This is part two in a three part series on outsourcing claims handling.
Just as insurers reduced their ranks of company field adjusters who were replaced by in-house or independent adjusters only to be embraced yet again, claims outsourcing is having a moment.
“Insurers, many of them driven by finance people, grow to view claims as a commodity. They outsource it, and sometimes they get bitten, due to later financial leakage, bad faith, transaction costs, et cetera,” Quinley, founder and principal of Quinley Risk Associates, said.
Industry experts agree the idea of claims outsourcing is a cyclical trend – one that tends to be driven by C-suite executives with finance backgrounds.
“It’s a recurring make‑or‑buy decision ‑‑ do we make the expertise in‑house and purchase it wholesale, or do we outsource it and buy it and pay retail? They may buy it, until things go wrong,” Quinley said. “Then they decide, ‘Well, let’s bring that function in‑house. Let’s try to compete on the basis of superior claims service.’ You see some carriers with TV ads and print ads that tout their claims service. They have tighter control, until they tire of the carrying costs of having a claims staff and they start the cycle all over again.”
Any change within a claims department may also be affected by the seniority of executive level staff.
“It seems to be a cycle. I look at it kind of in a …five to seven year swing. It seems to be a process, it takes about that long before the analysis and the full consideration for the cost involved. Also, you look at how often the changes occur at the executive levels of the carriers. If you’ve got someone who’s been over a claims department or a claims division for a major carrier for 20 years, you might not have seen as much of a willingness to consider other options or to look at other approaches. If you have someone that’s relatively new, five to seven years, sometimes they have a mandate to make some changes that might be a little more effective for that company’s business profile,” said Kevin Hromas, a Texas-based executive general adjuster.
Outsourcing Line by Line
Experts agree that certain lines of insurance can benefit from claims outsourcing while others may not.
“In some cases, selective outsourcing of particular types of claims or high‑dollar claims, for losses that require specialized expertise, might be wise. In other situations, outsourcing may carry certain business risks for the insurance company, said Quinley.
Quinley said that outsourcing considerations vary by line of coverage and type of claim.
“Some types of claims ‑ right or wrong, fair or unfair ‑ are perceived as more routine, more cookie‑cutter, more amenable to outsourcing,” said Quinley.
These lines could include auto glass breakage, comprehensive, auto physical damage med pay, some PIP claims and some medical only workers’ comp claims, he said.
“Your personal lines for both property and auto, I think, are the most beneficial, because those are areas that you’re looking at physical damages, where there’s not really a determination of liability or of questions of conditions that may come up as opposed to casualty type losses. Anything with a personal injury aspect, they have a lot more intangibles involved in them,” Hromas said.
He adds that property damage on homes or commercial property where there is no question of coverage and the appraiser/estimator/contractor just needs to physically inspect the damages and report back to the carrier file handler for determination are also good candidates for outsourcing.
“By contrast, other types of claims are less like crates on a loading dock and more like rare antiques, and they’re unlikely to be outsourced or commoditized en masse. Examples could be directors‑and‑officers claims, some sensitive product liability claims, some professional liability claims. I don’t think we’re going to see a whole lot of wholesale outsourcing of those types of claims, by and large,” said Quinley.
Dave Mandt, the owner of Professional Claim and Loss Consulting in Elma, Wash., cites an example of a specialized line of coverage that can benefit from outsourcing.
“In writing commercial property insurance, you sometimes get boiler machinery claims, and all those claims at American States were outsourced to Hartford Steam Boiler. They would handle a claim, and it was written on American States paper and it was paid on American States checks. That was a very narrow piece of the business that was outsourced, and it made a whole lot of sense to do it that way because that was a very specialized line of insurance,” Mandt said.
“When we look at outsourcing, if you think about the entire end to end processing being outsourced, that typically really only happens for very small carriers. They’ll outsource if the carrier’s focusing on a niche market and it requires some unusual level of expertise. They often will outsource the claims processing there, the entire thing. If a carrier is entering a new market they’ll often outsource the entire claims process. But generally what are much more prevalent is carriers outsourcing very specific functions,” said Karlyn Carnahan, principal at insurance research firm Novarica.
Carriers Consider Specific Functions to Outsource
According to Carnahan, it’s more likely for an insurer to outsource specific functions rather than the entire claims department function. Below are some claims functions that are commonly outsourced:
First notice of loss – A common outsourcing choice for insurers, it alleviates having employees on call afterhours or on weekends and also assures that no matter what time of day, a claimant can report a claim.
Claims inquiries – This enables rapid response to basic claims questions.
Adjusting or inspecting the risk – External adjusters are commonly used in catastrophe losses.
Adjuster scheduling – A third party firm handles all scheduling on behalf of the carrier.
SIU –Carriers may not have the expertise internally for their own special investigations unit or they may not have the scale of fraud that would justify having an expensive SIU. They’ll outsource the analytic piece or the entire SIU.
Medical bill review – A commonly outsourced aspect of claims handling, ensures proper medical coding and pricing according to a negotiated fee schedule.
Litigation management – Ensures the hours charged and reprising based on a negotiated fee schedule.
Document processing – Another area outsourced frequently.
Carnahan said that predictive analytics now play a role in a carrier’s decision to outsource specific claims functions.
“What I do see increasing, I see carriers increasingly using analytics to determine when to outsource. Let’s analyze a specific claim and determine whether it would be better handled by an external adjustor or better handled by an internal adjustor. Let’s predict whether or not this claim is likely to go into litigation and let’s bring litigation management techniques in right away,” Carnahan said. “What I’m seeing increase is carrier’s capabilities. More accurately determining when to best utilize these outsources.”
This article is part two in a three part series on outsourcing claims handling. Read part one, Outsourcing Claims Functions. Read part three, Risks of Claims Outsourcing Include Vendor Control, Brain Drain tomorrow. Listen to the podcast interview with Kevin Quinley.