Controlling leakage is still as important in insurance claims as it is in Tony Blair's Cabinet. Jeremy Baker identifies the weakest links....
Until recently, the words “claims leakage” were on every claim manager's lips – and on the lips of every finance director, too. Today, the subject of how to manage leakage does not seem to enjoy such prominence. Do claims professionals think they have licked the problem of customers receiving larger pay-outs than they are due? I hope not, because it remains not only widespread, but on the increase.
Leakage is thought to cost the UK insurance industry more than £200m each year. So it is hardly surprising that attempts to combat it have not been entirely successful. This is particularly the case when the claims-handling culture that is largely responsible for leakage continues to grow, rather than contract.
Contrary to popular belief, leakage was not discovered during the 1990s; it existed in many guises before McKinsey & Company brought it to the industry's attention. It is, however, a little surprising that an industry founded on professionalism, with hundreds of years of experience, required external consultants to focus its attention on such a fundamental flaw in its business.
Or is it? Discovering that your company is suffering leakage is similar, in many ways, to discovering that your house is suffering from an outbreak of dry rot. It may take some time, and the involvement of a specialist, to establish the existence of dry rot. One faces an anxious time waiting to discover the extent of the infestation and the remedial measures required.
Dry rot will not just disappear, and action needs to be taken swiftly to prevent it from spreading. The causes must be identified and removed before rebuilding can begin. Treatment can be expensive, but it is essential if the property is to be saved.
After the pain of discovery, the recriminations begin. When did it start? Did we ignore the tell tale signs? How could we let it spread so far?
Leakage, like dry rot, is not the result of a single cause, but a combination of circumstances. So what are the main factors that have contributed to its spread during the last decade?
Firstly, the drive towards a reduction in the administrative costs of claims handling has led to the centralisation of claims operations. Yes, here I am talking about our old friend the call centre.
The growth in call centres has been a direct result of insurers' desire to improve the delivery of their claims service. However, levels of technical competence and understanding have clearly suffered in an environment that places greater emphasis on the speed of the decision-making process, as opposed to the technical accuracy of its outcome.
Indeed, the operation of call centres is often based on headcount rather than technical competence. New recruits are expected to be operational within a very short time, but it is unrealistic to expect that the knowledge they have absorbed from an induction process will be sufficient to deal with the many and varied claim decisions they will face in their first years of employment.
Inexperienced call handlers will be asked to handle claims using a claims-notification system, which is likely to ask for responses to set questions. Unless the handler knows why these questions are important, they can do little more than ask them. They will not possess the skills or confidence to question the answers. Some leakage is an inevitable result.
The situation is unlikely to improve as staff settle into their jobs, either. In the absence of proper mentoring schemes to give employees a regular opportunity to improve their knowledge, the best that can be hoped for is a sporadic training programme. I doubt such measures will successfully combat continuing leakage.
When it comes to validating claims, decisions are being increasingly placed in the hands of suppliers and outsourcing agencies that operate under a delegated authority. The problems associated with inexperienced and inadequately trained staff are not the sole domain of insurers. As a qualified loss adjuster, I believe that the advent of delegated authority has had a profound effect. Certainly, claims are handled more quickly, but at what cost?
At the start of my career, insurers required that a preliminary report be provided for each claim. While there was a well founded belief among loss adjusters that these regular reports were rarely read by insurers, they served as an excellent leakage management tool. All reports had to receive the approval of a qualified adjuster, often the branch manager. Their role was not, as I suspected at the time, simply to ridicule the junior adjuster's writing skills, but to check the adjustment procedures and provide guidance. This served to substantially reduce leakage, improve the technical skills and, on rare occasions, the junior adjuster's prose.
Changes in working practices have robbed the profession of this valuable process of quality control. I doubt that every firm of loss adjusters can say confidently that the writing and approval of preliminary reports has been adequately replaced with other forms of training.
Insurers believe that the use of suppliers gives them a chance to improve their service to the policyholder and at the same time contain leakage. But does it? The opportunity to assess leakage occurring through delegated suppliers is often confined to a retrospective review of performance, namely an audit.
Time constraints mean audits are infrequent and confined to relatively small samples of the work undertaken by the supplier. Auditors are hampered by the quality of information they can access, because of a lack of transparency and a cold audit trail. One also needs to consider carefully the quality of the auditor; for certain suppliers there is an argument that specialist auditors should be employed.
The reason it was consultants McKinsey & Company who first highlighted leakage assessment was probably because they were objective observers. Unfortunately, objectivity can be the one crucial element missing from performance review programmes. Auditors are all too often drawn from a select pool of in-house people who are believed to possess the requisite skills. These individuals usually come from the very heart of the claims process they will audit. They can be conditioned to believe that what has been done is acceptable, just because it has always been done that way.
So, leakage can occur at any stage of the claims-handling process, whether it be during notification, validation or settlement. Insurers and suppliers are jointly culpable. If leakage really is to be beaten, they both need to place greater emphasis on improving the technical skills of everyone involved in handling claims.
For insurers, leakage-related losses could be the difference between a poor loss ratio and a profitable account. Firms are placing great emphasis on improving risk management techniques, but is it really possible to judge the effectiveness of such work when bottom-line profit margins are being constantly eroded by avoidable leakage?
And insurers are not the only ones to suffer. Their reduced profitability will undoubtedly lead to an increase in the cost of insurance for us all.