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The challenges for Insurance brokers who are managing claims

At the outset I should declare a vested interest – Proclaim is a specialist claim manager and we do from time to time compete with insurance brokers in end to end claim management for fees. That competition is usually limited to management of claims within a self-insured retention or within an authority from an insurer.

In this blog I won’t be considering the role of the broker as a claims advocate for an insured. This is the more traditional clam broker role – where the combination of technical expertise and leverage can be applied to a claim being managed by an insurer to get the best result for their clients.

Insurance brokers actually managing claims within their client retentions – rather than monitoring the way an insurer is managing it – is a relatively recent phenomenon. It is driven largely by economics – or what is somewhat crudely termed as ‘growing the customer wallet’. It has also been the subject of studies – books and articles – some of the most widely known being HBR articles by Chris Zook (Formerly head of Strategy at Bain and Co). Chris talks about ‘expanding beyond the core’ of your business to drive revenue growth – new services and new markets being the most common adjacent areas for expansion.

In the case of insurance brokers expanding to manage claims they are providing a new service to existing customers. A seemingly logical way to drive growth. However, when Zook talks about ‘adjacent services’ being provided to existing clients, he looks at successes and failures and notes three quarters of these growth initiatives fail. So the experience suggests there are some basic rules of thumb for successful adjacent service offerings. They are:

  • Don’t risk the core business – so an effective claims service should strengthen the core broking business
  • Don’t enter the business unless you have a good shot at being one of the best 3 in that market – which isn’t confined to the narrow market of brokers managing claims.
  • Pursue one opportunity at a time – often brokers have been guilty of offering a number of new adjacent services like claims preparation and risk management at the same time as entering the claim space
  • To be successful you need a repeatable formula – ideally not changing more than one variable from your existing successful core business

Most brokers fail in the claim space as they can’t compete with specialist claims businesses or underwriters who have claims in their DNA. Rarely have we seen a broker excel in this space. And it is most properly explained by the claims space being so different to their core broking offering; you really are changing a vast number of variables as you contemplate this adjacent service, so to use Zook language, broking isn’t a repeatable model when applied to claims. Brokers doing claim management will need to change a number of variables to be successful – many change brands, change marketing infrastructure, have a completely different IT system, fundamentally different processes, a different suite of supporting vendors and differing people, training and development requirements. It probably explains why the reverse rarely happens – you would rarely see a Claim Management Company seek to get into insurance broking as the skills are so different and the chances of breaking in to the best in the field would be slim. You really would be risking the core service to contemplate that.

Some local brokers change the name of the claim business; in some cases to address concerns about conflicts of interest. What it actually does is recognise this isn’t the same business as insurance broking – so already they are conceding they are working from a different formula to that which worked for them in broking. It also changes one critical variable – the brand.

We have seen examples of mixed results for brokers who have ventured in the claim management space. For instance, Sedgwick in the USA is one of the great success stories in the global TPA space. As their name suggests, they were once owned by a broker, but Marsh sold out in 2006 which precipitated their ascent and great growth story. In Australia Marsh were managing claims through their claims subsidiary CMS, but reached agreement to offload the majority of that business to Xchanging a few years ago. One can only guess it dawned on Marsh that several of the Zook principles weren’t being met, which no doubt drives the business to become more a financial drain than a revenue generator.

Zook gives good examples of where some other attempts at achieving adjacency went astray. For instance, Nike did well with their repeatable formula as they expanded into golf attire, but they had to raise the white flag when they tried to get into golf clubs. Not repeatable.

“The power of a repeatable model lies in the way it turns the sources of differentiation into routines, behaviours, and activity systems that everyone in the organization can understand and follow so that when a company sets out on a particular growth path, it knows how to maintain the differentiation that led to its initial success”.1

The other real conundrum facing brokers today who venture in the claims space is the fundamental conflict it offers to one of their core offerings of impartial advice to their clients. How do they advise their clients of the success or otherwise of their own services? What are they benchmarking against? If they have a claim experience that averages 30% above a clam specialist, what are their obligations? They could conceivably be costing their client millions of dollars in premiums over the period of their service….that would be an awkward conversation one day.

Do I write this out of frustration? Partially, but we have long been reconciled to the reality that brokers will seek to play in this space. So I am not saying brokers should not be in this space – they need to make up their own minds about that – but they need to be more accountable for the service. This means understanding if they are providing a service that meets industry benchmarks, not their own internal standards. For instance, brokers should look at getting regular independent audits done of their work to reassure themselves and their clients they are providing value.

There is no question that many of the brokers who have weighed in to the adjacent claims space underestimated the complexities and the variations in a claims service. You have to get systems, process, people, caseloads, training and QA all just so….or it falls apart. From the outside looking in, this seems a revenue (and control) driven decision that isn’t strategic. Those kinds of decisions catch up with you in the end.

 

1 – Growth outside the core – Chris Zook and James Allen – HBR article December 2003

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