Insights from The Lab

Insurance transformation projects: How to reduce insurance loss ratio and claims leakage with lean claims implementation

Article by : The Lab Consulting

How to reduce loss ratio in insurance

In our last blog post, we discussed the opportunity, and it’s massive, for successfully reducing insurance operating costs, claims severity, and claims leakage. In this article, we’re going to dive into deeper detail, again culling from real-life insurance transformation projects which The Lab has undertaken for numerous Fortune 500 companies and their claims operations nationwide in successful efforts to reduce insurance loss ratios.

How to reduce loss ratio in insurance: Reducing insurance claim severity with a lean insurance transformation project

Typically, we’ll design the insurance claims transformation project so that it’s carved into work streams, covering such areas as reporting, assignment, adjusting, and subrogation. We’ll establish a schedule for daily team meetings and weekly reviews at the regional and agency level.

But what’s the subject of all this carving and meeting? It’s actionable information. That’s the key to reducing the insurance loss ratio, claims leakage, and severity in a claims operation. We’ll introduce and measure key performance indicators or KPIs; as we’d noted in our last blog post, there’s an amazing lack of this ratio-based information in insurance claims operations generally. Our KPIs will focus on volume, quality, productivity, and service. It’s based on the mantra: “that which gets measured gets done.” The claims-transformation project KPIs are integrated into a daily dashboard which shows both individual and team performance.

Cost of claims control strategy and reducing claims handling costs: balancing productivity with lean insurance principles to reduce loss ratio

Here’s a typical “war story” we often encounter on an insurance claims transformation project. We’ll discover, for example, that two different workers in the same claims operation will be able to process different amounts of claims each day. Let’s say Person 1 is faster than Person 2. A typical claims operation might keep track of the total queue for everyone in that department, but once you get down to the granular level, you can actually make a difference. If Person 1 is working at twice the speed of Person 2, then it’s essential to route double the claims volume to Person 1 and thus “balance the line.” It’s a lesson from Factory 101. At the same time, as you surely guessed, it’s essential to elevate Person 2 to the performance level of Person 1.

As we’d mentioned in our last article, this entails, for example, capturing and disseminating insurance claims best practices from the top performers. That’s an important approach, given that the cost of replacing the lower performers can be prohibitive. And since you can’t always train everyone individually, you can use training aids. We employ desk aids (which we call “placemats”) which help workers quickly refer to insurance claims best practices they can use.

Insurance claims transformation project analysis tool: The capacity model

Part of an insurance claims transformation project design includes the development of capacity models. To successfully reduce insurance operating cost these must be implemented. This requires documenting the individual activities that go into adjusting a claim: the activity, who does it, and how long it takes. Using the value stream process maps (which we’d already discussed in the “Opportunity” blog), it’s possible to validate the times required to accomplish various tasks. We can’t tell you how many times we’ve told a client something to the effect of: “You have 30 people processing this type of claim—but the capacity model clearly shows that you only need 20 people to do it.” And the model is always right.

Lean insurance claims transformation: A process improvement project to successfully reduce insurance operating costs

In a typical insurance-claims transformation project, we’ll be able to identify a few hundred non-technology-dependent lean process-improvement opportunities. This is how we can help an insurer to standardize, reduce the steps required to complete a claim, and knock down the dreaded NIGO (“not in good order”) documents which cause costly downstream bottlenecks to reduce the loss ratio in insurance claims. That’s what makes this so revolutionary in the insurance industry: There are hundreds of insurance cost reduction opportunities and claims process improvements that hide in plain sight, if you only look for them. Taken individually, they’re painfully mundane. But when you scale them, the savings and impact on claims leakage and severity can be astonishing.

Speaking of standardizing, the variance we see in claims-processing operations can be embarrassing for leadership:

  • We’ll see geographical variance among adjusters and appraisers in the same region, or different regions—even after we factor out differing state regulations.
  • We routinely witness variance in durations for identical tasks of 2x to 7x or more.
  • We see variance in work methods that haven’t been documented.
  • We’ll see variance in individual worker productivity and capacity to improve.

Once you’re able to standardize these, you can realize significant reduction on your claims handling costs and claims leakage.

Reducing claims handling costs and insurance loss ratios with a lean transformation project: claims control strategy related improvements

There’s an entire population of issues that pervade claims operations; do these ring familiar to you?

  • How long is an automotive client still driving that rental car (which you’re paying for) after repairs are complete?
  • How many disability customers are still staying at home, after they’re fit to return to work?

Plugging these holes that increase claims leakage and severity is part of a lean insurance claims process improvement project. Creating and enforcing discipline can be as simple as making sure that you call the customer every five days vs. every ten days; are issues like this documented at your company?

We discovered, at various insurers, that their FNOL (first notice of loss) call center would often rely on a questionnaire to help its personnel to route insurance claims. But we would just as soon discover that, say, a vehicle which was clearly a “total loss” was being towed to a repair shop—even though it was beyond repair. The next step, after paying storage at the repair shop, was another costly tow to the salvage yard. The culprit? The questionnaire. It was poorly worded and unclear. Making this simple non-technology fix was able to save one of our clients over $1 million a year.

Reducing insurance loss ratio by controlling claims handling costs—and the claims about robotics projects

In the early days of computing, there was an acronym called “GIGO.” It stood for “garbage in, garbage out.” It meant that your software’s output was only as good (or bad) as its input.

Fast-forward a few decades to the outsourcing/offshoring craze. A similar expression cropped up: “Never outsource a mess.” You can figure out what that means.

The same applies today, in insurance claims processing, when it comes to alluring new technology such as robotics and AI (artificial intelligence). We will tell you: “Never automate a mess.” In fact, most of what you can automate in claims processing today can be done with existing technology. But it’s up to you to clean up the underlying processes first. Otherwise you’re just “automating a mess.”

Case in point: We worked with one of the world’s leading companies as they explored a shiny new robotics system. But it turned out that the project would cost more than it would save. The lesson for you is to resist the siren song of new technology. Even if you’re using things like macros to automate human activity, you won’t realize new efficiencies if you’re applying them to non-standardized processes.

Reducing loss ratio, claim severity and claims leakage: Next steps—the implementation project

In our next article, we’ll get into the details of project implementation and ongoing insurance claims process improvement. And we’ll include a claims-processing “war story” that’s sure to make you sit up and take notice.

Before you read that article, you might want to consider a 30-minute phone call with The Lab. In that one call, we can show you how The Lab routinely helps with insurance claims transformations, using our world-leading database of insurance improvement templates, best practices and irresistible self-funding, money-back-guaranteed engagement model. Contact us now to schedule that no-obligation call today.