Tag Archives: Internal Audit

Shakespeare & Claims: Looking Inward

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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

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

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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.

What mundane tasks do you hate to get to but know need to be done to make you a stronger organization?

Absence of procedures to notify reinsurance is a basis for bad faith

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Recently I was discussing bad faith and notice procedures with attorney Phil Loree Jr., an expert on reinsurance and arbitration issues and author of the the Loree Reinsurance and Arbitration Forum blog.  I thought this was a timely conversation as it reinforced the concepts regarding procedures and the potential risks when they are not in place. As with my recent post regarding the breakdown of procedures in a insurance agent’s office, the cost of failing to have proper policies in place was at issue (see my article Failing to document files can be costly).

Phil reminded me of the seminal case of  Unigard Security Insurance Company Inc v. North River Insurance Company 4 F3d 1049 (1993). The case established the rule that an insurance company can be held to have committed bad faith for lack of notice to a reinsurer if there was a showing of recklessness or gross negligence. The court found that the failure to implement a policy to notify reinsurers could be an example of a willful disregard of the risk to the reinsurer and would be considered gross negligence.

Unigard and the proposition of bad faith

A high level of good faith is owed to reinsurers

The Court in Unigard first began by defining the level of good faith owed by an insurer to their reinsurer:

“…the duty of good faith requires the ceding insurer to place the reinsurer ” ‘in the same [situation] as himself [and] to give to him the same means and opportunity of judging … the value of the risks.’ ” [citation omitted] …Nevertheless, because information concerning the underlying risk lies virtually in the exclusive possession of the ceding insurer, a very high level of good faith–whether or not designated “utmost”–is required to ensure prompt and full disclosure of material information without causing reinsurers to engage in duplicative monitoring. [citation omitted]. The question, then, is what good faith requires of a ceding insurer in the notice context.”

The establishment of the bad faith standard

The court continued to establish a standard for bad faith that is differentiated from simple negligence:

“… we do not think simple negligence in not disclosing a material fact constitutes bad faith. … Virtually every material non-disclosure will be the result of at least negligence, and, if bad faith and negligence are equated, no showing of prejudice would ever be required.

We thus think that the proper minimum standard for bad faith should be gross negligence or recklessness. If a ceding insurer deliberately deceives a reinsurer, that deception is of course bad faith.”

Lack of procedures alone can be deemed reckless

With the standard established as gross negligence or recklessness, the court discussed how the failure of implementing proper notification procedures was essentially a reckless act:

“However, if a ceding insurer has implemented routine practices and controls to ensure notification to reinsurers but inadvertence causes a lapse, the insurer has not acted in bad faith. But if a ceding insurer does not implement such practices and controls, then it has willfully disregarded the risk to reinsurers and is guilty of gross negligence. A reinsurer, dependent on its ceding insurer for information, should be able to expect at least this level of protection, and, if a ceding insurer fails to provide it, the reinsurer’s late loss notice defense should succeed.”

To have procedures or not, that is the question

There is an ongoing debate in the insurance industry about maintaining claim policy manuals as a potential risk in a bad faith action. The view is that if you have specific written procedures, and your claims staff does not follow them, then that could be used against them in a bad faith action. Here a court specifically states that failing to have procedures could be considered bad faith in the reinsurance notice situation. Recently, Claims Magazine discussed the very topic in an article by Kevin Quinley, Putting Procedures In Writing (Claims Magazine, 1/5/2010).  I agree with the general proposition from the article:

In terms of bad-faith worries and claim manuals, it is often better to explain one miscue than to tell a judge or jury that the insurer has nothing in writing for claim personnel to use as their guide, and that there are no minimum performance requirements.

Whether in the Unigard example above, or in the recent award against the agent I previously commented on, failing to have procedures or follow them can have a costly outcome. Claim handlers need some kind of guidelines to understand expectations, and to establish a baseline to measure performance. When handlers are trained on good practices, and are measured on those practices for compliance through and internal review or audit program, risks are diminished.

Focusing on good claims practices will not only lower exposure to bad faith, but will help reduce leakage, lower expenses and improve customer service.