Canadian Underwriter


January 1, 2000   by Sean van Zyl, Editor

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With little room to maneuver on premium growth and enhancing investment returns, property and casualty insurers are likely to turn their attention in the year ahead to better risk selection and improved claims handling efficiency to boost bottom-line performance, industry spokespeople say. In particular, the claims management arena is likely to become a competitive area of focus in the battle for customer retention, with increased technology investment and integration of 24-hour claim call centers already a growing area of the business.Almost a year ago CU ran an article covering a U.S. property and casualty insurer CEO symposium which focused on upcoming financial trends. One of the speakers, a top-ranking sector analyst, described the industry as going through several stages of denial and finally to acceptance in coming to grips with the inevitability of declining profitability and increased shareholder pressure to cut costs.

At the time, he referred to 1999 as “the pain stage” where the reality of the market’s trauma would finally feed into the upper floors of management, resulting in widespread downsizing and cancelled performance bonuses. That appears to have been a fairly accurate prediction for what lay in wait for the U.S. insurance industry, with several major public insurers having announced operational restructurings in October of last year. The pressure to do so arose from plummeting company stock prices on the back of what was probably one of the worst quarterly financial results to have ever emerged from the industry.

Canada’s insurers have not yet come under such intense pressure, although the financial figures so far released for 1999 are no better off than that of their U.S. cousins. As a result, many within the Canadian industry believe that it will only be a matter of time before similar pressure is brought to bear by foreign parent companies to enhance efficiency. And, similar to events occurring in the U.S., the focal point of this drive will be on improving underwriting performance through more appropriate pricing to claims experience and reducing expenses, with claim-related costs on center stage.

Although the latest financial returns of the Canadian industry, which cover the first nine months of 1999, show a modest year-on-year decline in claims overall, the second half of the year produced a sharp rise in the cost of claims to premium growth. As premium growth is unlikely to rise significantly in the near future with the outlook for investment performance remaining fairly poor, the only avenue for improvement lies in assessing the quality of books of risk and reducing claim-related operational expenses. This view is shared by Paul Kovacs, chief economist of the Insurance Bureau of Canada (IBC), and Joel Baker, general manager of A.M. Best Canada, both of whom believe that curtailing expenses will be the primary objective of insurers in the year ahead.

Responses from CEOs and senior claim managers appear to support this approach, with many believing that the claims management field will also become the industry’s new competitive front in the year ahead. Technology and call center application in claims handling will be obvious tools in the anticipated marketing war, they predict.

Reducing claim handling inefficiencies

Terry Squire, president of The Co-operators Group, expects this year will see greater emphasis being placed by insurers on reducing expenses. Although Squire believes that referring to “cutting claim costs” is too loose a term to apply to the topic of “expense reduction” — as companies have a contractual obligation to meet claim commitments — he does see increased market pressure being brought to bear this year on reducing redundancies in the claim handling system. The real issue, he points out, is to get claims settled quickly and efficiently.

The year ahead will likely see renewed attention given to several old debates on reducing claim handling expenses, with the prospect of one or two new items working into the system, Squire says. The “old debates” are typically bringing field adjusting work back into the organizational fold versus outsourcing, automatic settlement of small value/high volume claims, and establishing preferred vendor/supplier relationships. “None of this is new, and whether it is better to go one route or the other really depends on the size and type of business of the insurer. For instance, we service most claims ourselves, but I wouldn’t want to do so in all instances.”

What will likely make entrance in the year ahead is online Internet settlement of claims. Although online technology offers ample scope for cost cutting, the real benefit of doing so lies in customer marketing, Squire notes. “Claims management might become more of an issue [this year] to differentiate oneself in what has unfortunately become a commoditized market. Once online dealing [with customers] is tied into the sales base, then I see this having a significant impact on claims handling. However, while the technology is available today, it’s very expensive to build, and I think that this [integrated selling and claims technology] is an inevitable outcome, it’s probably a longer term objective, over say the next two to three years.”

Carol Jardine, vice president of claims at Royal & SunAlliance, is a firm believer in what she refers to as “pro-active cost management programs”. Such projects embrace all of the typical elements involved with claims management, the trick is integrating them into a program with specific measurements, objectives and time frames, she says. The prime objective in this regard is to ensure that service is enhanced and not compromised by cost-cutting measures, Jardine stresses.

And, she points out, “it’s easy to look at the current loss ratios of the industry in the 70% range and the overall premium volume of the market and say, ‘if I could cut out just one percentage point from the ratio, what will it mean for the bottom-line?’ However, the challenge is not just identifying where there is room to move, but how to go about achieving this end without causing major disruption.” Similar to Squire’s views, Jardine believes the central issue to claims handling is satisfying customer needs. As such, she says success in implementing any form of a cost-reduction program requires a commitment of resources with a long-term view to payback. “These programs are not quick-fixers, a program implemented today could take 12 to 24 months before producing any meaningful benefits.” However, the disciplined approach adopted by Royal & SunAlliance appears to be paying dividends, the insurer having shaved $24 million from 1998 claim expenses, which accounts for around 2.5 points of its loss ratio, Jardine observes.

Jerry Dalla Corte, vice president of claims at The Dominion of Canada, concurs that greater efforts will be made this year by insurers on claim cost reduction. And, like Squire and Jardine, he sees this in elimination of duplication within the system and focussing on quality control programs. And, he notes, the issue is not just about cost-control, the efficiency drive is being pushed along by heightened consumer expectations, namely the 24-hour call center convenience. “Customers are becoming more demanding to get a claim paid out and they also expect quick settlement,” he points out. The behind-the-scenes issue is that claims handling has become a competitive marketing tool in the ongoing battle for marketshare, Dalla Corte says.

The marketing face of claims

“We in the claims management business have always said that claims is a great way to retain business — today, this has become more recognized than ever before,” says Ted Doyle, vice president of property claims at Halifax Insurance.

Doyle points to recent industry research of the Ontario market showing that customers have around an 86% satisfaction level with the settlement of claims, “not many industries can boast of the same”. As the pressure to retain and expand marketshare continues, Doyle expects the claims management side of the business will gain higher profile
in insurer marketing campaigns. This will involve initiatives from advertising and brand distinction based on claim service to customer convenience in the growth of 24-hour call reporting centers. “Customer satisfaction is really the crux of it.”

The 24-hour claim reporting call center concept is an issue which Squire says will be interesting to observe this year. “If more call [claim reporting] centers are launched this year, I expect the drive to serve consumer expectations will have a major impact on other insurers to provide the same 24-hour facilities.”

Bob Rogers, the Ontario regional claims manager for Pafco, Pembridge and Allstate Insurance, says he would not be surprised if more companies move toward integration of call center and Internet technology applications in a bid to enhance the marketing role of claims settlement. “We’re selling the company based on claims service, there is no doubt about it. Probably this [claims service] is the most significant way for an insurer to distinguish itself. Technology doesn’t necessarily reduce costs, but it does improve customer satisfaction. However, just the ability through technology to communicate at greater speed produces a savings of a kind.”

Call centers and the Internet

As part of the Internet expansion announced last year, Allstate Insurance launched a web claims reporting service in Canada from the beginning of this year. For some time, the insurer has been operating an online service connecting brokers and claim handlers into one system. This has produced significant time savings, observes Rogers, although it is still too early to measure the success of the Internet claim reporting project. Will consumers eventually be brought into the loop between claim handlers, brokers and the insurer — probably at some point, Rogers says, although that is an unlikely development in the near future.

Claim call centers offer huge savings in the settlement of basic high volume/low value claims says Nick Briante, senior vice president of claims at Zurich Canada. Zurich’s call center is also a relatively new development, however, Briante is confident of the savings dividends it will produce. He too believes that growth in call centers will take off this year. And, with the Y2K system upgrades out of the way, he expects insurers will be channeling more technology investment into claims handling in the year ahead. “I see huge potential for Internet application in claims handling, primarily in business-to-business communications with vendors.”

This view is also supported by Doyle who believes costs associated with claim settlement directly relate to time expended by adjusters and repair/replacement involved with a settlement. “By getting a claim settled one day earlier, this means one day less in car rental costs, hotel costs, etc.” And, simply by cutting out a significant portion of the ‘paper trail” that results from a claim, studies show that the costs associated with the development of online technology is more than compensated for by the savings gained, he adds. Doyle also believes insurers will invest in call centers this year, but whether the savings gained through telephone settlement will exceed the possible indemnity costs involved will be an interesting issue to monitor, he says.

Vendor partnerships

Another area of claims management which is garnering serious attention is the establishment of national or even international vendor partnerships, says Doyle. Such partnerships typically included bodyshops and glass replacement suppliers. However, not only has the traditional list of “vendor partnerships” been extended to include everything from car rental companies and hotel chains to nearly any service touching on the cost of a claim, but these arrangements are being structured on a national basis. The idea, says Doyle, is to provide seamless customer service as well as gaining savings through group discounts. “The message is to satisfy consumers in saying that we can service you anytime and anywhere.” As a result, Doyle sees vendor partnerships as being the second area insurers are likely to expand on this year.

Vendor partnerships, which Jardine refers to as “supply chain management” is an integral part of Royal & SunAlliance’s cost management programs. Jardine says she has already seen signs in the market of other insurers moving in this direction. “Royal & SunAlliance has for time implemented a supply chain vendor management program to ensure value service as well as establish a reasonable rate of return for all the suppliers involved.”

This view is supported by Dalla Corte, who believes the real savings on claim expenses can be made through achieving “economies of scale” with vendors. And, he observes, by combining these partnership arrangements with new real-time technology capability, in other words bringing everyone from the broker, adjuster and bodyshop into the same communication loop, the cost-saving opportunities open to insurers are

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