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Why Extending More Claims Authority Means Extending More Responsibility

How much authority is too much authority?

Extending authority to claims personnel is always a difficult exercise. Deciding when, and how much authority to extend will always depend on the line of business, and experience of the claims professional.  Giving more authority also means extending more responsibility to the junior claims professional to make greater financial decisions for the company.

Any small increase in authority can really add up. For example, if you extend an additional $10,000 in authority to a claims professional who gets 10 new claims a week you are giving them the responsibility over an additional $5.2 million per year.  Do that for ten claims professionals, and that group can commit an additional $52 million per year to the company.

The inverse claim volume and value relationship

It is fairly well common in the industry that there is an inverse relationship between claim volume and the claim value.  A common example would 80% of the total incurred is found in 20% of the claim volume.  This would also mean the 80% of the claim volume is managing 20% of the incurred. Regardless of the exact split, this would mean that most of the claim volume is being handled by junior claims professionals.

In most companies the top valued matters are very well reviewed and examined. Those claims have to move up through the authority chain, and are seen by managers, specialists and executives, and in almost all occasions, are well worked up.  The lower value claims, however, are usually assessed and moved quickly with less scrutiny and review by senior managers.  Many claims of lesser value speak for themselves, and do no not require the work up or intense scrutiny that is needed in a multimillion dollar loss.

The lower level claims are the training ground for the industry and allow a claim professional to walk before they run with a more significant matter. Despite their individual value, the lower level claims add up. How much authority to extend is often an arbitrary matter determined by the level of the examiner. A junior examiner gets $10,000 and senior examiner $50,000 and so on. However, extending authority should be an exercise on how much responsibility the particular claims professional can handle.

The example above shows that even a moderate increase in authority can significantly affect the company’s financial outcome.  When authorities are left too low, however, there is more pressure on management and a greater risk non-value added duplicative work.  Claim professionals will have to prepare additional internal reports, consult more with attorneys and set up and attend meetings even to get a nominal increase. This creates an operational burden as well as higher costs.

So what is the big deal about extending more authority?

The authority goes up and so does the spending

Back in the day I was at a company that had a relatively new book of business that had not developed. Because of this, management made a decision to restrict the amount of authority extended to claim handlers and managers. As the book aged, as was expected, there was an increase in the number of larger claims. With authority levels relatively low, there was a delay in raising reserves and moving files. To alleviate any backlog, authority levels were increased for claim handlers as well as the threshold to present claims to senior management. The process worked and claim reserves were increasing when they needed to and files were moving to resolution. All seemed to be a success until a deeper look at the numbers told us a different story.

A close look at the numbers several months later revealed an interesting trend.  Average payments made within manager’s higher authority level were no different when compared to the pre-authority increase. This was a good sign that, at that level, there was a consistency as to how claims were being resolved. Unfortunately, the results were not as consistent at the lower levels. With an increase in authority came an increase in the average claims being paid out.  Lower level claim handlers were resolving more claims, and were doing it at higher level. While the study could have looked deeper at the total costs to see if this resulted in lower expenses due to quicker resolutions, what was clear was that with more authority came a willingness to spend more.

Where was the failure? Was it management extending too much authority? Was it the claim handler trying to resolve cases faster to move files off their pending? Did giving the ability to get a case resolved, without having to write up and present it, give too much responsibility to the claim handlers?

No matter the exact reason for the numbers, lessons could be learned and the one that stood out for me was don’t extend authority without extending responsibility.

What it means to extend authority with responsibility

Responsibility and authority are two different things and you cannot extend one without the other. With increased authority comes increased responsibility. In other words, as you extend more reserve or settlement authority to more junior employee it is important that they understand the increased responsibility that comes with it. They are becoming “keepers” of a larger part of the pie, and if they can manage that responsibility, then extending authority is appropriate. Blanket increases in reserve authority by a claims professional’s title, or years of experience, is not the best way to determine whether they will have the understanding of the responsibility behind that authority.

Extending additional authority to a number of claim handlers can have a dramatic affect on the department’s total incurred. Make sure claim handlers understand the impact, both good and bad, to the company. Interview your claim professional before the increase is extended and see how much they truly understand about the responsibility more authority will bring.  Ask them how they plan to protect the company assets while remaining compliant with fair claims practices. Reserves that need to go up, and claims that need to be settled, still need to happen, but it should happen when the claim professional understands what an increase in authority means. When this convergence of authority, understanding and responsibility occurs, then the increase in authority is warranted.

Spend the extra time ensuring there is an understanding of the responsibility of increased authority and you will create better claims professionals.

What steps do you take when extending authority?

Posted in Best Practices, SPOT on Issues.

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