March 1, 2002 by Jeff Clark, vice president of RiskVault Inc.
North American insurance markets are experiencing rapid change. The markets are hardening, underwriting is becoming stricter, premiums are on the rise, and the cost of claims is skyrocketing. There is no question that the tragic events of September 11, and the impact this had on economic markets, will only add to future market uncertainty. Needless to say, this uncertainty has had a profound effect on how we perceive risk, cost exposures, and how companies respond to the potential disruption they face.
In response, North American risk managers appear to be shifting emphasis towards strategies involving greater retained/managed risk. Traditionally such strategies have provided some relief from hardening markets. However, a critical success factor to such strategies is the ability of the risk manager to truly control greater risk retention and the related claims costs.
Traditionally, a risk manager’s ability to manage the claims component of greater risk retention was, and still remains in large part, a function of the quality of third-party administrators (TPAs) to whom they have outsourced the claims handling function. However, without electronic/paperless claims management systems, the risk manager was previously only able to manage claim exposures outsourced to TPAs in a “passive”, or perhaps “reactive” manner. Claims were set up and handled through traditional paper files. The aggregation of financial loss information was a manual and/labor intensive process. The information flow was painfully slow and risk managers were at the mercy of the TPA.
During the last insurance market price hardening, risk managers were introduced to the first wave of TPA electronic claims administration systems. The use of wide area networks (WANs) and client/server technology by TPAs to deliver claims information began the process of providing risk managers with real-time or “close to real-time” access to their critical data. Though this technology was slow and usually cumbersome, TPAs had begun the process of closing the gap between themselves and their risk managers. Risk managers obtained more control to manage their increased risk retentions. In many cases, these systems contained the first iteration of reporting tools, allowing risk managers to extract predefined loss runs and financial reports.
With the advent of public broadband networks and the Internet, the risk manager and TPAs could link through a seamless network of connections. The systems offered by some TPAs have evolved into powerful, robust and web-based claims administrations systems, capable, in many cases, of rivaling many insurer systems.
“Systems are now being developed and utilized which allow risk managers access to 24/7 real-time data to manage their claims portfolio,” says Farid Nagji of Cunningham Lindsey U.S. Inc. “This level of interaction allows the risk manager unprecedented influence and control over the claims process. Next generation reporting tool sets have been developed for such systems, allowing the risk manager to program and analyze their loss data when and as required. Additionally, paperless claim systems allow greater internal control for the TPA to manage their own business, with the end result being greater service levels and reduced costs through efficiencies.” These developments offer tool sets that the risk manager can leverage to influence previously unachievable reductions in total claim costs
Beyond proprietary systems
There is no doubt that web-based claims systems have had a positive impact on the risk manager’s ability to control costs and maintain strategies. However, these systems are usually proprietary designs owned by a TPA, and only available to a risk manager for claims outsourced to that TPA. For risk managers who need, or wish to partner with multiple firms to handle their claims portfolio, this can be a significant limitation on the benefit of the technology.
Take for instance a risk manager that utilizes TPAs based on location (i.e. per state/province) or based on line of business (i.e. G/L, property, WC, etc.). In such cases, the risk manager probably has to learn and access multiple systems to manage all claims. Also, many TPAs cannot afford the cost to build and maintain solid web-based claims systems. So, the risk manager may have only a few preferred TPAs who offer the extent of real-time paperless access to claims. The manager’s other TPAs probably still report through traditional paper intensive processes. This can be very inefficient.
Proprietary TPAs claims systems can also cause data transfer problems. What happens to the loss data if the risk manager transfers a claims portfolio from one TPA with one electronic system on one platform and with one set of standards to another TPA with a different system? In this respect, who pays for the costly interface between the two competing systems? Furthermore, with data resting in multiple systems, the risk manager must still manually consolidate critical loss information. “To deal with the problems created by proprietary systems for risk managers claims portals have been developed,” says Nagji. “A claims portal brings value to the risk manager on multiple fronts. Firstly it can act as an ASP claims management system, immediately providing a system to all of a risk manager’s TPAs that have not made IT investments. Secondly, a portal can act as a common platform for those TPAs with systems to interface to. In both cases, the risk manager is provided with a 24/7 ‘one stop shop’ for accessing all of their claims related information and management information. By channeling all claims through a single system, the risk manager is no longer faced with manual consolidation of critical loss information. Lastly, with the data centrally stored, there is no longer an issue of data transfer when an account is transferred from one TPA to another.”
Risk managers have learned that hardening insurance markets or rising claims costs are, and will continue to be, a constant challenge to master. However, while the future of risk management is likely to continue to become more complex as a result of corporate globalization and the drive for real-time business information management, this new era of IT-driven solutions also offers risk managers powerful tools to manage greater risk retention.
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