By Vincent Cialdella
Property/casualty insurance executives across all lines of business and around the world watch a wide range of metrics to gauge financial health and success. Margins, return on equity, combined ratios, loss ratios, and so on — there is no shortage of numbers to absorb, and each plays an important role in prudent company management. When pressed to choose what matters most, however, the answer is clear: shareholder value.
For insurers, the growing importance of capital management during most of the past decade speaks to the primacy of shareholder value creation. In addition to managing portfolios to mitigate losses, carriers continually seek new ways to optimize the deployment of capital through catastrophe and economic capital modeling, enterprise risk management frameworks, and other innovative practices. As part of their broader capital management initiatives, insurers can achieve greater growth by expanding the scope of their cost management efforts beyond close monitoring of their expense ratios.
Lowering expense ratios frees capital for reallocation to value accretive opportunities, such as investments in infrastructure, acquisitions, and new-market entry. Quite simply, capital equates to strategic flexibility, and improving how it is used ultimately leads to growth in shareholder value. Continued improvement in fraud detection, in particular, could return a considerable amount of capital to carriers, which they could redeploy to increase shareholder value.
Quite simply, capital equates to strategic flexibility, and improving how it is used ultimately leads to growth in shareholder value.
The proliferation and increased sophistication of risk and capital modeling technology over the past 20 years have been astounding, and the sales and marketing automation platforms used to enlarge a carrier’s customer base have exceeded even the wildest expectations of the insurance industry in the early 1990s. Advancements in the claims department, however, have been more recent. In fact, it’s only over the past ten years that insurers have generally invested more heavily in fraud detection and remediation — and are realizing returns on their investments.
Claims payments account for approximately 80 percent of carrier expenses, the single largest line item they generate. And fraudulent claims represent approximately $30 billion of cost in the United States alone, according to research by the Coalition Against Insurance Fraud. Any recapture of illegitimate expenses would add directly to the bottom line. Streamlining how the claims management process is handled and improving the efficiency of investigations are among the levers insurers can use to recoup claims expenses, widen margins, and increase the productivity of their capital.
When it comes to recapturing the claims payments that go to fraudsters, the greatest challenge today is the adoption of complementary solutions that carriers already have available. The necessary innovation has occurred; the latest technology just needs to be put to work.
Modern claims systems provide effective fraud detection and form a foundation upon which to develop further antifraud measures. Employing centralized fraud detection processes and enhanced claims-handling technology, claims departments and SIU employees can become more efficient and agile as they investigate suspicious activity. As a result, insurers will be able to identify more fraud, lower unnecessary claims payments, and redeploy capital to growth initiatives. Here are some specific practices that can help carriers unlock capital:
Using automated claim-scoring tools to identify which claims to fast-track (and which to investigate) yields operational efficiencies and increases staff availability to identify and pursue false claims. Carriers spend less time on legitimate claims that warrant payment and can allocate more time to addressing a greater number of potentially fraudulent claims.
For insurers, the confluence of claims technology, the growing prioritization of capital management, and the increasing demands of shareholders should become the foundation of a corporate culture committed to identifying and removing fraud.
Organized fraud rings represent a serious threat to insurer capital, given the larger dollar amounts involved (relative to other acts of insurance fraud). Link analysis and network analytics tools can connect dozens of data points to identify where large-scale fraud operations have organized. Stopping these large, complex operations — which can rake in millions of dollars in fraudulent claims — is a smart place for SIUs to concentrate efforts for the greatest return on their investments of time, personnel, and resources.
From operational efficiency to a fuller view of claimants, technology contributes to insurers’ ability to reduce the risk of fraud.
Savvy capital management entails using every option at a company’s disposal to maximize results within its appetite and tolerance for risk. While popular “inputs” have included, for example, raising capital and smarter underwriting, the next step in this evolution is to draw more capital from improved claims management. And the ways in which claims optimization can contribute to a carrier’s capital position are set to expand.
For insurers, the confluence of claims technology, the growing prioritization of capital management, and the increasing demands of shareholders should become the foundation of a corporate culture committed to identifying and removing fraud. Innovation in related business areas can empower carriers to pursue further returns. A case in point is medical billing, where fraud is frequently in the headlines and opportunities to avoid fraudulent payments are magnified. As a result, property/casualty carrier capital is further affected.
Committing to a robust antifraud culture and solid infrastructure can unlock capital, making it productive where previously it had fallen into the wrong hands. In the claims department and other areas of business, carriers have a clear opportunity for more effective capital management, and recent innovations have made it possible to achieve significant advances in increasing shareholder value.
Vincent Cialdella is president, Verisk Insurance Solutions – Claims and Crime Analytics. He is responsible for Verisk’s integrated suite of services to improve claims processing and fight fraud.