“All claims department operations are alike!” Many claim managers would argue such a statement is untrue. And yet, claim mangers have for years used “Industry Standard Performance Metrics” (ISPM) to judge the performance of their department and their staff. But does measuring performance against the rest of the industry assure your operation just like all the rest? Why should a claims department be different than the rest of the industry? Does handling claims just like every other insurance company add value for the customer?
Management needs metrics to assess staffing models, assure equitable work distribution, assure timely investigations and equitable settlements and judge department performance against the competition. However, the baseline cannot be arbitrary or a function of naïve forecasting (improving on last year’s numbers). Metrics are correlated with activity which is designed to achieve goals. If the goal is to be just like the competition, then the use of ISPM’s achieve that purpose. Being, “Just like all the rest” fails to differentiate your claim department from the competition.
This is where ISPM has played a role. By using ISPM, claims managers attempt to optimize performance and satisfy customer expectations. Achieving the operational efficiencies through compliance with the metrics is seen as synonymous with achieving customer satisfaction. For example, when the ISPM indicates first party auto cases are settled with seven days of the report, and department metrics demonstrate the department is settling first party auto cases within five days of the report, management will perceive the department as exceeding the customer’s expectations by exceeding the standard for the industry. This typifies the inherent assumption that policy holder expectations and satisfaction can measured through compliance with ISPM.
I understand the importance of measuring performance. Without metrics, how can management tell if we are doing any better this year than we did last year? Management uses metrics such as closing ratios, changes in pending, new claims received, average paid by line of business, claims duration, lag time and other measurements to establish a base line for evaluating department operational effectiveness over time. These metrics may also be useful performance management tool, form an objective for salary review and bonuses.
Point of reference, doing something better than a competitor is not doing it differently. Avoid the temptation to equate operational effectiveness with operational differentiation. Sustained competitive advantage cannot be maintained by measuring the history of your performance against what others have done. This is especially when the only reason to do so is, “because that’s the way we’ve always done it.” To gain market share, command premium pricing and improve margins, a company must identify a sustainable competitive advantage.
So, what’s important about being different? Competition remains a concern. Carrier face the treat of new entrants, competitor rivalries, government regulation, supplier power and buyer power on a regular basis. Positive financial performance has increased the incentive for a new company to compete a new market. Competition among carriers for market share continues to be fierce. Mangers are challenged to maintain efficiencies and keep down costs while they comply with new government regulations. Reinsurance and specialty markets continue to require tight controls, and the buying public now has more channels and opportunities to choose between carriers than ever. Economist and Harvard Professor Michael Porter discussed this concept in his 1996 Harvard Business Review article, “What is Strategy.” He notes:
“A company can outperform rivals only if it can establish a difference that it can preserve. It must deliver greater value to customers or create comparable value at a lower cost, or do both. The arithmetic of superior profitability then follows: delivering greater value allows a company to charge higher average unit prices; greater efficiency results in lower average unit costs.”
“Few companies have competed successfully on the basis of operational effectiveness over an extended period, and staying ahead of rivals gets harder every day. The most obvious reason for that is the rapid diffusion of best practices. Competitors can quickly imitate management techniques, new technologies, input improvements, and superior ways of meeting customers’ needs. The most generic solution – Those that can be used in multiple settling – diffuse the fastest.” (Porter, November-December 1996)
Underwriting, marketing and product development departments in almost all industries clearly get the differentiation message. Watch television and pay attention to commercials. They advertise how one smart phone is better than another, or how one laundry detergent get clothes cleaner and brighter than another detergent. When it comes insurance commercials, watch how they point out whose insurance is easier, faster, cheaper to get on-line. Whose insurance reduces your deductible for each year without an accident or replaces your new car with another one if your new car is totaled.
But data suggests claim departments continue to resists being different. Performance on claims is essentially similar between carriers because they are measuring their performance against the same metrics. Take a look at the NY Department of Financial Services Insurance Report Card on the performance of insurance carriers in the aftermath of Superstorm Sandy, http://www.nyinsure.ny.gov/insurancereportcards.pdf.
Reviewing the performance of carriers with 400 or more reported claims, the number of complaints ranged from .17% to 2.82% of reported claims. That is a 2.65% difference. Considering the study report on 322,647 claims, a 2.65% difference in the number of department complaints is statistically insignificant.
For those same carriers, the days from the date the claim was reported to the date of the payment ranged from 0 to 37 days, with a median of 22.45 days and a mode of 16 days and a standard deviation of 10.6 days. While some managers may consider a 10 day difference significant, this area of operational effectiveness fails to add value to the insurance product. The results in claim department are essential the same because they all measure the same activity. The use of ISPM is ingrained in the operational psyche of the claims industry.
Marketing departments ignore claims metrics in their marketing materials and commercials. All companies advertise fast claims service, but none use a settlement comparison metric or other claim specific metric to entice someone to buy. Even if a commercial does mention claims, there is no mention of these types of metrics. I have never seen an insurance commercial advertising that they settle claims 10 days faster than other companies. Have you? Why is that?
The answer is because those metrics are not used by prospective insurance customers as part of the decision making process. People may drop a carrier for being too slow in settling a claim. But the selection of another carrier is not based on the carrier’s claim duration, or closing ratio, or average paid by line of business. Such measures therefore do not increase the carrier’s value statement and are unlikely to support a premium price. Instead marketing focuses on things customers see as helping them save money, or make the decision easier. Sometimes, they advertise a new idea, such as reducing deductibles when you have no claims, or replacing your totaled new car with another new car. However, these innovations can be copied easily and diffuse quickly. The diffusion of new product and operational efficiencies moves the strategy back to price and increases pressure on management to implement additional efficiencies.
Claims departments need to transition from financial and production oriented metrics used by everyone else, to an innovative approach which truly differentiates the service to add value for the consumer. Management needs to focus on creative ideas which will influence consumer’s buying. Metrics need have a consumer and not a financial focus.
Instead of measuring how much was saved in allocated expenses, consider measuring the innovative way the claims department serviced the claimant/insured. Instead of measuring the average paid by line of business from one year to the next, consider measuring how working with policyholders made future claims less likely. It is very unlikely the claimant or insured had prior claims with the same department (workers comp excluded). This business about filing a claim and documenting damages is all new to them. They have been injured, or their property has been damaged or both. Individuals have to put food on the table, pay utilities and get to work. Business owners need to pay bills, make payroll and fill orders. Does it really matter to them that last year you saved 5% in allocated expenses? What more can you do to help them than just pay for damages? Educate them on how to avoid similar losses. Work with them on how to process the claim. Work with their contractors all along the way while the property was being repaired and avoid the temptation to just send the insured a check, close the file and leave them to their own devices.
But why should an adjuster do all that if management continues to measure closing ratios and use them in performance reviews? Closing the file is the easiest way to impact the monthly closing ratio report and the easiest way for an adjuster to achieve notoriety. Why should an adjuster be different, innovative, and creative if the yardstick used to judge performance continues to be the same old metric? A metric which is part of the ISPM we have shown fails to add sustainable competitive advantage for the company or value to the product.
The claims department is the service arm of the company which delivers the promise to pay that is insurance. Besides the agent, claims is usually the only operation of an insurance company most claimants ever see.
Claims departments need to move away from metrics designed to measure the financial impact of claim settlement and allocated expenses on corporate results. Let financial departments handle those measures. Claims needs to measure how it adds value.
Are you measuring that which makes your operations the same as all the rest or that which makes your operations different?
Porter, M. (Novemher-December 1996). What Is Strategy. HARVARD BUSINESS REVIEW, 61.