Activity-based management has significant benefits within an insurance company's claim department. Insurance companies collect premiums in exchange for a contractual promise to pay for covered losses under the insurance contract. When a policyholder experiences a loss they submit a claim for compensation to their insurance carrier. The structure and environment of a claim department can vary greatly. Most claim departments are fast-paced and structured with some combination of a centralized claim center and field staff. Many processes within this type of work environment can become stale, unbeneficial, and ineffective, requiring removal or redesign of a process. Insurance carriers strive to reduce overhead costs within the claim department to remain competitive and profitable. Activity-based management helps identify costly and/or inefficient processes for further analysis by management.
To clarify, insurance carriers classify costs within the claim department into two categories. The first is referred to as ALAE - Allocated Loss Adjustment Expenses. ALAE can be assigned directly to a claim in terms of settlement payout, defense costs, external attorney fees, expert witness expenses, and investigator fees. The second classification is referred to as ULAE - Unallocated Loss Adjustment Expenses. These overhead expenses cannot be directly linked to a claim, and they include expenses such as building costs, claim adjusters' salaries, and staff coverage counsel costs. These costs are separate and must be classified correctly, as each state requires certain reporting requirements.
Identify Activity Centers
Many companies are looking to reduce expenses within their claim departments by streamlining the handling of claims to eliminate wasteful processes. A tool that industry leaders are using is activity-based costing, which is a way to identify areas that can be improved through process redesign or process elimination. Implementing activity-based management into a claim department starts with the identification of activity centers. Activity centers refer to processes performed in the claims department, anywhere from the intake of the claim to its eventual closure. Below are common claim department processes.
Claim Department Processes
1. Intake, Setup, and Assignment
- Insured or agent submit claim to insurer
- Claim support staff sets up the claim in system and electronically assigns claim to an adjuster.
2. Locate and verify active policy
- Claim support staff verifies policy information and if the policy is active.
3. Contact the insured and/or claimant(s), take statement of the facts
- Claim handler contacts parties to the claim to start gathering the facts of the loss.
4. Investigate the claim, statement from witnesses, document the claim.
5. Verify the cause of the loss, coverage, amount of the claim.
6. Claim Conclusion
Once the key activities within the claim department are identified, the next step is to apply costs to these activities. Looking at the second process listed above, there are several costs associated with locating and verifying an active policy (e.g. labor hours, file room expenses, paper costs, etc.). First, the support staff has to locate the policy and verify that it is active. Then staff would identify the coverages under the policy and determine if the claim can be covered under the policy. If there is no active policy, the claim is closed and a letter is sent to the submitting party to notify them of the policy status. If the claim is active, the claim handling process begins and the policy verification process concludes.
If an employee spends an inordinate amount of time searching for a policy, this will be discovered when the labor cost/time shows up in the activity cost. Once costs are allocated to an activity, management can then identify cost drivers, which are the variables that increase/decrease activity-based costs. For example, one cost driver may be the time claim support staff takes to locate a policy. Once this cost driver is identified, management can further analyze ways to reduce the time spent searching for policies. A solution may be to scan all policies into one electronic system and have the system provide a summary of each policy on the first screen. Streamlining the policy retrieval process will reduce labor time spent searching for a policy, thus freeing up claim support resources that may be used elsewhere.
There are many processes within a claim department, and the structure is often complex. To remain competitive and profitable insurance companies try to keep the costs of claims operations efficient. To identify inefficiencies, activity-based costing and activity-based management can help to identify wasteful processes and/or needless costs. A full implementation of activity-based management may not be cost-effective, but should be considered to help identify areas for improvement.
