The claims audit process is a valuable tool in improving management systems. Alan Speyer says a full process review is an opportunity not to be missed

here is a pressing insurance market demand for claims audits that is being driven by the heightening of internal and external regulation. Traditionally, audits have been handled internally or by freelance staff and treated as a means to an end, with limited scope and, as a result, limited effectiveness.

However, claims audits are increasingly becoming claims reviews – a route to get at the strengths and weaknesses of claims organisations. The effectiveness of this route for the host company depends on having a high-level auditing team that will carry weight with both the regulators and management. The alternative, and the fate of many an audit, is a report gathering dust.

The tradition has been to take a sample of 50 or 100 files, divided over value, time lines and perils, to give a cross section of the organisation and then for the files to be scored against predetermined criteria such as service standards, compliance with best practice and appropriateness of reserves and settlements. The results are mostly recorded on a tick box basis and enable the instructing party to fulfil a commitment to internal or external audit.

This is a perfectly normal basis for conducting an exercise; but what does it achieve other than providing a health check on the subject organisation and supplying evidence that an audit has been done?

Auditing as a management tool

The control of claims exposure is critical to balance sheets, and an audit by an experienced team can provide a unique insight into the capabilities of the claims department and the level of exposures. It can also provide significant independent advice on the appropriate methods necessary to secure improvement in relevant areas.

The uniqueness of the opportunity is critical because the claims files tell the story of what is really happening in an organisation. Also, with the appropriate resources, a well-planned audit review can proceed on a multi-track basis and is very likely to be more revealing than management statistics, data printouts or projections.

The consultancy audit will normally extend beyond pure audit to report and advise on a selected proportion of the following elements:

Technical File Review

Rather than judging the claims handler on a traditional basis it is possible to look behind the file to see how management support is operating and the extent to which effective measures are in place to predetermine the responses of the claims handlers. These would include protocols for supply panels, constructive best practice documents and a sound prescribed reserving methodology. It is also desirable to see some direction in terms of strategy planning for target negotiated outcomes.

The main elements of this type of review are compliance, effective reserving, appropriate payments, available resources for big ticket and complex cases, leakage and management strategy.

Analysis of Systems and Processes

Systems are now critical to the efficient functioning of claims departments and it is important that audit teams have the ability to analyse the capability of the system and whether it is being fully mined for available management information. In addition, the audit should cover back ups, the control of access and passwords and disaster planning.

Effective Management

An audit would review the technical competence of claims handlers and external suppliers together with the management support available to them. It would also consider methodology, authority levels and the general effectiveness of the procedures that management has put in place.

The accuracy of reserves is clearly critical as are the appropriateness of payments and the adequacy of skilled resources. It is also recommended to review timelines in the creation of the ultimately accurate reserving positions, as this tends to determine the effectiveness of controls and the level of supervision exercised in respect of internal and external resources.

The audit/review approach is thus as much a report on management functions as it is on claims teams and process. However, it should not be viewed in a negative sense. Its sole aim is greater efficiency and more control on claims exposure.

An example of the depth a consultancy audit can go to, and the extent of the auditor’s involvement with a claims organisation, is illustrated by the case of a major London insurer which found, through an internal audit, that there were a number of flaws in its processes, which lead to a serious compliance issue.

Consultants were commissioned to review every current claims file – which totalled more than 3,000 – and, as a result, the reserves on 79% of the files were amended to secure substantiated reserve levels, while giving a significant positive seven-figure movement in reserved exposure. Many files were closed off, reducing the size of the claims portfolio, and co-insurance positions were restored.

The consultants also provided a series of detailed recommendations for management of the department in view of avoiding such situations in the future.

A second example concerns a major insurer that was experiencing difficulties with outsourcers in terms of consistency of reporting and a suspicion of serious leakage.

Consultants were employed to conduct a series of audits which looked at 5% of all files in all portfolios and reported on a comparative basis between the five different third party authorities on a technical comparison and cost effectiveness. As a result of the detailed consultancy report that followed, informed decisions were taken on the future handling of these substantial portfolios and two were subsequently removed from their handlers.

Cost effective opportunities

An audit of a claims department involves considerable effort and disruption, because it takes time to set up, temporarily opens confidential files and systems to scrutiny and pulls personnel away from their normal duties.

However, it is clearly worth taking advantage of the opportunity, despite the inconvenience, to look at all relevant information and issues which the audit could potentially bring to light.

The cost effectiveness of full targeted review is proven and it is surprising that such opportunities are often lost, perhaps because some in the industry are not aware that an audit can be very simply turned into a review and contribute constructively to the future management of claims spend.

A deep look into a claims team or department can produce a wealth of valuable management information and it is hard to understand why claims audits are so often overlooked, particularly as the ground work is already in place due to regular annual or six-monthly auditing.

Claims spend is the largest item on any insurance balance sheet so why not look behind the files? For a small investment the returns can be significant.