How insurers can address disaster-fund overprovisioning
What happens when insurance companies set aside millions for insured disasters that didn’t occur?
The recent catastrophic collapse of the Francis Scott Key Bridge in Baltimore will amount to record losses — $4 billion, by some estimates — for shipping insurers. The payout check from Chubb, who insured the bridge, was reported to be about $350 million. As of early May, the insurer was readying the payment, subject to authorization.
But what happens when insurance companies set aside millions for insured disasters that didn’t occur?
Insurers must prepare for disasters by earmarking claims funds ahead of an actual occurrence, often sending advance money to third party claim administrators (TPAs). The establishment of these loss funds happens everywhere in insurance as this early funding enables insurers to meet their promises of speedy payment. There are billions of dollars dispersed worldwide across multiple counterparties for this purpose.
Given the high level of advances an insurer might issue at any given time, tracking the dollar amount and whereabouts of these funds becomes a challenge for the carrier’s treasury department. For many insurance companies, funds “parked” with local third-party administrators can often amount to tens of millions of dollars.
Sometimes, if the event — say a predicted hurricane or wildfire — doesn’t occur, or doesn’t cause as much damage as anticipated, these undispensed funds can temporarily drop off the radar.
However we got here, it should be possible to move to a more efficient and transparent model wherein insurers have total visibility and control across such earmarked payments. At that point, an often-flawed claims process can become much faster and more efficient for all parties concerned. To begin with, insurers would want to know where funds are located without the need to go actively looking for them. A new level of transparency would enable speedier payments of claims, improving customer satisfaction, and from the insurer’s side, would also go a good way toward accounting for those overprovisioned dollars.
TPAs play a crucial role in claims processing.
Most large insurance companies use TPAs to handle their claims. They act as intermediaries between the insurer and the claimant or policyholder, delivering the benefits that have been promised faster and more efficiently than the carrier could do. Types of claims TPAs can administer include general liability, water damage, restoration, construction defect, automobile, property and casualty, product liability, professional liability and employment practices. Their ubiquity relieves labor-strapped carriers. But while their role is key in the insurance value chain, its very nature adds a layer of complexity to the claims process.
The funding element
In our current discussion of provisioning claims funds to cover forecasted disasters, TPAs figure prominently because they are the party actively sending off the checks that satisfy the claims — and in a sense are responsible for the funds to be in place so those checks are honored. As noted above, in the current model, insurance companies send a certain amount to the TPA in anticipation of an event; the TPA then has to hold that money in a separate account from which the claims checks will be drawn, known as an imprest account.
In an industry that has been slow to move toward automation and away from time-consuming and error-prone manual processes, this indirect way to pay a claim can be a recipe for confusion. One set of industry guidelines lays out numerous potential risks in outsourcing claims to a TPA. Best practices call for TPAs to use proper reserving techniques; acquiring the skills, experience and knowledge required to handle the insurer’s claims; proper management of the claims imprest accounts; awareness of state-by-state escheatment laws (that is, abandoned funds that are to be returned to the state); properly recording and not overfunding the imprest accounts; and finally, not using funds collected from the insurer for their own operating expenses.
All of these speak to the vast complexity of the claims process, which relies on third party administrators to keep accounts balanced and accurate. And to add further to the intricacy, as the industry changes so does the role of the TPA, layering on increasing fiduciary responsibility and therefore pressure. Clearly, there’s a case to be made on behalf of TPAs for carriers to gain real-time visibility and control over claims funds, even as it benefits the other stakeholders in the ecosystem, i.e. carriers and end-customers.
Consumers expect speedy communication and payouts.
In this digital age, consumers have come to expect immediate attention from their insurance company when they make a claim. For young and old alike, trying to get through on the phone for in-person service is no longer the preferred option. According to a 2021 Accenture report, 71% of people over 55 prefer to process their claims online though video or chats.
Indeed, digital platforms and tools are accelerating many insurance processes. However, according to a survey conducted by ValuePenguin and LendingTree just before the pandemic, 68% of all insurance customer complaints are related to claims handling.
The second most common of these complaints was claim delays. Of course, everyone wants their claim processed as quickly, and by as few people as possible, with clear communication. In a recent Himarley study, customer satisfaction fell into four categories:
- Timeliness of service and resolution;
- Communication;
- Process effectiveness; and
- Adjuster attitude and approach.
The highest-performing claims adjusters demonstrated “consistency in timely contact.”
Overprovisioning can be alleviated through transparency.
This brings us back to TPAs and those highly distributed claims funds.
Wouldn’t it benefit everyone — the insurer, the customer, and even the TPA — to have a clearer picture, aided by state-of-the-art technology, of where their money is? For the insurer, it would reduce the risks associated with TPAs’ handling and moving of claims funds. For the customer, more transparency would demystify and further speed the process of receiving reparation after a disastrous event. And for the third-party administrator, it would greatly reduce levels of fiscal responsibility and needing to account for moneys that may or may not get used to pay claims.
Bottom line, this calls for a more centralized approach to holding claims funds. When they are centralized and robustly safeguarded, they become visible and readily available to all relevant participants. This way, as much as 80% of funds can be returned to the insurer’s books by eliminating idle funds and optimizing active funding strategies. Knowing that claims funds are immediately at hand, it’s then a matter of selecting a payment method from multiple options, one that best works for the claimant, delivering the fastest payout possible.
Insurers have a lot of money distributed among TPAs, funds provisioned for a given claim that didn’t materialize, leaving the money to sit around temporarily in suspension, unaccounted for. TPAs have stated that they do not want to be responsible for it. Centralizing these allocated claims funds can give insurers’ treasury a whole new lease on life.
This setup is particularly well-suited to support the industry practice of using TPAs, as it allows carriers to retain ownership of the funds while granting secure access to third-party claim administrators. And it sets the stage for a more resilient and responsive insurance industry.
Phillip McGriskin is founder and CEO of Vitesse, a treasury and payments enabler for the insurance industry. He can be reached at phil@vitesse.io.
These opinions are the author’s own. This article was published with permission from the author and may not be reproduced.
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