Tag Archives: p&c

The Coming Consolidation in P&C Insurance

A weak economic recovery and regulatory issues are providing significant challenges to traditional business models in property and casualty insurance, especially in commercial lines. Carriers can no longer rely on investment income, and market-share consolidation should be a growing concern leading into 2014.

History tells us that the winners will be companies that are more progressive in their use of new operating models and tools, including advanced data and analytics.

Nigel Morris, managing director of QED investors and co-founder of Capital One, recently said: “In the late ‘80s and early ‘90s, Capital One was at the vanguard of a revolution deploying data-driven strategies in the credit card industry … I believe that insurance carriers increasingly have the same opportunity to grow the size and profitability of their businesses by more specifically meeting their customer’s needs.”
 

The credit-card industry shows what might happen in P&C. During that time in the late 1980s and 1990s, new marketing and risk-assessment strategies fundamentally changed the credit-card industry. Technology and information-based companies like Capital One flourished and garnered significant market share while those that clung to traditional methods floundered. The agent of change? Analytics. In 1988, Capital One (originally Signet Bank) was founded because it saw an untapped opportunity to leverage credit-score and consumer-spending patterns to find the best risks within the subprime market and revolutionize the credit-card industry.

Similarly, Progressive Insurance pioneered the use of analytics, also leveraging credit scores, to insure nonstandard risks at profitable rates and shake up the auto-insurance market.

The adoption of sophisticated technologies essentially creates a perfect storm. Those who use the best analytics create positive selection, gaining profitable market share. Those who don’t use analytics suffer from adverse selection, ending up with poorer-performing risks because they are working with outdated pricing and risk-assessment strategies.

As Matthew Josefowicz, managing director of Novarica, wrote in a recent report, “The massive proliferation of easily accessible data combined with the increased power of modern analytical tools has the potential to transform the insurance industry dramatically over the next decade. The strategy and operations of insurers in the near future could be nearly unrecognizable to current market leaders.”

Data and analytics will only continue to evolve and change the way business is done, whether it’s in insurance, banking, healthcare, shopping or another industry; the accessibility to personal information is truly transforming the world we live in and how we do business.  In the insurance world, companies like Valen Analytics are creating solutions and providing insights to help drive overall success, for instance by helping carriers manage and segment their portfolios to drive underwriting profitability.

Valen’s 2014 Outlook: Commercial Lines report sheds light on the industry’s top challenges and offers information to help better prepare and adapt for 2014; it is available in full here.

What Is The Difference Between Intrinsic Value And Market Value Of Insurance Agencies?

I have been valuing insurance agencies for a long time. I have been valuing them using both the Intrinsic Value and Market Value methods most of the time. For anyone interested in reading a brilliant description of these two methods, I suggest reading the article, “Musings on Markets” (September 7, 2011), by Professor Aswath Damodaran of the NYU Stern School of Business.

Intrinsic value is usually determined using one of several versions of the discounted cash flows method (the exact definition of cash flow varies, but all are intrinsic). This method states a firm's value is determined by the firm's future expected cash flow, discounted for time and risk.

In theory, market value also emphasizes cash flow. However, my experience is that most practitioners, especially when applied by agency owners but also some consultants, so inadequately account for cash flow and the risk that something will go wrong so that for all practical purposes, cash flows are disregarded. This makes market value agency appraisals purely speculative. Sometimes the result is an under valuation. More often the result is a value exceeding reasonability. Sometimes market value and intrinsic value are materially the same. After all, a broken clock is correct twice a day and 730 times a year. Most people would say being right 730 times a year is an awesome record.

A good example is the real estate boom and bust. The intrinsic value of the real estate never supported the market value. Many analysts and promoters became quite innovative in their development of “intrinsic” metrics that supported the market values, but the basic cash flow never supported the market value. The real estate investment only made sense if one could flip the investment at an adequately higher price before the market crashed.

The same force occurred in the market for insurance agencies. Very few agencies have an intrinsic value exceeding two times today or five years ago or ten years ago. If a business appraiser or a business broker sees someone who wants to believe an agency is worth more, the list of rationalizations, justifications, fictitious economies of scale, insightful product diversification strategies, and capital plays (interesting since capital is arguably free in some forms today) are infinite. If someone shoots holes in all these arguments, then ultimately the business broker will play their ultimate card: “We're so much smarter that we can make this work.”

The fact is the intrinsic value did not justify the price paid by many agency buyers five years ago. The strategies that caused the buyers to believe the values were justified were mirages of wishful thinking. The market was overheated and for whatever reasons, if buyers wanted to be in it, they had to pay a high price. There is and was nothing else to it.

The fascinating difference between intrinsic and market value for insurance agencies is that the intrinsic value should remain in a rather narrow band because:

1. Profitability in a well-managed agency is stable. By well-managed, I am excluding firms that are 100% or more dependent upon contingencies for their profits. In these agencies, profitability will vary wildly depending on their contingencies. Otherwise, expenses do not vary much year-to-year in well-managed agencies and therefore, profitability is stable.

2. Sustainable growth is humble. When you read about an agency growing 10% to 25% annually, ask, “How many annuals?” In other words, how long have they truly achieved such significant growth? Also, what risks are they taking? The Property & Casualty industry grows at approximately the same rate as the U.S. economy because the Property & Casualty industry insures America's economy. That rate is approximately 3% annually.

The Property & Casualty industry is not a growth industry and it has not been one for decades. To pretend otherwise is like an older model choosing the right makeup, the right lighting, and the optimum angle to look ten years younger. In fact, the evidence is strong that firms who grow multiple times faster than average have a higher than normal probability of cheating. Often the cheating is not malevolent, but it is still cheating.

3. Risk is comparatively moderate. The insurance agency business is one of the least risky businesses. It may feel risky, but compared to most other businesses, it is quite safe.

These three factors combine to create periodic value fluctuations, but within a rather narrow band on an intrinsic basis. This is why owning an agency is a great business in tough times while maybe less appealing in great times. So why is the fluctuation so much more on a market value basis? Speculators. The speculators may be banks, brokers, private equity, other agencies, but they are speculating. This creates some issues because speculators use market value plus twenty percent or so for their values. They have a tendency to build price without adequate regard for supporting cash flow or risk. This is why a boom takes years to build and the resulting bust can take just a few weeks.

The fact that speculators pay too little attention to cash flow and risk has two significant consequences. The first is that speculators value good agencies and bad agencies too similarly. The result is they pay too much for bad agencies and sometimes fail to purchase the best agencies because they're not willing to pay an adequate premium for quality. Now, some really smart speculators have learned that certain kinds of supposedly bad agencies do not actually have post acquisition bad results. One should not confuse these two situations.

The second consequence is when inadequate attention is paid to cash flow and risk upon acquisition, speculators eventually cannot or do not pay enough attention to building the people and systems necessary for organic growth. This is readily apparent in some brokers' results today.

Whether you should or should not emphasize market value over intrinsic value depends on your position and the market cycle. As a seller in good times, the market value will usually be your best deal because this industry has blessed sellers with an infinite supply of irrational buyers. Their numbers grow and constrict with the seasons, but rarely are they in short supply for long. The only exception to this is the really good agency. A market value may rarely adequately capture the true value of these agencies' cash flows and risk. Internal perpetuation is almost always the best course for maximizing their value.

If you are a buyer, a brutally honest intrinsic valuation is the best way to manage your risk. Market value should be entirely secondary. Always remember that no acquisition is better than a bad acquisition and since roughly every study ever done shows that 75% of acquisitions are failures when truly tested, this rule is worth cementing in your brain. The exception is that if the buyer has such a bad situation that a bad acquisition can hide their current dilemma, then maybe make the bad acquisition.

North American Property & Casualty Vendors: Partners In Claims Excellence

This article was excerpted exclusively for Insurance Thought Leadership from a 43-page research report by the author and published by Aite Group on December 12, 2012 as further described here. This new report from Aite Group reviews the many different vendors, products, and services that help Property & Casualty insurance carriers achieve claims excellence. Based on a May through August 2012 Aite Group survey of North American Property & Casualty insurance company claims executives, the report assesses the executives’ views of and reliance on various vendors, products, and services.

Introduction
The insurance industry has recently been transformed from operating in a product-centric model to operating in a customer-centric model across the entire enterprise, from sales and marketing to underwriting and from claims to billing. Today’s new consumers are better informed than ever, have a heightened sense of service entitlement, and are quick to exchange information, experiences, and opinions with one another using smartphones and social media, where their influence exceeds that of insurance company marketing. And over the past several years, in a fiercely competitive marketplace, North American insurance carriers have spent billions of advertising dollars on promoting their companies based almost entirely on the responsiveness and quality of their claims services.

It has long been understood that the claim is the “moment of truth” for property & casualty insurers with their policyholders, and it is truer today than it has ever been. When a claim is filed — by an average 10% of all personal lines insurance policyholders every year or, put differently, by the average policyholder once every 10 years — the claim is more often than not triggered by a traumatic or at least unpleasant event. Consider as well that the typical claimant has been dutifully paying his or her insurance premiums for years with nothing tangible to show for it and now, at this time of high anxiety, needs and expects prompt and attentive assistance.

Vendors play a crucial role in enabling carriers to achieve the elusive goal of claims excellence. Supporting the entire insurance claims process (though mostly transparent to claimants) is a large, well-coordinated, mostly virtual team of claims professionals with diverse skills and responsibilities. These professionals are supported by tens of thousands of claims software, services, and solutions vendors. Further, these third-party service providers frequently interact in-person with claimants earlier in the process and more frequently than do insurance claims representatives and as such become the face of the insurance company.

The extent to which all of these many different resources work together on behalf of the claimant and provide excellent customer service can dictate the claimants’ level of satisfaction and, in many cases, their intent to renew their insurance with that carrier as well as the opinions they will share and post about their claims experience. Because the challenges facing today’s property & casualty claims executives, including ongoing resource constraints and the many other factors described above, are unprecedented in terms of their number and complexity, claims vendors that best help them solve these challenges are the most highly valued and rewarded.

Claims Software
Carriers rely heavily upon a large and diverse variety of proprietary and third-party claims software systems and databases to manage every aspect of claims operations, from first notice of loss (FNOL) through claims payment. There are several hundred discrete operational processes across property & casualty claims, including auto, property, and workers' compensation lines of business. These processes include the claims management system (CMS) — the “core” or main operating system supporting the entire claims operation — and many other vendor software solutions — of which our report looked at vendor management software, automobile repair and property loss estimating software, and casualty management software.

Example: Claims Management System Software
Underpinning and supporting the entire claims operation is the carrier's claims management system, defined as the “core system” and the system of record for all activities and interactions for all claims. The extent to which internal and external applications, including vendor products and services, are integrated with the claims management system determines the overall efficiency and effectiveness of the claims process and, in turn, the policyholder satisfaction with the process.

Claims Services
Property & casualty insurance claims departments rely more heavily upon third-party claim service providers than one might imagine. Using the services, software, and solutions of about 250,000 claim service providers, U.S. property & casualty insurers spend approximately US$300 billion in the course of resolving 100 million claims. As discussed in this report's introduction, third-party service providers frequently interact in-person with claimants and are often the face of an insurance company. Moreover, the extent to which all of these many different resources successfully work together on behalf of claimants can dictate claimants' satisfaction with their insurance company.

For all of these reasons, successful carriers value these relationships and spend a great deal of time and effort selecting, managing, and working closely with vendors to ensure claims are handled quickly, courteously, and professionally, no matter how complex the process may be “behind the curtain.” While there are many others, the services and solutions included in our report include First Notice of Loss, claims analytics, insurance replacement rental cars, total loss vehicle valuation, salvage management, collision repair networks, national independent appraisal and adjusting services and litigation management solutions.

Example: Insurance Replacement Rental Cars
Insurance replacement rental cars are used extensively by insurance companies to provide temporary transportation to claimants whose automobiles are being repaired after an accident (most auto insurance companies include or offer temporary rental car coverage for a small additional premium). Of all the claims vendor services used by carriers, this category may be the most critical in terms of ability to influence the customer claims experience, policyholder satisfaction, and retention. In addition, it represents a significant overall claims cost for insurance companies and a major challenge for claims adjusters in terms of logistics, the many associated claims process touchpoints, and overall time consumed in managing the process.

Enterprise has come to dominate the insurance replacement rental car segment for a few simple but not-so-obvious reasons. Primarily, it focused on and perfected solving the unique needs of this very different segment of the rental car market. Its competitors treated insurance replacement rentals as just another small portion of their second-largest segment (the local market), choosing instead to focus on their larger and still-growing airport markets.

Enterprise quickly identified the many major pain points of insurance claims adjusters who were tasked with managing temporary rentals as part of the auto accident and repair claim process, and it ultimately simply assumed all of those responsibilities in exchange for the carriers' rental car business at competitive prices. Enterprise also understood the critical value of developing working relationships with local insurance agents and body shops, and it tasked their branch managers with doing both aggressively. Finally, Enterprise's family-owned and -run business philosophies have informed its business operations, including its college graduate-focused recruiting practices, its internal career-promotion policy, and its fierce focus on customer service.

Enterprise's impressive success may well be the insurance industry's best example of the rewards available to vendors who learn how to execute and manage insurance claims process outsourcing to the highest possible level of customer satisfaction.

The graph below illustrates respondent perception of the listed insurance replacement rental car vendor solutions' performance, regardless of whether respondents currently use them. As might be expected given the explanation above, perception of Enterprise performance is almost completely positive.

Perception of Insurance Rental Car Replacement Services

About This Report
This article is excerpted from a 43-page research report by the author and published by Aite Group on December 13, 2012 as further described here.

Companies with products and services named in the complete report are ABRA, Accenture, Acuity Management Systems, Aderant, Allegiant Systems, Allstate Insurance, Aon eSolutions, AQS Inc., Arbitration Forums Inc., Athenium, Audatex (a Solera company), Auto Claims Direct, Auto Injury Solutions, AutoNation, Avis Budget Group, BlueWave/Cover-All, Bottomline Technologies, Brightclaims, Caliber Collision, CARSTAR, CCC Information Services, CGI, ClaimForce, ClaimHub, Claim Toolkit, CodeBlue, Collision Revision, Copart, Corvel, Cox Enterprises, Craig/is, Crawford & Co., CSC, Cunningham Lindsey, CynCast, Detica NetReveal, Eagle Adjusting, Enterprise Rent-A-Car, Exigen, EXL Services, FairHealth, FairPay, FINEOS, Fiserv, FixAuto, Gerber/Boyd, Group 1, Guidewire, The Hartford, Hertz, HSG, HyperQuest, IA Net, IBM, Ingenix, Innovation Group, Insurance Auto Auctions, ISCS, ISO, Legal Services Group (LSG), LexisNexis, Lynx Services, Maaco, Manheim, Mitchell, Mitratech, MSB, NuGen IT, PDA Appraisal, Pega Claims, Penske, Performance Gateway, PowerClaim, Premier Prizm, Procura, QCSA, Quest, Ravello, Safelite Solutions, SAP, SAS, SCA Appraisal, Service King, Simsol, Sonic, Sterling, StoneRiver, SunGard, Symbility, Systema, Total Resource Auctions, Trillium, Tropics, Trover Solutions, Trumbull Services, Tymetrix, Van Tuyl, Verisk Analytics, Vista Equity Partners, Wipro, Wolters Kleuwer, and Zywave.

Hospital Cost Shift

A big decline in both auto accident and severe injury frequency has not produced a corresponding decline in loss costs. The slack has been taken up by inflated soft tissue injury claims fueled by hospital cost shift. Financially savvy hospital administrators and new software that “enhances” billing techniques have overcome claim deterrents so effectively that the industry seems unaware. There is an answer, but the industry may be satisfied with the status quo for now.

A 2008 report by the Insurance Research Council (IRC) provides empirical evidence that since 2000, a significant decrease in auto claim frequency has been mysteriously offset by an equally significant rise in severity, leaving loss costs essentially unchanged. Of particular note, the Insurance Research Council report points to a study by the National Safety Institute showing that improved automobile safety engineering has been lowering the frequency of serious injuries and deaths. This makes the rise in bodily injury and personal injury protection claim severity particularly vexing.

The graph below is taken from the Insurance Research Council report and it depicts the described trends:

Percentage Change in Countrywide Claim Frequency, Claim Severity, and Loss Costs

This paper is the result of research that was aimed at discerning the root causes of the three simultaneous trends and whether their relationships are coincidental or causal.

In summary, the findings were as follows:

  1. The decline in claim frequency was (is) primarily causally related to lower per-capita driving, which in turn is causally related to the combination of a significant rise in gasoline prices coupled with rising unemployment over the same period.
  2. The rise in property damage severity is largely causally related to an increase in vehicle repair and replacement costs that is in turn driven by the efforts to make vehicles safer, such as airbags.
  3. The rise in bodily injury and personal injury protection severity is the result of a significant shift of the total cost of national health cost burden from the government and private health insurers to the Property & Casualty insurance industry.

The Root Cause Of Medical Cost Shifting
The decline in claim frequency and the rise in property damage severity were considered transparent enough not to warrant further elaboration in this article. This turned our focus to unraveling the seemingly mysterious rise in bodily injury and personal injury protection severity, especially in light of the decline in the rate of severe injuries that can be causally related to the property damage severity rise.

Our findings in this regard are a confluence of causally related phenomena as follows:

  • The government has been tightening payment controls and cutting reimbursement rates for medical providers under programs like Medicare and Medicaid.
  • Private health coverage payments to providers have declined as fewer employers provide coverage; for those who do, the deductibles and co-payments have grown considerably.
  • Hospitals and other significant medical entities have responded by appointing financially savvy administrators and implementing electronic medical record systems that have morphed from being efficiently focused to being revenue enhancement driven.
  • These savvy administrators and their new software programs are defeating the government and private software tools designed to vet electronic billing submissions. They accomplish this via “diagnostic upcoding,” a means of reporting an injury or illness as being more severe than in actuality.
  • Though these tactics are aimed primarily at the government and private health plans, they have worked equally well at overcoming Property & Casualty company claim deterrents, driving up the cost of what were once considered small soft-tissue personal injury protection and bodily injury claims.
  • While the tactics are effective against the government and private health insurers, those entities have mitigated their effects by lowering medical procedure reimbursement rates. Because the Property & Casualty industry lacks the means to do the same, it is absorbing an ever increasing share of total national health care costs, a phenomenon referred to as “cost shifting.”

Understanding Diagnostic Upcoding
The rise in bodily injury and personal injury protection severity is the manifestation of the growing cost shift from hospitals and other medical providers that are passing a progressively greater percentage of the total cost of national medical costs to the Property & Casualty industry.

In many ways, this shift is an unintended consequence of a financial stalemate between the government and private health insurers on one side and hospitals and other medical providers on the other. Hospitals and other providers turned increasingly to upcoding to offset the steadily decreasing reimbursements from the government and private health. But the Property & Casualty industry, which accounts for only about 10% of hospital utilization, was subjected to those same programmed upcoding schemes, seemingly without awareness, or at least without taking mitigating actions.

It is evident that something is driving the increase in medical care costs

The following are direct quotes from the IRC (emphasis added):

“We use the following indicators and more: extent of disability, rate of hospitalization, days unable to perform duties. And we see that injuries are not becoming more serious nor have they changed much. But, it is still evident that something is driving the rise in severity. Since injuries do not appear more serious, medical usage and treatment costs are driving the increase in medical care expenses.

“Low reimbursements from public health insurance programs, such as Medicare and Medicaid, have prompted hospitals to shift costs to automobile insurance companies — raising auto injury claim costs. Cost shifting in 2007 resulted in $1.2 billion in excess hospital charges. The full impact of hospital cost shifting, including that occurring in other insurance coverage, is likely much greater.

Medical Coding 101
The medical profession has a well-established regimen of coding to describe both the nature of injuries and illnesses as well as the therapies utilized to treat them. The coding classification that defines the nature of pathology, the diagnosis, is referred to as “ICD-9 codes.” For therapies, the codes are referred to as “CPT and HCPCS codes.”

ICD-9 codes form the basis for CPT and HCPCS codes because the diagnosis precedes the selection and introduction of the appropriate therapy or therapies. So if in the same instance the ICD-9 code indicated a bruised hand but the CPT/HCPCS code reflected a coronary bypass, software programs employed by the government, private health care providers and the Property & Casualty industry can detect the mismatch and prevent the payment.

The government and private health insurers tie their reimbursement rates to the CPT/HCPCS codes. When the therapy code is correct for a particular diagnostic code, the software can discern the appropriate payment amount based on a programmed fee schedule. With such a system, it is easy for the government to institute an across the board fee reduction of 10% or to apply the reduction in a variable way and accurately estimate its aggregate impact.

The Property & Casualty insurance industry is able to follow government fee schedules in some instances (mainly Workers' Compensation) but in most states relies on “usual and customary” charges for auto, the aggregate average of what medical providers bill for each CPT/HCPCS code. There has been significant controversy and litigation related to the sources of the “usual and customary” data.

Overall the government, private health care and the Property & Casualty industry all use software programs to vet medical billing that start by insuring that the CPT/HCPCS coding for each therapy match the ICD-9 diagnostic code and then, checking the amount charged for each therapy against a fee schedule or, for the Property & Casualty industry, the “usual and customary” charge.

From “Patient Centered” to “Profit Center”
The belief that doctors would not falsely inflate a diagnosis, outside of outright fraud, was common at the outset of the electronic vetting system, and with good reason. But the confluence of government fee reductions and the decline of private health care created significant financial duress for hospitals and providers. Something had to give, and turning away the uninsured was not an option, although more and more providers are opting out of Medicare and Medicaid.

That answer came in the form of savvy hospital administrators and slick new software that added efficiency but even more so, drove up revenues. It did so by making certain that the highest legitimate diagnostic code was being selected. It also provided upfront audits to spot instances such as a therapy that overshot the initial diagnosis so that “coding corrections” could be made before the billing process was invoked. Increasingly, such corrective activity was administered by support personnel who lacked medical knowledge and sought only to satisfy the systems requirements.

The Impact Of Diagnostic Upcoding
The medical coding system is logical and it lends itself well to automation, which vastly increases efficiency for everyone. But its cornerstone is the ICD-9 diagnostic code and while expert systems can aid a doctor in making a diagnosis, the ultimate decision (at least for now) still rests with the doctor's judgment.

With enough information, a system could flag potential upcoding in certain instances. Gradually such a system will evolve and become increasingly effective, but for now, expert human intervention is required to decide whether the reported ICD-9 diagnostic code is reasonable in light of numerous data points derived from a forensic examination of the mechanism of injury.

This chart reflects a huge shift in ICD-9 supported CPT coding from 2002 to 2008:

Increase in Emergency Department E/M Billing Levels

Most Doctors Are Victims Not Perpetrators
It should be noted that hospitals and other providers were likely losing legitimate revenues by not paying sufficient attention to billing practices in the past. Therefore, some of the change in the above chart is likely justified. But like a pendulum that may have swung too far in one direction in the past, there is ample evidence of over-compensation on its way back.

A Few Recent Headlines

4-18-2011: CtW Investment Group Calls for Board Accountability

7-21-2011: Prime Healthcare Accused of Medicare Fraud

8-31-2011: Alleged Fraud Uncovered During EMR Training

9-12-2011: Dallas Hospitals To Pay $1.4M, Settle Upcoding Investigation

9-21-2011: Doctors Protest CEO at Knapp Medical Center

This is not meant to suggest that all hospitals and providers, or even the majority, cross the line, but a systemic change has occurred and one manifestation is the alarmingly frequent allegations of billing related maleficence.

Examples Of Recent Articles From Hospital Industry Publications:

Examples Of Recent Articles From Hospital Industry Publications

The Property & Casualty Industry Response
Had cost shifting not occurred in parallel with the significant decline in accident frequency, loss costs would have dropped and companies would have utilized the capital windfall to lower their prices and gain market share. That would have led to a significant decline in premiums accompanied by expense reductions significant enough to maintain underwriting and claim expense ratios.

Many of the financial incentives in the industry are determined as a percentage of premiums. Shrinking premiums produce shrinking companies, lower cash flow, weakening balance sheets and endangered financial ratings. None of those are desirable outcomes for carriers. Independent Agents and Brokers work on commission, a percentage of written premiums, so if they earn 15% on an $800 auto policy that without cost shifting may have shrunk to a $600 policy, they would have taken a 25% revenue cut.

There may be Nash equilibrium in play, with everyone being happy under the current circumstances. But as the Insurance Research Council points out, if accident frequency returned, first loss costs, and then premiums would spike. The longer and larger the cost shift is allowed to grow, the greater the potential market disruption becomes when the day of reckoning arrives. But for anyone who is not betting on a near term economic revival, and/or the significantly lowered gasoline prices that could fuel increased frequency, this may not be a burning issue.

Is Anybody Hurt By Cost Shift?
Auto insurance consumers are financing the cost shift through artificially high insurance premiums. To the extent that some of those same individuals consume more medical services than are paid for, there seems to be fairness. But for those who shoulder the full burden (or more) of their medical expenditures, “the affluent,” this resembles income redistribution.

What Does This Portend For Claims?
As things stand, most claim department leaders either don't realize what has happened, or believe that their particular policies and practices have prevented this for their company. A benchmark comparison of company loss costs against like competitors would force one to choose to either disbelieve the phenomenon entirely or accept that they are as vulnerable as everyone else.

The standard industry claim deterrents for medical cost containment are two software programs, medical bill repricing and automated bodily injury evaluation. Both are highly susceptible to diagnostic upcoding, but few claim leaders understand the algorithms that drive these systems and imbue them with capabilities that they don't have. Those claim people far enough into the details to know better are not empowered to act.Efforts to inform claim leadership typically meet with stiff resistance, because they genuinely believe that they “have it covered.” And even if they knew they did not, why would they want to have such significant leakage called out when loss ratios are stable, and nobody is pointing a finger in their direction? But acknowledging and addressing the issue would create more work on top of what already feels insurmountable.

Closing Thoughts
This article was written for the purpose of calling out the significance of cost shifting to the industry. I do not believe that the industry is purposely allowing the cost shift, but when a bad situation creates comfort, a sense of urgency is elusive. The more entrenched the problem becomes, the more difficult the exit strategy.

The Property & Casualty industry will continue to represent a relatively small percent of hospital utilization, but it is continuing to pay a growing disproportionate share of the total cost. Even if driving never perks up again, as the cost shift grows a tipping point nears where premiums become too high.

Finally, there has been too much focus on automating claims over the past twenty years or more and far too little focus on basic claim handling. This is one example of numerous significant pockets of leakage that arose as a result.