by Frank Huang | January 21, 2019
Underwriting and claims have a lot in common. Both are easily considered afterthoughts when things are going well, yet scapegoats when things sour. Both are very technical, yet are both part art and science. And both can superficially be considered defense only, whereas both – if done well – can actually be a competitive advantage of the company, and thus part of its offensive strategy.
To this end, there are a three areas that PEO leadership and the claims department should consider to ensure there is feast instead of famine.
In-House or Outsourced Claims Management
The first area to consider is whether a PEO should keep its claims management in-house or to outsource it to a third-party administrator (TPA), or even some combination of the two. The pros and cons with each path usually stem from the reality of where they are, and who has access to the data.
In-house claims management means data is kept in house. The alternative of outsourcing doesn’t mean that the PEO can never access its own data, but often there are hurdles that complicate easy access to your data.
In conjunction to having access to your claims, in-house claims management also allows for continual evaluation of claims experience to ensure that the claims management philosophy is aligned to the company’s goals. This is often difficult to achieve when outsourcing to a TPA, as TPA personnel will be handling multiple clients similar or even different to your business. Having the TPA provide a dedicated team that only works on your claims is an option but is naturally more costly and still no guarantee of an aligned claims management philosophy.
Yet for all the advantages to keeping claims management in-house, there are advantages to outsourcing. A TPA should be able to scale up its operations and personnel quicker than a PEO can to handle higher claims volume. A TPA should have greater breadth or depth of expertise amongst its personnel than a PEO. And a TPA may have analytics and software superior to that of the PEO.
Claims Department Organization
The second area to consider is how the claims department is organized. This decision may be made for you if you outsource to a TPA, but can still be a necessary decision if you are building an in-house team.
A claims department is best organized by geography and experience. Geography separates the organization vertically and ensures that the claims professionals are routinely working with state-specific regulations and risk partners. It also mitigates hurdles due to time zone differences and claim volumes. Experience adds a horizontal dimension by placing claims personnel of varying experience levels and training in each geographical region. This allows for more complex claims to be routed to the more specialized claims personnel, and the remaining simpler claims to go to more junior staff.
The third area is potentially the most impactful, but may also be the least intuitive. Consequently, this last approach is rarely undertaken by PEOs except for the more sophisticated risk programs. The approach? To connect claims to sales. And the conduit is the actuarial function.
The actuarial function is one of the least visible and least straightforward to understand. The actuarial function utilizes an actuary and his/her training in mathematics, statistics, economics, finance, legal, and other fields to estimate how existing claims will develop and settle in the future. Simply put, the actuary is predicting how much a group of claims (e.g. by fiscal year or by jurisdiction) will end up costing. For a coverage like workers compensation where claims can take many years to settle, this type of prediction is useful because it provides PEO leadership with an early view into how profitable a particular risk is.
It is extremely important for the actuary to understand the claims philosophy and environment, and the details of specific claims. Good open communication between claims and actuarial will allow the actuaries to produce more accurate estimates, which allow the PEO to respond quicker and with greater confidence.
But how is sales involved? The actuarial work product is often referenced and utilized by the PEO’s risk partners, especially those who are helping assume or mitigate that particular risk (e.g. an insurer). Insofar as the actuary’s estimate increases or decreases 1%, it is reasonable to assume that the insurer may increase or decrease premiums in the same direction and possibly by a similar magnitude.
Due to this, it is important that the claims function not only have a cursory understanding of the actuarial analysis, but they should leverage that understanding and pursue initiatives meant to address issues causing higher actuarial estimates. For example, perhaps the actuary is increasing his/her estimates by 10% due to large lingering claims or worse-than-expected development in a particular geography. The claims group can formulate and implement a strategy to address this issue, in hopes of ultimately impacting the actuary’s selection. With the right execution, the PEO could begin seeing significant results in time for the following year’s renewal negotiations, providing a significant tailwind for sales.
Claims, just like underwriting and other risk groups, has the potential to be an integral component of the company’s competitive advantage. With the right structure and strategy, the claims group can be a profit center for years to come.
- What led to your organization’s decision of in-house or outsourced claims management?
- Do you believe the assertion that your claims group could positively and directly impact sales?
 I will expound upon this more in the subsequent “Actuarial” function article.
|Frank Huang has more than 15 years of actuarial consulting experience serving a wide range of clients, including serving as ADP’s Chief Actuary.|