The Consultant’s Perspective:A Fresh Look at

Controlling Claim CostsBy: Michael T. Murdock, CPCU, ARM, ARe, ACI

P&C Practice DirectorThe Nolan Company

June 21, 2013

• Historically low interest rates – Combined Ratio impact • Reserve redundancy industry-wide at YE 2011 at 2 - 4%

(excluding asbestos and environmental)

• Reserve releases will continue to taper in 2013 for accident years 2003 – 2007(1.43B in 2012)

• Insured natural catastrophe losses in 2012 (US) > $58B well above the 10 year average of $27B

• Continued rate increases across many lines of business• Will rate increases exceed claim cost inflation?• How can a “quality-driven” claim operation positively impact

results?

Issues Facing the Industry – Claim Impact

Source: Moody’s3

• Combined Ratio components impacting results: Managing Loss Costs Controlling ALAE (DCC) Controlling ULAE (A&O)

• Evaluate (5) Key Drivers in the claim operation affecting results: Human Resources Technology Claim Handling Processes & Workflow Vendor Management

• Identify opportunities for improvement within each Key Driver• Analyze results and take corrective action

How can claim operations improve profitability?

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Focus on Improvement – Not Cost Reduction

• A well managed, efficient and engaged claim operation can save 2 –4 points off the combined ratio

• Simple cost reduction in budgetary and vendor expense areas will not achieve optimum results

• Look at the underlying causes of loss and expense costs• Engage your departmental staff in a project to identify opportunity in

Key Drivers and implement improvement plans• Avoid the creation of “special programs” – need full staff engagement

and nothing should be “off-limits” in the review process• It may “take money to save money” but be prepared to support the

cost benefit analysis (i.e. technology improvement)• Be prepared to make operational, technological, process and staff

changes – expect “change management” challenges

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• People are your most important asset!• Most critical position – Claim Analytics• Effective hiring practices • Internal and external training for experienced staff and trainees• Outsource vs. insource• Core adjuster competency affect results (+/-)• Match skill level to claim level• Fast-track claim models• Use of claim call center• Meaningful metrics - look at what matters • Centralization vs. Decentralization

Key Driver – Human Resources

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• Impact of technology on productivity (+/-)• Impact of technology on operational processes• Most new claim systems require “customization”• Is your claim system allowing adjusters to be efficient?• Adapting technology to a changing environment: new vs. old • Use of Predictive Analytics to improve results:

Predictive modeling in fraud prevention Textual mining Improved decision making, adjuster performance & settlement

outcomes Early detection of adverse claim developments Provide strategic insight

• Use of Mobile technology – claim reporting and adjuster tool• Effective use of claim management reporting and metrics

Key Driver – Technology

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• Fundamental core claim activities: Claim investigation – critical impact on results and reserves Damage evaluation process Liability evaluation - application of “comparative negligence” Effective settlement negotiations – ranges and potential overpayments Recovery

• Reserve management: Timeliness / Accuracy Adverse impact of both redundancy and deficiency

Litigation management: Form over substance – not working and increases costs Adverse affects of litigation on both Loss and ALAE Use of ADR options

• Fraud Management: Changing landscape on approach Use of Analytics

Key Driver – Claim Handling

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• Use technology to improve operational efficiency and productivity• Prepare and analyze process workflow maps – they provide critical

information on efficiency and inefficiency• Convert manual processes to automated processes• Using several systems simultaneously negatively impacts productivity• Eliminate manual “work-arounds” resulting from technology

implementation• Listen to the staff’s system complaints – they cost money!• Eliminate paper and printing – it is costly and impacts productivity• Revise manuals and processes to improve efficiency and avoid costly

mistakes

Key Driver – Process & Workflow

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• Re-evaluate vendor pool of resources: quality and pricing• Negotiate creative pricing which aligns business interests• Use a vendor cost-benefit analysis approach: continued

outsource or insource?• Limit the number of vendors to maintain leverage• Implement vendor SLAs• System integration/interface with vendors to improve

efficiency and productivity• The impact of litigation expenses requires a critical

analysis in every claim operation

Key Driver – Vendor Management

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• Review all aspects of the organization to identify cost reduction• Ratios are important (Loss, LAE, etc.) but need to look at the dollar

amounts to develop target objectives and monitor progress• Your claim operation can save 2 – 4 points off the combined ratio• Mitigate loss costs with improved quality claim handling• Focus on operational improvements and not simple “cost cutting” –

understand root causes• Improved technology and use of analytics is the future of claim

operations• Process and workflow analysis will yield expense reduction

opportunities• Human resource and vendor management are critical for success

Summary

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QUESTIONS

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