Last year was one of the costliest years for insurers in history, with record-setting Atlantic hurricane losses amounting to $43 billion, as well as man-made catastrophic disasters culminating at $7 billion — nearly double the annual averages from 2007. With claim costs averaging 60 to 70 percent of an insurer's costs, losses could add a minimum of three to four points on operating costs. This is not a good thing in the current market environment.

Stop the Bleeding

A few years back, a large number of insurers could have absorbed such costs. However, many P&C carriers have seen their results erode because of the current economic downturn and substantial financial losses generated on their investment portfolios. That means many insurers have lost a main source of income.

In addition to the financial results being impacted from the cost side of the equation by increased claims and on the revenue side by lower investment returns, insurers are being hit on a third front: customer attrition. Insurers that until now have placed little attention to improving customer experiences and interactions within their organizations find themselves with alarming attrition levels that directly impact their top source of income: the premium line.

In its 2007 world insurance report, Capgemini recognized that 40 percent of non-life customers had switched providers in the past year because of the poor quality and quantity of the interactions they had with their insurers. Considering that those results were found during a time of economic growth, it is not hard to imagine how much larger the numbers may be now. In recessionary times, customers are apt to be more critical of the value they receive from their insurers and are thus more likely to switch.

Customers have very little patience for poor service. Claim handling is recognized as one of the top sources of customer attrition and, when combined with an insurer's inability to appropriately handle increasing levels of losses, it becomes a grim picture. Already, according to the same Capgemini report, badly handled claims and poor service experiences in the claim department have been shown to result in an attrition rate of nearly 22 percent.

While we cannot assess how investment returns will perform in the years to come in support of profitable growth strategies, insurers that take a more strategic approach to improving their customers' experiences give themselves a better chance at managing their bottom-line losses. Identifying and controlling sources of costs while delivering exemplary customer experiences can stem the loss of profitable customers and hone retention for key existing customer segments.

Catalysts for Change

Enhancing processes and channel interactions is not a new idea. However, now more than ever, every dollar saved through operational efficiency initiatives is important if companies are serious about meeting required shareholder value and return on investment. Such insights are illustrated by many analyst houses, in particular by Forrester's Marc Cecere in his November, 2005 report on key requirements for insurance claim systems. This is also illustrated by Gartner's Kimberly Harris-Ferrante in her September, 2008 report. To be competitive and meet consumer and user demands, insurers will need to deliver updated, integrated, seamless, and intuitive claim systems supported by robust, business-driven tools and optimized processes customized for different user profiles. Selecting applications that can enhance an organization's ability to utilize all relevant internal and external insights on claims and customer trends while improving customer interactions through a variety of communication channels will also become important in a world that has become more inclined to use social and digital media channels.

As customer service agents find themselves with less or virtually no time in which to answer simple routine questions such as “Did you receive my claim?”, “What is the status of my claim?”, “What is my deductible/How much of my deductible have I satisfied?”, or “Why was this claim not paid or denied?” it becomes critical to find ways to evolve current capabilities with innovative interaction. This allows claim professionals to respond to such basic inquiries and also to promote customer satisfaction through transparency, speed, and convenience.

The next catalyst for change involves reducing claim costs through non-intrusive, real-time leakage detection. Claim leakage detection and prevention has always been one of the primary areas of concern for insurers. However, this function has not always received the investment funds and resources required to significantly impact the operational financial results of an organization. It has often been considered little more than a cost center by many carriers.

By leveraging advanced decision-making capabilities such as predictive models and advanced reasoning strategies, insurers are now able to investigate and apply (in real-time) the latest financial terms and conditions from an insurance contract. They can also detect missed recovery opportunities through sophisticated interviewing techniques. By applying additional intelligence to existing systems and applications, insurers can detect and channel fraudulent behaviors, as well as supply chain errors and abuses to the most qualified resources. We believe that operational savings in this domain could reach between 30 and 40 percent.

Claim leakage represents 10 percent of an organization's claim costs. So if we imagine a small insurance organization that generates $100 million of premiums in one of its P&C business lines, an average of $65 million of that income will be consumed to manage and settle claim costs, including $6.5 million inadvertently disbursed to cover leakage costs. It has been found that more than $2 million in leakage costs can be shed by leveraging advanced analytic predictions combined with a decision-making approach and technology.

The last catalyst involves deploying “Next Best Action” strategies to ensure settlement accuracy and enhance customer experiences. The key contributor to a competitive advantage in such a marketplace may not solely be the detection and prevention of leakages throughout the processing of claims — which will certainly deliver operating costs savings — but instead the ability to provide a customer with the best settlement option for his specific circumstances while taking into consideration an organization's savings or growth objectives and contractual agreements with third parties. It also must take place in a very short period of time. Such strategic alignment will deliver additional cost savings, as only the most relevant options will be presented to a customer or a claim support advisor. It becomes a key contributing criterion that differentiates leading customer retention-focused carriers from the masses.

How Do We Know?

This is an idea that matters in the current market environment. Indeed, whilst the operational cost theme is top on the agenda, every one percent of deflection eliminated could represent millions of dollars of existing revenue retained and potential incoming upstream revenues. We have already seen the positive impact of such implementations on early adopters.

As the old adage goes, “The customer is king,” and this is likely to shape insurers' views of their customers for the remainder of 2009 and beyond. The question is whether insurance companies are prepared to consider new ways to retain customers by deploying the right technology components in the claim department. K

Sabine VanderLinden is director of worldwide insurance solutions for Chordiant Software. She may be reached at [email protected], www.chordiant.com.