As claim severity climbs, analytic insights hold key to containment

By Abhishek Lall, Randall Day  |  October 29, 2018

Insurers today are struggling with what seems like an intractable problem: the impact of rising claim severity on their bottom line. This upswing shows no sign of abatement: for the past two decades, severity has increased almost every year for auto and workers’ compensation medical and indemnity claims.

With severity on a steady ascent, large-loss workers’ comp claims disproportionally exacerbate the problem. Despite the fact that claims over $1 million are less than 0.5 percent, they contribute 7 percent to losses. That’s important because over the last 15 years, the number of claims under $1 million has declined, while changes in larger claim sizes have been more volatile.1 During years when “mega” claims (those greater than $10 million) peak, as they did in 2016, the issue of how to manage these high-stakes claims becomes even more urgent.

Auto severity has risen while accidents declined

The auto line of business presents an interesting paradox: frequency has fallen in recent years (down to 2.2 percent in 2017) with the advent of driver assistance technology and vehicle safety improvements, but severity was up 7.6 percent during the same year.2 Those same sensors that make vehicles safer make them more expensive to repair. But this is not the only contributor to severity—bodily injury costs have also increased.   

Increases in medical costs and lost wages contribute to upswing

Medical costs in claims are rising for third-party liability claims. Unfortunately, opioid prescriptions are still negatively affecting costs and leading to addiction problems. While opioid prescriptions have declined, they’re still considered to be at epidemic levels. In 2012, 55 percent of workers’ comp claims had an opioid prescribed; in 2016, it was still high at 45 percent. 2 

In the workers’ comp space, changing demographics have contributed to rising medical costs. With baby boomers aging, so does the average age of the workforce3—and advanced age is a significant factor in severity. 

Lost time on the job has also caused claim costs to escalate. Between 1997 and 2017, workers’ comp medical lost-time claim severity soared with a 175 percent increase. 4 As wages rise with a healthier economy, the cost of lost time is affected. Between 2007 and 2017, indemnity claim severity and wages grew at a similar rate.

Identifying high-severity claims at first report

When it comes to large-loss claims, the enemy of the adjuster is time. For each week that passes when a claim is not identified as high-severity, opportunities can be lost in managing expenses and lost costs. For example, perhaps an early medical decision is being made that warrants close oversight, such as a recommendation for surgery in a case where physical therapy should be tried first. The faster these types of complex, expensive claims are managed, the better the outcomes.

Obstacles to managing severity

Identifying which claims will spiral out of control is no easy feat. And one obstacle lies within the claims department’s current situation itself: workloads have increased at the same time that senior staff members are leaving in an unprecedented wave of retirements. Pinpointing the factors that will make a claim high-severity is a skill that many newer claim representatives just don’t have.

Different lines of business present different challenges in the severity scenario. For example, in liability claims, reports of injury can be made some time after they occur—and many times with scant details. When that attorney call comes in, adjusters may be scrambling to confirm injuries, timelines, and the facts of what happened.  

Predictive analytics forecast severity earlier

Clearly, these high-severity claims are ripe for analysis to determine if any aspects of the costs can be better managed. The good news is that technological innovations are helping adjusters make the right calls on high-loss claims. A study in which predictive analytic tools were applied to an insurer’s liability claims resulted in 80 percent of high-severity claims being identified right at first notice of loss. Ultimately, the system accurately identified 95 percent of medium and high-severity claims.5

These advanced analytic systems examine a host of factors influencing severity, including age, injuries, demographics, and hundreds of other variables. All of these data points are simultaneously analyzed, and the systems assign a score that’s generally reliable. When insurers already have a tool built that analyzes claims, predictive analytic modules can be layered on top of them to generate more accurate, earlier results.

Forewarned is forearmed

When a claim is marked as high-severity, resources can immediately be devoted to its management: the case can receive the attention of more experienced claims representatives, managerial and home office examining oversight, case managers, and more. Independent medical examinations, peer reviews, or medical reviews can be scheduled to ensure that treatment plans are effectively developed. Return-to-work plans can be actively managed, exploring opportunities to modify work assignments to provide a real chance for the claimant to reclaim an active, productive life and to mitigate actions brought against policyholders. 

For all types of claims, another benefit of using predictive analytic tools is that reserves can be shifted in anticipation of high costs. Over time, these systems can provide benchmarking data that can be used to help senior management make informed department decisions, from adjusting staff to analyzing the risk profile across their book of business.

ISO Claims Partners has predictive analytic tools for workers’ compensation and liability claims that are built off a company’s own historical claims and informed by huge volumes of industry and medical data.  To learn more or to schedule a demo, please call 1-866-630-2772 or send e-mail to CPinfo@verisk.com.

Source Material

  1. https://www.insurancejournal.com/news/national/2018/09/19/501728.htm
  2. NCCI’s Annual Issues Symposium 2018 State of the Line Highlights (taken from conference presentation)
  3. https://assets.prb.org/pdf08/63.2uslabor.pdf
  4. NCCI’s Annual Issues Symposium 2018 State of the Line Highlights (taken from conference presentation)
  5. ISO Claims Partners’ data from client case study

Abhishek Lall

Abhishek Lall is vice president of analytics and leads the injury analytics team at Verisk. He has more than ten years of progressively responsible experience providing leadership, direction, and functional expertise to design, develop, and deliver advanced analytics on complex initiatives. Before joining Verisk, Abhishek led a team of data scientists at Travelers responsible for developing predictive modeling solutions for fraud detection, risk control, and other claims initiatives. He is also the author of seven U.S. patents based on advanced analytics.

Randall Day

Randall Day is vice president of business strategy for ISO Claims Partners. In this role, Randall relies on his extensive background in claims, claims consulting, and technology to bring industry-focused solutions to our customers. He joined ISO Claims Partners in early 2013 as director of claims solutions and successfully spearheaded the development of our groundbreaking predictive analytics product, wcNavigator, which has experienced great acceptance in the marketplace.