Property & Casualty: Deterring Claims Leakage in the Digital Age

Change is on the horizon for one of P&C’s most stubborn problems. Here’s how insurers can ready their organizations — and capitalize on the benefits.

Executive Summary

The insurance industry estimates that leakage,

defined as the difference between what is paid out

on a claim plus expenses and what should have

been paid, is from 5% to 10% of claims paid annu-

ally. Leakage is attributed to a lack of adherence

to industry best practices — in other words, mis-

steps committed by the adjuster handling the file.

Closed file reviews, today’s chief line of defense,

are effective at identifying where leakage is occur-

ring and which behaviors need to be reinforced.

However, since these reviews are conducted after

the fact, the dollars are already lost.

New technologies can help. Advancements in big

data, text analytics and business rules technolo-

gies now allow claims executives to deter leakage.

Namely, they can audit claims in progress against

a broad range of criteria, to identify missteps as

they’re occurring and allow for course correction

prior to settlement. Moreover, insurers can decide

which audit criteria are important to them, and

they have the flexibility to make changes without

IT support.

This white paper will explore the main factors

contributing to claims leakage, the growing com-

plexity of claims handling, and how to leverage

the new generation of big data platforms and

advanced analytics to reduce claims leakage.

Cognizant 20-20 Insights | April 2018

COGNIZANT 20-20 INSIGHTS

Property & Casualty: Deterring Claims Leakage in the Digital Age | 2

CLAIMS’ LONG AND WINDING — AND BUMPY — ROAD

Claims organizations are set up to follow an

orderly sequence of steps: Claims are investi-

gated, evaluated and then settled. This linear

sequence is often lengthy, with room for nuance

— and error. For example, adjusters might approve

medical treatments without following the guide-

lines to first seek a second opinion. They might

engage a third-party expert when it’s not called

for — or fail to hire one when it is.

Claims leakage results from a disconnect between

those orderly steps. Leakage is the difference

between two important points: the cost of actual

claims paid plus expenses, and the amount that

should have been paid plus expenses had best

practices been followed. It’s a stubborn problem

that costs insurers hundreds of millions of dol-

lars annually. In the P&C industry, conventional

wisdom puts the yearly tab for leakage between

5% and 10% of claims paid.

At the root of the leakage? The independent

nature of claims handling. While adjusters are

pivotal to claims’ success and expected to follow

best practices, they typically work autonomously,

often shouldering the twin pressures of large

caseloads and mandates to move claims expe-

ditiously. The fast pace of the claims workplace

can stymie the coaching efforts of even the most

dedicated claims managers.1 Complicating mat-

ters, most carriers’ legacy systems offer limited

visibility into adjusters’ behavior.

UNDER PRESSURE, BEST PRACTICES BECOME CASUALTIES

As a result, shortcuts along the claims lifecycle

can seem necessary, and so best practices often

become casualties. The outcome is unneces-

sary costs in allocated loss adjustment expenses

(ALAE), unallocated loss adjustment expenses

(ULAE) and indemnity (see Figure 1, next page).

Mistakes can happen. In our work with insurers,

they tell us that failure to adhere to best practices

is the most common driver of claims leakage. File

missteps range from incomplete investigations

and lax vendor management to hastily prepared

settlement strategies. For example, an adjuster

might sidestep developing a formal negotiation

strategy in favor of settling at the top end of

the range, or approve treatment for a workers’

compensation claim without first obtaining an

independent medical evaluation (IME).

Adjusters aren’t the only ones under pressure.

Claims organizations perennially feel the heat to

do more with less, regardless of how well they

perform against targets or execute claims-sys-

tem upgrades and other resource-consuming

transformation initiatives. Given P&C carriers’

modest 3% CAGR,2 the call to reduce costs is a

steady drumbeat, and claims organizations are

typically the focus. For claims executives, there

are three certainties: death, taxes and the neces-

sity to do more with less.

Leakage is a stubborn problem that costs insurers hundreds of millions of dollars annually.

Cognizant 20-20 Insights

Property & Casualty: Deterring Claims Leakage in the Digital Age | 3

Drivers of Leakage

ALAE

Engagement of Third-Party Services• When not required given loss facts.

• No business case and no identification of benefits.

• Failure to engage in cases where recommended.

Selection of Non-Preferred Vendor• No business case.

• No engagement letter to confirm rates and responsibilities.

Vendor Management• Failure to manage proactively.

• Inadequate communication and follow-up.

ULAE

Workload Management• Inadequate visibility into adjuster workload.

• Re-acclimation of loss facts and prior discussions.

• Task assignment to inappropriate skill/cost resource.

File Reassignment• Missed loss facts at notification.

• Ineffective segmentation/file assignment schema.

Productivity Drags• Ordering unnecessary reports and time spent on review.

• Errors and reworks.

• Unnecessary approvals.

INDEMNITY

Coverage Determination

• Failure to escalate potential coverage issues.

• No investigation of other potential available coverage for the insured

and other parties.

• Failure to address incoming risk transfer requests.

Attorney Representation• No timely contact with insured or claimant.

• Poor relationship-building.

Liability Determination• Incomplete investigation.

• Decision without supporting documentation.

Missed Subrogation Opportunity• Missed referral.

• Lack of thorough investigation.

• State of file doesn’t support subro arbitration or litigation.

Source: Cognizant

Figure 1

Cognizant 20-20 Insights

Property & Casualty: Deterring Claims Leakage in the Digital Age | 4

THE FIRST LINE OF DEFENSE: PROMOTING THE RIGHT BEHAVIORS

Claims organizations’ first measure against

leakage remains advancing best practices.

Well-documented policies and procedures elimi-

nate guesswork among managers and adjusters

and help promote the right behaviors to drive the

right results.

Traditional closed-file reviews are the next best

action. They identify errors and trends, and

allow managers to refocus training and mento-

ring efforts. During the review process, internal

QA teams probe claims files for, say, evidence of

proper documentation for an independent anal-

ysis on liability. They audit for establishment of

a business case prior to engaging a vendor, and

evidence of proactive vendor management. Did

adjusters apply sound judgment or simply go

through the motions? Is there evidence of strate-

gizing for a successful outcome?

The reviews are useful, but most are manual and

typically conducted on only a small number of

files. Carriers often engage independent third

parties to perform more comprehensive leakage

studies on larger claims samples.

Closed-file reviews and leakage studies add value,

yet both types of audit share the same weakness:

They focus on claims that have been paid. They

examine what has happened rather than what is

happening. The dollars are already out the door.

CLAIMS ADMINISTRATION SYSTEMS: SMALL STEPS IN THE RIGHT DIRECTION

Claims administration (CA) systems offer a mea-

sure of assistance for deterring leakage. These

systems’ core focus is workflow automation and

assigning the right activity to the right skill set.

By minimizing human involvement, they bene-

fit claims organizations on the lookout for cost

efficiencies. But they open only a limited window

into potential missteps on in-progress claims.

In many respects, the systems serve as the back-

bone to optimizing the claims management cost

structure. The carriers that derive the greatest

benefits are those that have taken the time to

understand how adjusters spend their time, and

that redesign claims-handling processes to route

activities to resources with the right level of skill.

They’ve formally delineated roles and responsibil-

ities between adjusters and processors so the CA

system shifts work to the lowest-cost resource.

One unintended consequence of CA systems is

that they create an environment in which the

claims process can feel mechanical. Our clients

tell us that, while useful, CA systems contribute

to adjusters’ decreasing emphasis on outcomes.

Rather than strategizing on how to generate suc-

cessful results, adjusters tend to focus on the

steps that the system assigns. The emphasis is

on clicking buttons and closing out activities,

especially among junior adjusters. Too often a

successful outcome is merely one in which all the

boxes are checked.

Closed-file reviews and leakage studies add value, yet both types of audit share the same weakness: They focus on claims that have been paid. They examine what has happened rather than what is happening. The dollars are already out the door.

Cognizant 20-20 Insights

Property & Casualty: Deterring Claims Leakage in the Digital Age | 5

EMERGING TECHNOLOGIES CONVERGE TO REDUCE CLAIMS LEAKAGE

Perhaps paradoxically, emerging digital technol-

ogy can restore the focus on human-centered,

successful outcomes — and prevent leakage

errors. Digital technology is already helping

claims organizations quickly evaluate new solu-

tions’ benefits. Now it’s opening a real-time

window into claims files.

For P&C carriers, the change is dramatic and long

overdue: The new technologies enable carriers

to perform digital audits on in-progress claims

with the same rigor and discipline as closed-file

reviews — but before settlement. What’s more,

while closed-file reviews are limited to a dozen or

so claims per adjuster, digital audits provide real-

time visibility into thousands of ongoing claims.

What’s behind the breakthrough? Three core

technologies converge to make it possible:

• Big data analytics: Big data refers to data sets

so large and complex that traditional data pro-

cessing software is unable to capture, manage

and process the data within tolerable time-

frames. Advancements in data management

platforms allow such large data sets, common

with P&C claims, to be searched for patterns,

trends and associations — especially relating to

human behavior. That’s good news for claims

organizations. For years, their only option

was to run reports and then manually pore

over them. Big data platforms enable them to

perform the same tasks on in-progress claims

quickly and efficiently. Analysis becomes more

strategic, technical and specialized.

• Text analytics: Advances in text analytics

maximize the utility of claims organizations’

voluminous stores of data. Analytics tools can

search through and extract words and phrases

from anywhere in a document, whether the

data is structured or unstructured.

Claims audits get a boost from text analytics

in two key areas. One is the review of adjuster

file notes to search for key words to identify

issues or to assess if meaningful progress is

being made on a file.

Text analytics also boosts the ability to

burrow through the unstructured data that’s

abundant in P&C claims. When digitized,

information submitted through medical bills,

records and ACORD forms converts from

unstructured to structured data. It becomes

searchable. In a workers’ compensation claim,

for example, text analytics can search medi-

cal records for treatments unrelated to the

workplace injury, such as comorbidity and

preexisting conditions.

• Customizable rules engines: The advent of

digital rules engines enables carriers to quickly

and easily audit any condition for which data

is available. For an auto claim, for example, an

insurer might audit for file inconsistencies,

such as the insured being deemed more than

50% at fault even though the other vehicle

was making a left turn. Equally significant

for claims organizations, rules engines work

separately from CA systems’ core application

code. Business users can modify rules without

disrupting the application code — and with-

out the need for IT skill sets. That efficiency

is a key advance for claims organizations.

Claims executives can write the rules that are

important to them, and make changes with-

out having to take a number and get in line

behind other pressing demands placed on IT.

New technologies enable carriers to perform digital audits on in-progress claims with the same rigor and discipline as closed-file reviews – but before settlement.

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LOOKING AHEAD: HOW CARRIERS CAN START PLUGGING LEAKS TODAY

The convergence of new technologies for real-

time digital audits will help P&C carriers achieve

the cost reductions they need to improve bot-

tom-line performance. It closes the gap between

strategy and action.

What can your organization do today to deter

claims leakage and prepare for the advent of dig-

ital audits?

• Examine the causes of leakage in your orga-

nization, and begin identifying the issues

you’ll want to audit for. Digital audit flexibil-

ity means your organization’s claims function

can prioritize any leakage areas it chooses.

(For some of the most common, see Figure

1 on page 3.) If there’s data for an attribute,

it can be audited. Looking for evidence of

adjuster engagement? By spotting key words

or string text within file notes and data fields,

text analytics can audit for well-thought-out

plans of action (POA) and continued progress

at 30-, 60- and 90-day intervals. Similarly,

multivariate data analytics can audit for

inconsistencies that indicate errors in analy-

sis, judgment or data entry. The unstructured

data that’s abundant in P&C claims becomes

searchable when digitized, so claims functions

can audit medical records for, say, treatments

unrelated to workplace injuries.

• Start preparing your managers. The rebal-

ancing of claims managers’ priorities is

overdue. It’s not uncommon for today’s manag-

ers to have 10 adjusters reporting to them, and,

depending on the line of business, responsibil-

ity for more than 1,000 claims. What’s more,

while industry best practices recommend man-

agers spend four to six hours daily reviewing

direct report files, studies show most devote

fewer than three hours.3 Digital audits are set

to be a catalyst for positive change, providing

managers a more comprehensive, data-driven

approach for identifying problematic claims.

How will managers reboot their workdays?

• Keep coaching a priority. Managing claims

in the digital age won’t be just about tech-

nology. Promoting the right behaviors that

drive the desired results will remain carriers’

primary path to optimal claims outcomes. Dig-

ital technology will aid that effort, providing

greater visibility into adjuster strengths and

weaknesses and helping to create a continu-

ous cycle of assessment, measurement and

improvement that stands in stark contrast to

today’s reliance on closed file reviews.

• Consider small improvements along the

claims lifecycle to stem leakage losses.

Based on our client engagements, we esti-

mate carriers’ 5% to 10% leakage breaks

down as follows across the claims lifecycle,

although it can vary by carrier:

Ĕ 2% – 4%: ALAE Ĕ 1% – 3%: ULAE Ĕ 3% – 4%: Indemnity

Given that leakage costs can total hundreds of

millions of dollars, even small improvements rep-

resent significant savings. Carriers can begin to

whittle away at leakage by promoting behavioral

changes among adjusters, such as more appropri-

ate, proactive selection of vendors. Quantifying a

business case for vendor engagement is the kind

of routine practice that’s often overlooked. Rein-

forcing such practices can help carriers begin to

trim leakage costs.

Cognizant 20-20 Insights

Property & Casualty: Deterring Claims Leakage in the Digital Age | 7

Digital audits are set to be the catalyst for positive change, providing managers a more comprehensive, data-driven approach for identifying problematic claims. How will managers reboot their workdays?

Cognizant 20-20 Insights

Property & Casualty: Deterring Claims Leakage in the Digital Age | 8

FOOTNOTES

1 www.propertycasualty360.com/2016/12/13/here-are-the-results-of-the-2016-claims-salary-sur

2 www.iii.org/presentation/p-c-insurance-industry-overview-and-outlook-082316

3 www.towerswatson.com/en-SE/Insights/Newsletters/Global/emphasis/2015/how-to-become-a-triple-threat-pc-claim-department

Mark Wassel Claims Leader, Cognizant’s Insurance Practice

Mark Wassel is claims leader for Cognizant’s Insurance Practice,

responsible for the mobilization of digital claims solutions. Mark has

over 15 years’ management consulting experience, architecting and

leading business transformation initiatives for P&C claims. He can

be reached at Mark.Wassel@cognizant.com.

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