Tag Archives: benchmarking

Quantum Leap on Reserve Estimates

No single liability is quite as important to insurers as a best estimate of unpaid claims. It drives earnings reports, shapes financial statements and influences a host of other management decisions. But aberrations in data and model risk often cast a shadow over the reliability of reserve ranges from which this point is selected. Traditional development pattern benchmarks have provided some support in estimating these fundamental liabilities, but, even here, the process has long been a one-dimensional exercise, at least until now.

In determining a central or “best” estimate for property and casualty (P&C) reserves, the goal has never been to zero in on the exact final outcome for an insurer’s ultimate losses but to arrive at an estimate that is as likely to be high as it is to be low. Rather than trying to pinpoint one elusive number, the unpaid claim analysis process has focused on understanding or illustrating the variability around the estimate by identifying a range of reasonable estimates using different methods and assumptions. By producing other reasonable estimates, actuaries moved somewhat closer to the goal of understanding the full breadth of the possible outcomes, but this approach still lacks specificity and provides little more certainty around an unpaid claim estimate.

Commonly used “static” loss development pattern benchmarks that use industry data have been helpful in assessing some of the actuary’s assumptions but not all of them. The lack of specificity in these benchmarks has only marginally improved confidence in the selection of a range and central estimate.

The question is how do you overcome these challenges?

A recently developed dynamic benchmarking tool, which includes percentiles at all stages of development, allows for the calibration of a benchmark that better resembles individual portfolios. As such, this rigorously back-tested tool can provide actuaries an added level of confidence in the reasonableness of any entity’s reserve ranges.

This next-generation benchmarking tool, known as claim variability guidelines (CVG), is derived from extensive testing that involved all long-tail Schedule P lines of business and more than 30,000 data triangle sets. Using such an extensive database both:

    • Provides for the development of a more extensive and reliable benchmark that is much more surgically focused than traditional industry averages.
    • Instills greater credibility in the loss development patterns derived for each line of business.

Four real-life scenarios

The value of this new benchmarking tool stems from its ability to guide an actuary’s decision-making process by providing an interactive means of comparing the assumptions or estimates from a method or model based on real data and results against comparable alternative assumptions or estimates.

To illustrate the potential impact of using such benchmarks, four representative data sets were used from randomly selected companies of four different sizes: A) small, B) regional, C) small national and D) large national. Minor changes were made to the data to protect the identities of each company. For all four companies, the commercial auto line was selected as a common denominator for contrasting the effect of the guidelines for different exposure sizes. To illustrate how useful the guidelines are in practice, a unique variety of lines of business was sampled for each carrier. The accident year earned premiums by line of business for each company are illustrated in Figure 1.

See also: Provocative View on Future of P&C Claims  

Figure 2, which shows the incremental and cumulative loss development patterns for commercial auto for Company A, provides an example of the type of CVG output that actuaries could use to guide their thought processes. In this case, the incremental loss development from the user’s model shows a pattern that initially might seem to be relatively smooth, but when compared with output from an industry average or the guidelines its irregularities become apparent. For this company, whose loss development pattern is somewhat volatile, using a benchmark pattern other than the average (shown in the “CVG Average Pattern” row) seems appropriate. But which one?

While the guidelines indicate that the 46th percentile (shown in the “Best Fit” row) is the best fit overall, the 46th percentile is less than ideal at different periods, where “best fits” vary from the 13th percentile in development periods 0 to 12 to the 99th percentile in development periods 72 to 108. In fact, there is considerable variability in the recommended fits—a situation that might be expected, considering the data limitations that a small company often encounters. But does the user’s calculated loss development pattern (shown as “User Input ATA Factors” in Figure 2) reflect the company’s uniqueness or contain random noise that could be smoothed by the benchmarks?

Using the cells in the CVG line, actuaries can select different assumptions and see the impact on their results. Is a dip or bulge in the User Input pattern due to noise, or does it reflect reality? Perhaps the company consistently pays claims faster than the industry average? How different is the mix of business compared with the industry average? Are the User Input Age-to-Age (ATA) factors from 72 to 120 months indicative of salvage and subrogation recoveries that should be included?

At any point along the pattern, actuaries can adjust the pattern—using the User Input pattern, the selected guidelines pattern or an alternative—to reflect their understanding of a company’s data. This guided sensitivity testing provides actuaries a way of systematically exploring loss development patterns and deciding how much smoothing is necessary or which pattern is most appropriate.

As the exposures increase, the volatility of the calculated loss patterns decreases. For example, the commercial auto loss pattern for Company B in Figure 3 now meanders closer to the best-fit pattern, a situation that is reflected in the increased consistency among the best-fit percentiles (“Best Fit” row). In this case, the best fit is at the 71st percentile. As the patterns calculated from the user’s method and the guidelines move closer together, as is the case for this regional company, the justification for selecting a pattern other than the average increases.

By comparing the development pattern graphs in Figures 2 and 5, the difference between the loss patterns calculated from the data and the guidelines merge ever closer for the small national company, as seen in Figure 4, and for the large national company the loss patterns nearly overlay the average, in Figure 5.

This convergence of the loss development patterns on the average, interestingly enough, also illustrates how the static average-based benchmarks are most relevant for large national companies, how the various percentiles around the average become more valuable as the exposure size decreases and how both large and small companies benefit from the additional information available in a dynamic benchmark.

Once an actuary decides on a loss pattern, a range of reasonable estimates can be established by, for example, using patterns 20 points on either side of the selected loss pattern, as illustrated in Figure 6 below (assuming our best fit is at the 46th percentile and the table sets’ lower and upper benchmarks are at the 26th and 66th percentiles).

In each of these examples of this next-generation benchmarking process, the estimates for the “normal” weighted results (in Figures 7 and 8 below) were done mechanically using common methods and assumptions to prevent personal biases from masking the potential impact of this process. In practice, this step would be an interactive process, with the guidelines influencing the selection of assumptions and methods and vice versa.

For the small company illustrated in Figure 7, the guidelines patterns from Figure 6 are used to estimate unpaid claims to be between 850 and 1,210. This result can be compared with the range and weighted average for the five methods used by the actuary, who now has a supplemental process for deciding on a best estimate. That process includes a new tool for deciding whether any of the estimates in the normal range are unreasonable, e.g., is the lowest estimate in the weighted range reasonable?

For even the most volatile lines, this process provides a guided method for inquiry and analysis that can lead to greater confidence in the end results. As each line of business is reviewed, they can also be added together to get a view of the overall range for the company, as illustrated in Figure 8.

See also: De-Siloing Data for P&C Insurers  

Determining a range of reasonable estimates and a best estimate are fundamental building blocks for assessing the financial health of a company, but they are only a small part of a claim variability process. From benchmarking unpaid claim distributions to setting risk-based capital requirements—topics of subsequent articles in this series—the next generation of benchmarks can help actuaries retool their methods of inquiry and build confidence in the numbers shared with management.

Say Goodbye to Benchmarking

I cringe every time a company wants to do a benchmarking study. Wikipedia defines benchmarking as “comparing one’s business processes and performance metrics with industry bests and best practices from other companies.” From the requester’s perspective, it is the prudent thing to do. So what’s the problem? The problem is the company’s mindset.

Typically, the company already knows it is falling behind the industry and wants to pinpoint exactly how badly it lags. The company subsequently sets its sights on “catching up” with industry leaders, which will actually only make the company average. The leaders have in effect set a new standard for what their mutual clients expect. Is it really worth investing the time and expense to perform a benchmarking study, digest the results, prioritize, fund and develop new components just so you can become average?

By the time the changes are implemented, the industry leaders have moved on to more innovative products and solutions, forcing you to reevaluate and repeat everything you’ve just completed in an attempt to become par…again. Is that what your customers and investors expect from you? Is that really the best you can do?

You’ll seldom find an industry leader doing benchmarking studies. Rather than focus on the competition, vanguards focus on assessing the needs of the customer. What are the current pain points? What needs are being unmet? How many unnecessary steps or how much excess time does it take for a customer to use your product or service or interact with you? Wouldn’t it be cool if we could only offer/eliminate/change _________ (fill in the blank)? Leaders force their teams to think creatively about solving problems, which in turn often makes their company unique and makes their customers loyal.

See also: Insurance 2025: Smart Contracts  

Talk to the folks on the front line to gather feedback on what is and isn’t working, and ask what they are hearing from customers. What kind of feedback are you getting through social media or customer surveys?

Listening to clients is an acquired skill and often is not fully appreciated for the value it holds. I’ve seen a company implement the wrong strategy after misinterpreting the multiple choice survey responses and failing to study and digest the free form comments. Surveys can become a landmine of misdirection if not done right. How many times have you completed a survey that asked about how well the customer service agent handled your problem, when the real problems had nothing to do with the agent and everything to do with the flawed processes created by the company? Make sure your surveys provide customers with open-ended questions that give them the opportunity to tell you what you can do better. Their comments will only add value if you actually take the time to thoughtfully harvest and analyze them. Ignoring the answers to a free form question is a huge lost opportunity.

Having spent many years successfully leading innovation, I can honestly say that I never looked at what the competition was doing. I didn’t care. In fact, I often felt that, if I studied my competitors, it would taint my view and subconsciously lead me down their imperfect path as opposed to forging my own targeted solutions. It was more important to study our internal processes and any workarounds we had implemented, which is an easy way to flush out underlying problems that affect both the customer and company. Innovation, after all, is really about solving problems in a creative way.

See also: The State of Workers’ Compensation  

Sometimes, what’s going on outside your industry could be more important than what is happening within your industry. Disruptive companies typically come from outside and are not shackled by tradition or legacy technology or benchmarking results. They’ve asked the right questions – what would make things better or easier for the customer – and listened carefully to the responses. That’s where you’ll find valuable answers that will lead you to a new strategy – one where you’ll do more than just keep up with the industry leaders. It’s time to forgo benchmarking as a tool of the past, one that supported businesses that moved en masse at yesterday’s slower pace. Instead, rely on your own customers and internal resources to show you the way forward.

Why Video Will Pervade Insurance

Video footage from dashcams or from cell phones that use driver assistance apps are becoming standard today. Some insurance companies are accepting dashcam footage as part of the claims process or are offering incentives (such as reduced premiums) to those who agree to install a black box or share their video feed.  According to the British Insurers Brokers’ Association (BIBA), there is already a fivefold increase in the involvement of vehicle black box technology during in-vehicle insurance policies.

If we judge by the increase in software companies offering video-based products specifically for the insurance industry, it is safe to say video is proliferating in the customer service and property evaluation aspects of insurance, too.

We anticipate this trend to grow even more in the years to come. This growth will almost certainly culminate in video becoming a standard for the insurance industry. The introduction of video opens a door to some amazing and innovative technological advancements. Video is not only the best channel for conducting communication with millennials, it is also a rich source of critical benchmarking information for unlocking opportunities, innovative customer service and practical applications. We can use video to build efficient workflows and back claims processes with accurate and factual evidence to increase response time and improve performance.

See also: FinTech: Epicenter of Disruption (Part 1)  

Vehicle insurance is a great example of the impact video can have on the insurance industry. Just a superficial look shows there is an infinite amount of information regarding your vehicle that is out there — be it from your own dashcam or cell phone, other call phones, CCTV, traffic cameras or home security cameras. Video is everywhere, and that is not all. There are some really interesting technologies that can analyze driver video footage when combined with real-time data retrieved from the vehicle’s own board computer (such as available via standard OBD2 connectors). These tools can show the average speed the driver is going and profile driving habits, such as keeping a safe distance, observing the speed limit, the times of day the driver is more (or less) active — and more. All this information can be compiled to provide an accurate and personalized analysis of driving and behavior patterns.

By centrally collecting all your video-based information, you gain the ability to combine several technologies that augment video input and provide a better all-around picture. Let’s face it: With the volume of business the insurance industry has, the way you manage your video must be able to perform and grow at the same capacity — while also complying with privacy laws and managing complex content access control policies.

Once video is collected, we also gain the video’s metadata consisting of additional information such as date and time. With this information, we can start augmenting our understanding of the video. We can use GPS to cross reference the driver’s location. Include weather tracking software to assess the impact of external driving conditions and combine this information to calculate the effect these conditions have on the driver’s ability to drive safely. We can use social media to understand specific road conditions for specific times and places, such as using GEO tracing for Twitter to monitor real-time complaints from drivers in a specific location at any given time. With all this information integrated and overlaid on top of video (either recorded or in real-time from the field), insurers are able to significantly increase incident processing accuracy and, over time, construct personalized profiles that can result in reduced policy costs and more efficient claim processing.

For example, insurers can initiate a probation process for new drivers where a certified mobile app is installed on their phones to be mounted on top of the vehicle’s dashboard. The app will record the drivers’ behavior overlaid with car data (such as taken from OBD2 or calculated from the video) and, after a set period of time, calculate insurance plan premiums based on personalized driving habits and issue feedback to the drivers. It would be interesting to see this kind of methodology implemented as a standard for all drivers and use the conclusions collected from all video and other complementary information to create a number-based score for drivers that indicates their objective risk.

See also: Connected Vehicles Can Improve Claims  

Apart from establishing driver ranking, there is so much more out there that can be funneled to help evaluate drivers, driving techniques, road conditions, vehicle performance and incidents. We are already starting to see sprouts of innovation making use of video that can ultimately improve insurance and the driving safety all around, from startups like DrivingBuddy and Nexar that aim to improve driver safety with real-time video feed analysis of driver activity to government and police initiatives aiming to crowd source driving and parking violation reports.

Power of ‘Claims Advocacy’

“Claims advocacy” is fast getting the attention of workers’ comp claims leaders as a powerful approach to better claims outcomes. The on-demand economy has created cultural and multi-generational expectations around service, speed and simplicity, and some claims leaders have already figured out how to deliver.

The workers’ compensation industry is in the throes of internal debate about mission and purpose.  Employee-centric claims models have become a large part of this debate. Some claims leaders say that payer organizations should move away from a compliance-oriented and, at times, adversarial style to an “advocacy” style of claims management.

Research, too, indicates that claims advocacy is top of mind for industry executives. The responses of 700 participants in Rising Medical Solutions’ Workers’ Compensation Benchmarking Study confirm that many claims leaders know the building blocks of advocacy and recognize its potential value. 

We recently interviewed claims leaders to better understand the practical meaning of the concept, as it applies to all claims operations, from self-administered employers to insurers handling claims for thousands of policyholders.

What Is Claims Advocacy?

We asked Noreen Olson, workers’ compensation manager with Starbucks, for a definition of advocacy.  (Starbucks employs 180,000 “partners” worldwide and has close to 12,000 outlets in the U.S.) Olson proposed this:

“In workers’ comp, advocacy is a process grounded by the values of dignity, respect and transparency that coordinates activities to assist the injured worker effectively and promote expectancy and engagement in recovery, efficiently restores (and often improves upon) health and well-being, and resolves the experience in mutual satisfaction.”

Others we spoke with endorsed this or a similar definition. They all have in mind not a checklist, nor a charm offensive, but a culture.  A claims culture that makes access to benefits simple and builds trust – and one that must be supported by executive buy-in, organizational values, technology and operating systems to be successful.

Access to benefits from the worker’s perspective includes ease of filing a claim, ease in obtaining prescribed medications, access to medical specialists and help in navigating the healthcare maze. Along the course of injury recovery, there are many opportunities that affect access and trust as perceived by the worker. The highly respected Workers’ Compensation Research Institute reports in its Predictors of Worker Outcomes Series that “trust” is a key driver of claims outcomes.

See also: How Should Workers’ Compensation Evolve?

Why Now?

Tom Stark, technical director of workers’ compensation at Nationwide Insurance, told us that advocacy has been around for a long time. He’s practiced advocacy since the 1980s Several forces converge to promote advocacy in claims today. Claims leaders are emphasizing, or perhaps “reemphasizing,” the importance of interpersonal relations. As claims handling has shifted from onsite home visits to lower contact models, the importance of emotional intelligence, soft skills and customer service skills is greater than ever to dispel uncertainty and engender trust.

Perhaps the biggest driver of customer service and transactional speed is the American retail sector. Its massive engagement in these areas has shaped everyone’s expectations – of all generations. Millennials, born in the 1980s and 1990s, in particular have grown up with this customer-focused approach and therefore bring to the claims environment high expectations for both delivering and receiving quality service. Slow, bureaucratic responses can shock injured workers. Darrell Brown, chief claims officer at Sedgwick, says, “We are now an on-demand economy. That is the way it is.”

Why Is Claims Advocacy Attractive?

Brown says that engaging the injured worker is key. Fast and helpful response to injury pays off in worker satisfaction and lower claims costs. “People file claims, but they don’t know what is going to happen. If you lose injured workers at the beginning of the claim, to anxiety and fear, they go to litigation.” Brown also says that when claims professionals engage more constructively with injured workers, their own experience is better. This leads to better morale and talent retention.

For employers, claims advocacy provides a special opportunity to directly align work injury response with their corporate brand, core values, employee communications and benefit delivery.

Walking the Walk

Albertsons Safeway, with more than a quarter million “associates” in 34 states, has crafted its claims approach to reinforce engagement and confidence for the injured workers. Director of Managed Care and Disability Denise Algire, who is also the principal researcher for the Workers’ Compensation Benchmarking Study, says that staff talks with injured employees on the day of injury. “We focus on education and reducing uncertainty,” she says.  They avoid potentially intimidating or antagonistic terms like “adjusting,” “examining” and “investigating.” They also start with the positive expectation that every employee wants to return to work. “Workers’ compensation has become adversarial because we manage the system based on the deceptive few versus the deserving many,” she says. “Our claims approach is based on the majority, not the minority.”

Brown talked to us about tangible actions. “If you can make a compensability determination in two days, even though the law gives you 14 days, imagine how much uncertainty and anxiety is removed,” he says. “The same applies to indemnity payments. The industry is often guided by regulatory requirements. If you can take action and make payments sooner, why make it later? You’ve got to walk the walk.” Starbucks, for example, direct deposits indemnity checks into employees’ accounts to increase speed.

Advocacy does not hinder organizations from being compliance-minded. Rather, it becomes one aspect of a holistic, customer-driven framework that aims higher than the bar often set by regulatory standards.

See Also: How to Win at Work Comp Claims

Barriers to Overcome

Stark sees lagging technology as getting in the way of engaging the injured worker. To him, claims tasks grew exponentially while support staff in claims offices were cut. Claims technology has often not kept up. He says, “Look at the work-arounds – count the number of sticky-notes on the adjuster’s screen. If technology is not there to support effective claims management, even in its most transactional form, you are really stressing the model. How are you going to be an advocate?”

Olson brought up two challenges that Starbucks has solved but still confront most employers. She believes that it is important to make it as easy as possible for a partner to report an injury. At Starbucks, they not only have web, mobile and call center options, they also allow partners to self-report their injuries versus going through their manager or HR.

Olson additionally stresses the importance of easily moving the partner to other benefit programs if the injury is not compensable and to avoid language like “your claim is denied.” She says that placing the award of benefits in the “right benefit bucket” needs to be done seamlessly so that the partner does not feel on the hook. In addition to the state mandated language in these instances, Starbucks includes its own letter that communicates that, while the claim isn’t eligible for workers’ comp, the partner may be eligible for other benefits to help with their injury/illness.

One barrier that Algire notes – simply “rebranding” claims adjusters as advocates is not enough. “A true cultural shift will require organizations to move beyond performance metrics that are based primarily in cost containment to those based on clinical quality, functional outcomes and patient satisfaction,” she says. This shift is critical to “walking the walk” and reinforcing the advocacy approach with claims staff.

Conclusion

The on-demand economy has created cultural and multi-generational expectations around service, speed and simplicity – giving workers’ compensation a blueprint for claims advocacy. Embracing consumer-driven models around injury recovery is emerging as a competitive advantage, both from a claims outcomes and a talent recruitment/retention perspective.

The 2016 Workers’ Compensation Benchmarking Study will be surveying claims leaders on advocacy, among other pressing topics, to better understand its current application and perceived viability.  A copy of the 2016 Study report may be ordered here.

Elite Performers Don’t Warm the Bench

A batter looks at the pitch coming at him and, in milliseconds, decides—am I going to swing or not? In the insurance industry, we are increasingly having to make fast decisions, so I segmented my customer base of carriers, reinsurers, wholesalers and retailers to find a handful of traits that you can quickly identify, so you can have elite performers by your side, whether you are looking for talent for an internal team or an outside adviser to bring a different lens to your growth strategies.

Every client I’ve found to be doing really interesting work fit this profile.

Smart, tough, curious

  1. The executives who get that what has gotten them here may or may not be the answers to their evolution as an individual, a team or an organization, are smart. You cannot train, coach or elevate the performance of people who lack a certain level of intelligence. These are people who’ve been there and done it; they have credibility and grit.
  2. They’re tough. They don’t accept fluff. They don’t need pedestrian advice. They’ve been there, they’ve seen it, and they have earned the acumen, not just read it in a clever op-ed piece. They need key people around them to constantly raise the bar on what they’re doing, not set the bar and forget it!
  3. They’re naturally and insatiably curious. They want to know about the thought or practice leadership others can bring. They ask deeper questions, like, “We have a conservative business model. How do I develop a robust digital strategy that allows us to think and lead very differently?” That’s an example of thought and practice leadership.

The focus of interactions is very much on output, not input. The best executives don’t care about some CYA report. The outcome they care about is, “How am I better off because of your unique insights or independent perspective?” They care about benchmarking global best practices, about ols that help them collectively raise the bar on their human capital agility and contextual intelligence! They care about attracting and constantly developing a world-class organization – with diversity of thought. They care about finding a methodical approach to gain mindshare and wallet share, which often translates into market share. Those are all “what’s in it for them,” outcomes, not deliverables, meetings or countless conference calls to discuss a meeting that’s coming up about a meeting that we need to meet about!

Above all, action

These smart, tough, curious insurance industry executives share a fundamental trait: They are very action-oriented. That demands a high tolerance for prudent risk. They realize that a conservative business plan will seldom suffice and that the need for making bets is no longer a luxury, it’s a necessity.

I was recently referred to the president of a global insurance company. During our second interaction, we had a chance to really delve into an intelligent conversation around what I call adaptive innovation – based on the ability to sense and respond to market trends. We soon got around to, “how do we introduce the team to some of your ideas?” I said, “A speaking engagement, an opportunity to share some of these insights with them, is always a good opportunity to plant a seed.” He immediately replied, “I’m getting my senior team together in Singapore in 10 days. I know it’s incredibly short notice, but could you be there?” That’s an example of an action-oriented mindset. He didn’t say, “Let me think about it, have my actuarial team analyze it, let me get 17 other proposals, discuss it with 18 layers of bureaucracy in my organization and get back to you in 2020.” I often say, perfection is the enemy of progress. And what I’ve learned in the past decade of advising truly visionary leaders is that power doesn’t corrupt; powerlessness corrupts!

The elite performers of the insurance industry, as in the world of professional sports, have a bias for decisive action. They’re not afraid to make a bet. They know that not every hit will be a home run but definitely understand, and make sure their organizations understand, that lots of singles and doubles often add up to a winning score after nine innings. That’s how the best of breed stay ahead of the competition.

How would John Madden tackle this?

When you work with advisers, you should do a John Madden on their assessments. Circle in green what you love, things you want to focus on. Circle in red what you don’t see value in.

These circles will start conversations: Why did you cross that out? What is that belief founded on?

The answers will lead to more questions: You say you have a great relationship with your customers, but you do you really know? Are you going to point to some stale survey you did five years ago?

By the way, when your metrics are at their best is the most dangerous time to become complacent. That’s when you really want and need outside counsel. You grew by 22% last year. Good for you. How do you know it shouldn’t have been 34%? How do you know the growth will continue this year?

Surround yourself with people who will push you with tough questions, and tell you what you need to hear vs. what you may want to hear.

The 21st century is an arena in which you cannot afford to stay still. That agility has to come from the top. You can’t tell me you want your workforce to be nimble and agile, if you don’t demonstrate that agility yourself. Don’t stay on the bench, or you’ll attract other benchwarmers. Are you going to swing or not?

Takeaways

1. If you segment the people with whom your work has had the most impact, you are likely to find the elite performers share certain characteristics. Figure out what those are, and aim to attract, retain and develop a lot more of them.

2. For me, “smart, tough, curious and ready to act” sums up the characteristics of my most amazing strategic relationships.

3. To put a scope to a strategic relationship, go at it like John Madden would—iteratively, in active conversation, with plenty of healthy pushback from both sides.