Outsourcing can sometimes receive a bad rap, often as a result of a bad experience with an outsourcing arrangement. Often these bad experiences relate to important business functions that are off-shored to economies like India where there are significant cost advantages but cultural and other issues. Recently we have seen some very large IT projects move back in house, GM being a good example. The reason for bringing these functions back in-house are due more to the changing nature of IT rather than any failure in business process outsourcing. In many companies, IT is at the forefront of their strategic plans, and is now considered a core capability. The importance of the function and the need to move quickly and flexibly to create competitive advantage is the driver of IT moving back in to the business.
We think that the outsourcing of claims does not sit in the same basket as the trend facing IT. Most of the business we do in claims is not, and never will be a core capability. Recently, we think partly due to efforts to identify areas to cut costs, we have seen some of our clients contemplate an in-house claim model. Another one of our clients remarked that we shouldn’t be surprised – we make claims management look relatively easy, so companies think it can be easily replicated.
The aim of a claim specialist is to take away the time and hassle involved in dealing with claims. As claims are all we do, for hundreds of different clients, we have great experience in dealing with claim situations. Often we do make it look easier than it is. The reality is that good claim management requires a delicate combination of systems, expertise, case loads, support and infrastructure – not to mention culture and accountability.
For clients who are dealing with claims internally, or for those companies who are contemplating moving from outsourcing of claims to an internal model, there is a need to understand that managing claims is far from easy. Our experience is that companies looking at an in-house model tend to underestimate the impact and cost of a number of important factors.
Complications of moving claims in-house
Outsourcing gives you access to a specialised skill set of resources, processes and scale that an in- house model cannot match. Some of the perils of moving to an in-house model include:
- Limited access to expertise; the collective intellectual capital located in a business is lost
- A corporate client or underwriting agent does not have the scale, experience or training methodologies specific to claims that typically promote a
best practice environment
- Corporate clients can offer only limited career paths and so are more limited in ability to recruit and retain staff
- Claim systems are sophisticated, bespoke and expensive to manage. To replicate a good claim system can cost more than $100,000 per year.
Account Managers working within a specialist business take advantage of the scale that creates strong working relationships with service providers like lawyers and adjusters
- Having an external party managing claims creates tension and accountability over and above an internal unit
- Often a client deals with one Account Manager. They often can be led to believe that an obvious solution for them is to poach the Account Manager
and the service and results can be easily replicated. This underestimates a number of important factors:
- Infrastructure: Any one Account Manager is supported by a number of Managers, support staff, finance, HR and marketing. Some of our clients have more than 15 people involved in their day to day business, yet they only see one (or two) people as their direct contacts.
- Continuity: The smaller your claim management team the more vulnerable you are to absence from sick leave or holidays; and the greater your vulnerability to resignations, where the whole recruitment and training process becomes a disruption to your business
- Experience: Account Managers and the business in general build a base of understanding about your business and your claims that can’t be simply carried across to another destination
- If you are a company with a high excess, insurers may value the process and results of a proven independent claim specialist – especially during a harder market
- If your loss history deteriorates – as often occurs with in house models (most in house models run at $3-4k per claim above our claim cost average) – you may find it harder to place your insurance competitively and your broker may find it harder to market your account without an independent third party managing your claims.
Costs of moving claims in-house
We recently benchmarked the claim costs of an in-house model against those of a similar risk profile. The difference in results showed the weaknesses inherent in an in-house model. At an average of over $3,000 per claim cost saving, this translated to multi-million dollars. The more compelling statistic – each member of the Claim team was leaking costs of around $500,000 per year. So next time you focus on the costs of an internal claim manager, don’t just think about their salary – think also about the costs they may leak…it could be a multiple of their direct costs.