Tim Crossley explains how by modernising the claims process insurers can cut costs and improve their customer service image
The outsourcing cycle has turned. More and more insurers are not only bringing their services back in house but investing heavily to make sure that this time they work - and work efficiently.
Many insurers have found that not only are the outsourced service standards not of the highest, but costs are greater and the expected gains in using dedicated technology have not been achieved.
One of the arguments for moving claims to outsourcers both offshore and out of the main office was in the belief that outsourcers were more likely to invest in state-of-the-art technology. This often was not the case.
So, as insurers look to move many of their claims functions in house or upgrade those that have remained in the main office, what are the priorities?
One strong management theme is that it is more efficient to get rid of low skilled claims jobs than it is to outsource them to a lower cost provider. Sadly, few legacy systems can support this initiative.
This fits in well with the fact that insurers are at last getting round to the idea that the Cinderella department of claims needs a significant technology spend and update if it is to meet the changing demands of the market, customers and the regulator.
Too many insurers have been bolting on ill-fitting systems which need the constant attention of very expensive consultants if they are to work effectively over time.
Is it perhaps time for Cinderella's sisters in finance and IT to take a second look and see her for her true potential?
IT analyst Gartner certainly thinks so. It states: "In 2006, property and casualty insurers will significantly increase the investment in claims technologies and process modifications to support efficient claims processing.
"A focus on customer service, catastrophe planning, loss reduction and claims management will intensify."
One reason why insurers are increasingly reluctant to outsource their technology is that these systems are absolutely mission critical.
A serious problem with software could leave employees playing Solitaire all day.
So they are very conscious of the quality and reliability of systems, and many realise that the best way to guarantee that is to keep a close eye on what they build.
Insurance companies know that to effectively speed up responses to customers and keep up the quality and cost control they must process claims in house.
It has taken the loss of guaranteed investment income to make insurance companies realise that having a world-class claims operation is becoming recognised as a critical element of success in the insurance business.
Creating a state-of-the art claims organisation is no easy matter. If you do not outsource there has to be an acute focus on people, processes and technology. It is not just a question of throwing technology at claims. Process and people have to change.
And those that just automate their existing processes find the law of unintended consequences can bite very deep.
The need is for technology that allows you to radically improve the claims operation, not just do what you were doing in the past faster. Flexibility both for now and the future is a key demand.
The demand is in fact for web-based systems to deal with policyholders, brokers and underwriters, while at the same time automating the process and keeping in touch with both claims handlers and loss adjusters.
Part of the essence of a good system is that it will not only take over a major part of the workload, but it will also automatically assign claims to claims handlers who have capacity - transforming them from a reactive team to a proactive team.
In the US, where introducing state-of-the-art claims technology is estimated to be between five and 10 years ahead of the UK, pressure to improve claims operations has come from a variety of sources.
First, there are market and society pressures, such as the massive increase in medical and legal bills, shifting workforce trends and increasingly demanding customers.
Only recently, US statistics showed that better claims technology improved both the productivity and the longevity of claims handlers.
In the US, modern web-based technology has allowed insurers to reduce clerical staff by 40%, reduce claims processes from days to hours, significantly increase recoveries and greatly improve the supervision of claims.
In short, technology helps to upgrade the job and make it more interesting. All these factors are also true in the UK.
At the same time, the trend to upgrade claims technology is also being driven by industry forces such as an increased awareness of so-called claims leakage, or the difference between the appropriate cost of settling a claim and its actual cost.
Other factors include the softening market, concerns about industry-wide under reserving and access to lower-cost technology.
The objectives of a world-class claims operation should be to reduce leakage to 3% of premiums, down from the 7% to 13% that companies more typically face.
This improved level of leakage produces a significant reduction in loss adjustment expenses and an increase in customer satisfaction.
Industry studies suggest that companies experience a 95% retention rate among customers that have had a positive claims experience, while that rate falls to just 25% among customers that have had a negative claims experience.
In addition to offering customer service benefits, having a world-class claims operation yields management information that can lead to more accurate underwriting and more cost-effective compliance.
The flexibility of the latest technology allows companies to develop really fast-track claims operations.
Using fast-track/express claims - an approach that streamlines the claims process for 'no-touch, low-touch or one-touch claims' - is one example of how a claims operations can be transformed.
It is estimated that any insurance company could direct 40% to 60% of all its claims into an express claims model.
Insurers also must craft appropriate career development and compensation practices for claims employees, design working performance management systems, provide proper training and set clear expectationsif they are to achieve a world-class claims operation.
As Cinderella claims follow her American cousin to the investment ball, will she get there in a coach and horses or on a bus? IT
' Tim Crossley is the vice president, EMEA, for Guidewire ClaimCenter