Cutting the cost of insurance claims: Taking control of the process

Gaining control over claims can reduce an insurer’s costs significantly, yet often comes at a price. Any attempt to introduce more competition, such as bidding auctions, is likely to meet with resistance from service providers accustomed to calling the shots. Some insurance companies have even chosen to take complete charge by managing the end-to-end process in-house, but this strategy requires a big investment and brings added complexity. Taking a more enlightened approach, insurers should try to align their commercial practices with those of repairers or other providers. In addition to giving suppliers more assurance of future work — such as preferred supplier lists — they should come up with creative ways to reward good cost performance. Some may even want to enter into closer partnerships to tackle specialized types of claims.

Many insurance companies are not making the most of the vast amount of information at their disposal. Benchmarking and other forms of analysis can provide greater understanding of the true drivers of costs, enabling firms to compare the costs of different providers or predict the risk of a large payout for a claim. Insurers are also failing to exploit the talent at their disposal, viewing the claims department simply as a back-office, transaction-based function. By gaining a better understanding of the risks and costs of claims, and prioritizing accordingly, claims professionals will be free to take on a more strategic role, focusing on higher-value work. Such a step forward may require further investment in systems support, but should help insurance companies achieve the control they seek.

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Claims are the heartbeat of insurance

A claim is the defining moment in the relationship between an insurer and its customer. It’s the chance to show that the years spent paying premiums were worth the expense. If a claim is handled well, retention rates may rise. If handled poorly, the insurer may not only lose the customer, but also damage its wider reputation.

Commercially, claims represent by far the largest single cost to insurers; up to 80 percent of all premiums are spent on claims’ payment and associated handling charges. By keeping these costs under control, an insurance company can price competitively without sacrificing margins.

However, there’s a delicate balance between reducing expense and giving customers a positive claims experience. Seeking multiple supplier quotes may get you a better price, but can also be very time consuming, especially if the claimants themselves have to chase and approve the estimates, leading to a negative customer experience. At the other extreme, without sufficient controls on liability and claims costs, insurers can pay too much to service providers, or even unknowingly make payments for fraudulent claims.

The often adversarial relationship between suppliers and insurers can also hinder efficiency, because those carrying out repairs or other services have no real incentive to cut their costs.

With its knowledge and experience, the claims handling team has the potential to make a big contribution to improving performance. Unfortunately, this area has traditionally been seen as a low-status, back-office function focused purely on transactions. This perception is slowly changing, as insurers recognize the value in taking greater control of the whole claims process and using sophisticated, risk-based decision-making techniques.

Five issues for insurers

To keep both service providers and customers happy, and to return healthy profits, insurers need to address five key issues: (1) taking greater control of the claims process; (2) understanding your customer; (3) choosing the right claims model for your business; (4) developing a mutually beneficial relationship with service providers; and (5) gaining an information advantage.

Creating a 21st-century claims model

To reap the benefits of greater control, insurers will have to rethink the whole role of the claims department, which has traditionally been considered a relatively low skill area focusing on (often manual) transactions. Until the function is seen as a core part of the customer experience that can bring real value to the business, insurers will continue to view it as a back-office function.

In building a 21st-century claims model, insurance companies have to consider the supporting business processes. These provide the allimportant data that enables claims professionals to make effective decisions.

Staying in the driver’s seat

Investing in greater control over claims can be an expensive business, and may meet considerable resistance from service providers anxious to preserve their margins. The alternative for insurers is to remain at the mercy of repairers, builders, and clinicians who have no real incentive to seek low-priced supplies, and who provide little transparency in costs.

The use of more aggressive approaches such as auctions can lower costs dramatically, but may also upset service providers and can even lead to boycotts. A preferred supplier list may be received more favorably, however, because it gives repairers and builders more assurance over work volumes.

To maintain a win-win relationship with service providers and intermediaries, insurers need to understand and work with these partners’ business models, and reward good performance. This may take the form of additional work and higher agreed-upon margins. A further approach is to create groups of providers specialized in a narrow range of activities, increasing efficiency and lowering costs.

In taking control of the customer experience, insurance companies should consider the claims model that’s appropriate to their market position. Moving from a position of low to high control is costly and adds to complexity, so may work only for those with a large market share.

The industry is awash with data, but it isn’t always used to best effect. A more systematic use of benchmarking can help insurers spot good and bad cost performance and react accordingly. And data-mining techniques can help predict the risks and costs of new claims, enabling the insurer to segment high and low risk exposures, devoting more resources to the former.

To make these gains, the claims function needs to step out of the shadows of the back office, to be viewed as an important strategic activity with the capacity to add real value to the business. Claims are the heartbeat of an insurance business and can deliver huge value both in reducing costs, which can be passed to customers in lower premium prices, and in being the “moment of truth” in the customer value proposition and experience.