Chapter 7: Management of Expenses - Insurance Claims Handling (non UK)

Why is it imperative that the cost of settling claims is accurate, carefully monitored and properly reserved for?

The claims department has the highest expenditures in an insurance company

What can happen if a claims department regularly sets aside insufficient funds to cover the cost of claims, or if claims are regularly overpaid?

There could be a negative effect on the profitability, and even the solvency, of the company

What is it called when a claims department overpays a claim?

Leakage

What are the costs that a claims department makes?

• Settling claims
• Costs of running the claims department itself

Who is responsible to make sure that the costs of a claims department are controlled?

The claims manager

What is the role of the claims manager?

To develop operational excellence in the claims department

What is needed for an insurer to create a coherent approach to all aspects of claims management?

• A corporate claims philosophy
• Clear claims procedures, including reserving practices
• If appropriate, a quality management system
• An efficient use of information technology (IT)
• The use of outsourcing, where appropriate

While the claims manager will be responsible for the day-to-day implementation of the claims management, who works out the strategy?

Senior level management

What are the claims manager's key tasks in the context of a company's overall approach to claims management?

• Ensure the company's strategic direction is followed
• Set business plans and objectives to ensure smooth operation of the plans
• Maintain a sufficiently senior status so that they are able to exert the influence the role demands
• Have sufficient resources budgeted to the department to meet their objectives, and have an effective departmental structure to ensure the work is done
• Ensure suitable links are maintained with other departments, including underwriters, actuaries and claims support functions where things like suppliers, best practice and complaints may be managed
• Have suitable computer systems that produce effective, accurate reports and preferably incorporate a workflow system
• Maintain best practice within the claims department
• Be aware of current underwriting practice and reserving methodology
• Ensure that the company's approach to environmental, social and governance (ESG) is implemented where possible

What do insurers need to do since they have an intrinsic relationship with several environmental, social, and governance (ESG) factors?

Consider ESG factors in risk analysis and loss mitigation

For what kind of insurers is it beneficial to consider ESG factors in risk analysis and loss mitigation?

Insurers trying to create their ground in the accountability towards a sustainable future and IRDA (Insurance Regulatory and Development Authority) is cognizant about that fact

What are the aspects of the claims managers responsibilities when it comes to considering costs?

• Overseeing the internal cost of running the claims department
• Monitoring the cost of the claims themselves during the average claims lifecycle

What is the overseeing of the internal cost of running the claims department?

Claims expenses

What is the monitoring the cost of the claims themselves during the average claims lifecycle?

Claims indemnity

What are the responsibilities of the claims manager in regard to overseeing the internal cost of running the claims department?

• Staff salaries and benefits
• The cost of any outsourcing
• IT provision

What are the responsibilities of the claims manager in regard to monitoring the cost of the claims themselves during the average claims lifecycle?

• Payment of claims
• Subrogated recovery
• Recovery from reinsurers, where appropriate

What is not a consideration for a claims manager when determining costs and expenses of running their operation?

Office rent and rates

In relation to staffing, what does the claims manager need to do?

• Ensure they have the means to recruit, train, motivate and retain intelligent and competent staff
• Effectively manage and motivate staff

How can a claims manager motivate staff?

• Plan tasks and responsibilities
• Act as a senior point of referral for technical queries
• Provide leadership through decision-making and pro-active working methods
• Control and monitor progress
• Coordinate training and ensuring staff improvement

What does the claims handler need to make important decisions about during the claims process?

• The validity of the claim
• If it is a valid claim, the size of the payment

What does it mean for a claims handler to check the validity of a claim?

Checking to see if the claim falls within the scope of the insurance contract

During the process of settling a claim, what is there scope for?

Paying more than is justified by the details and circumstances of the claim

What is leakage?

The amount by which the actual settlement exceeds the amount that would have been required to make an acceptable settlement under the policy

What are payments that are made in a claim that do not necessarily need to be made, but have a good reason to?

Ex gratia (out of grace) payments

What are the circumstances where ex gratia payments would be made?

• Where an exclusion is a borderline one
• Where hardship would be created
• To preserve good business relationships

Why is it debatable for ex gratia payments to be categorized as leakage?

They are not based on contractual obligation

Why can't ex gratia payments be regarded as avoidable overspend?

They are authorized by a claims manager

What is true about ex gratia payments in relation to reinsurance?

They would be problematic to recover from reinsurers

What is required to identify overpayment?

A detailed review of the handling of a claim through its various stages

What would a review of overpayment consider?

• The cause of loss falls within the policy scope
• The date of loss falls within the policy dates
• The claim was notified within the time limit
• There is sufficient proof of the extent of the loss
• The correct policy excess has been properly applied
• The effect of under-insurance has been properly calculated and applied to the settlement figure
• All recoveries have been made
• All subrogation has taken place
• All contribution has been taken into account
• Any fees paid are reasonable and not inflated
• Depreciation has been taken into account
• It is a repeat claim
• The insured damage or site has been (re-)inspected
• The settlement was appropriate

What is true about quantifying overpayment?

It is not an exact science and entails a degree of subjectivity

How can overpayment be categorised?

• Soft leakage
• Hard leakage

What kind of leakage is failing to negotiate an adequate adjustment for wear and tear?

Soft leakage

What kind of leakage is failing to deduct a policy excess?

Hard leakage

What is the formula for calculating leakage

What was actually paid - What should have been paid = Overpayment (Leakage)

What should be done once overpayment has been identified?

Steps should be taken to prevent or limit its reoccurrence

How can leakage be avoided?

Claims handlers should be properly trained and systems should be in place to prevent it

What should be taken into account to reduce leakage in regard to properly training claims handlers and having systems in place to check if certain things were done before the file is closed?

• An indemnity offer was made
• The excess was taken into account
• Salvage was sold to the benefit of the insurer
• Subrogation rights were exercised against the third party

What are the steps that can be taken to reduce leakage?

• Senior management focus
• Employee skills
• Supervision of staff
• Quality management
• IT checks
• Culture

How can senior management focus help to reduce leakage?

They could put emphasis on reducing claims payments in particular rather than expenses in general.

What claims should management controls be in place for?

All claims, not just the large ones

How can employee skills help reduce leakage?

They should be trained to the appropriate levels and be encouraged to take professional qualifications

What training should employees take to improve their skills and reduce leakage?

• Legal training
• Awareness of market practices
• Knowledge of best practice

How can the supervision of staff help reduce leakage?

Supervisors require all the same skills as the rest of the employees and more

What are the skills that supervisors have that employees don't in regard to reducing leakage?

• Management training
• Presentation training

How can quality management help reduce leakage?

• Adequate checks should be in place to avoid hard leakage and as many aspects of soft leakage as possible
• Checks are usually undertaken by way of regular audit

How can IT checks help reduce leakage

Computer systems can be designed to stop certain areas of leakage

How could a computer system be designed to stop certain areas of leakage?

A system could warn or stop a user from making a payment for which an excess or deductible has not been applied

How can culture help reduce leakage?

• Insurers should allow a culture of accuracy and open challenge to flourish
• This encourages staff to be more attuned to ensuring the accuracy and validity of their actions, and ultimately reduces errors and omissions

What is the main cause of leakage?

Poorly skilled, badly trained staff using ineffective, disparate systems

How would an improvement in business processes affect leakage?

It will directly affect profitability

What happens the longer it takes to process a claim?

There is more opportunity for money to 'leak' out of the company

When policyholders pay premiums for cover what do they expect in the event of a claim?

To be paid an indemnity

Why is it critical that an insurer ensures that it has sufficient funds to pay the claims that are made?

They are effectively a 'trustee' for the vast amounts of money generated by all of the premiums

What is the proportion of funds an insurer sets aside to pay out reported and estimated claims?

A mandatory solvency margin

Why is it critical for an insurer's financial state to be continually assessed?

To ensure that it remains in a position to pay its liabilities (its claims)

Why is it necessary to monitor a company's financial performance?

• The regulators need to be satisfied that the company is solvent in order to allow it to continue underwriting and paying claims
• For purposes of their annual reports and accounts
• To maintain management control (especially in respect of budgeting)

What annual reports and accounts are often required by law?

• Profit and loss account
• Balance sheet

What shows the transactions carried out by a company during the financial year?

The profit and loss account

What shows the financial position at the end of the financial year?

The balance sheet

What does the balance sheet show?

The assets and liabilities of the company

What should not be disclosed in the liability section of a balance sheet?

Premium reserves

What are examples of premium reserves that should not be disclosed on the balance sheet?

• Outstanding claims
• Incurred but not reported (IBNR) claims

What do management accounts enable a company to do in regard to the company's operations?

• Plan (budget)
• Monitor
• Control

What are typically produced more frequently than the annual reports and accounts?

Management control accounts

What is the objective of claims reserving?

To estimate the future cost of claims

Between whom are there delays in the insurance market and the processing mechanisms operating within it?

• An incident occurring and the notification of that claim to the insurer
• The notification of a claim and the settlement of that claim by the insurer

Why do insurers need to set up reserves for unsettled or unnotified liabilities?

Because of the delays in the insurance market

What contains all the reserves allocated to each individual claim by its claims handler?

The outstanding claims reserve

What is the outstanding claims rerserve?

The aggregation of individual claim reserves, covering the cost of claims that have been incurred and reported to the insurer

What are the reserves for claims that have been incurred by the insured but have not yet been reported to the insurer, who consequently knows nothing about it?

Incurred but not reported (INBR) reserve

What is true about INBR reserves?

There is a possibility that the insurer may incur a liability to pay the claim, but as the insurer is not aware of the matter it is impossible to reserve for it individually

What statistical data can be used to calculate the amount to reserves needed for INBR claims?

• Past experiences of claims
• Actuarial modeling
• Different sources of information

What are the sources of information that could be used to help calculate INBR reserves?

• Legislation
• Market knowledge
• Judicial developments

What covers shortfalls in provisions for outstanding claims reserves?

Incurred but not enough reported (INBER) reserves

When would INBER reserves need to be used?

• When amounts reported are understated
• Where the insurer has insufficient information to decide what would be adequate reserves

What are the types of reserves that an insurer can have?

• Outstanding claims reserve
• Incurred but not reported (INBR) reserve
• Incurred but not enough reported (INBER) reserve
• Equalization reserves
• Catastrophe reserves
• Unearned premium reserve
• Unexpired risk reserve
• Provision for claims handling expenses
• Re-opened claims reserves

What kind of reserves are required by law and are designed to smooth fluctuations in loss ratios for certain classes of business?

Equalization reserves

What is an example of a loss ratio?

The ratio of premiums to claims

What kind of reserves are set up to cover a large number of related individual losses arising from one event?

Catastrophe reserves

What kind of reserves are the elements of the premium for which insurance cover has not yet been provided?

Unearned premium reserve

What is an example of unearned premium reserve?

If only six months of a policy period has expired at year end, only half the premium has been 'earned'

What kind of reserves are only needed where a loss is foreseen in relation to the unearned premium reserve?

Unexpired risk reserve

What kind of reserves are used to cover the anticipated future costs of settling claims?

Provision for claims handling expenses reserve

What would the provision for claims handling expenses cover?

• Direct costs (e.g. loss adjusters' fees)
• Indirect costs (e.g. office expenses)

What kind of reserves occur when the claim is closed but then the underlying circumstances of the claimant deteriorate?

Re-opened claims reserves

When would re-opened claims reserves be used?

For personal injury claims which have to be re-opened later with a suitable reserve