On a practical level, that means they must report more (and more detailed) data than ever before, and face significant fines and penalties for non-compliance.

For many P&C insurers, the goal has been to create more competitive, flexible and scalable claims operations. While some have seen bottom-line benefits from improved claims handling and reduced expenses, the benefits have often been limited by a siloed approach; that is, too many insurers have invested in “point” solutions that allow them to comply with MSP regulations, for instance, but don't fully integrate processes or data flows for optimal process efficiency and effectiveness.

Further, insurers are constrained by their limited capabilities in predictive analytics and business intelligence (BI). In today's market, it's essential for insurers to be able to segment customers, identify promising new markets, gain precise customer intelligence and make better decisions. These elements are especially important relative to claims performance and can provide a sustainable advantage. Finally, they can provide an edge in terms of making regulatory compliance programs more efficient and less costly.

The bottom line is that P&C insurers must adopt more robust BI and analytics capabilities if they are to successfully transform their claims operations, create true customer-centricity and meet evolving (and expanding) regulatory requirements.

This article will address the nature of the challenges P&C insurers face today and provide a roadmap for those carriers ready to move forward and use BI and analytics as a lever for effective claims transformation and regulatory compliance.

Why Claims Transformation Now?

A number of market drivers have made claims transformation an imperative for many P&C insurers:

Claims fraud and leakage

The current economic environment has greatly increased the risk of claims fraud and placed additional emphasis on claims leakage. As a result, insurers need broader capabilities in trend analysis and pattern identification. At a minimum, they must be able to cross-reference parties involved in claims. Today, however, stand-alone data repositories and limited visibility across functions mean many insurers are vulnerable to claims fraud and have little capacity to measure the effectiveness of their fraud-prevention efforts and teams.

BI and predictive analytics tools are part of the story. Traditionally utilized by the underwriting and marketing/product development units, predictive modeling is being used by claims leaders in the areas of fraud detection, leakage analysis, large-loss identification and subrogation and salvage recoveries. Identifying fraudulent claims at an early stage in the claims life cycle can be a tremendous cost-saver for the industry.

With a multifaceted approach to fraud identification and referral based on automated, sophisticated business intelligence tools in conjunction with leading practices, insurers are effectively reducing indemnity costs.

An intensifying regulatory spotlight

Insurers are especially focused upon the analytics required to remain compliant with new regulatory requirements and jurisdictional mandates, including many that may seem more targeted at large investment banks and hedge funds. While well-known regimes, like HIPPA, MSP and Dodd-Frank, generate most of the headlines, state-level initiatives can be just as challenging in terms of data gathering; for instance, the New York Department of Financial Services, which oversees both banks and insurers, is conducting an ongoing investigation into the “forced-place” insurance for homeowners who missed mortgage payments or failed to keep homeowners' policies up to date. Insurers will likely have to provide objective data to show that they were not forcing consumers into inappropriate or overly costly policies, and that loss ratios, premiums and commissions paid to referring parties (like mortgage servicers) were in line with standard practices.

Weak or inefficient performance in regulatory compliance can have serious consequences. Costs, penalties and fines for non-compliance can be significant, while the price tag associated with inefficient and excessively manual data-gathering and compliance processes can be just as daunting. In fact, some insurers face a choice of either paying fines or investing in new systems so they can produce the data they need to avoid the fines.

The regulatory scrutiny falls not just on the companies themselves, but on their leadership teams as well. An Allen & Overy/Willis Group study determined that the “combination of heightened public and shareholder scrutiny, and a proliferation of powers amongst, and growing interaction between regulators globally means the spotlight is on directors and officers like never before.” The study found that 64% of respondents identified criminal and regulatory fines and penalties as the second most significant risk to their business (“Regulatory Investigations Top Directors' List of Concerns: Willis/Overy Survey,” Insurance Journal, 14 December 2011).

Indeed, eliminating the risk of fines—the amounts of which have been increasing steadily—and streamlining compliance are two tangible components of the business case for BI-enabled claims transformation.

Aging systems and lack of integration

Many insurers have accepted the reality that their existing IT systems and toolsets simply are not up to the challenges of competing in the 21st century insurance marketplace. In fact, at many insurers, key systems have reached the end of their life spans. Thus, any organization interested in automating back-office processes, increasing claims staff productivity and enhancing the customer experience will likely need to upgrade core systems.

Some insurers can only implement stand-alone solutions to meet the MSP fund-reporting requirements while others can configure the requirements within their current claims management system. In other cases, specific applications or databases have been modernized, though not necessarily integrated across functions, which is where the most substantial value proposition lies. Part of the challenge comes from fragmented IT portfolios. The links and integration among claims, billing and CRM systems, for instance, are very tenuous.

Claims and underwriting should also consider integrating their data repositories, given that they generate the vast majority of data used by the entire enterprise.

Rising customer and broker expectations

More empowered customers are also a force for transformation. Accustomed to using sophisticated banking and retail websites and transacting via smartphones, today's policyholder now expects insurers to deliver similarly streamlined processes, integrated data streams and personalized information. That's especially true for the highly visible process of claims management: ideally, insurers should be able to provide “on-demand” updates of claims status and a fully “mobilized” user experience.

Higher broker expectations are part of the story as well. Brokers expect to receive automated notifications about milestones in the claims process, as well as intuitive self-service tools for their own use. Insurers who cannot meet the rising customer demands may struggle to retain the full brokerage force as well.

Understanding the landscape

The right path to claims transformation will vary greatly, depending on the unique market portfolios of different types of carriers. For instance, personal lines carriers routinely have higher-frequency but shorter-cycle claims. That means their optimal solution design allows for the ready capture of all the necessary data elements for compliance reporting, without slowing overall claim-handling and outcome cycles.

Commercial and specialty insurers routinely write higher-valued policies that have longer cycle times and greater total financial exposure attributable to higher policy limits; however, swift implementation is still a necessity. With these lines of business, insurers must maintain constant interaction with regulatory agencies.

Professional liability insurers, which write coverage for professionals such as lawyers, doctors and architects, will have other concerns. Such policies routinely have high limits simply because of the nature of the work performed by the insured. Related claims have longer cycle times, often with a requirement that the insured approve any settlements. These attributes create a unique situation for insurers as there can be considerable delay in the adjudication of a claim, thereby creating a need for the insurer to maintain a high-touch interaction with the regulatory agency.

The Analytics Advantage

Advanced BI and analytics capabilities have already helped forward-looking insurers address several of their most urgent challenges, ranging from expense and cost management to evolving customer preferences, shifting risk profiles and changing regulatory regimes. For example, insurance organizations that have excelled in risk management have been successful in aligning performance analytics with strategic initiatives by adopting consistent metric frameworks and role-based use cases. The key has been in aligning data assets to the metric frameworks and use cases to promote data integrity, security and system performance. The use of advanced modeling techniques has led to significant improvements in enterprise risk management as well.

Given these advantages, it's no wonder market interest in BI and analytics is on the rise, especially relative to claims transformation. In recent years, more than half of North American and UK insurers have identified improvement in analytics as a goal for their initiatives. In 2009 and 2010, 14% of North American and UK insurers increased their spending on business intelligence by more than 10% while another 22% increased their spending on business intelligence by 5%–10% (Ellen Carney, “The Outlook for Insurance Software Spend in 2011? More of the Same,” Insurance Networking News, 28 January 2011).

While there is growing recognition that effective analytics can anticipate market trends and deliver critical insights more quickly to stakeholders across the enterprise, there is also legitimate concern that the underlying technology platforms (especially in claims management) may be incapable of supporting the advanced tools needed for BI-enabled claims transformation. Specifically, upgrades of existing claims technologies or deployment of new platforms may enable further automation of current processes and streamline manual compliance processes.

Further, the integration of core functional systems — like claims and underwriting — as part of broad-based transformation programs “turbo-charge” the business case: the returns on investments for both claims transformation and BI and analytics programs rise dramatically.

Risk management in the context of claims transformation

Enterprise risk management (ERM) is one area where advanced analytics has demonstrated its value for executives seeking better insight into market conditions and operational performance and for improved decision support. At its best, ERM involves the creation of a holistic perspective of risks as opposed to siloed views, which allows the organization to analyze the contingencies and interdependencies of risks across all core functions of the business.

To the extent that they enable ready access to insights regarding trends and scenario modeling, BI and analytics toolsets have proven invaluable for helping insurance executives make critical decisions about resource allocation and new product development to improve overall performance. In this sense, ERM has truly become part of business management. In the past, it was often a siloed exercise within capital management or actuarial groups, where necessary reserves were “guesstimated” based on worst-case scenarios and the best available data (which might not have been current or complete).

Long-term planning and immediate actions: the roadmap to claims transformation

Insurers looking to leverage BI and analytics to drive claims transformation and streamline regulatory compliance must consider a range of important steps.

Automate for speed and efficiency

The speed of today's marketplace means insurers must respond to claims submissions more quickly, provide informational updates sooner and more regularly, and “close the loop” on the overall process much more efficiently. The only way to meet these new customer-driven realities is to automate every step of the claims management process. Automation is at the heart of every successful claims transformation program. The processing of reinsurance claims and aggregate limits are two areas where automation can pay particularly impressive dividends.

Focus compliance on business benefits

While many insurers give in to the temptation to view regulatory compliance as a “check-the-box” exercise, top performers embrace a philosophy of regulatory compliance that is geared toward creating business value. For instance, by integrating all repositories for customer information, companies will be able both to communicate with customers more effectively and to complete regulatory reporting more efficiently. Further, by applying advanced analytics toolsets, they can track patterns and identify opportunities for increased cross-selling, as well as provide early warnings on potentially fraudulent consumer behavior.

The key is to view regulatory requirements as a single entity and manage it centrally, which creates the ability to leverage object-oriented solutions and use single data sets to meet multiple reporting needs.

Think holistically and avoid one-off, “point” solutions.

Broad process integration may be as important as automation in terms of enabling claims transformation. Specifically, all new BI and analytics toolsets must link effectively within the broader technology ecosystem. Again, the end-game involves ensuring individual data assets that support multiple processes are housed, managed and validated in a consistent and robust fashion.

Experience teaches us that stand-alone solutions—such as those to meet the MPS fund-reporting requirements—only go so far in driving transformation when they are piled on top of already-fragmented legacy systems. A better solution is to configure requirements within current claims management systems that meet near-term needs for regulatory reporting without disrupting the customer-facing aspects of claims management. Embedding regulatory compliance into well-designed and broader claims management processes takes more up-front planning but ultimately pays considerable benefits in terms of eliminating the risk of fines and penalties and reducing the cost while enhancing efficiency.

Create transparency to focus on value-adding work

Transparency is a prerequisite to supporting the necessary trend analysis and improved claims resolution performance. It is a key capability that will provide a competitive edge and the ability to access instantly a summary of each customer — a single, integrated view providing a snapshot of every claims interaction that customer has had with the company over time. This will create confidence that the operation is compliant, efficient and effective.

From a compliance standpoint, insurers need to monitor the environment to minimize costs associated with non-compliance. This type of transparency allows organizational leaders to focus staff on true drivers of customer satisfaction. For instance, some insurers estimate that up to 30% of staff time is spent on administrative activities — like trying to track down customer data — that aren't specifically tied to faster claims resolution.

Evaluate the technology options

Many insurers have reached a clear consensus regarding the insufficiency of existing claims management systems to meet the new market and regulatory requirements. Therefore, the essential question becomes whether to upgrade current platforms or replace them with a next-generation toolset.

Many business factors contribute to this decision. If the decision is to deploy new software, evaluation and selection criteria must be formalized, with input from both business and IT leaders. Packages must be weighed in terms of their suitability for phased implementation and integration with other core systems, like policy administration and underwriting.

Configuration and customization options must also be addressed. If the plan calls for upgrading current systems, similar questions must be raised about new modules, compatibility with data repositories and reporting capabilities. It is safe to say that establishing a flexible platform that can be modified and extended is critical to ensure that organizations are prepared to respond to future market and regulatory shifts.

Optimize processes — not just technology

While advanced, modernized technology is a core element of the solution, insurers can't afford to overlook the opportunity to optimize processes as part of their transformation initiatives. In other words, new, modernized technology will not automatically solve existing process inefficiencies.

Deploying new systems or upgrading existing ones offers an excellent opportunity to streamline, synchronize and automate processes for optimal efficiency and effectiveness. The development phase of claims management systems must take into account all claims processes to determine if they are helping to satisfy policyholders, agents and brokers.

Re-engineering processes is commonly carried out when there is implementation of a new claims management system. The areas of focus vary; however, reinsurance, aggregate limits and regulatory reporting and compliance are consistently priority areas. While there is much uncertainty and many options for claims and IT teams to navigate, one thing is clear — maintaining the status quo is no longer an option.

Don't overlook training and education

Training, education and organizational change management often make the difference between mere systems implementation and true transformation that effectively repositions the organization. Training programs and educational tools that support the implementation of new toolsets can also reduce barriers to change. Sharing the business case for new systems, process optimization and the revitalization of claims operations (whether the case is based on regulatory requirements or cost savings) may mitigate the risk of staff resistance to new ways of working.

Expect further evolution

While the volume of change in the P&C market seems unprecedented, the reality is that this degree of change is likely to continue, thanks to rising competitive stakes and increasing customer expectations. Ongoing change is also likely on the regulatory front. It is essential to understand the impact these changes may cause and to comprehend how to incorporate the needed capabilities within current in-flight initiatives. Part of this process would be knowing which capabilities should be added as a factor in the planning of a new initiative or be added to a work stream for an existing transformation project.

Addressing the measurement of compliance while working to optimize claim processes is possible through a holistic approach. Again, using BI and analytics toolsets to gain insight across claims transformation and ERM programs will help the organization succeed across all the dimensions of operations required to win in the marketplace.

Whether companies have already invested in a new claims management system or are considering such an upgrade, they must consider the new realities — including higher consumer expectations, the need to achieve and maintain agent and broker loyalty and the continuing evolution of the regulatory environment.

In the P&C market, customer-centricity is the hallmark of the top-performing carriers. That is why claims transformation is no longer optional. What was recently considered leading-edge or highly innovative will soon be viewed as baseline capabilities or standard operating procedures.

Ever-changing regulations have also created the need for insurance organizations to re-examine the sources of their current BI and analytical data models. New reporting requirements call for new and more robust approaches to ERM (a challenge also faced by banks and other financial service firms).

Due to the critical role of claims management in insurance, any effort to transform the organization will require considerable investment, commitment and discipline. But the business case for transformation is real, as evidenced by the significant investments being made by the P&C industry in its claims organizations and by the results being realized—especially those that embrace advanced BI and analytics capabilities as part of their transformation initiatives. Whether an organization is at the beginning of the claims transformation process or in the midst of a multi-year program, one thing is clear: those companies not making investments risk being left behind by their competitors as the claims function continues to grow in importance as a strategic differentiator in the marketplace