Who (Almost) Murdered the Program’

April 19, 2004

Program business in the current hard market is not quite dead, but has taken gunshots to the torso. There are heavy bruises on the neck, rope burns on the wrists and wounds consistent with a pointed object to the chest.

Was it Miss Scarlet in the kitchen with the knife? Was it the underwriter in the study with the pen? Was it Mr. Green in the library with the lead pipe? Was it the carrier in the office with the lack of capacity? Was it Professor Plum in the lounge with the wrench? Was it the reinsurer in the attic with the withdrawal of support? Or was it the claims third party administrator (TPA) in the basement with the leakage?

It is getting harder and harder for managing general agents (MGAs) to find carriers with capacity and to find the necessary reinsurance for program business. Carriers who are willing to invest in programs are requiring extensive due diligence, stricter oversight, more frequent audits, and are often requiring shared risk as well.

But first let’s examine the body …

Current state of the program market
The withdrawal of large amounts of insurance and reinsurance capital from the program market has left many MGAs desperate for capacity. Close to a dozen major carriers that were providing capacity to the U.S. MGA market have now withdrawn or are gone (such as Legion, Kemper and Canterbury). Many insurers and reinsurers have redirected their capital to what they think are more profitable lines.

Carriers are changing the way they do business with MGAs, doing much heavier due diligence before signing on with an MGA, and requiring more extensive oversight. Underwriting standards are being raised, and many MGAs are now being required to share in the risk with contract terms providing smaller commissions but more generous profit sharing. Some carriers feel this ensures that they and the MGA are on the same page with the same goals. Plus, carriers and reinsurers are accepting fewer programs overall.

Not exactly a good time to find new programs, or for a newcomer MGA to try to get established.

The investigation
The attention of investigators was drawn to the change in stock market conditions. Once upon a time in the 1990s the stock market was good. Some said blind men could find their way to a 20 percent investment profit. But after the meltdown and dot-com collapse, one needed very acute vision indeed to keep from losing one’s shirt in the market, let alone make a profit.

The 9/11 tragedy removed a huge volume of capital from the market and produced a very negative reaction to risk.

Both these leads dead-ended in that they produced no culprit capable of being arrested, indicted and brought to justice from an insurance point of view. Stock markets will rise and fall, irrational exuberance happens, and catastrophes occur.

But both leads pointed to the clue that unravels the case.

Programs with strong loss ratios survived the hard market and thrive today. Those with weak financial performance and losses are in the morgue. Locating the most common difference between the two brings convicting evidence to bear.

Culprit unmasked: the claims operation!
While some programs may have died of natural causes or at the hands of others unknown, there are many that would have lived had the claims been professionally handled. The coroners say that fatality often resulted from small errors compounded over many claims, until eventually life could not be sustained. A claims administrator can have a significant effect, either good or bad, on the health of a program. If an MGA goes through all the effort required today to get a new program off the ground, but poor claims handling makes the program unprofitable, its life will be cruelly short.

A claims administrator’s decisions as to personnel, workloads and claims best practices can make or break the loss ratio. But if you wait for the loss ratio to tell you that your claims operation has a problem, the victim won’t stand a chance.

Can the victim be saved?
Here we examine six areas of possible leakage due to poor claims handling, and what you can do about each one to bring a program back to life.

Poor control of adjuster workloads
Often, this is the leak that drains most of the blood from a program. When adjuster workloads exceed best practices, the adjuster no longer has control of his or her voice mail, let alone his or her files. Policies and procedures are abandoned to a frantic effort to cope, to deal with the squeakiest wheel or the nastiest plaintiff attorney. Investigation, thorough review and application of standard procedures go out the window. Mistakes are made, coverage is confirmed where there is no coverage, coverage is wrongly denied, liability is incorrectly assigned—the list goes on. Adjuster overload is not just a wound, it’s a gaping hole gushing program blood all over the floor.

Those employing TPAs must know what the adjuster loads are—pending and newly received—at intervals no greater than monthly (weekly is better). And the new claims per adjuster reported should reconcile to the total new claims received during the period. Pendings must reconcile to total open claims or features.

Failure to detect and control fraud and abuse
Does your claims operation even look for fraud, and is there any effective process for dealing with possible fraud?

Estimates of fraud and abuse vary by line of business. But if your claims operation is not referring even 1 percent to Special Investigation Units (SIUs) and on to the Department of Insurance Fraud unit, you know that folks are asleep at the wheel and word is getting around that your program is an “easy mark.” When that happens, fraud and abuse skyrocket and 20 percent or more of your indemnity can be supporting the criminal element. Some estimates are that one-third of all claims have some element of fraud. This is an injury that can be life-threatening.

To see if you are afflicted, ask the following:
• How well is the front line rep trained to detect the indicators of fraud?
• What is the percentage of claims that are referred to SIU?
• Who handles the SIU investigations? Is this a front line rep with pending or specialized personnel?
• What does the SIU do with files investigated? Examine some of the investigation reports, examinations under oath, etc.

Leaving subrogation recovery with front line reps
If your claims operation leaves subrogation in the hands of the front line reps, they will collect only a fraction of what can be collected in any program with a normal mix of insureds and liability. Subrogation primarily requires one thing—persistence, dogged persistence. This only occurs when subrogation is handled in a dedicated unit. Front line reps have new claims every day. They have voice mail and attorneys to contend with. They send a letter and then … put it on the bottom of the stack.

To repair this injury, demand a dedicated subrogation unit whose personnel do nothing but work on recoveries. If the claims operation does not have the resources to comply, demand that all subrogation be outsourced. The 20 percent to 30 percent of recovery paid to a subrogation vendor will often be a bargain when compared to the increase in collections.

The jagged knife of legal costs
Legal expense can bleed a program to death. The three things to look for are:
• A litigation avoidance program that settles what should be settled. Control by the claims operation is vital, as it is often not in an attorney’s economic interest to avoid litigation.
• Negotiated rates with a panel of attorneys. In the absence of such rates, your program could go to the hospital and leave by the back door.
• Good control of attorneys. All litigation should be addressed with a defense plan created by the attorney and a budget. This must be converted to a calendar, and the claims organization must run that calendar tightly.

No one minding the store (inadequate metrics used)
If claims performance is being managed based on loss runs at the end of a month or quarter, the patient is possibly already drifting into a coma.

If there is an absence of data that measures performance at a claims rep level, there is little one can do to immediately improve a bad situation since one does not know who is causing it. Ask to see what metrics are being used to manage your program. Once you get these, or establish new metrics in the event there have been none, ask for the numbers weekly. Once you are receiving these weekly, ask what is being done about a particularly poor number you happen to notice. Get the claims operation managing the program to use actual performance metrics on a weekly basis.

Managing correctly with sensible metrics can be the wonder treatment that brings your program back to life.

Insufficient claims data and analysis
A good claims system can be used to provide reports that identify trends in a program. Claims data can be used to fine tune underwriting rules, pricing or distribution channels. A successful program that endures is a team activity involving both claims and underwriting. When the claims side is silent, major symptoms go undiagnosed. It’s one of the ways programs can die young.

Tips for transportation programs
If you have a transportation program, here are three more vital signs to monitor.

Material damage leakage
A serious program injury can be sustained by the failure to desk review 100 percent of the appraisals (and estimates too, if your program pays minor damages without appraisal). “Desk review” means to have an expert review the auto damage estimates, to ensure that the most cost-effective estimate has been written, which of course follows industry guidelines. The absence of a strong and consistent desk review process is treated as an invitation to inflate estimates. This is true in Direct Repair Programs and independent shops, throughout the industry. If you aren’t desk reviewing every appraisal, you could be named as an accomplice in the attempted murder of the program.

Make your claims operation desk review 100 percent of appraisals before front line adjusters are allowed to accept them. If your TPA does not have the resources to do it, make them outsource the function.

Total losses
Total losses contain enormous potential for leakage. Among them:
• Excessive advance charges due to slow handling.
• Excessive vehicle rental days due to slow settlement.
• Salvage recovery lost due to failure to obtain DMV documents.
• Total loss valuations too high.
• Prematurely totaled vehicles.
• Failure to manage salvage inventory resulting in lower or lost recovery.

If your claims operation leaves total losses in the hands of front line claims reps and does not have a dedicated total loss unit, it is near certain that significant program leakage is occurring. Two or three extra days to move the salvage costs $150 or more in advance charges. Delays in settlement cost $25 per day or more in car rental. Front line reps don’t move as fast as dedicated units and will cost you money. Find out how your claims operation is valuing total losses—we have seen claims departments value them based on asking prices in local papers and pay on average $500 per car more than actual value.

If your claims operation does not have a dedicated unit and does not have the resources to create one, demand that the total losses be outsourced. Such an arrangement can save you significant money per total loss and help bring that auto program back to life.

Control of BI and PIP claims
Bodily Injury (BI) and Personal Injury Protection (PIP) claims require control by the adjuster. One cannot let the plaintiff attorney or claimant control the pace of the claim or they will drag it out forever and cost you a fortune.

Review and control of treatment and medical specials is vital, whether by Independent Medical Review (IMR) or the various software solutions designed for this purpose. Overloaded adjusters cannot control the pace of these claims. Check the résumés and the loads of your BI claims reps. Experienced people with reasonable loads will prevent this program injury from becoming life threatening.

Summary
Once you have gone through all the effort necessary to create a program, it’s vital to ensure its future health. A healthy program is a thing of beauty and a joy forever to an MGA. A thorough review of your claims organization’s performance can have a very beneficial effect. And if that review discovers a wound, small or large, require those responsible for claims take appropriate corrective action. A properly functioning claims operation will ensure contentment (i.e., underwriting profits) for your carriers and robust health for your programs.

David Morse is founder and chairman of David Morse & Associates, a third party administration, independent adjusting and fraud invetigations firm, headquartered in Los Angeles and founded in 1979. More information on the firm can be found at www.davidmorse.com. Morse can be reached via e-mail at: dmorse@davidmorse.com.

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Insurance Journal West April 19, 2004
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2004 Program Directory, Vol. I