Managing the Monster

Social inflation is not a new concept—Warren Buffett warned shareholders about it back in 1977. In recent years, though, there have been noticeable changes, including the “significant rise in the number of claims that are being pursued through courts, as well as the sharp increase in the level of compensation,” according to Jeff Rieder, partner at Aon STG Benchmarking Advisory Practice, who spoke about social inflation during a recent CLM "CCO Discussions" webinar titled, "Improving Litigation Avoidance: Best Practices for Leveraging Quality Data."

Co-presenter Katie Henry, managing consultant, Strategy and Technology Group at Aon, adds, “We know litigation is on the rise; we know it's on the rise over the last four years. Insurance litigation is up over 47%.”

Rieder says the implications of social inflation are far-reaching and include company solvency as some insurers get hit with large Nuclear Verdicts; policies, procedures, and programs insurers put in place to deal with social inflation, such as policy forms and training or education of claims staff; and higher reinsurance costs.

The question remains, what can be done to mitigate the impact of social inflation? One key strategy that Henry outlined is the development of robust quality assurance programs. The purpose of a quality assurance program, notes Henry, is to gain the proper insights through data (and the appropriate quality assurance tools to collect that data) to identify both litigation drivers and key points throughout a claim’s lifecycle where intervention can help manage the ultimate cost. From there, insurers can establish best practices around training, communication, and investigation.

“Where do good claims go bad? How do they go off that path?” asks Henry. “How does it escalate, and where can we help intervene? There are multiple points of intervention we know of over the life of the claim, [and] quality programs can help you [manage] that.”

Communication and the Claim Timeline

Henry discussed key points throughout the life of a claim where identifying opportunities for intervention can help improve outcomes. “We know when we get involved on a litigated claim, the sooner, the better, right?” says Henry. “If we get notice of suit, we’re already way behind, and it's really hard to react to those types of losses. So, what can we do to avoid litigation?”

Communication is key, Henry notes, and that starts from the first notice of loss and interactions with the injured party. “If we’re having poor communication with our injured party—we’re not keeping up with contact because [of an inexperienced or overworked adjuster]—is there technology that can help intervene with that communication?” She mentioned alerting systems and texting programs as examples of technology that could help in this area.

Henry also discussed the point in a claim where an insurer may want to settle with an injured party. “We know we’re liable. We know where we want to land as far as what this claim is worth, but we [need] to have those communication skills to negotiate.” The key at this stage is negotiating with the attorney, and communicating in the right way at the right times is critical. “The breakdown can happen at this point too,” Henry notes. “So, again, [what] different points of intervention [can we] identify through a quality program?”

Continuing up the escalation of the claim, Henry says that when negotiation with the attorney fails, a suit is filed. “Can we still avoid litigation at this point? We all know the answer is yes. We can still avoid it before we have to hire our defense counsel and go to trial. That is the last, worst-case scenario. We don’t want anything to go to trial because then we have to deal with…the social inflation, Nuclear Verdicts,” and juries that are more willing to support higher verdicts.

Identifying the Key Intervention Points

As Henry noted, all along the claim timeline there are intervention points, and, if insurers recognize these points, different strategies and best practices can be developed around them. 

Henry says, “If we don’t have clear best practices, that’s a breakdown.” Insurers, from the first notice of loss, need to set expectations with claimants, explain the claims handling process, and keep claimants informed throughout the process. “Once that breaks down, [claimants] seek communication from other places, and that’s through plaintiff attorney ads on TV, billboards, and letters.”

Understanding, identifying, and developing communication training around these intervention points is part of an effective quality assurance program. It starts with analyzing claims data through quality assurance tools to identify intervention points. From there, best practices and proper training ensure claims professionals can act on the data insights and, ultimately, avoid costly litigation.

What Does a Quality Assurance Program Look Like?

Whether it is a breakdown in communication or some other factor, a quality assurance program allows claims departments to identify litigation drivers across different types of claims so they can address those drivers through appropriate training of adjusters and managers.

This begins with compiling the appropriate data through a quality assurance tool. How can insurers drive a claim to a good outcome and avoid litigation across the entire claim timeline? An effective quality assurance tool, says Henry, will help insurers gain the necessary insights. “It’s going to break it down by phase level—are we dropping the ball at contact? Is it settlement negotiations? What is our trending looking like? Can we compare our adjusters? Where is the performance improving? Can we use mentor groups? We have really good performers over here. What are they doing, and how can we tie that back and bring up our poor performers? Is it staffing? Is it technology? Is it process?” Measuring the right information with a quality assurance tool will help answer those questions.

But quality assurance goes beyond collecting data and doing reviews. Henry says, “What do you do with all of those metrics? It should come back to your training, coaching, and development program. If we’re bringing in an inexperienced claims handler…how do we train [that professional]…for litigation avoidance?”

She adds, “We want to train our most inexperienced—our entry level—claims handler to avoid litigation from day one.”

Finally, a quality program will assess adherence against the best practices established, which will help determine the causes of any shortfalls. As an example, Henry says, “So if our timely contact is four hours, our question is, were contacts made timely?

“And what am I going to get out of that? I'm going to determine, is our staff overworked, truly? Is it a technology issue? Can I not get back to people in a certain amount of time because I have too many claims, or are there too many roadblocks in my process and my day-to-day? Do I have too many clicks, too many systems?

Henry adds, “There are so many insights that you can glean from a quality program, and having those steps in line is going to help you get more effective in developing out your litigation avoidance policies.”