Claim Reviews Empower Better Decisions By Putting Critical Information In Hand

Are making blind decisions the way to go?

Insurance is as much about having the right information at the right time as anything. Whether it’s an underwriting choice to price a risk correctly or a claim decision to when to pay a claim, having the best data available can make or break an organization. Despite this fact, many organizations fail to take advantage of tools and rights available to them prior to making critical business decisions (see our previous post “The Importance of the Pre Bind Claims Review in the Reinsurance Context“).

A reinsurance company looking to bind a new risk, or an excess carrier following the fortunes of a primary, should not leave decision making to what is found on a loss run or in an application.  Loss runs can be misleading without an understanding of what is behind them. At Lanzko we recently found an audit where the underlying carrier failed to reserve for expense in what was a well run claims department.  In that particular company, expense reserves were handled by actuarial. Our client had not been aware of this and was able to adjust pricing accordingly, avoiding a significant underpricing of the risk.

It is important to understand that most reinsurance or excess contracts allow companies to inspect the organizations they underwrite.  If this right is available then why not take advantage of it to learn more information? Data runs can give you a basic overview of a firm’s existing losses, but they will do little to give you an understanding of the underlying organization that created those numbers.  To get a complete picture of how a claims department functions one has to go beyond the numbers and conduct a claims department and file review.

Resources, Resources, Resources

Not every account can be reviewed.  Whether you in-source or outsource claims reviews, the costs can add up. There are also other things that come to mind when determining when a review is cost effective.  If you conduct reviews using claims staff focused on handling claims there is a risk that the time out of the office is not as valuable as the time spent on existing file management. It should also be noted that in-house claims staff may not be properly equipped to understand other parts of the operation they are reviewing.

If you outsource, it may increase your costs and your vendor may not provide enough value for the report they provide. Unfortunately, many companies do not even budget for a review program. It was suggested to me that if you had a $100 million book of business and set a budget of  0.0025% of premium you would be able to conduct an outsourced reviews of your top 15 accounts.

Is 0.0025% of premium a reasonable cost to pay to get better information about the risks you underwrite?

8 reasons when a claims review becomes critical

Whether it’s a resource allocation issue, or just simply enough time, getting to conduct reviews regularly may be difficult. Nonetheless, there are times when a review must be done and should seriously be considered in these situations:

  1. Account Renewal
  2. Late, inadequate or infrequent claim reports
  3. Significant management changes or turnover
  4. Financial problems with Cedent or Primary
  5. Loss results are too good to be true
  6. Unexpected claims in lines of business
  7. Historically volatile product lines
  8. Change in company participation

A successful review means going beyond the claims files

Reviewing the highest exposure claims is certainly of value, however it will not give you a complete picture of the organization and their ability to consistently manage claims. High exposure claims are almost always reviewed by various layers of management and are usually well worked up. Despite this, many organizations only choose to review those files that may impact their layer.  What about the files that don’t make it to the senior level?

Understanding the process for how claims move through the system is critical to ensuring they are properly reserved and manged. Consistent claims handling comes from an organization that has good process, strong systems, good technical results and an oversight program. When looking at a claims department you need to look at the whole operation to learn more about:

  • Organizational overview and structure
  • Authority levels
  • Systems
  • Management/Staff Experience
  • Reserve Management and Expense Control
  • Quality, Controls and Compliance
  • Best practices
  • Spend management (vendors and counsel)

Doing a claims review is not just smart business, it is becoming a requirement

In Europe, new risk management standards are being implemented as part of sweeping regulatory changes contained in Solvency II. As part of these new regulations, companies that rely on others for their claims are going to be more responsible to ensure those third parties are operating effectively. This will effect everyone from reinsurance companies to cover holders to those who outsource claims to third-party administrators. The United Kingdom’s Financial Services Authority (FSA) described it best in a proposed CEO letter about reserve adequacy when they wrote:

[W]e expect firms to take a considered and proportionate approach to the reserve-setting process, and have robust processes in place which adequately capture the risks associated with an increasingly challenging claims environment. We expect such processes to include, as a minimum, the monitoring and assessment of:

  • The adequacy of individual case reserves;
  • Underlying claims processes;
  • The adequacy of data quality; and,
  • The reserve projection and selection process.

Claim reviews, if not already being done, will be a requirement in order to truly understand the “underlying claims process” as well as the “adequacy of individual case reserves.”  If you are not able to answer these questions you may be subjecting yourself to significant regulatory scrutiny.

Create a process around your process

The importance of these reviews cannot be overstated. But having accepted the fact that you need to do more reviews, make sure you are managing that process properly.  Develop a “best practices” guideline for claims reviews which should include:

  • When reviews are done and what are triggering events for the reviews (see examples above)
  • How are files selected for claim reviews
  • Outline different types of reviews with standard objectives
  • What department criteria will be reviewed and what claim file criteria will be examined
  • Understand who will be doing the reviews (claim handlers may be good at reviewing a claim file but may lack in experience when it comes to other operational aspects of a department)
  • Have a standard understandable rating system
  • Manage your claim reviews in a central location
  • Document the process to be able to respond to inquires from interested parties (regulators and stakeholders)

Even if you decide to outsource your claim reviews, it is important that you ensure your vendors have a documented process to provide consistent reviews and can maintain appropriate records.

When managed correctly, a proper claims review program can save the company from making bad decisions. Given that the costs, relative to the risk, are relatively minor, along with changes in regulation and oversight requirements, failing to make claims reviews a regular part of your organization could be a critical mistake.

5 Things To Avoid When Negotiating In Business and Claims

Don’t Box Yourself In When Negotiating

Let’s face it, claims is as much about negotiating as anything. It is a significant part of our jobs as claims professionals, yet little real time is spent honing those skills. I had always considered myself a pretty good negotiator despite having never had formal training. I mean I am an attorney, I could argue with the best of them, and I knew my cases.

All this changed when I finally did take a class on negotiation during my first insurance job at Zurich.  Like many training classes, this one involved role playing.  Like many, I was not a big fan of role playing, however this particular class changed my view.  The role play had been set up with each party given a specific set of instructions as to how to manage the negotiation. Despite it being staged, the emotional responses were fairly real and opened my eyes to techniques to become a better negotiator.  I learned to take the emotion out of the process and to follow a very set, repeatable, procedure.

From that point on I had always entered a negotiation with all of my offers written out in advance and rarely did I stray from that framework. It was a huge change in the way I managed negotiations and it paid off on numerous occasions and led to what I believed to have been some very good results.

Avoid These Five Things To Become A Better Negotiator

Recently I came across an article in Inc. Magazine that listed the 5 Things You Should Never Say While Negotiating.  These 5 suggestions are a great framework to to help become a better negotiator.

As I have done in the past with other business suggestions, I am reprinting much of this article in its entirety with comments as to how they relate to claims. The article also gives great links to more detailed information on the specific technique.

1. The word “between.” It often feels reasonable—and therefore like progress—to throw out a range like “I can do this for between $10,000 and $15,000.”  But that word between tends to be tantamount to a concession, and any shrewd negotiator with whom you deal will swiftly zero-in on the cheaper price or the later deadline. In other words, you will find that by saying the word between you will automatically have conceded ground without extracting anything in return.

TCS: We have all used the “meet in the middle” technique. It really can lead to one party being entrenched on the higher side.  Stick to you offers and decrease the amount as you increase the offer. For example if you want to settle the claim for $70,000 first offer $25,000 then $45,000 then $55,000 then $62,500 and so on.  Every time you decrease the offer you send the message that there is an end and you are coming to it. Believe me, by the third offer they will may even say to you “you are trying to get this at $70,000.”  Use this and you remain in control and help direct the outcome. Be comfortable with your valuation and don’t be afraid to get to it.

More Insight: The Art of Effective Negotiation

2. “I think we’re close.” We’ve all experienced deal fatigue: The moment when you want so badly to complete a deal that you signal to the other side that you are ready to settle on the details and move forward. The problem with arriving at this crossroads, and announcing you’re there, is that you have just indicated that you value simply reaching an agreement over getting what you actually want. And a skilled negotiator on the other side may well use this moment as an opportunity to stall, and thus to negotiate further concessions. Unless you actually face extreme time pressure, you shouldn’t be the party to point out that the clock is loudly ticking in the background. Create a situation in which your counterpart is as eager to finalize the negotiation (or, better yet: more eager!) than you are.

More Insight: Creating Win/Win Negotiations

TCS: Just as you need to be prepared to walk out, you need to be prepared to stay as much as needed.  You are never in a rush and as long as you let them know you are happy to stay till an agreement can be reached.  Remember, it’s about maintaining control of the negotiation and arriving at a fair price for the damages claimed.

3. “Why don’t you throw out a number?” There are differing schools of thought on this, and many people believe you should never be the first person in a negotiation to quote a price. Let the other side start the bidding, the thinking goes, and they will be forced to show their hands, which will provide you with an advantage. But some research has indicated that the result of a negotiation is often closer to what the first mover proposed than to the number the other party had in mind; the first number uttered in a negotiation (so long as it is not ridiculous) has the effect of “anchoring the conversation.” And one’s role in the negotiation can matter, too. In the book Negotiation, Adam D. Galinsky of Northwestern’s Kellogg School of Management and Roderick I. Swaab of INSEAD in France write: “In our studies, we found that the final outcome of a negotiation is affected by whether the buyer or the seller makes the first offer. Specifically, when a seller makes the first offer, the final settlement price tends to be higher than when the buyer makes the first offer.”

TCS: I am so glad there is actually research on this subject, and I cannot agree more. Too many times I have heard claim handlers say they didn’t want to be the first to throw out a number. I strongly believe that offering money first puts the negotiation off to a good start. For me it comes down to how comfortable you are with your evaluation. If you have sufficient facts and information to believe a claim is worth $35,000 then what is the harm in starting off with a number that you would be thrilled to settle for? They know what they want for their case and if it is some wild number then start preparing for trial.  More often then not your end number will be closer to theirs.

While it is possible to real get a case for a better number than you would have thought, that doesn’t happen as often as you might think. If you are not comfortable with your evaluation then you are probably shouldn’t be negotiating in the first place.

More Insight: Bargaining for Advantage

4. “I’m the final decision maker.” At the beginning of many negotiations, someone will typically ask, “Who are the key stakeholders on your side, and is everyone needed to make the decision in the room?” In negotiations, particularly with larger organizations, this can be a trap. You almost always want to establish at the beginning of a negotiation that there is some higher authority with whom you must speak prior to saying yes. The point is, while you will almost certainly be making the decision yourself, you do not want the opposing negotiators to know that you are the final decision maker, just in case you get cornered as the conversation develops. Particularly in a high-stakes deal, you will almost certainly benefit from taking an extra 24 hours to think through the terms. For once, be (falsely) humble: pretend like you aren’t the person who makes all of the decisions.

TCS: This is a great one and is very important even in the larger cases.  Going back to get authority is a great technique even when you have all the authority you need. When I used to attend trials I would always come dressed casually and sit in the back so no one would think I was the one with the authority to settle. If the settlement is right, make the deal.  If not, take the extra time to make sure the decision is sound.

More Insight: 7 Tips for Masterful Negotiating

5. “F-U.” The savviest negotiators take nothing personally; they are impervious to criticism and impossible to fluster. And because they seem unmoved by the whole situation and unimpressed with the stakes involved, they have a way of unnerving less-experienced counterparts.  Whenever you negotiate, remember that it pays to stay calm, to never show that a absurdly low counter-offer or an annoying stalling tactic has upset you. Use your equanimity to unnerve the person who is negotiating with you. And if he or she becomes angry or peeved, don’t take the bait to strike back.

TCS: I love claims professionals that take their job personally and feel they have a stake in the claim that goes beyond their corporate fiduciary responsibility. Nonetheless, this is not the place to let those emotions get the bet of you. Know your claim, go in with a plan, and don’t panic because you are in control.

More Insight: The Ultimate Guide to Negotiating

Some final thoughts

As with any list, there are always more suggestions that can be added to make them better. In reviewing the five above there is one clear message that rings true for all of them: Know your case and be comfortable with your evaluation. If you have a good work up and know what the value of a case is, then you will never be wrong if you can settle the case for that number. You also have to be prepared to do this when the other party is not as prepared.

Join the conversation, add to the list and let us know about other techniques