers can put the technology in place to automate and support key claims functions as well as capture the operational knowledge of their retiring workforce, operations will slow to a crawl and progress and innovation will cease.
The writing is on the wall. If carriers continue to drag their feet, they will soon be surpassed by competitors with advanced claims processes and systems. Adoption of modern, Web-based systems is already past the early adopter stage with insurers of all sizes jumping on board. Carriers that stay on their current platform and watch the technology train leave the station will eventually witness customer dissatisfaction turn into customer defections. Operational profitability will continue to decline—even as modern technology solutions are available, proven and affordable.
Delivering operational profitability and increasing customer satisfaction simply cannot be accomplished with many of the claims infrastructures currently in use. Mainframe-based and other legacy systems have become far too expensive, inflexible and functionally limiting to adequately meet even the most basic demands of the new, and rapidly changing, insurance marketplace.
Modern claims technologies, however, can make a difference in enabling the claims department to be a key driver of operational efficiency and business opportunity. Some industry experts estimate that the application of new, Web-based claims technologies can bring an improvement of four to five points to an insurer’s combined ratio, a key indicator of financial health.
New technology systems have been designed to seamlessly manage the full claim lifecycle—not just one or two pieces of the process. Being Web-based, the system can be accessed from any browser, enabling adjusters to use the system remotely from a disaster scene or wherever their business takes them. The claim file moves from a paper file that can only be accessed by one user at a time, to a virtual file that can be shared with multiple parties simultaneously, e.g. adjusters, supervisors, and litigation and subrogation specialists. Analyst firm Gartner contends that “aggressive insurers” have already begun to invest in advanced solutions that provide “end-to-end claims management.” They are reducing claims leakage and providing superior customer service by “paying claims quickly, accurately and cost-effectively.”
A P&C insurer’s financial performance depends heavily on its claims organization. Combined losses paid and loss adjustment expense routinely account for sixty-five to seventy-five percent of the money flowing out of an insurer. Key areas for claim improvement include:
- Claims Indemnity Leakage—Estimated at an annual rate between 6 to 10 percent of net written premium (NWP) (Sources: Accenture, McKinsey & Co., and PriceWaterhouseCoopers)
- Loss Adjustment Expense Leakage—Inefficient processes, inappropriate use of claims adjusting resources and excessive legal bills, etc. add another 1 to 4 percent of NWP leakage each year. (Source: ibid)
- Claims Adjusting Efficiency—Well above 40 percent of a claims adjuster’s time is spent on activities that do not actively assist in bringing the claim to a prompt and reasonable settlement.
(Sources: Accenture, Tata, and Celent)
- Customer Retention—Satisfaction with claim handling drives 44% of the overall insurer impression by customers who filed a recent auto claim.
(Source: J.D. Power and Associates, 2006 National Auto Insurance Study)
- 4% to 6% reduction in pure losses and 10% to 12% reduction in loss adjustment expense are feasible through the appropriate selection and application of modern claims technologies. This estimate represents a 4 to 5 point improvement in the carrier’s combined ratio.
(Source: Celent, “Technology Enabled Claims Performance Improvement”, September 6, 2006)
The Train is Leaving the Station
Is your claims operation feeling the strain of antiquated claims technologies, high IT maintenance costs and shrinking pools of both legacy system skills and claims adjusting talent? Are you wanting on the train to enjoy a smoother ride?
Consider the fate of the steam locomotive before you decide there’s no urgency to climb onboard with the new generation of claims management solutions. Carriers that have taken the leap are already enjoying a strengthened competitive position through increased customer satisfaction, improved operational expenses, and maximum adjuster and IT staff value. Modern claims technology is also proving to be a recruiting aid—attracting a generation of employees accustomed to a browser-based world for whom green-screen legacy systems would simply be intolerable.
Those that invest in the ticket for a journey on the train of change can face the insurance industry future with a highly efficient claims organization—one in which adjusters are freed from unproductive tasks and enabled to invest their time and know-how on ensuring the highest quality customer service and the most appropriate claims outcomes. That is a winning value proposition for the carrier and the insured alike.
is product marketing manager at San Mateo, California-based Guidewire Software
, a provider of core solutions to the property/casualty insurance and workers’ compensation market. Mahoney, a 21-year insurance-industry veteran, can be reached at email@example.com