Future of Property and Casualty Insurance Claim

Future of P&C Insurance Claims B. K. Eappen, B. Krishna

Future of Property & Casualty Insurance Claims

Bonny Kurian Eappen Krishna Bhagavatula

October 2003


Copyright 2003 Tata Consultancy Services. All rights reserved. No part of this document may be reproduced or distributed in any form by any means without prior written authorization of Tata Consultancy Services.


Contents

PREFACE ................................................................................................................... 2

PURPOSE................................................................................................................... 2 OUTLINE ................................................................................................................... 3 ABBREVIATIONS .......................................................................................................... 3

THE LAST TWO DECADES ......................................................................................... 4

CHANGE DRIVERS ........................................................................................................ 4 TODAYS WORLD ......................................................................................................... 5

State of insurance applications today .................................................................... 5 State of P&C Claims Business Processes today ....................................................... 5

THE FUTURE FOR P&C CLAIMS................................................................................ 7

MORE INNOVATION...................................................................................................... 7 COST MANAGEMENT ..................................................................................................... 7 CLAIM PROFILING ........................................................................................................ 8 CUSTOMER INTERACTION MANAGEMENT ............................................................................ 8 DATA MARTS AND DATA WAREHOUSES.............................................................................. 9 BETTER DATA MANAGEMENT .......................................................................................... 9 INSURANCE FRAUD MANAGEMENT .................................................................................... 9 CREATION OF A CLAIMS HUB. ........................................................................................10 MANAGED CARE .........................................................................................................10 INTEROPERABILITY AND STANDARDS................................................................................10 USE OF APPROPRIATE TECHNOLOGY.................................................................................11 EMERGING TECHNOLOGY VISION FOR THE FUTURE ...............................................................11 OUTSOURCING...........................................................................................................11

CONCLUSION.......................................................................................................... 11

ACKNOWLEDGEMENTS : ........................................................................................ 13

REFERENCES :......................................................................................................... 13


Preface

Purpose

Insurance Industry is unique, in the sense that this is an industry where a buyer spends significant money to buy a service which he hopes he will never have to use! However, when that person is forced to use the service, it is an experience that usually leaves a lasting impression. The service that is being referred here is an Insurance Claim. A typical P&C Claims Business Process is given below. The blocks in blue depict the core tasks and the gray blocks indicate support areas.

Market downturn and increased competition is forcing major changes in the Insurance Industry and in the way Insurance Companies operate. Competition is permanently altering the expectations in the minds of Insurance Costumers on what they should expect of claims processing. To cope with this change in expectations, the industry, as a whole, is evolving with respect to what it offers to customers. This impacts and will continue to impact Architecture and Technology decisions as well as Business Processes. TCS has amassed over 13,000 person years of experience in insurance related IT and Business consulting areas, having helped over 160 major insurance companies around the world. This experience, along with our industry domain expertise, helps us to identify challenges facing the industry and to provide effective solutions to our clients.i Based on TCS experience and research, this whitepaper provides an overview of TCS view on where P&C Claims is headed. The focus of this report is the North American P&C Insurance Industry. This paper is intended for Business Leaders, Software and Business Architects, Project Managers and Application Development Leads working on P&C Insurance Applications.

Notice of Loss

Validation and Investigation Litigation

SalvageRepair Subrogation

Repudiation

Refine Reserve

Fraud Management

Invoke Reinsurance

CRM

Update Policy

Data Warehouse

Settle

Reserve

Notice of Loss

Validation and Investigation Litigation

SalvageRepair Subrogation

Repudiation

Refine Reserve

Fraud Management

Invoke Reinsurance

CRM

Update Policy

Data Warehouse

Settle

Reserve


Outline

This document is structured into two modular sections: The introductory section discusses background perspectives related to todays scenario in P&C Claims arena. The second section covers the ongoing and expected developments in P&C Claims solutions and Business Processes.

Abbreviations

ABC Activity Based Costing ABM Activity Based Management ACORD Association for Cooperative Operations Research and Development B2B Business to Business system interactions CLUE Comprehensive Loss Underwriting Exchange IBNR Incurred But Not Reported claims J2EE Java 2 Enterprise Edition MIB Medical Information Bureau PDA Personal Digital Assistant UML Unified Modeling Language XML Extensible Markup Language


The Last two Decades

The last two decades brought unprecedented innovation and change in many industries. Even conservative industries, like the Insurance, evolved tremendously over this period. This section explores where the P&C Insurance Claims Administration business function and technology finds itself today.

Change Drivers

The major developments in the insurance industry, during this period were:- Increased competition from established organizations in other industry verticals like

banking and manufacturing. During this period, many banks started leveraging their client base to sell packages of various financial products, including insurance. This is being further fueled by legislation like the Gramm-Leach and Act.

Use of technology to allow better customer and employee access to services and up to date information (customer, policy and claim information). One of the factors that facilitated this growth was the rise in general acceptance of the Internet.

Competition from new and agile insurance carriers and service providers that jolted

the more traditional ones out of a cozy slumber. Even with comparatively minor business shares like that of the web based carriers, they got extensive publicity and customer mind-share.

Increased customer awareness, due to the all pervasive competition. This creates an

expectation for quick, cost-effective and consistently good service. Growing awareness of the inefficiencies of the insurance processes, especially the less

automated and highly skill oriented Claims process. Major market downturns that exposed the vulnerability of investment income. Apart from all these, there were the unprecedented and extensive cash outflow caused by increase in jury awards against insurers, natural and manmade disasters like hurricanes, and wanton destructions like that which occurred on the 11th of September, 2001. This changed how insurers, the general public and governments perceived personal and commercial insurance. All these factors have been exerting heavy financial pressure on the industry. Claims being the most significant cash outflow in an insurance organization (consuming around 80% of an insurers annual revenue); even a one point improvement in its efficiencies will contribute significantly to the bottom line of the organization. Furthermore, it has been established through industry studies that, on an average, the longer a claim takes for settlement, the more is the money spent on the claim. Considering all these, many insurance carriers have already initiated ambitious Claims Business Process Improvement and Claims Application Replacement programs. This article further explores what the future holds for P&C Claims.


Todays World

State of insurance applications today Traditionally, insurance companies have developed proprietary policy and claims administration applications. These systems are typically inflexible in supporting new product lines or expanding business into new locations and are incapable of handling an increase in policy volumes. META Group believes insurance companies must replace or overhaul their current legacy P&C administration systems by 2003/04, or they will be unable to compete in a rapidly converging marketplace. The insurance industry is experiencing extreme pressure to modify and streamline the insurance value chain, forcing insurers to re-examine core business processes and technologies that impact their ability to deliver and service products quickly, accurately, and cost effectively. (Excerpts from META Group Research in May 2001 iii, iv ) The approach of writing proprietary applications and piecemeal technology purchases has resulted in disparate systems which have become restrictive enterprise data silos. State of P&C Claims Business Processes today Here is a snapshot of todays P&C Insurance world.. 1. Insurers paid out $91.8 Billion in losses from weather-related natural disasters in the

1990s. This is close to four times the weather-related claims disbursed out during the entire decade of the 1980s. Even though it is a fact that the world witnessed many major natural and manmade disasters during this period, this also indicates a disturbing trend in increase of Claim Payout amounts.

2. Industry surveys show that insurers spend $75 per month as administrative cost on

every claim that is maintained on its books. 3. An average P&C Auto Claim takes about 3 weeks to settle. 4. An industry study of over 6000 closed P&C claims, across multiple companies

concluded that over 40 % of the time spent in Claims Handling process is associated with routine overhead functions that have limited impact on the outcome of the claim.

5. A Forrester Research survey of the Insurance Industry in Jan 2001 (xiii) came up with

the following findings regarding P&C Claims Administration. The Top Seven areas which offer the greatest potential to reduce cost are:- - Implementation of Technology - 46% - Executing Best Practices - 28% - Cycle Time - 26% - Personnel - 20% - Litigation Expenses - 18% - Corporate Expenses - 18% - Outsourcing - 16%

(Multiple responses were accepted)

6. Most Insurers go through 3 to 6 manual handoffs while handling each claim. 7. Many large P&C Carries still have inflexible and modestly automated business

processes for Claims Administration. Most of them have old, user-un-friendly legacy systems supporting those processes. These systems do not integrate well with vendor


systems that support functions like liability estimation, bodily injury evaluation, fraud detection, litigation support etc.

8. Medium and small sized carries are looking more towards Claims Administration

vendor products. 9. Realizing the opportunity in the extent of customer and other party interactions within

the Claims Process, Customer Relationship Management (CRM) solutions vendors, like Siebel, are making entry into the Claims Administration Market.

10. Enterprise Resource Planning (ERP) solutions vendors, like SAP, are also striving to

enter the Insurance Applications market. 11. Major IT services and consulting companies are selling frameworks (Accenture Claims

framework, Bearingpoint CTF Claims) rather than COTS solutions or pure-development solutions.

12. There is a surge in insurance fraud instances, especially in Auto insurance claims. For

instance, a study by the Insurance Research Council (IRC) found that one in four auto PIP claim in New York City in 2001 involved some form of fraud or buildup.

13. National Insurance Crime Bureau (NICB) states that in the recent past, losses from all

types of insurance fraud add up to almost $100 Billion every year. NICB & Society of Certified Property and Casualty Underwriters (CPCU) estimate that every American household pay $300 extra in insurance premiums each year to offset the cost of fraud in personal lines of insurance.

Note: In the US, Auto Insurance contributes to 65% of the P&C industry. Auto Insurance is also the most commoditized line of business in insurance that is further characterized by large volumes of relatively small premiums, intense competition, volatile regulation and political interference. Many of the observations and conclusions in this treatise are based on observations on the Auto Insurance industry.


The Future for P&C Claims

More Innovation

Industry surveys show that P&C Insurance carriers expect about 25% of their revenue in 2005 to come from new products. This and the trend in adaptation of new channels for doing business, globalization, as well as mergers and acquisitions will result in a need for more flexible and adaptable claims systems. This will in turn force many carries to replace their legacy claims systems or to out source claims handling. Insurers will make sure that the new systems provide straight through processing in claims handling to:- Reduce manual intervention Reduce the claim handling time and Identify fraudulent claims, early on.

Cost Management

Studies have shown that with a right mix of process improvement, outsourcing and technology utilization, claims cost can be reduced by up to 15%. Insurers will strive to do this through: - Process Improvements. Investment income has dwindled and this continues to

focus the Insurance Companies on process improvements for cost containment. As part of this, Business Processes will be modified to reduce the number of manual interventions and handoffs. ABM, Six-Sigma and Lean Manufacturing techniques based process improvement will be used for this.

Flexible Workflow Management. Systems that support Claims Business Processing

have to be flexible in their workflow management. There will be a shift towards usage of Workflow Components that are driven by externalized business rules.

ABC & ABM. Activity Based Costing and Activity Based Management will become

more widely used in Insurance Processes. Usage of Activity Based Management to identify the activities that consume a major share of the cost will become more prevalent. This will be difficult to implement in cases where there are applications, especially legacy applications, which are not amenable for change. In such cases, this will be one of the considerations that will drive the replacement of such applications.

Use of Mobile Technologies. Personal Digital Assistants (PDA) and Pen Tablet PCs,

with or without digital cameras and wireless connections will become more popular in the insurance industry. These will enable accurate capture of Loss Event information and also the effectiveness of utilization of expert Claims Adjusters, especially in catastrophe situations. In todays world, in many circumstances (like the Houston Floods of 2001) a catastrophic event affects the communication backbone that is relied upon by most of these wireless mobile technologies. In the future, more and more Claims field staff and Adjusters will rely on direct satellite systems and other more reliable technologies that allow them to upload and download information on to a central repository.


Usage of mobile technology for handling claims

Telematics & GPS. Telematics and Global Positioning Satellite (GPS) technologies

will become more popular. Services like GMs OnStar will become more popular on economy cars. This will reduce accident response time and thereby improve the Claims Quality of Experience and also reduce Claims Expenses. Similarly, GPS technologies like LoJack will be used more extensively in tracking stolen vehicles. These technologies will be integrated with insurance applications.

Outsourcing. Large Insurance carriers will focus more on their core competencies

and will outsourcing various non-core areas related to claims processing. This will include areas like call-centers, claims adjustments, and bills verification. This is in spite of the challenges posed by the Sarbanes-Oxley Act, (with respect to the assertions that are to be made by an Insurance Carriers management).

Effective utilization of GIS. There will be better usage of Geographical Information

Systems (GIS) to alert customers that could be impacted by oncoming Catastrophes and to provide guidance and advice on how losses can be minimized and to make necessary administrative plans. This will lead to better risk management and reduction of overall claims cost.

Buy versus Build Approach. Gartner stated in a report on Insurance Claims

Processing Trends and Directionsxv i that few insurers will build Claims systems from scratch on there own. Also, point solution providers will continue to play in the mid size market. However, in the immediate future, insurers will try to get incremental benefits in the claims processing rather than revamping claims solutions using a big bang approach.

Claim Profiling

Insurance Companies will become more and more proficient in categorizing Claims. These categories and their characteristics will be used for profiling claims and for defining business rules that allow one-touch processing of simple claims and for allocating appropriately skilled adjusters for others. This profiling will also allow Insurance organizations to be cognizant of potential liability limits. Such profiling will enable most effective utilization of resources and will thereby reduce claim handling cost.

Customer Interaction Management

One of the greatest challenges in Claims management is for the claims representatives to have access to up to date and real-time information on each and every claim. More and more Claims systems will be integrated with Document Management (with indexing) and

Claim Record and the Streaming Data is relayed to the back office system via

wired or wireless network

Incident at LocationClaim Adjusters take

Still/Motion Pictures in the field

Pictures/Video is digitized(Streaming)

Claim Information is entered on the mobile device and pictures are

attached electronically

Information is uploaded and the claims processed on the

back office systemMOBILE EXTENSION









back office system









back office systemMOBILE EXTENSION


Customer Relationship Management type components. However, only the large Insurance companies will be able to afford commercially available CRM solutions. Others will use part solutions or develop Common Customer Data components. Today, the tangled trail of phone messages and paperwork that usually follow an auto accident and subsequent auto repairs make drivers frustrated. Not surprisingly, auto claims processing which involves handling estimates, adjustments, repairs, billing and communication among everyone involved is time-consuming, expensive and frustrating for the Claim Handling staff of insurance carriers.

Data Marts and Data Warehouses

More and more organizations will try to tap into the information that is hidden in reams of data that they have been accumulating in their databases and application files, regarding all kinds of interactions with customers, suppliers, and other external parties. In the insurance industry the move towards effective utilization of data through creation of Data marts and Data warehouses will strengthen further. Claims data will be a major area that will be stored in such Data warehouses, apart from information on the policies and customers, customer life events, customer interactions, policy endorsements etc. In the foreseeable future, these will be on Relational Databases, like UDB, Oracle and SQL Server. Since this data tends to get voluminous it will also become necessary to provide data summary extraction facilities.

Better Data Management

Organizations will become more skilled with extracting information (Data Mining) out of the reams of data that gets accumulated in the operational databases and in Data Warehouses. Liability estimation and loss reserving (including appropriate reserving for IBNR) will become more and more effective because it will be sensitive to information that is available on similar situations. This will be enabled by better ways of deriving information out of the data that gets accumulated in the P&C Administration systems. Insurers will also create a co-optive environment to share the claims data across organizations. Credit rating service providers like Equifax, Experian, TransUnion etc. will become more and more popular in the Insurance arena. They will facilitate better risk management and underwriting capabilities that help insurers in controlling costs and also in reducing the perpetration of fraud, using data analytics. Ability to apply Injury Science analysis to descriptions of a cars damage increases Personal Injury as well as Physical Damage claims handling productivity and allows for more accurate claims settlements. Organizations will also become more adept at using accumulated information for actuarial analysis.

Insurance Fraud Management

In the US, insurance fraud is the second most pervasive form of crime next only to income tax evasion. Apart from the extensive use of Fraud detection training, manual red flags etc, many insurers (80%) have started using external claims database searches for detection of potential frauds. Going forward, insures will use more fuzzy-logic based and analytical approaches along with geographic data mapping to automatically flag more and more potential fraud cases.


Most Insurance Companies will not have sufficient data on their own databases to pre-empt the need for the usage of external databases, like ISO ClaimSearch, for identifying fraud scenarios. These external databases will also add more mathematical and analytical features that will help their customers in making more ad hoc queries into the database. As mentioned earlier, credit rating companies like Equifax, Experian, TransUnion etc., will play a role in helping insurers in detecting fraud early on to avoid excess payments by Insurers.

Creation of a Claims Hub.

When a claim is being processed there are various stakeholders and support personnel who need direct access to accurate and timely information on that claim. In many cases, an open information sharing mechanism like a Claims Hub on the Internet or Intranet, that is available to various third parties and suppliers facilitate the fostering of a quick and most appropriate settlement. However, it has to be noted that many independent Claims Hubs and portals did not survive in this competitive market, in the past. A Forrester Research study of P&C Insurance Industry concluded that Claims Hubs will save up to $10 Billion per year, in the future. It has also been shown that a Claims Hub could reduce an average Claim Processing time by a week. Dedicated Insurance/ Financial Services Hub is an area where many large insurers will invest money, despite the failure of earlier initiatives.

Managed Care

Average claim costs have been steadily going up over the years. In P&C claims, apart from litigation cost, two areas of concern have been:- 1. Abusive health care providers who provide excessive treatment and make multiple

billing etc., for bodily injury and 2. Steadily increasing repair costs. This will drive medium and large insurers to move towards establishing managed care partners, among repair shops, health care providers, builders, plumbers etc. More of medium and small insurers will establish partnerships or consortiums, to enter into managed care arrangements. This move will be further augmented by integration of Claims Administration systems with the systems of such providers.

Interoperability and Standards

In the world of Internet economy, interaction and inter-dependence is necessary to ensure that an organization focuses on its core-functions, and that it out-sources its non-core functions. There is also a need for automated interaction with insurance industry agencies and other insurers for subrogation, statutory reporting etc. Many of the previous sections also listed how insurers will work with other service providers and organizations to deliver better service to its customers. In this context, the use of standards like ACORD XML will become more prevalent. This also provides the insurer the ability to replace a service provider or system component, if necessary. It is also to be noted that many insurers will acquire, be acquired by or will collaborate with other financial services companies (like banks and investment companies) and product manufacturers and will provide comprehensive packages of financial services to its customers. This will need interactions with external systems, which will be aided by the usage of standards.


Use of appropriate technology

To quote the old clich, change is inevitable. Any new technology that is used has to lend itself to quick change. This will be achieved through Component Based Development, Business Rules Externalization, Extensive Parameterizations in systems and through the utilization of standard interfacing technologies like XML, which is becoming a de facto industry standard. This is a trend that will strengthen in the next few years.

Emerging technology vision for the future

The emergence of the web services architecture will free companies from the straitjacket of existing enterprise-centric IT architectures; companies wont have to acquire new assets to grow (a slow and often treacherous process); they will be able to rent them, as web based services, from third parties. The capital-intensive model of owning resources will be supplanted by the much more efficient model of orchestrating resources. A new kind of business organization a re-bundler, focusing on the assembly and co-ordination of business processes that stretch across industry and markets will likely emerge and gain enormous power. (Excerpts from Harvard Business Review in Oct 2001 xv) Considering the possibilities in collaboration that it brings, secure web services will become more and more accepted. This will enable insurance carriers to easily establish B2B interfaces with Claims related third parties like Mitchell International (Auto glass clearinghouse.). Some of the major P&C carriers like Travelers Property Casualty Corp, and Allstate Corp are already testing the waters with web services. xvii

StandardBrowsers

SmarterClients

SmarterDevices Open Internet

Communications Protocols (HTTP, SMTP, XML, SOAP)

Richer, MoreProductive User

Experience

Applications LeverageGlobally-Available

Federated Web Services

Applications Become Programmable Web Services

OS Services

BizTier Logic

Biz Logic & Web Service

OSServices

Public WebServices

Building BlockServices

InternalServices

XML

XML

XML

ServersData, Hosts

XML

Other Services

XML

XML

XML

HTML

Figure : Web Services The Next Generation

Outsourcing

Insurers will find out means and ways to transfer the risk by using outsourcing as a vehicle in Claims area. Whilst Companies like CCCIS will continue to play in traditional outsourcing areas, innovators like Visibility will make use of new technologies in various areas like litigation management, claims profiling etc. to reduce the overheads for the insurers.

Conclusion

With the vanishing investment income and a more competitive market situation, Insurance Carriers will focus more and more on Business Process Improvements and technology


utilization for cost containment. With nearly 80% of the earnings being consumed through Claims, this focus will be squarely on the Claims area.


Acknowledgements :

The authors wish to thank their colleagues, especially, Mr. K Paddy, VP and Head of the Insurance Practice, and Mr. B Lakshminarayana, from the TCS Insurance Practice who provided valuable inputs for this treatise.

References :

i. TCS Insurance Practice Home Page Refer to http://www.tcs.com/insurance/index.html ii. Architecture for Insurance Applications, by M. Somasundaram and Bonny Kurian

Eappen, - Refer to http://www.tcs.com/0_whitepapers/htdocs/AIP_text.pdf iii Property and Casualty Administration Systems Selection Criteria: Part 1., Insurance

Information Strategies, Delta 087, 22 May 2001, META Group Research iv Property and Casualty Claims Administration Systems Selection Criteria: Part 1.,

Insurance Information Strategies, File 110, 5 Oct 2001, Patricia Pfeiffer, META Group Research

v Insurance Information Strategies, MetaGroup, File :115, by Judy Johnson, Oct 2001 vi The Future of US Auto Insurance 1997 Datamonitor vii Fighting Insurance Fraud, Survey of Insurer Anti-Fraud Efforts, Insurance Research

Council, ISO, Dec 2001 viii Making a Dent In Auto Insurance Fraud : by Ron Panko, ISO Net, Oct 2001 ix Insurance Fraud: Crime That Hurts us All, NAII x Claims Vision, Concept note by Corporate Insurance group, Tata Consultancy Services xi Fraud Behind Worsening Claim Trends in Metro NYC Triggering Surge in New York No-

Fault Costs, xii Study Reports, Jan 2002 xiii The Virtual Claim, Forrester Research Report, by Todd Eyler, Ron Shevlin, Jeremy

Sweeny and Tom Watson, Jan 2001. xiv Insurers Should Prepare for Change in Competitive Landscape, by Julie Gallagher, May

7, 2003, Insurance & Technology xv Your Next IT Strategy by John Hagel III and John Seely Brown, Harvard Business

Review, October 2001 xvi Insurance Claims Processing Trends and Directions by Kimberly Harris, Gartner,

January 2003. xvii Selectively Testing the Web Services Waters by Julie Gallagher, InsuranceTech

September, 2003

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