Tag Archives: premium leakage

Premium Leakage Due to Legacy Systems

When there’s a leak under your sink, do you let it keep dripping or call a plumber? Sounds like a simple question with an obvious answer. But what if you don’t know you have a leak? You’ve gotten used to a high water bill and less water pressure without even realizing how much you could be saving if you found the leak and fixed it. 

This scenario isn’t unlike an issue many of today’s insurance carriers are experiencing called “premium leakage.” Inefficiencies, inaccuracies and risky processes due to the use of legacy systems cause carriers to unknowingly “leak” premium they should be collecting. Fortunately, eliminating premium leakage is simply a matter of looking under the kitchen sink to find the source and taking the necessary steps to stop it. 

Where Legacy Systems Fall Short

The systems we now consider to be “legacy” (i.e. Excel, COBOL or VB6) have been relied on by insurance carriers for decades. For many carriers, these systems are seen as tried and true. Having accepted legacy systems as a way of life, carriers can have trouble noticing their shortcomings. 

But as we look beneath the surface, we can see that legacy systems are causing some of the major pain points insurance carriers face:

  • Multi-entry 
  • Siloed workflows 
  • Inaccurate data 
  • Manual errors 
  • Slow turnaround times 
  • Redundant processes 

These pain points are due to legacy systems’ inability to share data seamlessly across the organization, integrate both internally and with ecosystem solutions and automate rules and regulations. 

The Real Cost of Legacy Systems 

Legacy systems aren’t just painful, they’re costly. A recent FINEOS study shows that an estimated 5% to 10% of insurance premiums vanish every year due to the inefficiencies caused by legacy systems. Premium leakage comes from multiple areas within an insurance carrier’s operations. However, a few spots are notorious for leaking valuable premium: 

Case Setup Inaccuracies

A top culprit for premium leakage occurs when setting up and installing a new employer group on multiple systems that are not integrated. This process requires massive amounts of work-arounds and inevitably results in data inaccuracies across systems. Roughly 5% of annual premium can be lost just in this one area.

See also: Pressure to Innovate Shifts Priorities

Enrollment and Eligibility Management

This notorious source of premium leakage can make or break a carrier’s year. Whether the carrier or the employer is responsible for managing eligibility and enrollment, relying on legacy systems or repurposed solutions (i.e. using a P&C system for anything in the life, accident and health market and vice versa) means the carrier is ill-equipped to properly manage enrollment and claims eligibility. This results in millions of dollars lost that otherwise could fund additional staff, capital investments or strategic initiatives.  

What Carriers Can Do to Fight Premium Leakage 

The solution to eliminating premium leakage is the same as the solution to better mobility and flexibility: strengthening your core. Because legacy systems and custom solutions are inherently prone to premium leakage, carriers must rethink their core system solutions to combat it. 

So, what do these stronger core systems look like? They’re modern and integrated and allow data to flow freely between the carrier and the employer. They’re also purpose-built for the market they serve, enabling the insurance carrier to be a reliable source of truth for current plan and policy information, as well as member data for the employer. 

With stronger core systems in place, the premium calculations for both the employer and the carrier are based on the same source of truth. Further, when an employee is enrolling for coverage the benefits and provisions are accurate and truly reflect what is eligible. This turns into accurate premium being billed to the insured and, most importantly, the right benefits being paid when they are needed. The result is zero premium leakage, and money back toward the insurance carrier’s bottom line.

The Customer Experience Goes Beyond the Monetary Benefits

While monetary recoupment is an exciting reason to tackle premium leakage, there are also customer satisfaction benefits of upgrading from legacy systems. Modern core systems make processes more efficient and yield faster turnaround times on claims for the employee. As most claims are filed in times of serious illness/injury or bereavement, a quickly processed claim can significantly improve a customer’s experience during a difficult time. 

Additionally, the insurance carrier must meet the insured or enrollee where they are. To accomplish that objective, the digital experience offered must come with the same accessibility and ease experienced in most apps available to the insured. Carriers can’t offer a superior customer experience digitally when their technology backbone is made up of older legacy systems that are unable to support APIs or integration. They need modern systems that come equipped with APIs and the data structure to support the insured at all points of the policy lifecycle. 

See also: Insurance Outlook for 2021

Transformation Pays Off

Premium leakage can be eliminated when carriers decide it’s time to look under the kitchen sink, see the source of the leak for themselves and call in the plumber. In this case, the plumber comes in the form of a modern, SaaS-based core system. By addressing the costly inefficiencies caused by legacy systems, insurance carriers can keep the full measure of their projected premiums in their pocket while also providing a superior customer experience.

Use-Based Insurance: The New Lie Detector?

The California district attorney offices in 22 counties recently filed 171 felony and 28 misdemeanor charges against 187 people for alleged auto fraud involving 40 insurance companies. While these numbers are staggering, the truth is that 49 other states could probably do the same.

Insurance fraud is becoming more of a norm than an exception, particularly in the wake of a shaky economy. In fact, 24% of those polled by the Insurance Research Council said it’s acceptable to pad an insurance claim to make up for a deductible, and 18% said it’s okay to pad a claim to make up for premiums paid in the past!

In auto insurance, fraud involves several little white lies, including:

  1. Falsifying the garaging address
  2. Underestimating annual miles driven
  3. Omitting some drivers in the household
  4. Overstating the extent of damages when filing claims
  5. Fudging when and how an accident occurred
  6. Forgetting to report changes that may affect applied discounts. According to a 2010 report by Quality Planning, premium leakage cost auto insurers $15.9 billion in 2008. False reporting of vehicle rating factors, including annual mileage and rated territory, accounted for $6.5 billion in lost premium. Driver rating factors, such as unrated operators, accounted for $8.9 billion.

Fortunately, through smartphone-based usage-based insurance (UBI), auto insurers finally have a way to deter and detect fraud, and to recapture a portion of the dollars lost to premium leakage. Here are some reasons:

  1. First and foremost, usage-based insurance has a built-in deterrence factor. Those who are more prone to fraudulent activity are least likely to sign up. Therefore, the quality of your policyholder pool naturally improves as a byproduct of UBI.
  2. False garaging addresses are easy to detect thanks to the GPS element of a smartphone UBI platform.
  3. Annual mileage driven becomes a non-issue because the usage based insurance app periodically communicates with the vehicle’s odometer.
  4. Certain smartphone UBI apps develop driver signatures over time and are able to detect when other people are driving by comparing current driving behavior to the normal policyholder driving behavior. This capability could flag the possibility of unreported drivers.
  5. Smartphone UBI apps also detect hard braking and sharp cornering events, as well as a vehicle’s geographical location at any given time. This data could be used to corroborate a policyholder’s claim. For example, if a policyholder says a tree limb hit his car in his driveway at 9:09 p.m., but the UBI data shows that the car had a hard braking event that occurred 22 miles away from home at 9:09 p.m. on the date of the reported damage, further investigation may be warranted.

As you calculate the potential costs and returns of usage based insurance, make sure to include the potential impact of fraud reduction in your equation. That figure could be just as important as the new market share you plan to attract.