A Claims Tale Of Three Little Managers And Their Review Programs

Posted on June 20, 2012 by Marc Lanzkowsky

My Take On The Old Story Of The Three Little Pigs

Once upon a time there were three claims managers who were told by their CEO to go out and make sure they have the best organization possible. Since they all knew that the best way to a good organization was to develop process and procedures and make sure all who worked there understood them, that’s just what they did. Each built an oversight program to ensure all was well and to prevent being attacked by all those wolves out there.

The first manager built a review program out of straw, the second out of sticks and the third out of bricks…..

Please work with me here as I am trying to be metaphorical.

The Manager Review of Straw

The first manager was a proud manager. She knew she had a good group and they worked just fine. She had instructed them on her way of doing things and had provided sufficient training to let them know was expected. Her “straw” review program was to wait for something to happen and then if there was a problem to fix it. One day a huge claim showed up on her desk. She had never seen or heard of this claim, but it was big – the type of claim that could really cause her a problem. Well that claim, it turns out, had been in the office for over a year. Information had been received to provide sufficient warning for everyone to make sure the company was ready. If only she had known about it.

After dealing with “fixing” the problem a knock came on the door. It was the manager’s big reinsurance company. This reinsurer was large and seemed to come out of no where. The manager was shocked. This reinsurer said….”manager, manager, let me come in” the manager responded “not by the hair of my chinny chin chin!” The reinsurer responded, “then I will huff and I will puff and I will blow your department down.” And that’s exactly what the reinsurer did.

The manager lost his house of straw and somehow landed a new job at her manager friend who said come on over you will feel protected in my department of sticks.

The Manager Review of Sticks

The Manger of Straw’s friend, the Manager of Sticks, sat her down and told her how it was going to be. We here in the land of sticks are prepared for any possible problem. We have a wonderful review program made of sticks. This program is so good we can prevent all those problems that got you blown down in the house of straw. We also have procedures in place, the Manager of Sticks said, but we oversee it all with regular reviews. We spend time reviewing claim files and recoding all that information on these sheets of paper. We catch it all before a problem arises so he told the Manager of Straw that she will be fine here in the house of sticks.

The stick reviews went on every quarter. The sticks were filled with all this great information and captured all this detail about the claims and what was working and not working. The problem is the sticks piled up and once they were in that pile it was hard to understand what was working. Someone had to put the sticks in an order to really understand how many problem sticks there were. Low and behold a day came when a whole series of claims came in all seemingly insignificant. It turns out there was a trend and a real problem brewing with a particular type of claim. Individually they seemed fine, collectively they were significantly under reserved. Those sticks had the information but it was so spread out and disorganized that the information was lost. Without the information available, the company rewrote that book of business and was now going to face a very big problem to explain to the shareholders.

The Manager of Sticks was about to get a knock on the door!

Knock knock….”who is it” asked the Manager of Sticks? It’s the Chief Underwriting Officer, the Chief Financial Officer and the CEO. See it turns out that they had some explaining to do to the board about a reserve charge that seemed to have come out of no where. “Manager Manager please let us in” with the Manager of Straw next to him nodding her head thinking oh I know what’s next, the Manager of Sticks responded “not by the hair of my chinny chin chin.” Well those executives were not about to be shut out and said “then we will huff and we will puff and we will blow your house in!” and that is exactly what they did.

Amazingly, the Manager of Sticks and the Manager of Straw were able to find jobs again in their friend the Manager of Brick’s company.

The Manager Review of Bricks

Working for the Manager of Bricks was actually not as bad as people thought it would be. Yes he was a tough manager and expected a lot from his people, but in the end he wanted them and the organization to succeed. The Manager of Bricks was keenly aware that when procedures were working and followed there was less of a chance of surprise. He also knew that the way to avoid those surprises was to have a very specific audit and oversight program in place. Because the Manager of Bricks also knew that using technology in the right way was a benefit, he made sure he had an oversight tool in place to manage the review process and make sure he captured, and not wasted, all the hard work performed by his reviewers.

The Manger of Straw and the Manager of Sticks had never seen anything like it. All the reviews were coordinated in one place online (of course they used the Audit Portal). Issues were categorized and follow-ups documented. Trends just popped off various dashboards and made it so simple to proactively run the department.

Then one day there was a knock on the door. It was the big bad mean regulator trying to find a violation. “Manager, manager let me come in” the regulator yelled. The manager of Bricks responded….”sure come on in and look around.” The regulator had apparently wanted to see the offices the Managers of Straw and Sticks but there was nothing left there to see. The Manager of Bricks had nothing to fear. When the regulator asked for controls and a plan it was all ready to be shown. Issues that had been identified and corrective action plans were clearly in place and the regulator was pleasantly surprised. After giving the Manager of Bricks a clean bill oh health he left with no adverse claims findings.

Don’t you love a good story? Maybe if we were all like the Manager of Bricks things would be better!

At Lanzko we can help shore up operations to become more like the Manager of Bricks using our Audit Portal application. Give us a call to learn more.

2 Company Types And Their Approach To Claim Audits: The Have To’s And The Wants To’s

Posted on November 9, 2011 by Marc Lanzkowsky

Don’t Do It Because You Have To But Because You Want To

I am often brought in to an organization to consult on their claims auditing processes. Whether it’s conducting file reviews for my clients, developing an audit program and procedure, or to automate the process with the Audit Portal, I have seen a lot of audits. There are many reasons to conduct audits, but it usually comes down to one of two reasons:

We audit because we have to
We audit because we want to

The Have To’s And The Wants To’s

Companies that audit because they have to could really care less about the outcome. They audit because a regulatory agency told them they have to, an external auditor told them they have to, or senior management told them they have to. It’s a chore. Their goal: get in, get out, and figure a way to pass the review. No one cares about the process because all it is doing is taking time away from them doing the real work at hand.

Companies that audit because they want to care about the process and the outcome. They strive to improve their organizations. They are goal oriented and focus on improving themselves. They do this because they understand that auditing is a way to finding gaps and making those gaps go away. It’s a way to ensure people have the direction to succeed which in turn will help the company succeed. Companies that audit because they want to provide better customer services, are efficiently run, have happier employees, and are singularly focused on providing the best low cost claims services in a responsible manner.

Be The Best You Can Be

Don’t be the have to company and instead strive for excellence. Develop an audit program that encourages learning as its core value. Engage the group in the process and strive to improve both the organization and the people that make it up. Stay focused and committed to the process and the outcome. Measure those results and track them over time. Watch how your people grow and improve, and watch your costs go down and your production goes up.

Which Company Are You?

Shakespeare & Claims: Looking Inward

Posted on June 6, 2011 by Marc Lanzkowsky

Looking In From The Outside

Ariana Huffington recently wrote about taking responsibility for ones own action in her article On Dominique Strauss-Kahn, Shakespeare, and the Enemy in the Mirror. As she reflected on some of the recent news of the week and reminded us that

in the game of life, as Cassius said in Julius Caesar, “The fault, dear Brutus, is not in our stars — but in ourselves…” This was a frequent theme of Shakespeare’s, who put it another way in All’s Well That Ends Well, when Helena says: “Our remedies oft in ourselves do lie, which we ascribe to Heaven.”

So what the heck doe this have to do with claims? More than might appear at first glance.

Insurance companies and claims departments are quick to blame all sorts of issues when problems arise. The loss was unexpected, we didn’t know the information was available, or my favorite, it was the other guy’s fault. As Ms. Huffington went on to write

In the end, if we spent even a small percentage of the time we devote to obsessing about those we consider our rivals, competitors, and enemies on examining where our own fault lines are, it’s hard to believe we wouldn’t be more successful

For companies to be successful they must look inward and then act on what they learn.

Don’t Let History Repeat Itself

Recently I was part of a claim review that found significant issues in not only how claims were being managed, but in how policies were being issued. I provided my report and commentary about what was found. Regardless, the client chose to move forward to renew the account. It reminded me again of the time when we in claims had recommended the company get out of a particular class of business only to be told “it’s OK we doubled the premium.” Then reality sank in two years later when the loss ratios went over 220%.

Now I am not against writing business. I agree with the principal I learned from the CEO of one of my former companies that it’s not about not writing business it’s about writing the right business at the right prices and terms. Regardless, reviews done in both those cases provided valuable information that could help to improve the operation.

Claims auditing is a way to look inward and learn the faults within our ourselves. A good claims review can identify weaknesses and provide a road map to improve an operation. Regular reviews can help prevent surprise and insure the department continues to improve. Of course, the information needs to be used to improve decision making and not ignored. As has been said “those who ignore history are bound (or doomed) to repeat it.”

Learn From What You Already Know And Review Your Claims Regularly

Claim Reviews Empower Better Decisions By Putting Critical Information In Hand

Posted on March 30, 2011 by Marc Lanzkowsky

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:

Account Renewal
Late, inadequate or infrequent claim reports
Significant management changes or turnover
Financial problems with Cedent or Primary
Loss results are too good to be true
Unexpected claims in lines of business
Historically volatile product lines
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.

The Importance Of The Pre Bind Claims Review In The Reinsurance Context

Posted on June 29, 2010 by Marc Lanzkowsky

Don’t leave the gate open. Let a pre-bind claims review ensure you are secure in that new risk

I recently had a conversation with one of our Lanzko Associates, Nigel Shepherd, about the importance of conducting a pre-bind review in the reinsurance context. He was relaying a story from his past about how a POST bind review showed a significant exposures, which had not been reflected in the line of business profile contained in the client’s submission. This unknown exposure was largely responsible for that reinsurer going into run-off. It was a preventable event had the review taken place prior to binding.

A lot can be uncovered when reviewing claims in advance of binding a new risk

Pre-bind reviews can greatly improve the information normally found on a submission. Claim numbers are just numbers when there is no context of information to understand the operation that supported them.

A good pre-bind review can help to:

Uncover unknown issues about department staffing and operational deficiencies that could affect future reserves and loss payouts.
Understand the reporting and reserve controls to see if there are impediments to setting appropriate reserves.
Determine the nature of the reserve philosophy and how it is employed to learn if reserves reflected are likely to be increased or decreased significantly prior to payments.
Ensure a claims system can handle reporting needs of the reinsurer as well to see if it is designed to improve efficiencies and help, not hinder, the managing of claims.
Learn how effective cost cutting initiatives, such as anti-fraud programs, litigation management and subrogation, truly are.

Why take the risk?

I asked attorney, and fellow blogger, Phil Loree of the Reinsurance and Arbitration Law Forum, as to his views on pre-bind reviews and he said:

“A pre-binding audit is a dispute-prevention technique. While reinsurers can in appropriate cases obtain rescission when a cedent fails to disclose facts material to the risk, why buy a costly lawsuit or arbitration proceeding that could have been avoided by a modest, upfront investment of time and money?”

So why do companies take the risk of not conducting pre-bind reviews? There are always a multitude of factors that can come into play and mostly center around cost. Reinsurance companies with no in-house claims departments sometimes don’t have the staff to handle these types of reviews. Even the ones that do are usually faced with departments with claims to manage, and accounts to audit, with pre-bind reviews running low on the priority list.

Regardless of the reason, the failing to conduct a pre-bind review can be a risky venture.

For a healthy dose of good business judgment, an ounce of prevention goes a long way.

The Need For Claim Auditing In Catastrophe Loss Situations Such As The Gulf Tragedy

Posted on June 15, 2010 by Marc Lanzkowsky

Claim auditing is an essential tool to ensure best practices and timely claim payouts

Obviously the tragedy caused by the Deepwater Horizon accident will be felt for years, if not decades to come. I have previously commented on claims issues surrounding this loss that have yet to hit the industry in my Commentary: Expect Gulf Oil Slick Claims To be Extensive And Impact Multiple Lines of Business. Recently there have been numerous reports about the speed and adequacy of claim payments being made by BP, including a statement by President Obama, that White House will be watching the claims process closely (see White House Statement of June 7, 2010). On June 9, 2010 it was reported that Admiral Thad Allen met with BP to ensure “every legitimate claim is honored and paid in an efficient manner” (see UPI – Allen, BP Meet on Claims Process). And even more recently, the administration is seeking BP to establish a compensation fund so the Federal Government can manage the claims process (see White House: Obama poised to take claims processing away from BP unless it changes system).

Managing this enormous claims undertaking won’t be easy and will be criticized for years to come. Regardless, claims auditing is a way to ensure ongoing claims practices are fair and expeditious.

The enormity of the claims process

While changing daily, there are some reports, BP has processed over 51,000 claims and paid over $62 million (see BP Oil Spill Claims Reach $1.6 Billion). With over 25 claims offices and some 600 claims professionals working to resolve matters, this is one of the largest claims organizaitons operating in this country focused on one event.

From a claims management perspective, handling this many claims is an enormous task that is fraught with potential problems and criticisms. It is a massive undertaking rivaling claims organizations for some of the largest insurance companies for all lines of business. Keep in mind that it all had to be established in a matter of a few short weeks.

While there is no easy way to manage such an onslaught, there are a few things that can be done to make sure best practices and timely compliance is occurring: Internal reviews and audits.

Audit to ensure compliance and look for waste

There are a variety of Audits that should be explored when faced with a large catastrophe situation. A proper audit can look for weaknesses in the operation, provide valuable feedback to improve those weaknesses and further protect against waste and mismanagement. In a large CAT loss situations, such as in the Gulf tragedy, audits should be an essential element of the process.

3 Claim audits that should be done, preferably by a third party not associated with those managing the claims, can include:

Best practices and procedural reviews to ensure there are no delays in payments, the claims staff is appropriately trained, and to identify inefficient processes. When done correctly, and regularly, these reviews can save money and ensure appropriate payments are being processed timely and appropriately.
Anti-fraud assessments are needed to ensure fraud is identified and prevented. The reality is in any catastrophe situation the unscrupulous will come out of the wood works to claim all sorts of false damages. Fraud diverts resources away from legitimate claims and will only create further delays in the claims process. Ensuring fraud is properly detected, and ensuring law enforcement aggressively prosecutes those involved, is essential.
Vendor selection and compliance must be reviewed to ensure appropriate vendors are being hired and “kept honest” to help those who have been damaged. Many vendors will say they can handle certain types of losses or repairs when the reality is they are not staffed nor experienced in the areas they claim to be. A proper vetting process and regular audits of those vendors, is the best way to ensure compliance and prevent waste (see How Do You Effectively Manage A TPA? Speak Up And Be Active!).

Audits performed periodically can ensure ongoing quality claims services, and help to see if claims are being handled consistently from office to office. Successes from one office can then be passed to others, and failures can be used as learning experiences to prevent future problems.

What other audits should be done in the Catastrophe loss situation?

2 Chores that should not be neglected to become a stronger claims organization

Posted on May 18, 2010 by Marc Lanzkowsky

No one likes to cut the grass, but to make the lawn grow strong, it needs to be done regularly

Lets face it – no one really likes to do mundane things. Nonetheless, it’s those very chores that have to be done regularly to ensure a strong organization. Like cutting grass, the longer you let it go the worse it is for your grass, and the harder it will be to fix the mess that has been created (for more on cutting grass read the The Importance of Mowing Frequency).

There are certainly enough chores that need to be done in the world of claims that no one likes to do. You know what they are and can include writing notes on files, keeping a diary and paying bills. But as any good claims handler knows, if you fail to do those tasks regularly, not only won’t your grass grow, but you will have quite a clean-up later.

Two chores that can really help claim departments grow nice healthy grass are in the areas of training and managerial assessments. Taking time to do these two chores regularly will go a long way to creating a stronger claims group.

Education and training

Claims is an ever changing world, and whether it’s a new legal issues or keeping skills sharp, you can never stop learning. Malcolm Gladwell, in his book Outliers, discusses the 10,000 hour rule. Mr. Gladwell explains that to get good at anything it really comes down to the amount of time you spend doing it. I know it seems like common sense, but even common sense needs to be repeated from time to time. To improve the skills of your claims professionals it’s imperative to keep the learning process going.

Becoming a world class claims organization requires, not only hiring talented claims professionals, but is also in how you keep those skilled workers fresh and up-to-date. Lunch and learns, continuing education, reading articles in trade publications, or subscribing to a great blog on claims, are all ways to encourage claim handlers to learn and grow. The effect on your operation will be clear – better, smarter and more efficient claims professionals.

Managerial File Reviews

Despite hiring the right people, and training them regularly, you still have to review their work from time to time. You can’t just wait for problems to happen before doing something about it. Conducting regular informal managerial reviews of claim files is the best way to prevent problems before they become disasters. Being proactive about reviewing files will help you truly understand how your claim’s professionals are working and keep you abreast of developments and trends that are occur.

Doing a basic review should take no more than a few hours a week and should become part of a routine. Take a look at one or two claims files per handler or adjuster every week. These reviews can be quick assessments as to basics practice such as proactive handling and reserve adequacy. Save the detailed “section by section” review for an annual best practice audit. Keep these reviews simple and short. Maintain a basic record of the files reviewed, and create a simple rating system of “acceptable” or “needs improvement.” Make sure it’s informal, so it’s less of a chore, and let the claims professionals know how they are doing regularly. If there is an issue or trend developing you will know about it, and be able to correct it, before it becomes a real problem.

Be the envy of your neighbors in the industry

There are certainly other chores to address for claim handlers that if left unattended will leave a garden full of weeds and a lot of work for the future. So mow the lawn often and save yourself time and money later. Your organization will grow strong, more efficient and be a leader in providing the best claims service.