Insights from The Lab

Insurance claims transformation: Successfully reducing insurance operating costs, claims leakage and claim severity

Article by : The Lab Consulting

If you’re looking to reduce the loss ratio in your insurance business, there’s no better place to start than the claims process. Contrary to prevailing opinion, claim severity can be reduced by standardizing the processes in your claims handling operations with lean insurance management methods and non-technology improvement. In fact, you can realize significant claim severity and claims leakage improvement, while successfully reducing insurance operating costs.

In this article, we’re going to look at the lean insurance transformation opportunity which exists in your claims operations. The information we’ll present here is all drawn from real-life engagements which The Lab has worked on for numerous insurers across the country. And if you think these stories don’t apply to you, know that they’re drawn from insurance claims-processing operations spanning all lines of property and casualty, automotive, homeowners,’ supplemental life and health insurance, disability income insurance, commercial auto, nonstandard auto… the list is as big as the industry itself.

The enduring dilemma of claim severity and reducing insurance operating costs

Everyone knows that it’s in the insurance company’s best interest to settle a claim expeditiously, from first notice of loss through closure. You certainly don’t want a claim to drag out and, say, let a claimant be unduly influenced by some attorney’s TV commercial or a friend’s war story. The faster you can settle, the lower the claim severity—and the lower the impact on your insurance claims handling costs.

As we said, everyone knows that. But then why is there a prevailing bias in the industry against fast adjusters? We see it all the time: Insurance companies believe that if you, as an individual, are processing claims too quickly, then you’re naturally going to be too generous and contribute to increased claim severity. The more insurance claims you process, the more money goes out the door.

Spoiler alert: we’ve found the exact opposite to be true. But before we explain that, we realize that there’s some background to this bias, which we’d like to address and, frankly, dismantle.

How to reduce the loss ratio in insurance: Use lean insurance claims transformation to drive down claims leakage and claim severity

There are two issues which we routinely encounter at our lean insurance claims transformations, both of which feed the perception of a trade-off (which is entirely false) that “productivity sacrifices quality.”

The first issue is that the productivity itself is never sufficiently scrutinized. When we are brought in to help transform an insurer’s claims-processing operation, one of the first things we do is capture the “as-is” of the company’s key performance indicators or KPIs which are crucial to insurance claims operations transformation and the reduction of claims leakage.

Shockingly, we’re the ones who must do this. While the insurance companies always have lots of data, it’s typically in the aggregate. It’s not expressed as work-to-time ratios (“Who did how much today?”) that can be used to drive improvement. So there’s a lack of visibility. Without the right KPIs implemented, successfully reducing insurance operating costs becomes nearly impossible.

The other issue we encounter is more of what we’d consider an insurance claims operations cultural bias. This says that claims-processing is an art. Thus it takes lots of time. It can’t be standardized. It can’t be simplified. It can’t be industrialized.

Nothing could be further from the truth. When executives of Fortune 500 insurance companies ask us how to reduce the loss ratio for their insurance company, we always respond with “you must standardize your process and the front-line operations level.” We recently engaged with various insurers and found nearly 200 lean insurance improvement opportunities spanning the entire lifecycle of insurance claims processing operations from reporting, through adjustment and back-end activities ranging from subrogation to auto salvage. These inefficiencies and failures to implement best practice—when left unchecked across hundreds of insurance claims operations teams—amount to tens of millions of dollars of negative impact on the insurance loss ratio. And the vast majority of them can be addressed without the need to introduce (or budget for) any new technology.

Cost of claims control strategy and reducing claim severity costs with lean insurance transformation

You might think that The Lab’s task of finding these insurance claims transformation improvements might take months. That’s not true. We’re typically able to uncover vast insurance claims leakage and severity inefficiencies, not to mention untapped surplus capacity, in a matter of about six weeks, on average.

We’ll do things like benchmark insurance claims operations KPIs such as rental-car days or body-shop storage. We’ll find inefficiencies internally which lead to excess usage of expensive (and under-motivated) external resources such as independent adjusters. We’ll implement daily reporting of KPIs, which, amazingly, just don’t exist in most insurers’ claims-processing operations. These insurance claims transformation building blocks quickly identify ways to reduce claims leakage and claim severity.

We’ll also create “subway maps” of current-state processes. Imagine, graphically, an insurance claim that should move efficiently from left to right on such a map. That’s how it should look. But we often find insurance claims that double back, get sent to senior processors when they should be handed off to lower-level people, and re-routed yet again… the clean “subway” looks more like a tangled mass of spaghetti. Process mapping is a key analytical tool when implementing a cost of claims control strategy.

Seeing such a mess can be a humbling moment for insurance claims leadership or executive sponsors. We’ll hear comments such as “We’re killing ourselves! Why are we doing this?! How can we successfully reduce these insurance operating costs?” At one company, for example, we found that five teams were processing claims… and each one used its own kind of notes. One simple issue like that confounded everyone downstream, as they struggled to reconcile who-meant-what. As simple as that.

A lean claims transformation to reduce the insurance loss ratio requires transparency

Remember our “spoiler alert” above? While the insurance industry bias says that fast processors must be too generous, and slower processors more prudent, the facts prove otherwise.

We have shown, time and again, that the fastest individuals are actually the ones chalking up the lowest insurance claim severity and leakage. And the opposite is not only true, but devastating: We find that the slowest performers, at the very bottom of the “whale tail” curve of employees, demonstrate the highest claim severity and leakage. The challenge, once identified, is to capture best practice from the top performers, and instill it into the lower ones, elevating their claim processing productivity to reduce the loss ratio and claims handling costs.

In our next article, we’ll move from the “opportunity” phase to the “project design” phase, with more eye-opening insurance claims operations war stories and lessons learned that you can use in successfully reducing insurance operating costs.

In the meantime, you can learn, in just one 30-minute call, how The Lab routinely helps with lean insurance claims transformations, using our world-leading database of improvement templates and irresistible self-funding, money-back-guaranteed engagement model. Contact us now to schedule that no-obligation call. We promise you’ll find it fascinating.