Tag Archives: subrogation

Blockchain Smooths Subrogation

Subrogation is a relatively manual, time-consuming process often requiring physical checks to be mailed on a claim-by-claim basis between insurers. Sounds laborious, doesn’t it? That’s because it is.

In 2018 alone, the total amount of dollars demanded and issued through the subrogation process was over $9.6 billion for all insurance carriers, and multiple sources of data increase the potential for fraudulent claims. According to Claims Journal, up to 10% of claims costs for U.S. and Canadian insurers are attributed to fraudulent claims.

With so many disparate parties, including claimants, carriers, third-party adjusters (TPAs), law firms, recovery companies and regulatory entities, involved in the process, subrogation is in desperate need of innovation. Fortunately, emerging technologies are providing solutions.

In this post-COVID world, with reduced dependency on physical location, the digitization of insurance has caused a significant ripple effect for businesses in subrogation, including those involved in risk management and data protection.

The Proverbial Silver Bullet?

Blockchain, or distributed ledger technology (DLT), can help insurers drive more efficient processes, including use of new “smart” contract models. 

Smart contracts allow insurers to enforce agreements by storing business rules in programing code and have them execute automatically once the required terms are met. Smart contracts can significantly reduce the cost of “netting.” Netting is a process when two insurance companies give visibility into corresponding liability and recovery efforts. Today, this process can take days or weeks or months. With transparency provided by blockchain, the netting process can occur in real time. And, this is a huge cost and compliance savings for carriers, as well as for the entire ecosystem.  

Blockchain employs consensus management to manage risk pools, underwriting and claims payments. The contract is digitally signed on the blockchain, providing all parties a single version of the contract, eliminating the possibility for version mismatch or misinterpretation.

Security 

Due to the nature of DLT, blockchain can automate transactions and allow multiple organizations to share data securely. Data is stored on multiple machines, making it essentially “public.” In this scenario, it becomes incredibly difficult for a hacker to alter the content of the data because it would have to be done on every node simultaneously. 

Data is more secure because blockchain networks store data in a format that cannot be replicated or tampered with. Each block of information is also stamped with a unique alphanumeric hash key, which contains information about that block and all the ones that proceeded it. If one block is altered in any way, it will be immediately apparent by comparing it with others in the chain.

See also: Breakthrough for Blockchain?

Transparency 

Blockchain technology is providing new ways of carrying out data exchanges that are more secure and transparent than ever before. The ability to make these transactions without a central authority enables better serving customers by removing the bottlenecks and inefficiencies that come with outdated manual processes.

Having stakeholders house their data on a blockchain creates a shared source of truth, which would facilitate data-sharing, reduce costs and decrease the likelihood of errors. By creating a single source of truth, a blockchain solution would eliminate data redundancy, reduce the potential for errors and speed the process by eliminating the need for continual information requests. An automated blockchain payment solution would eliminate the need for reconciliations, improve audit quality and reduce the potential for payment fraud. 

In addition to claims processing, a blockchain payment solution can streamline operations, improve accuracy and reduce costs across the value chain in such areas as agent/broker commissions and incentives, premium receivables, premium refunds at cancellation and service provider/vendor payments.

Blockchain employs smart contracts and consensus management to manage risk pools, underwriting and claims payments. The contract would be digitally signed on the blockchain, thus providing all parties a single version of the contract, eliminating the possibility for version mismatch or misinterpretation. Blockchain provides immutability by design. And, each party owns their ledger and a record of unconsumed evidence. Decentralized transactions (with common access to a ledger that has a secure audit trail) provides an improved basis for non-repudiation, governance, fraud prevention, financial data and reporting.

The Future of Subrogation – Sponsored by Blockchain

Blockchain is poised to rewrite the rules of competition in the subrogation industry by streamlining operations, enabling data to be shared seamlessly with external stakeholders and disrupting traditional business models and intermediaries.

Blockchain: A Hammer Looking for a Nail?

Netting of subrogation payments, the exchanging of payments between carriers at regular intervals instead of on a claim-by-claim basis, is a concept that has been around since the mid-1990s. It is once again back in the news with the announcement that State Farm is developing its own blockchain solution to net subrogation payments between itself and another unnamed carrier. Some say this is an innovative solution for the use of blockchain for the insurance vertical, but is it really nothing more than a hammer (blockchain) looking for an old nail (payment netting)?

All will agree there is room for vast improvement in reducing friction of the subrogation workflow, including the exchanging of funds. Carriers send thousands of checks to each other on a monthly basis in the settlement of subrogation claims – the same process that has occurred since the beginning of time relative to the subrogation process. It’s expensive, involving the printing of checks, mailing costs and the labor to apply funds by the receiving company. Each payment needs to be broken down and applied in the claims system to the individual lines of coverage for the original claim payment and then balanced out in the accounting platform. In a “netting” scenario, the total value of what two companies owe each other is issued by one payment, but then still has to be reconciled on both an outbound and inbound basis, making sure to reconcile every claim that is affected. Remember, each side of the payment has premium ramifications. Many touchpoints, applications and processing.

No wonder this has been an issue, but why does it still garner so much focus, with the advancement of financial technology and the reduction of check processing fees? Shouldn’t we now be focusing on a more holistic solution for the industry affecting more than just the payment?

In the mid-1990s, banking costs drove the netting conversation as a way to reduce fees, but the industry wasn’t able to come together on how to solve the problem. Competitive pressures, internal constraints and the problem of how to reconcile the carriers’ multiple platforms contributed to the futility of the conversation. Industry organizations even tried to solve the problem but with no success.

9/11 changed forever how the banking industry dealt with checks. The country was brought to a standstill for three days due to air traffic being halted (remember, checks were physically moved between the Federal Reserve branches on a daily basis via planes at that point). One of the outcomes of this national tragedy was the implementation of the Check 21 Act in 2004, allowing the image of the check to have the same “value” as the original check. Financial technology, better known as fintech, was developed to place the imaging process of the check into the hands of the business customer, allowing it to image the payment and send it to the bank. The banking industry gave the insurance carrier a digital scanner so the carrier could do the teller’s job of scanning the payment instead of the bank incurring that cost, but the insurance industry still had to manage the application of funds manually as it did before.

Great move for the banks and yet carriers couldn’t figure out their now 10-year problem of netting even though technology existed to take that scanned copy of the payment and automatically apply it to the claim file via new insurance technology. No changes were required to claim platforms of the paying carrier or how the receiving company had to apply the funds – just a straight automation opportunity with a substantial labor savings. However, the major carriers still pursued the netting solution even though the problems they were originally trying to solve were no longer an issue.

See also: Blockchain: Seizing the Opportunities  

We are now 15 years removed from the introduction of fintech by the banking industry, and the netting conversation remains! Banks allow their business customers to image and deposit their checks through a scanner. Consumers manage their accounts through their mobile devices along with the ability to transfer money to each other through apps such as Venmo or Paypal. Moving money has become extremely inexpensive, with the result for all of us being the reduction in the processing fees. Then why does netting continue to be promoted as a problem that needs to be solved when the costs have dramatically decreased? One does have to wonder.

The industry is working through various use-cases for blockchain, and, yes, you guessed it, the financial transaction of the netting of payments is still being pursued. The original problem of check processing costs is no longer an issue, while the same issues of allocating the information to both claim files remains. Participation remains problematic, but the level of concern increases if a blockchain is being managed by one of your competitors. Who has access to the data? Where is it stored? How can it be used? Does a netting solution created and managed by a carrier create a competitive advantage for that carrier?

If we can get beyond these questions, the bigger issue remains as to why time, money and effort are being used to address a 20-plus-year-old issue that can be handled via existing technologies rather than complicating the process with the additional friction of netting being added to the industry’s expense? Maybe the alternative is to use blockchain to digitally transform the subrogation workflow affecting LAE in dollars rather than cents while also maximizing recoveries.

Our industry will continue to evolve and build on new technologies. Let’s be sure to swing our hammers at nails supporting the future building blocks rather than those 20-year-old rusted out nails.

The Question That Insurtech Is Avoiding

There’s a lot of it about. Insurtech and technology, that is. New ways of doing stuff. Breaking traditional distribution models and deconstructing established supply chains. Who could not be excited?

But there’s another side to this coin, and that’s the issue of established practice. Insurance isn’t a new gig, like telematics, but something that’s been around for three centuries. Some might argue even longer, as there are records of even the ancient Egyptians sharing and aggregating risk. Protecting the few by collaborating with the many.

Over the centuries, insurance hasn’t been an easy ride. What do we mean by appropriate compensation, or, in insurance parlance, by the principle of indemnity? How to deal with those at fault, or, in insurance language, the matter of subrogation.

See also: Where Will Unicorn of Insurtech Appear?

But in the old way of doing things, we all knew where we stood. Insurance contracts had evolved over decades, and where there had been differences in interpretation the legal system had sorted things out for us. There was a sort of certainty and framework to our business and a more certain relationship, even if the topic of trust remains contentious — the level of trust between policyholders and carriers has always been low, despite a degree of contractual certainty.

Now, here we are in a Brave New World of insurance. Things will never be the same because of technology, the experts say. Some say insurtech is mainly just about new distribution channels, customer management and operational efficiency, but that leaves the rest of the insurance proposition.

It feels like we’re throwing a ball onto a sports field and asking the two competing teams to sort out the rules for themselves.

Will there be winners and losers? Of course. The winners will be the legal profession, which will spend years, perhaps, discussing where the liability for death rests as a result of a driverless vehicle incident. Was it the manufacturer – as a product liability issue? Was it the occupant of the vehicle – extending the concept of occupiers liability? Was it the system administrator, which ran the system and which surely must be involved somehow? Maybe even the victims themselves: “Don’t you know you need to be more careful, with all these unmanned gadgets all around us?’”

We can’t all just contract out of responsibility. The proverbial buck must rest somewhere.

Think forward a few decades. Let’s accept that the insurance industry will have been re-engineered and reimagined, with robots, chatbots and wobots. Let’s assume that physical risk is calculated in a more granular way and that underwriting risk management is absolutely aligned to the risk appetite of a carrier. And we have somehow managed to be proactive, to have better responsiveness to climatic change and everything else. And ubiquitous devices provide us with bottomless barrels of information, from which our systems draw insight through advanced analytics.

See also: 3-Step Approach to Big Data Analytics

Someone, somewhere, will need to address the question — what does all this mean contractually to the insurance industry? After, all isn’t insurance just no more than a contract, between two parties? Or was that concept somehow lost, somewhere inside the Innovation Hub, or among the bits and bytes of technology?

Isn’t it time that someone slowed the momentum of change and had a real hard think about the legal implications for insurance?

Insurance Needs a New Vocabulary

Lots of industries face criticism because they talk the talk but don’t walk the talk — the computer industry, for instance, long talked about making machines intuitive but required users to work their way through manuals and memorize long series of steps before they could accomplish anything. But the insurance industry doesn’t even talk the talk yet.

Sure, everyone is talking about improving the customer experience, but look at the words we use. Many are opaque — the industry talks to itself, somehow unaware that customers are listening and are turned off by the gobbledygook. Some words are even offensive — we’re saying things to customers that we really don’t want to be saying.

We have to at least get our talk — our vocabulary — straight before we tackle the much deeper issues and figure out to really engage customers and address their evolving needs.

My least-favorite word is one so widely used that few will find it offensive: “adjuster.” My problem: If I’m filing a claim, I don’t want it adjusted. I want it paid.

Yes, I realize that processing claims is complicated and that all sorts of adjustments need to be made. I also realize that no industry simply pays when a claim is made against a company. But if you send me an “adjuster,” you’re telling me right off the bat that you don’t trust me, and that’s a lousy way to start an interaction. It certainly isn’t any way to start a relationship, which is what insurers insist they want with customers these days. Don’t trust me, if you must, but send me a “claims professional” or simply a “customer service representative.” Don’t send me an “adjuster.”

Less offensive but still unnecessarily bad are words like “excess” and “surplus.” The insurance may be categorized as excess and surplus to you, but not to me, the customer. I’ll thank you to treat my needs with the respect they deserve (says the customer).

Some words need to go away because they already have meanings — and they aren’t the meanings assigned to the words by the insurance industry. A binder is a plastic cover with three rings that you buy for your kids at this time of year as they head back to school; it is not temporary evidence of insurance. An endorsement is something you put on the back of a check — or at least used to, before banks simplified deposits. An endorsement is not something that modifies an insurance policy.

Mostly, many terms need to be revisited because they are opaque, and often archaic:

  • “Underwriting”? How about “assessing risk”?
  • “Actuary”? That’s a legitimate word, but I prefer the European form: “mathematician.” (“What do you do at XYZ Insurance Co.?” “I’m the mathematician.”) “Mathematician” just seems friendlier.
  • “Capitation” and “subrogation”? Important functions, but there have to be layman’s terms that can be substituted.
  • If I’m buying life insurance, good luck getting me to grasp intuitively the difference between whole life and universal life; “whole” and “universal” are practically synonyms in this context.
  • “Inland marine”? Please.

While we’re at it, let’s do away with the acronyms. All of them — at least on first reference, and mostly in subsequent references, too.

Changing the language will be hard because so many in the industry subscribe to what I think of as a 19th century sort of approach to business: Let’s make things seem as complicated as possible to justify the existence of lots of experts and intermediaries and to demand nearly blind faith by clients. This is sort of the “don’t try this at home, folks,” approach to business. Leave the complicated terms to us.

The approach has worked for insurers for a very long time. It has worked for doctors and lawyers. If a cynical T.A. in a philosophy class in college way back when is to be believed, it worked for Hegel, too — he supposedly wrote a short, clear version of his big idea (thesis/antithesis/synthesis), and no one took him seriously; he then wrote a 1,000-page, nearly impenetrable version, called it merely the introduction to his ideas and found lasting fame.

But things have changed since Hegel wrote in the early 1800s. Now, if I want to remind myself about Hegel, I turn to Wikipedia and its clear, little summary; I don’t crack open The Phenomenology of Spirit. Change has accelerated in recent years, to the point where even doctors find themselves having to communicate more with patients in plain English.

If doctors can simplify how they communicate about the mind-boggling issues involved in medicine, then the rest of us can figure out how to talk the talk in insurance. We need to begin by taking a hard look at every term we use and revising many of them, from the perspective of a total newbie customer, so we talk to customers the way they expect us to talk to them.

That’s the only way to lay the groundwork for the broad improvements in the customer experience that we all want to deliver and that customers are increasingly demanding.

Chasing the Right Numbers on Claims

Managing a claims operation is challenging. There are so many moving parts, dynamics and procedures. Information comes gushing in like a fire hose, making it difficult for many companies to effectively assemble and organize it. It’s crucial to help claims divisions focus on the right numbers instead of chasing numbers that have no value.

Most claims leaders know that there are a few factors that affect the majority of claim outcomes. However, many times organizations will mistakenly target metrics “for metrics’ sake,” at the expense of common sense.

Traditionally, a claims supervisor or branch manager will receive metric targets from senior leadership. Unfortunately, the intent of these goals is skewed dramatically by the time they reach front-line personnel. For example, let’s take a company that wants to improve customer service by inspecting vehicle damage the same business day. While this is a noble idea and has the potential to increase customer satisfaction, branch level managers are often forced to abandon rational thinking to meet a specific “inspection metric” or quota. Managers will chase the numbers to obtain an inspection, often having staff appraisers take photos of damaged vehicles over fences or taking shortcuts in an attempt to meet requirements. This often leads to compromised accuracy and raises the question — “Does it really make sense?” It does to the manager who needs to meet goals and protect her job but does it truly increase customer satisfaction? Not necessarily.

Having a goal at the top doesn’t mean that the numbers will retain their true meaning by the time they get to the daily staff. It’s crucial to focus on figures that actually create better claim outcomes and customer experiences.

Here’s another example of how differing goals within a claims organization can skew overall results when managers are forced to manage to the wrong numbers:

Let’s say your insured damages another vehicle and that claimant decides to go through his own carrier for repairs. Now the carrier sends in a subrogation demand that includes excessive rental, overlapping operations, duplicate invoices and mathematical errors. Would it be a good idea to just pay what is being asked without reviewing for accuracy?

Well, for some insurers that don’t have the staffing or the expertise in the subrogation department, quite often an excessive demand like this might just be rubber-stamped. The subrogation department may be overseen by an individual who has been compartmentalized away from day-to-day claims. If this manager’s goals and metrics don’t include accuracy, he may just pay this overinflated demand.

Chasing the wrong numbers can give the misperception that the manager is achieving goals, but the best possible outcome wasn’t achieved.

So what’s the answer?

The key is matching numbers to desirable outcomes that make sense. Eliminate any metrics that provide little value and only serve to create busywork. With the wealth of data that companies are able to gather and analyze, the focus should be on information that has a direct impact on customer retention and quality service.

One must carefully focus on the right numbers to add value and help push the organization forward to achieving that ideal balance of client satisfaction and operational efficiency.