Monthly Archives: April 2010

6 Essential Elements To Explore When Choosing A Third Party Administrator

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Don’t Roll The Dice To Choose A Good TPA Just Do A More Complete Due Diligence

A Third Party Administrator (TPA) is often the best way to handle claims for an organization. Many self-insured and captives choose to outsource their claims instead of creating their own internal operation (see my prior post of A checklist of the 8 critical issues to be concerned about when self-managing claims). Whether to get expertise in a particular areas, or not wanting to invest in the infrastructure to build a claims department, using a TPA can be a smart business decision. In fact, many insurance companies will outsource some, or all, of their claims for the same reason. Regardless of what type of company you are, choosing the right TPA is imperative. The TPA will become the face of your company for claims and, how well or poorly, they handle claims will be a reflection on your organization.

So what make a good TPA and what should you look for? In order to find out you must conduct a comprehensive due diligence of the TPA you are about to hire. This is especially the case when that TPA will be holding and managing your claim dollars. Besides understanding the financial strength and capabilities of the TPA, it is also important to know whether they will be able to meet your data needs, provide consistent claims handling, and work to lower costs where they can.

While not an exhaustive list by any means, below I address 6 essential elements, and questions, that should be explored as part of any due diligence when selecting a TPA:

  1. Claims Systems – A strong claims system is an essential tool for any claims organization. Take time to understand the capabilities and limitations of a TPA claims system. Can they provide remote access so you can review your claims online? Do they have a paperless file system? Can they capture information that would be critical to your organization such as specialized loss codes or basic policy information? Do they use any other systems to help lower costs such as litigation management billing software or some unique estimating program?
  2. Reporting Capabilities – With a good system loss reporting should be easy. Regardless, it is important to understand the types of loss runs and reports that can be provided. How frequent can they be provided? What format will they be provided in? Can you easily request specialized reports, or do they have a system that you can customize reports on your own?
  3. Litigation Management Program – Litigation management is one of those things that seem to be less emphasized in a lot of organizations. Nonetheless, this is an area that if ignored could result in higher legal costs. Ask if the TPA trains their staff on litigation management cost reduction techniques. How are legal bills reviewed and what kind of program is in place to review counsel performance? Do they have a panel of law firms, and if so how are those firms selected?
  4. Quality Control and Internal Audit – Consistent handling across multiple claim offices is difficult to accomplish without clear handling best practices and internal controls. Does the TPA internally review their claim handler’s performance? How often are claim files reviewed for good practice compliance internally? What kind of metrics do they use to ensure files are proactively managed and consistent across the board? If they produce an annual internal audit report, ask if you can review it and see how they deal with deficiencies. No operation is perfect, but how well they recognize and address problems can be very telling.
  5. Subrogation/Salvage Capabilities – Many claims organizations fail to actively push subrogation and salvage opportunities. These areas, when done correctly, can lower claim loss dollars and return money to the coffers. How aggressive is the TPA in driving these key cost savings initiatives? Do they have a separate unit, or are the handlers expected to manage subrogation and salvage? How are they tracking returns? Are their results within industry expectations for a particular line of business?
  6. Special Investigation Unit and Anti Fraud Initiatives – All TPA’s will tell you they train their staff and actively pursue fraud when identified. This information should be readily available and reviewable. Ask the TPA how many fraud referrals they made to the states for a given line of business. Is the number consistent with the industry expectations on fraud reports? Do they have an SIU onsite or do they use and outside vendor to manage fraud? Have the TPA’s claim handlers received their annual fraud training as required by certain states?

A few other items worth considering would also include:

  • Management structure
  • Reserve philosophy
  • File loads per adjuster
  • Turnover
  • Financial stability
  • Banking arrangements

Hiring a TPA is a critical process that must be reviewed carefully. Take the time to perform a thorough due diligence, or hire an expert to do it for you. Getting a comprehensive analysis will ensure you are choosing the best TPA for your organization.

A little extra effort in the selection process will pay dividends in the future with a better customer experience and lower costs.

4 Key Areas For Claims Handlers To Review When Dealing With Follow Form Policies

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Follow-Form Coverage Does Not Mean All Your Ducks Are Going To Be In A Row

A follow form excess or umbrella policies is a type of policy where the terms and conditions of an underlying layer of coverage are adopted and incorporated into the “following” layer. While these policies may still have independent provisions and exclusions, they will nonetheless relate back to the underlying, “followed” policy for most of the terms.  In many situations this way of handling excess coverage prevents inconsistencies and ensures there are no gaps in coverage. However, in complex matters involving multiple layers of coverage, or when the language conflicts with the underlying layer, many problems can occur. In claims involving these types of policies, claims handlers must fully analyze all the terms and conditions of all the policy provisions to truly understand the coverage applicable.

There are many forms of language such provisions can take, but below is a good general version of a follow form provision:

“The terms and conditions of insurance of this policy are the same as those of the “underlying insurance” in effect at the inception of this policy except as specifically set forth in this policy and any endorsements attached hereto.”

Follow form policies have been effectively in use for a while. Regardless, as insurance layers have become more complex, so have the issues surrounding these types of coverage. Problems can occur for multiple reasons and the end result could be an expansion or contraction of coverage. Recently, Dennis Wall, Esq., pointed out, in his Insurance Claims and Bad Faith Law Blog, a court decision that addressed a problem with a follow form policy:

“Following form” is a term of art in the insurance industry, and it is not to be used blindly, according to a recent judicial decision.  An Excess Liability Insurance Policy containing that phrase to describe its coverage, may find that its coverage will be held by a Court to provide coverage which the carrier may not have contemplated.  This happened in a recent case in which there were two (2) underlying policies, one which did not exclude coverage for punitive damages and a second underlying policy which did expressly exclude coverage for punitive damages…. Having failed to either expressly provide for which of any underlying policies it would be “following form,” or to expressly exclude coverage for punitive damages, the Federal Court held in that case that the subject Excess Liability Insurance Policy provided coverage within the limits of Tennessee Law for punitive damages assessed against its Insured.

In the case above, coverage was expanded beyond what was originally intended.  Rich Scislowski, an attorney and Senior Research Analyst for IRMI.com, gave the following list of the Top 10 Problems With Follow-Form Coverage, to point out the complexity of these types of policies:

  1. Umbrella Exception Conflicts with Umbrella Exclusion
  2. Misidentifying Underlying Policy
  3. Confusion over Applicable Underlying Policy(ies)
  4. Follow-Form Endorsement Converts an Umbrella to a Straight Excess Policy
  5. Contract Requires a “Broad as Primary” Endorsement but a Follow-Form Endorsement Is Procured
  6. Excess Policy Follows Form to an Underlying Policy That Excludes the Loss
  7. Higher Level Excess Policies Follow Different Underlying Policies
  8. Excess Policy Follows any Underlying Policy with “Additional Terms” Not in the Primary Policy
  9. Follow-Form Provision Makes Higher Level Excess Policy Follow the “Most Restrictive” Underlying Policy
  10. Follow-Form Provision Excepts “Anything Inconsistent” with the Umbrella or Higher Level Excess Policy

The overriding theme in the above list is that coverage issues are going to be present when underlying layers are not properly defined. While many of these concerns should have been addressed in the underwriting process, the reality is any problem with follow form policies will be the claims handler’s responsibility once the claim is filed.

So what are the key issues that should be looked at by claims professionals when reviewing a follow form policy?

At the minimum claim handlers should do the following:

  1. Understand which underlying policy is being followed: This sounds easy, but can be very complicated when there are multiple policies and multiple layers. Check with underwriting to ensure that the policies intended to be followed are correctly identified. Are the correct layers identified by policy number in a schedule of underlying insurance? If multiple layers are identified, does the policy correctly specify which layer will be followed?
  2. Secure copies of all underlying policies: As any experienced claims professional knows, getting copies of underlying policies can be a challenge. Stating the obvious – clearly having copies of the underlying terms is essential in conducting a coverage analysis. It can never be assumed that the underlying provisions are “standard” and that no conflicts exist. Different layers may have different follow form language that may expand or contract coverage offered in your policy. In multiple layer situations it is very possible that the coverage you thought you were sitting over may not even exist for a particular claim.
  3. Analyze how all layers connect: Diagramming multiple layers, as well as how their follow-form language applies, is extremely valuable when dealing with high exposure multiple tier coverages. While you maybe the 4th layer following the primary lead umbrella, the 3rd layer may follow the primary layer and have some conflict negating coverage. After the analysis, you may learn that your coverage attaches lower in the tower than was intended.
  4. When in doubt – get help: The key for a good claims person is to know how to SPOT the issue and seek assistance where needed. These provisions and policies can get confusing, and how the language is written as well as the intent of the parties, will determine how much coverage is truly exposed. When in doubt, engage coverage counsel for a written opinion on the applicability of all layers of coverage. Its better to be safe early on then to find out later that your exposure is much greater than expected.

Follow-form provisions can work to both limit or expand coverage in different situations.  Understanding exactly what is covered, and how much is exposed, is imperative for a proper coverage determination. Once a claim comes in it is the claims handlers’ responsibility to effectively analyze all the possibilities to know how much is potentially exposed.

When problems do occur, use the information to help improve future policies. Discuss the issues and possible solutions with underwriting and become a more effective operation and help limit future issues.

New Claims Technologies To Help Companies Drive Revenue And Differentiate Themselves

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Still Working With Files? Time To Reevaluate Your Technology

New Study By The Gartner Group Shows 10 Technologies With The Greatest Impact For The Property/ Casualty Industry To Drive Revenue

The Gartner Group, Inc., in a new report, has identified 10 technologies that they feel will have the greatest impact for the Property and Casualty industry to help differentiate themselves and drive new revenue.

“There is a long list of technologies that P&C insurers can use to improve their processes — from product development through customer service. Many of these technologies, however, provide only incremental or minor improvements, have limited or no return on investment (ROI), or do not promise to help P&C insurers radically change their business models, reduce operational costs or generate revenue,” said Kimberly Harris-Ferrante, vice president and distinguished analyst at Gartner. “With budgets challenged and with limited funding for discretionary spending, it is imperative that organizations prioritize their investments favoring those that will generate the greatest ROI and drive the most value.”

Many of the technologies suggested by Gartner can have a significant claims impact. Below I comment on 4 that I feel can have the greatest impact on claims:

  1. Modern Policy and Claims Management Systems – Companies with modern systems, that integrate well with the rest of the organization, have enhanced workflow and business process management (BPM) capabilities. Such systems are easily adoptable as business changes occur and give the company a clear competitive advantage. As Gartner points out, “the adoption of these systems by personal and commercial P&C insurers can provide significant value, including reducing the total cost of ownership, when legacy systems are decommissioned.
  2. Business Intelligence and Analytics – Data and analytics are a logical extension following the adoption of updated systems. Customers are demanding more information and can easily be provided what they need with newer analytic tools. Having better information will also lead to better risk decisions and pricing. In addition, as more states require specialized claim reports, these types of analytics are required to ensure compliance with ever changing data requests.
  3. Advanced Fraud Detection Solutions – Gartner put it best on this one by saying “it is key that insurers reduce losses and leakage to retain profitability. Better control of fraud is essential in accomplishing these goals. Advanced tools analyze data (structured and unstructured) to identify fraudulent claims in real time at point of data entry. This will assist P&C insurers in reducing losses that result in driving up operational costs and may result in companies having to increase insurance premiums based on these losses”
  4. Mobile Devices/Technologies – Any way a consumer can submit a claim promptly and easily will be an invaluable tool. The buzz word in business is mobility and it is no different with claims. With most mobile devices now containing cameras, documenting losses early in the process is easier and can assist in preventing fraud. From the adjuster side, stronger, integrated, mobile technology will greatly speed up claims processing significantly reducing costs.

Failing to adopt new technology will put companies at a competitive disadvantage. Every company should look to evaluate their current systems and offerings and create a strategic plan to keep up-to-date with software and solutions. Staying ahead of the curve is a sure way to help drive costs down and stand out from those who don’t.

Prior to going down a new technology road, I would again encourage an assessment of your claims operations. For further comments on how to manage new technology, please see my prior posts of Putting Puzzle Pieces Together and the Challenge of Creating a New Claims System, as well as With old claims systems come old claims processes – You can’t change one without the other!

What trends are you seeing in claims technology that will be essential for companies in the coming years?

Cutting Costs Without Overloading The Claims Handler – Part 2 Of The Series

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Trying To Save Money But Can’t Figure Out Which Road To Take?

Last week I offered the first of two solutions to reduce costs in key claims cost cutting areas when hiring full time staff is not an option. As I noted in the post, 2 Cost-Cutting Solutions To Get Work Done Without Overloading Claims Handlers, overworking claims handlers with additional tasks not part of their core job function – to evaluate and settle claims – can result in some aspect of their job suffering. Key cost cutting initiatives, such as Anti-Fraud and subrogation recovery, get put aside by the handler and never get the fullest attention needed to be successful.

Having achieved improved results in my prior life, I suggested both outsourcing and hiring a dedicated part-time employee to handle certain tasks. The first example I presented centered on having an outsourced vendor put a resource “on-site” for improved results. In the context of an Anti-Fraud solution, having the vendor “on-site” resulted in more fraud reports to the states, improved claim handling through knowledge transfer, and lower costs. The program was a success.

This example tackles a similar problem of trying to improve results without the need to hire a full time employee in the area of litigation management bill review.

Claim Handlers Really Don’t Do A Good Job Of Cutting Legal Bills – A Part Time Hire Solves The Problem

Conventional wisdom has been that claim handlers are in the best position to review legal bills on the claim files they work on. The reality is legal bill review, for most claim handlers, is a dreaded task considered a necessary evil.  In addition, I find that some claim handlers rarely cut inappropriate charges because they develop a working relationship with the attorney and do not want to hamper that relationship for what are felt to be minor issues.  However, when the bill review process is separated from the claims handler, many of these concerns or conflicts go away. Handlers can focus on managing claims and developing open working relationships with counsel and billing issues can be addressed by others.

Possible Solutions

In looking for a proper solution I considered vendors that review legal bills as well as bill review software.  Legal billing vendors that provide the service usually get paid based upon the amount of money they save. This type of review can create problems and can sometimes be perceived as a conflict.  I was not trying to create an adversarial relationship with counsel, so this idea was put aside. Bill review software provides an excellent job of catching billing discrepancies that frankly can’t be caught manually. Unfortunately, billing software requires a larger capital investment, IT involvement, and time to implement. While the projects often pay for themselves through reduced legal fees, at the time, it was not a road that I was able to follow. What I needed was an attorney who understood the legal process and could work with, and speak with, counsel on billing issues. As I was working in a claims organization that hired many lawyer/claim handlers it seemed like a natural solution.

How To Make It Work

While I did not want to hire a full time attorney, I was approached by someone who knew a stay-at-home attorney looking to work 20 hours a week in a flexible environment. Being able to provide that kind of work load is sometimes not possible for many companies, however, given what I was looking for, the solution to my problem seemed to have found me. At the time, the company I worked for had an excellent claims system (since I helped design it I was always going to say this) which made it easy to set up a part time employee remotely. A new process was designed to allow claim handlers to send our litigation bill reviewer invoices for compliance analysis and review.  At first it was decided to limit reviews to invoices with known issues and ones over a certain dollar amount. Bills could be forwarded electronically, reviewed, analyzed and returned to the handler with suggested changes. A form letter was instituted where disputed charges were listed and explained. The new program was in place and it worked.

In the first year the program reviewed over $15 million of legal invoices. On average, legals bills were reduced by 10% with most of the reductions due to billing errors, duplications and failing to comply with agreed upon rates. The most fascinating findings came when we opened the services to Third Party Administrators doing work on the company’s behalf. It turns out that bill review reductions were 2-3% higher for work being done for the TPA than for work being done for in-house claim handlers. No matter what the reason, the bottom line was over $1.4 million dollars saved in the first year alone.

Lessons Learned

  • Claim handlers, despite being close to the claims process, were not in the best position to review legal bills
  • Attorney’s seem to be a little more cautious reviewing their billing submitted to the company directly than when submitted to the TPA
  • A small amount of diligence can result in huge savings – these savings add up and were clearly worth the small investment to retain a part-time employee

The solutions I offer here, and the prior post, are not limited to world of SIU and litigation bill review. Hiring a part-time employee, or “on-site” vendor,  to manage any initiative is a great idea when specialized knowledge is an appropriate way to get better results and the need for a full time employee is not needed. As noted, subrogation and salvage recovery are great areas that can also benefit from these types of programs.

I have just offered up two solutions to the age-old problem of trying to do less with more. While the solutions are not new, sometimes to become more effective you need proper execution and new ways to look at old problems.