Simply put, claims leakage is the difference between what an insurer actually spent to settle a claim and what they should have spent. But claims leakage is discoverable only after a claim has been paid during a claims review cycle – when it’s far too late to do anything about it.
Claims leakage costs carriers over $30B annually, and accounts for 5% to 10% of all claims paid. In life insurance, that number can reach 25% - a drain that is particularly painful in a sector so ripe for disruption.
What is Claims Leakage?
To be clear, claims leakage isn’t about insurers trying to underpay on claims, but to control their spend so they pay only what they are contractually obligated to pay.
The International Risk Management Institute defines claims leakage as
dollars lost through claims management inefficiencies that ultimately result from failures in existing processes (manual or automated).
As insurers work to create the best possible customer experience at the lowest cost possible, they must weigh the cost of thoroughly investigating a claim against the negative effect a protracted claim settlement experience might have on customer satisfaction. Considering that today’s customers can change carriers in a matter of minutes, all it takes is one less-than-perfect interaction to lose the claimant’s business, and quite possibly that of their family and friends.
Insurance companies find claims leakage causes during the claim review cycle, when closed claims are examined to ensure that industry best practices are being performed. To learn the extent of the claims leakage, insurers compare the ways claims were settled or closed against a range of leakage factors.
According to the IRMI, those factors could include
(H)ow consistent were the settlement decisions made when compared across the claim organization? Were proper reserving and settlement guides used? Was investigation sufficient to reduce the likelihood of fraud? Were subrogation/third-party recovery attempts made consistently and effectively across this sample of claim files?
Subrogation is the right of an insurer to pursue a third party who caused the loss, in order to recover the amount of the claim paid by the carrier to the insured for their loss.
Primary Causes of Claims Leakage
With apologies to Harold Leavitt, developer of the “people, process, and technology” concept of business management, those are the three biggest contributors to claims leakage. That’s according to PwC, who break down the causes in these fundamental ways:
- People: Human error, relying too much on manual processes, insufficient training that leads to poor decision-making, and KPIs that aren’t aligned to business strategy.
- Process: Inferior business processes made worse by insufficient review processes, failure to perform and document investigations, and a lack of real-time claims monitoring.
- Technology: Legacy and siloed data systems, poor data quality, and ineffective use of analysis tools.
PwC also noted three areas where claims leakage is likely to occur:
- Failure to detect fraudulent or overinflated claims caused by the limited effectiveness of fraud rules engines, and infrequent assessment of fraud risk
- Errors in payments made to claimants due to staff inexperience, manual processes, siloed data systems, and a lack of proper QA
- Missed opportunities resulting from insufficient documentation/communication, and inconsistent approaches and repeated claim reassignment across claim handlers
An unspoken truth here is that people drive all three of these causes of claims leakage.
“People, We Have a Problem”
Analysts at E&Y note that claims adjusters make decisions based on their skill levels, so if they aren’t at the highest level, their ability to see potential problems will be greatly hampered. Claims that move from one adjuster to another can cause a dangerous lack of case continuity in addition to slowing the entire process. Sloppy vendor management also has a role to play in claims leakage, particularly when it comes to legal and medical professionals.
They also point to the lack of proactive claims handling, and missed subrogation, recovery, and offset opportunities among claims leakage primary causes.
However, it is difficult for even the most experienced claims adjusters to recognize and quantify the preponderance of risk factors that characterizes a claim with a high potential for additional loss development in a timely fashion.
PwC analysts admitted.
Modern technology and intelligent process automation can help insurers overcome many of these costly issues. Automating repetitive tasks ripe for human error, eliminating paper-based activities that don’t add value to the claims handling process, and using artificial intelligence, machine learning, predictive modeling, anti-fraud technology and other advancements can enable carriers to make their people more effective.
Controlling claims leakage isn’t a matter of eliminating the human touch. It’s a matter of partnering the right processes and technology with the best people.
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