Necessity Breeds Innovation

There is an old saying that Necessity is the Mother of Invention.

Without a doubt, insurers are facing a time of necessity. They are currently focused on finding ways to reduce their claims costs. Up to the end of the third quarter of 2010, federally regulated Canadian property and casualty insurers paid out slightly more than $18 billion to resolve claims. That’s up from the $17.4 billion they paid out for claims over the same period in 2009.

Of course, insurers are always looking for methods to contain loss costs. But investment losses after the market crash of 2008-09 brought this imperative into high relief. From a consumer’s perspective, when an insurer refers to “the need to reduce loss costs,” the conversation starts to sound pretty abstract. Consumers may not appreciate the complications for an insurer arising from having to deal with several different kinds of companies and networks of companies - known as ‘vendors’- in order to resolve policyholders’ claims. A vendor is anyone who supplies or sells goods or services to a company. Examples of vendors in the property and casualty insurance industry include car collision repair centres, medical and rehabilitation clinics, restoration firms, engineering firms, legal firms, independent adjuster firms, as well as many other professionals who help insurers restore some degree of normalcy to the life of a policyholder in the event of a claim.

Talking about “innovation” in the property and casualty industry is not easy: sensitive relationships are at play. Insurers need vendor partners in order to help make good on the promise to replace or repair a damaged car, home or business. Likewise, vendors need insurers to buy their goods or services. When insurer-vendor relationships are strong, they are mutually supportive and can help the claimants ride out difficult times. But when times are tough, no family wants to air out their dirty laundry in public. Family matters are sensitive and hence rarely publicly discussed.

For various reasons, several sources understandably shied away from speaking about innovative, concrete ways to reduce loss costs, not wanting to upset the apple cart and destabilize solid vendor relationships. Other concerns relate to the competitive nature of the business: an insurer competing with another on claims service is not going to spill the beans about a method that gives it a competitive advantage over the other. For these reasons and others, many sources, if they did talk to us about innovation, did so on condition of anonymity.

Sensitivities aside, insurers and vendor partners have been working on a number of initiatives to reduce claims costs over the past couple of years, and they have done so in ways that are profitable for both insurers and vendor partners alike. In the spirit of proving that financial necessity has indeed borne the fruit of some innovate ways to reduce loss costs, Canadian Underwriter sought out new approaches to conducting business in an atmosphere of cost containment.

Definitions

Before moving on, it is worth mentioning words like “invention” and “innovation” have many different meanings to players in the claims business. “Innovation is a loose term,” observes Glen Martin, senior vice president of claims strategy and claims services at Aviva Canada. “It could be transformational or it could just be continuous improvement. Everybody defines it differently. We see it more as a continuous improvement. I don’t think there’s been any Big Bang innovation in procurement.”

Procurement

What, exactly, is procurement?

Like “innovation,” it is a loose term with many possible meanings. Simply defined, procurement is an approach to acquiring goods and services. An online dictionary definition of procurement refers to a “complete ¿process of obtaining goods and services from preparation and processing of a requisition through to receipt and approval of the invoice for payment. Also called sourcing, it commonly involves (1) purchase planning, (2) standards determination, (3) specifications development, (4) supplier research and selection, (5) value analysis, (6) financing, (7) price negotiation, (8) making the purchase, (9) supply contract administration, (10) inventory control and stores, and (11) disposals and other related functions.”
For insurers, procurement helps predict how much a claim will cost. Predictability of price and service is important, because this allows the insurer to estimate how much premium to charge a policyholder. (Insurance is a rare business in that the true cost of a policy is not known until well after the purchase of the product.)

For many, the word ‘procurement’ conjures images of requests for proposals (RFP), requests for information or requests for quote (these are all commonly lumped under the general category of an ‘RFP’). In the RFP process, a vendor is asked to outline services to be provided to the insurer, who will be providing them and how much these services will cost.

RFPs are a relatively new phenomenon. There is some controversy around them, because they often call for some variant of a flat fee from professionals who more commonly bill by the hour.

Sources in the area of insurance defence law, for example, can name at least four flat-fee - or hybrid - billing arrangements emerging over the past several years. In some instances, insurers may ask a legal firm for a single quote to handle all of its claims defence work, including trigger mechanisms that put lawyers back on the hourly clock. Variations of this include flat-fee requests for certain steps in the claims defence process. How much would it be, for example, to charge an insurer for opinions? How much would it charge for a defence? How much for a discovery?

The above approach effectively asks professionals such as lawyers or engineers for their ‘average’ rate to accomplish specific tasks. This isn’t an easy task: in the legal world, for example, some discoveries will be three weeks, while others could be three hours, making it difficult to fix an ‘average’ price. Some procurement contracts may spell out a per diem rate instead of an hourly rate.

Also, some RFPs explicitly spell out a “roster” identifying the professionals who will be paid for supplying a service. In doing so, insurers may stipulate that no junior or student members work on a file, or those not on a roster will not get paid for their services. The contract may also specify cost levels for incidentals such as photocopying or a process for travel arrangements.

Procurement is not for everybody. Nevertheless, some vendors see procurement as a way for larger businesses to streamline their services, thus benefiting both the vendor firm and the insurer. “It works for us because we are big, and we can leverage on junior people,” says Chris Giffin, president and co-founder of the forensic engineering firm Giffin Koerth. Giffin notes many firms are afraid of being asked to come up with an ‘average rate,’ but this is really just a matter of determining who is the best person to perform a given task. In coming up with a flat rate for service, a firm is being asked to make sure the right people are assigned for the right tasks. Viewed in this way, procurement not only saves money for the insurer, but it streamlines the vendor’s operations.

“You don’t need a guy at $250 per hour going out to measure the crush damage on a vehicle,” Giffin says, by way of example. “You send out a guy at $150/hr to do that. That’s what I mean by efficiencies. A larger firm can do that. But if you have a one-man shop like some of our competitors, an engineer will get assigned a file and do the whole job from start to finish. That particular expert is doing the high-end analytics, but he’s also measuring the crush on a vehicle. It’s just not efficient.”

For a vendor, RFPs may be the
first step towards the prized goal of business volume from an insurer. Some sources see this happening on the accident benefits side in Ontario, in the medical and rehabilitation area. Assessment centres offer discounted rates for assessment services, thereby reducing their profit margins. In exchange, the insurer channels thousands of claims through the assessment centre.

Volume deals do not benefit all vendors equally. It would take a larger assessment centre to have the structure and personnel in place to process thousands of claims. As one source put it: “If you’re only making half a cent on a widget, the answer isn’t necessarily to produce more widgets if your costs outweigh that.” And if the arrangement does not take into account the quality of the work being performed, there is always a risk that doctors simply will exit the realm of accident benefits claims.

Jamie Trimble, a partner at Hughes Amys LLP, agrees effective procurement contracts include safeguards to uphold a high quality of work to be performed. Also, they include escape clauses, lest the agreement does not benefit the insurer, the law firm or both.

Certainly vendors proposing alternative fee arrangements must have a good handle on the services they offer and how much those services will cost. “The question is: ‘Can we do this on a flat fee ‘X’?'” says Trimble. “In order to say yes or no to that, you’ve got to understand your business and the costs associated with it, and that requires statistical information. And then you have to make sure there’s enough margin built in. If you think you can do it - if you can give the client what it needs in terms of price certainty, or at least predictability, over a defined period of time and for a certain price - and still make a reasonable rate of return for the investment of your time, effort and money, then you give it a whirl and see.”

Leveraging Technology

Many vendors are leveraging technology to improve the efficiency of their business. Improved efficiency is an indirect way to save money, because it frees capacity to deal with more claims over a fixed period. Over the long run, more work done in the same amount of time reduces insurers’ claims costs, sometimes significantly. Two examples of this can be seen in the car collision and reconstruction firm areas.  

In the car collision area, car repair centre networks are applying technology to improve the efficiency of their business. In one example, the CARSTAR network of collision repair centres has started to apply pre-existing technology in a new way. The end result helps to reduce insurers’ repair times and costs.

“CARSTAR launched a major initiative in the beginning of 2010 to use a rather unique approach to repairing plastic parts versus replacing them,” says Larry Jeffries, executive vice president of CARSTAR Automotive Canada. It started when a technical manager found a new application for existing technology used to re-manufacture plastic bumper covers on a large scale. CARSTAR modified the technology for use in a smaller, repair facility environment. Now, instead of outright replacing a damaged plastic bumper, a bumper cover can be repaired for between $300-$700, depending on the make and the model of the vehicle. That, in turn, reduces labour costs to just three or four hours. Fewer labour hours mean a damaged car is repaired quickly, returned to the claimant promptly and thus spares the insurer daily car rental costs.  

Approximately how much is saved in the repair process by repairing plastic parts instead of replacing them, using this technique? “I’m going to say in the 30-50% range, so pretty significant,” Jeffries says.

New technology has also helped car collision repair centres expedite the process for ordering new car parts, says Marty Reddick, president of Supreme Collision Centre. “We’re working with two different Web-based, part-sourcing companies with two of our bigger insurance partners,” Reddick says. “One of the [part-sourcing] companies is called AOF Vision. The other one is called APU Solution. Basically, these programs allow us to order our parts Web-based. It gives us one source of contact to order our parts, as opposed to having to call two or three different suppliers. Rather than playing phone tag, it allows us to order parts electronically. It substantially reduces our administration time.”

Again, reducing administration time means faster repair or “cycle” times, a key goal for both collision repair centres and their insurer partners. “I had a meeting with one of our larger insurance companies, which said if they could eliminate one day of rental cost on a per-claim basis, it could save them $2 million a year,” Reddick says. “If you go from 10 [day rental times] to six, there’s $8 million.”

Restoration and adjusting firms are similarly benefiting from the use of Web-based technology. “One of the biggest things that has changed is the administrative burden to our business,” says Stephan Roy, business leader of disaster restoration of ServiceMaster of Canada. “Liability is a large issue and [insurance] carriers obviously want to protect themselves [in litigation]. In order to protect themselves, they will need documentation. Supporting information is becoming that much more critical.”

Creating documentation is no easy task. In the restoration business, many different reports must be produced and measurements taken. If a water-damaged home is being restored, for example, a home restoration firm will be taking atmospheric measurements, including the temperature of the home, the relative humidity and how wet the area is (measured by the grains per pound area being dried and the moisture levels of that area). Estimates for new or replacement materials must be generated. Also, the firm will be tracking the packing and removal of the home’s contents prior to restoration. Reports will be created to account at all times for the whereabouts of the contents (known in the business as a “chain of custody.”)

For the past two years, ServiceMaster has been using a new technology to create reports and send them to insurers. “We have a hand-held computer system that is for onsite field use, but synchronizes information with a Web-hosted platform that delivers all of these outputs,” Roy says.

The system collects signatures much like a courier service does. It employs a bar code system and a built-in camera to take digital photos. The device drives the process of collecting data related to atmospherics, managing equipment and equipment sizing, following all of the industry’s certification standards. It also provides documentation and charts validating the work had been completed. “It provides documentation charts identifying this is what it was [like] when we arrived, and it met dry standard when we left,” says Roy. “It creates charts, forms and electronic signatures on authorization forms, providing responsibility and release from liability.”

It also integrates into Exactimate, a system insurers use to estimate replacement costs for insurance repairs. “What we perform in the field and the data collected in the handheld, we export to our Web-hosted platform and then export the information into the [insurer’s] estimating system,” Roy says. “So it reduces all of the duplication of having [to produce documentation] that’s handwritten in the field.”

Independent adjusters are also starting to use handheld technology, allowing them to spend more time in the field and less time trying to generate administrative reports in the office. “Rather than walk into someone’s house after they’ve been robbed with a suitcase full of forms and papers, you can work paperlessly from your tablet PC,” Martin notes. “It’s sent wirelessly to the head office and the claim is already starting to be worked on before [the adjuster] even leaves the premises. That’s a big change from where we are today.” To permit these electronic exchanges of data and information, insurers will need to update - and are u
pdating - their technology systems, he notes.

Best Practices, New Protocols

In some instances, “innovation” could mean something as simple as trying a new approach. This may be codified in the form of best practices or protocols.

In the medical-rehab area, for example, VPI has put out a white paper calling for med-rehab professionals to work together with insurers to intervene earlier in the auto accident injury treatment process. Early intervention in this context involves assessing injury victims for psychological or social factors that might inhibit recovery. This is in contrast to the standard “case management” or “medical management” approach, in which the insurer stands by while the health care provider treats the physical ailments almost exclusively.

“We’ve proven that unless you are talking about a very severe catastrophic injury, for people who are disabled for more than eight weeks, the injury or the pain is not the primary barrier to recovery,” says Gail Rieschi, president and CEO of VPI Inc., a firm specializing in employment and HR management services. “It’s really the psycho-social factors that are in play. After eight weeks, the chances for getting people back to work are reduced significantly. You really have to [assess and treat] people in the 8-12 week period, or your ability to resolve a claim reduces to 50%.”

VPI’s strategy is to get as much information about the claimant as early as possible in the claims process. “Consider any psycho-social risk factors, get as much information about the employment situation as possible, and actually direct the medical practitioners in terms of applying the appropriate treatment,” Rieschi says. “It’s really taking that control. It does change the way the insurer handles the claim, because they are getting different assessments done much earlier. The claims adjuster would be saying: ‘I want to talk to the individual. I want to get some more information about them and their response to the accident. I want to get some more information about their employment situation. I want to use that information, get it to the medical treatment providers, and they need to incorporate this.'”

Early intervention protocols are also being developed for personal property claims involving fire damage. “During the first week after a fire, you are able to reduce the damage,” says Richard Lavallee, vice president of claims experience and claims development at Desjardins General Insurance Group [DGI]. “If you clean the house during the first 24-48 hours, you will be able to clean [things such as plastic window frames, household fixtures and structural items]. If you wait, you will have no choice but to replace all of that stuff. That’s a really important cost for the insurer. It will take more time to replace all of that stuff for the client.”

DGI has been working with its vendor partners to develop an early-intervention strategy and protocol for dealing with fire damage. The program is called LargerLoss. It outlines expectations of the insurer, the vendor and the policyholder after a home is damaged by fire. “The protocol is put in place with our partners and says: ‘Okay, during the first hour, you have to do that and that and that,'” says Lavallee. “The second day, we have to do that, the third day we have to do that.”

The DGI protocol also outlines expectations of the policyholder. “That means at the first moment of the claim, we explain to the client what he has to do on his side,” Lavallee says. “Because for sure clients have something to do, including helping the advisor to build a list of the contents lost or damaged.” The client will also need to know how to help in the cleaning process, what types of permissions they will need to sign, how often they will be expected to leave the house and help in the process of finding alternate accommodation. “That’s the kind of protocol we would like to put in place,” says Lavallee. “What helps insurers reduce the cost of the losses is to do things quickly and properly.”

New Degree of Trust

Success in the endeavors described will often require taking new approaches to the relationships between insurers and vendors. For example, Lavallee advocates doing away with the terms “vendors” or “suppliers” altogether. “The first change we have done when I arrived in January [2010] was to change the word ‘vendor’ to ‘insurer partner,'” he says. “It’s more of a partner, because we serve the same client [i.e the policyholder]. The partner supplier does not provide the services to DGI. They provide the services and product to the same client (as DGI). When you begin to think like that, that changes your relationship with the partner, because you are working together to try and find the best way to have the best client experience during the time we have to serve the client and settle the claim.”

For some, this may be a mere question of semantics. For others, the language reflects a new degree of trust between insurers and their claims-handling partners. This new trust itself can open the door to new forms of cost containment. Take non-reporting agreements, for example. Here, insurers give partners the authority to perform tasks without coming back to the insurer for authorization.

Craig Duncan, vice president of claims at CNA Canada, explains how the system works. “You would have a template [of standards],” he says. “There would be dollar figures as well as claims figures [indicting when] the claim would be reported. But, if it didn’t meet any of those triggers, then it could be considered non-reporting and then the vendor could handle it on that basis. You are almost making the vendor an extension of your own claims department.”

The non-report arrangement intends to reduce paperwork passed back and forth between vendors and insurers - a huge time-waster. In some instances, in the area of independent adjusting, for example, it may mean vendors are entering payments into an insurer’s system directly, thus eliminating duplicate data entry. The payments processed must of course be within pre-approved limits and are subject to audit. Still, these arrangements certainly require a great deal of trust between insurers and their vendor partners. But such trust is an implicit part of a good working partnership, Duncan notes. “My view is that if you trust your partner, then you have to enable them and give them the tools and the authority to go out and do your work for you,” he says. “If you’re giving the vendor the work, but then you basically say, ‘Yeah, but you have to tell me every time you want to write a cheque for $50,’ then you’ve really lost any efficiency you sought to gain.”

In the end, “time is money,” Lavallee notes. “At DGI, everything is about the client experience and the client. What we try to do with the client is try to figure out a way to serve the client quickly and give him everything he should have. And at the same time, we want to help all of our clients pay less premium. The only way to pay less is to be able to work on the costs of the losses generally for everybody.”