UK: Taking Claims To The Next Level

Claims management is emerging as an increasingly critical competitive differentiator in the face of mounting margin pressures and ever more exacting customer expectations. Simon How, Paloma Jiménez Baena and Juan José Noguera Romero look at how innovative approaches to customer segmentation and supplier management being developed in Spain and the UK could help insurers across Europe to reduce claims costs, enhance service and strengthen operational control.

With claims costs typically accounting for around 80% of insurers’ operating expenditure, effective management has always been crucial. The pressure for even tighter control of costs has intensified in recent years in the wake of fierce price competition, escalating claims inflation and the resulting squeeze on combined operating ratios, margins and returns.

Looking ahead, these challenges can only grow. In particular, the impact of rising building expenses, motor repair costs and personal injury payouts is being compounded by an increasingly litigious environment.

Climate change could add further loss and uncertainty by increasing the potential frequency and severity of subsidence, flood and windstorm damage. The heightened risk of aggregated losses for volume property insurers was highlighted by the floods in the northern English city of Carlisle in 2005. These flood-related losses, were the worst in the UK for nearly a century. Looking ahead, research by the Association of British Insurers concluded that annual insurance losses from flood damage in Europe could increase by e100-120 billion by 2080. The cost of severe windstorms (1 in 250-year events) could rise by at least e25-30 billion.¹ These claims losses could be compounded by a higher cost of capital for an insurance industry facing the uncertainty and earnings volatility of an ever more unpredictable climate.

Over and above the cost, insurers now increasingly recognise claims as a vital ‘moment of truth’ in the customer relationship. While an ‘enjoyable’ experience can help to cement the ‘lifetime’ association and open up opportunities for profitable cross-selling, delays or poor handling can erode satisfaction and jeopardise retention.

Many leading companies have responded to these competitive challenges through a more systematic approach to claims management aimed at driving down costs while enhancing service and speed of settlement. Key objectives include improving the accuracy and consistency of reserving through closer coordination with actuarial and underwriting teams. Many claims teams are also seeking to focus resources more effectively by automating routine business and so allowing staff more time to devote to complex files. Underpinning all these developments is investment in staff training and more effective management information.

Harder to control

However, many insurers continue to find it difficult to apply this more systematic claims model to the management of third-party arrangements including such costly areas as repairs, replacement and professional fees.

An area that has proved especially problematic is the control of litigation. In particular, it may be difficult to impose a clear and consistent approach as to which cases should be settled out of court and which should be pursued through legal channels, especially for larger companies that maintain an often extensive panel of external lawyers. In many instances, this lack of direction results in avoidable litigation, hefty legal bills and lengthening claims backlogs.

The potential for delay was highlighted in a survey of UK insurers writing volume property and casualty business, which was carried out by PricewaterhouseCoopers in the autumn of 2006.² Among the key findings was the wide divergence in the time taken to settle comparable claims, indicating that some firms may be able to maintain better control than others. For example, while some 40% of participants were taking Taking claims to the next level between 101 and 500 days to finalise a bodily injury claim, a quarter generally needed 500 or more.

The survey interviews also revealed a strong desire for a less adversarial and expensive system of settlement. ‘The legal profession must recognise that the 40%-plus costs of transferring compensation from insurers to deserving claimants cannot be sustained,’ said one participant. While the survey focused on the UK, these issues and concerns are likely to resonate across Europe.

The right choice

A common response is to encourage staff to settle more cases out of court and so help to avoid the time and expense of legal proceedings. However, this could create as many problems as it solves, as the motor claims experience of a leading Spanish insurer highlighted. In particular, while the company’s average legal expenses per claim were significantly reduced by this proactive approach to settlement, the savings were more than offset by an increase in both payouts and the number of claims. It would appear that a more amenable approach to early settlement may have heightened the company’s vulnerability to more frequent, exaggerated or even fraudulent claims.

To help overcome this problem, the company worked with PricewaterhouseCoopers to analyse more than 15 0,000 motor claims. This research is now being used to help staff distinguish the claims which are most likely to be genuine and therefore can be settled out of court from those that may need to be investigated or contested. The choice draws on a number of telling variables identified in the analysis of past claims, including age, location and type of car.

Such analysis is a natural extension of the identification and segmentation of behavioural patterns that are now routinely used in developing differentiated client marketing and service models. Its deployment in the claims field can therefore not only reduce costs and speed up the payment of genuine claims, but could also help to integrate claims into wider business planning and customer relationship management.

Comparable claims analysis can also be used to rate the performance of the lawyers themselves, along with other third-party service suppliers such as mechanics and doctors. For example, through examination of medical expense claims, the insurer in Spain was able to evaluate some 50,000 doctors that had received payments for treating its clients. The resulting performance and value-for-money ratings enabled the company to draw up a list of 2,000 preferred doctors that are now used in most cases. A smaller panel can be more cost-efficient and easier to manage. Selecting only the best doctors also, of course, guarantees better treatment for clients.

Cutting out the middleman

In the UK, the margin and customer retention pressures have been heightened by the soft rating environment. Use of technology and other key aspects of claims management are already generally advanced, forcing companies to find fresh ways to further cut costs and improve service. One solution has been the direct sourcing of home, electrical and other replacement products, which enables the insurer to benefit from wholesale economies of scale. Many insurers are also taking on the management of repairs, an approach that not only offers potentially lower and more predictable costs, but also a guaranteed service for customers.

These developments have paved the way for the growing convergence between insurers and service providers. In 2005, Aviva acquired the RAC, a company offering a broad range of motoring services including breakdown support, vehicle checks and driving lessons, along with insurance. Recent years have also seen the emergence of companies like Homeserve, which provide ‘branded’ plumbing, electrical and other home services for partners that include utilities and insurers. Such businesses are now believed to be looking at possible openings in Continental Europe.

Yet, while claims strategy in the UK is evolving, it is notable that the PricewaterhouseCoopers survey found that many participants may be failing to leverage this ‘moment of truth’. In particular only a third of respondents firmly believe that when a claim is paid, they maximise the relationship potential with the customer.

Leading the way

Claims efficiency is now at the forefront of the rapid evolution of the European insurance marketplace. Having moved their internal claims functions to a more competitive cost and service footing, many leading insurers are now looking at how to improve the value and performance of external services in areas ranging from professional fees to repair and replacement.

In Spain, the extension of segmental and behavioural analysis to claims experience could help to provide a more informed and proactive approach to the management of professional and other services. In the UK, claims functions are increasingly evolving into supply and service providers in their own right, including managing price and quality control for their clients.

While such developments can enable insurers to square the competitive circle by delivering higher service quality at lower premium prices, they require scale. In particular, it would be difficult for a smaller company to replicate the huge bulk-buying reductions that are giving larger firms such a vast cost advantage in supplying repair, maintenance and replacement. As claims and other aspects of the insurance value chain become more commoditised, larger companies may also have more scope to market higher-value-added financial and service contracts to their clients.

Footnotes