Despite earning record profits in 2006, reinsurers are failing to put their excess capital to good use, warn David Siesko and Neil Weiss. Investing in cutting-edge claims technology and best practice now will save headaches in years to come.
The past couple of years have been very profitable for reinsurers and have led to a certain amount of available investment capital. Their future investment choices will determine how well reinsurers bear the softening market cycle.
They are generally moving their investment
capital in one of two directions: internal technical improvement or mergers and acquisitions. The latter choice appears to be more popular, and perhaps more glamorous; however, the benefits of internal technical improvement should not be ignored.
2006 was a record year for the insurance industry globally. According to Swiss Re’s latest Sigma study, worldwide premiums written amounted to $3,723bn, an increase of 5% over the previous year. The performance of the industry also improved in terms of capitalisation and profitability. In fact, record profits were the order of the day for most reinsurers in the absence of any major catastrophes and with non-life premium rates remaining high. Many insurers and reinsurers have returned some of the excess capital to shareholders via buybacks and increased dividends. But not all of it is being put to good use.
Reinsurers often make the mistake of pressuring claims and customer service departments to reduce internal expenses at the cost of technical and customer service excellence. This is especially common during softening market cycles, like we are in today. Yet in this environment, it is more critical than ever for reinsurers to adopt progressive IT systems in order to promote service excellence, reduce costs and deliver significant return on investment.
Through a few basic steps, reinsurers can improve service excellence and efficiency in their claims departments that will benefit both customer and carrier.
Handling claims better
Services must be delivered seamlessly across all departments. This can be accomplished through segmentation techniques, which categorise claims by complexity, customer claim history and customer profiles. This results in streamlined processing cycles and ensures precise and accurate handling.
Seamless operations benefit both the customer and carrier. For customers, it makes them feel that every service offered by their reinsurer is synchronised to provide a comprehensive strategy designed to enhance value. For reinsurers, it gives them an enhanced picture of all customer needs. As a result, additional marketing and service packages can be developed to better serve customers while increasing sales.
Despite the obvious advantages, less than half (only 44%) of North American insurers, are currently using advanced claims segmentation technique, according to a recent study from Accenture.
“Access to new revenue by growing the company is usually a more attractive proposition to many corporate boards than investing in internal efficiencies
In addition, services must be delivered consistently over time and routine coverage positions must remain consistent from deal to deal. Loss evaluation and claims reserving practices must remain consistent. Any deviation in practices on coverage or reserving gives the impression that a reinsurer’s claims process is disorganised and arbitrary. Consistency within these practices will provide the carrier with superior predictive capabilities when assessing future loss expenses.
Next, a carrier should assess its customers’ experience through crucial, consolidated data mining of claims results and trends. A sophisticated review of quality data provides deep insights into areas where improvement is critical, not only from a service perspective but also in efforts to cut costs. Performing this step today can help prevent unnecessary headaches later.
Finally, reducing costs within a claims department hinges on the efficiency and speed of claims resolution. Fortunately, when well executed, these factors also improve service excellence simultaneously. Access to accurate and reliable information must be simple for management, vendors, underwriters and other parties involved in the claims process.
Implementing these strategies, of course, requires investment in state-of-the-art claims systems. These innovative technologies provide centralised internet-based reporting, remote access to carrier claims systems, user-friendly screens, automated task management, and automated billing review. Most North American insurers and reinsurers are not using these options.
Nearly 90% of them, in fact, said their claims-processing technologies are disconnected from core IT systems, according to the Accenture study. The savings associated with integrating these programmes into a claims department can be significant. Failing to take on the initial cost of implementing these programmes will only perpetuate unnecessary expenses over time.
Most claims officers are aware of technological enhancement options (and most will implement these systems into their claims departments at some point in the future). These is still, however, the inherent conflict in a reinsurer’s approach to its customers – that of providing excellent service while declining coverage when necessary.
Traditional solutions to dealing with the inherent conflicts in customer service are still helpful:
• Claims staff must present a clear and firm carrier position;
• Coverage issues must be explained while taking into account the customer’s perspective;
“Any deviation in practices on coverage or reserving gives the impression that a reinsurer's claims process is disorganised and arbitrary
• Claims departments must aggressively manage the reservation of rights letter through any process deemed most successful in each respective market; and
• Settlement should be reached with as little confrontation and unnecessary expense as possible.
Online dispute resolution technology is another means of dealing with these issues. It provides parties with the opportunity to submit offers and demands online confidentially allowing disputes to settle automatically whenever the demand is less than the offer. Such software cuts liability expense ratios, lowers litigation and claims-handling expenses and closes claims quickly and fairly. Cases are resolved in minutes as opposed to days or months while both policyholders and carriers are more satisfied with the resulting settlement. This technology is currently being used within major insurance and reinsurance companies and corporate and governmental self-insured programmes.
Ignoring best practice
Many reinsurers are using their recent influx of capital to make acquisitions within the insurance industry. The advantages of acquisition are clear – an expansion of their customer base provides additional opportunities for profit from new revenue sources. Access to new revenue by growing the company is usually a more attractive proposition to many corporate boards than investing in internal efficiencies. It is important to highlight some of the pitfalls of this strategy.
Attempting to integrate a substantial amount of new business into an outdated or inefficient internal claims management system can reduce the added value of the acquisition. Obviously, if internal systems are not in order, adding an entity with its own confusions can multiply inefficiencies exponentially. Thus, before expanding through merger or acquisition, internal preparations should be a top priority.
A focus on financial statements and bottom line valuations generally characterises the due diligence efforts made by companies considering acquisitions. Reinsurers should heed this clear warning – look beyond the balance sheet; thorough due diligence within claims and underwriting departments is mission critical. What a company is buying on the balance sheet may not accurately reflect the true nature of the target acquisition’s organisation. This is especially true after such positive market conditions. Serious organisational issues may arise during the coming softening market cycle.
The best way to ensure that the profitability of the company being bought will be sustained in the long term is to conduct an independent audit of its claims and underwriting departments. The auditor’s report can be used as leverage to demand improvements pre-purchase or to negotiate a more reasonable price that reflects the assessment. Being able to negotiate a significant price reduction makes the cost of the audit in time and dollars more than worth it.
A reinsurance company is far more than its balance sheet. The coming years will test the strength of many organisations. Those that invested wisely in internal technical excellence and demanded the same quality from their partners will come out on top.
David Siesko and Neil Weiss are with Siesko Partners, a New York-based consultancy.