The controversial issue of outsourcing insurance claims continues to be debated between the growing numbers of insurers justifying cost initiatives by reducing staff and outsourcing claims handling to overseas centres.
The end result is (generally speaking) a lame and poor service. Most often, these claims are outsourced to an organisation that doesn’t have the competences to comprehensively understand the basics and is ill-equipped to deliver an efficient and professional service.
This cycle remains typical in the current environment and generates a good proportion of negativity between the relationship between insurer and broker. The resentment, in fairness, lies with the broker and his relationship with his client, often the receiver of the entire calamity of errors, which in retrospect, should not be the case.
Cost-effective and efficient infrastructure
The question beckons: how do we manage claims in a cost-effective and efficient infrastructure, not to mention impose a process of governing for the fair treatment of customers?
The entire process begins with the decision-maker – the insurer and how they attempt to manage all the elements in harmony in a bid to deliver a robust product.
As the current market will ultimately influence decisions on budgets, so too new legislation will probably take precedence in ensuring regulatory compliances are tightened up, at the same time restricting any slackness seen in past years.
Since 2002, claim costs within the UK general insurance sector once again rose and will continue to rise as the recession hits the economy with a vengeance. It’s a price we have to pay, it seems, for all those years of previous prosperity. Reports such as those by Datamonitor suggest that claims management is now the most critical area for today’s insurers.
Why are claim numbers rising?
What are the key drivers that could be contributing to rising claim numbers and costs? Which insurers have succeeded in keeping claim management costs under control, and how? What trends will be evident in the future?
Historically, insurers may have been complacent with their strategy and approach as to how to manage claims and, as a result, a relaxed attitude has predetermined the decision to sustain current systems. Perhaps current systems were designed to deliver an adequate service, but have they? It’s only now these particular issues have become crucial that we witness a debate emerging on what other options are available.
Claims to GEP ratio performance
Rate rises create the false illusion of better claims to GEP ratio performance. Interestingly enough, between 1998 and 2002 property claims costs only rose by 1.9% per year, but a 5.7% annual rise in GEP was the real driver behind 9.4% improvements in the claims to GEP ratio over the same period.
In the motor sector in 2002, claim numbers fell by 0.3% and frequency fell by 0.9%, yet claims costs still rose by 5.0%, indicating that tackling growth in claims costs is the key issue.
Outsourcing claims: is it a good idea?
As business theory would propose companies improve profitability by leveraging their core competences, in the insurance context, many peripheral activities have been outsourced with the perception that this simple process requires a straightforward approach for delivery, despite the importance of claim payments as the key service provided by the insurer.
It’s obvious that there are many benefits to outsourcing claims, including reduced costs, access to new technology and skills and a ‘one-stop’ business transformation. The cost can infringe on the lost claims handling skills, lost cross-functional interaction and agency issues related to the ongoing relationship with the service provider.
However, these risks can be negligible if a company outsources claims to access the benefits of a competitive market by substituting an in-house service with that provided by a highly competitive service provider or technologically innovative new product.
Companies should invest in buying in other services to settle claims quickly and fairly to satisfy their clients and ensure that future premiums aren’t inflated to meet exaggerated claim costs.
Care should be taken in selecting the right service provider that can deliver a combination of skills in claim handling, commutation and schemes of arrangement.
The golden rule is to treat your outsource provider as a genuine business partner and not as an outsourced operation. The best approach recommended is to take a more strategic view to outsourcing, using the process to initiate change and drive innovation.
What to outsource?
How is the existing process being administered within a company, and what options are there to simplify this method and substitute it for a cost-effective and less time-consuming process?
Claims are increasingly outsourced despite the importance of claim payments as the key service provided by an insurer. Insurers have a complex and time-consuming process to undertake in recruiting staff whose main role is to process the administration of the escalating number of claims.
A good percentage of these claim disbursements are still provided by the antiquated method of issuing cheques. Cheques are expensive and, for the employers, the cost of creating and mailing cheques laboriously time consuming and expensive.
The elimination and disintegration of the cheque begs the question as to how claim disbursements will be processed, substituting the old fashioned method of issuing a cheque for something a little more practical.
As well as the general cost savings that are realised in all cases when switching from paper-based payments, the costs of replacing lost or stolen cheques can be reduced though the issuance of a generic payment card. Prepaid cards that not only serve as a means to receive payment, but can be used in a similar way to a debit card.
Many insurance companies are migrating claim payouts to prepaid cards, not least to ensure that payouts for replacement items are used for the correct product.
Insurance prepaid claim card
Prepaid was originally created to serve the un-banked. It still caters for a large proportion of the un-banked market, however, a prepaid card programme represents so many advantages that deliver cost-effective and revenue churning opportunities for companies that the payment industry is being turned upside down to embrace this new phenomenon.
Insurance companies can solve disbursement challenges and reduce expenses associated with current cheque and cash issuing methods while maintaining total control over claim settlement.
Insurance companies can white label their own bespoke prepaid card in their brand and easily restrict claimants’ redemption with closed or controlled prepaid card schemes. This avoids the chance of insurance fraud as claimants do not receive any cash.
Prepaid cards with full BACS capability
Prepaid cards – in particular those with full BACS capability such as supplied by specialist prepaid card providers – offer solutions with advantages for the company and cardholder.
These technologically-driven prepaid payment solutions allow un-banked staff to be treated in exactly the same way as banked staff. Prepaid cards can be offered to those without bank accounts, but only credEcard’s card schemes provide prepaid cards that can be paid directly via BACS allowing payroll and expense payments to be loaded directly onto them.
Typically, all prepaid cards have a 16 digit account number, but BACS does not recognise this number. This presents a problem. CredEcard has its own BACS sort code and each card has its own account number. Hence, a perfect solution, enabling credEcard’s prepaid cards to be loaded directly by BACS.
Insurance companies are beginning to see the additional functionality of embracing prepaid schemes. Revenue can be earned on transactions, there’s a reduction of risk on fraudulent claims, increased brand awareness and, ultimately, these cards offer a convenient and flexible claim payout.
Prepaid: it’s waiting to grow
Still in its infancy, the prepaid industry is set to change with the number of cards in circulation estimated to grow at over 110% per annum for the next four years. It’s predicted that, by the end of 2010, the use of prepaid cards across the eurozone will generate 2.3 billion transactions with a euro 75 billion turnover.
Bank branches are closing. The entire financial world is stepping into a grave of dead skeletons of useless financial tools. In turn, consumers are faced with the overwhelming decision of how to manage their money.
Prepaid might just be the answer.
Aurelia Bonito is with credEcard Limited
