Claims leakage is an all too familiar issue for insurance companies. On the surface, the biggest impact of claims leakage is the loss of revenue from potentially overpaying a claim and being unable to recoup those funds from the payee. But there are more severe consequences for insurers that don’t have a scalable and repeatable process for ensuring that their claims process is highly accurate and driven by process excellence.
According to insurance industry expert, Bob Finlayson, the true impact of claims leakage isn’t just felt from a judgement call made during a claims process, or from an outright error. Companies tend to mainly track leakage from that which is often called hard leakage, such as a claim that is paid when an incident or person is not covered, or the failure to collect a deductible, which can be easily verified and not subject to possible disagreement between the field and Home Office Quality Assurance units. However, “there are other more hidden costs that result from poor claim handling and can have a greater impact on the bottom line,” he shared. “These big issues add overhead, cause the loss of reputation, frustrate employees, can cost an insurer new business, and attract the unwanted attention of state insurance commission auditors.”
When the insurer is subject to a state insurance commission audit “such an audit can hit an insurer hard as it frequently identifies many instances of adjustment errors resulting in multiple fines, potentially leading to the loss of the company’s license to do business in that state” he shared. “Moreover,” Finlayson continued, “because audit results are public information it will likely result in additional audits from other state commissioners, resulting in yet more fines and, ultimately, poor ratings from the state, leading to reputational damage with both customers and business partners.”
Other areas where the consequences and costs of claim errors are usually not tracked are: the greater length of time a claim is kept open to rectify errors leading to higher outstanding reserves and more open claims; customer dissatisfaction and subsequent non-renewal of their policy; increased expense of extra supervision to prevent or correct errors; and the potentially higher staff turnover rate due to the inadequate training and supervision that are often the root causes of the initial claim errors.
For an industry that is built on the accuracy of actuarial tables, this much risk surely has to be unacceptable. Yet up until now, the only way to truly mitigate the full scope of negative impacts from a poorly adjusted claim has been to rely upon a manual audit process. “It’s an insurer’s goal to avoid having too many transfers for a single file,” explained Finlayson. “One of the major findings of an exhaustive consultant-led project was that the claims leakage increased exponentially with the increased numbers of file handlers. Additionally, the longer a file stayed open, the more likely it is that problems will arise, and that not only will it be a source of claims leakage in the payout process but that it will be a problem file during such a state insurance department audit.”
With advancements in insuretech, particularly with AI-driven solutions coming to market, there are possibilities to help insurers reach their goal of a ‘one touch file’ and minimize the opportunity for claims leakage and the negative impact of audits. “Adjustors already have claims platforms and estimating platforms available to provide various levels of guidance,” Finlayson shared. “But these AI-driven solutions, fueled by the deep analysis of available data go a step further in identifying patterns of risk, behavior, and fraud which cut down the risk of error significantly.” By adding these guard rails, not only are the issues that cause irregularities identified early in the adjudication process, but they also give an adjustor the opportunity to document and justify a decision if, or when, there are extenuating circumstances.
Taken up another level to that of an internal audit process, data-driven insuretech solutions can play an additional role in mitigating claims leakage and the impact of external audit irregularities. “The best way to avoid an unpleasant external audit is to have a robust internal audit or quality assurance process in place,” Finlayson noted. Based on his experience in the insurance industry, Finlayson is cautious about the traditional sample audit where a sample of files is selected to be reviewed manually. “Sample audits tend to result in selection bias when it comes to the chosen files,” he shared. “If there are too many ‘good’ files or too many ‘adverse’ selections the result of the audit is nullified or at least be questioned by the audited group because it is statistically invalid.
Instead, Finlayson recommends turning to digital claims audit where each file can be reviewed automatically based on parameters set by the insurer. “From there the results can be analyzed, applied, and adherence to selected standards can be tracked,” he shared. “From the data it’s then possible to do “just in time” and specifically focused training and correction with adjustors through education and supervision in a positive way. Here, the emphasis isn’t on mistakes made, but on the correct way to handle a claim, or an element of a claim, with the goal of getting to an error free file.” Such a system can also provide valuable and accurate performance evaluation of both front-line staff and their supervisors as it looks at everyone’s performance in exactly the same way adhering to the standards and guidelines that company has established.
The pathway to the perfectly handled claim is the ultimate goal for all insurers. The adoption and inclusion of AI and data-driven tools that help identify not only individual errors, but also patterns of mistakes is helping them get closer to that goal. “Technology isn’t replacing the knowledge and insight of an adjustor,” concluded Finlayson. “What a digital claims audit process enables is a better understanding of the root causes as trends become more noticeable and more valid because of the volume of claims that can be reviewed. A sample audit can only identify what is in those particular files and doesn’t give a broad and unbiased view against a statistically valid sample. A digital claims audit identifies all files or instances where an error is recorded based on the established criteria and does so much faster and more accurately. In the end, this benefits each stakeholder in the claim – the customer who is satisfied with their policy and the outcome of their claim, the adjustor who is handling claims more quickly and more accurately, and the business that is reducing overall expenses as well as avoiding audits, fines, and reputational damage. It’s a true win-win-win situation.
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