Tag Archives: value

Distribution Debunked (PART 2)

In a previous article, we discussed how there has been a rapidly accelerated emphasis on insurance technology, data and distribution. But are we as an industry spinning our wheels? The answer is a big “yes.” Why? Because we haven’t asked the right questions and aren’t trying to solve the right problem.

Here’s how distribution breaks down:

A Painful Process

Our customers have many issues around running and growing their businesses. Insurance empowers customer to do just that — hire employees, comply with regulations, etc. — but the way we go about it is asking endless questions (multiple times over). We focus on what we think doesn’t work instead of what DOES work about their businesses. We are the Negative Nellies. We turn little things into big things, over-analyze them and then use them as reasons to charge higher rates. An evolved distribution would:

  • On the back end:
    • Draw on information in data bases and simply ask the customer to validate that nothing has changed.
    • Handle everything electronically ONCE. (And, no, email doesn’t qualify!)
    • Use publicly available information to fill in the blanks.
    • Leverage class and big data to price and only use underwriting to manage exceptions.
  • On the customer-facing side:
    • Stop sending apps we have to print out, fill in and fax back or, even worse, writable PDFs that don’t save (we have to fill it out over and over until we get it completed on one run through) and then come back and tell us we need to fill out yet another app for another market. It’s like Groundhog’s Day, and we don’t have time for it.
    • If we DO have to fill something out, let us know what information we will need ahead of time so we can have it ready. Right now, we have to stop and start as we have to go look for stuff — and, frankly, we just don’t have time for it.
    • Let us know what the cost is ahead of time. We know you don’t want us to shop our policies — we don’t want to either — so do us a favor and don’t make us. We don’t like being painted into a corner, and we’ll continue to look for a partner who respects that.

See also: 3 Skills Needed for Customer Insight

Pain About the Purchase

Have you ever bought a house and thought about the real estate agent collecting a fat check? Have you gotten a knot in your stomach because you know you paid to fund that? What about the finance guy at a car dealership? You sign on the dotted line because you need to, but you know he’s pulling down a check for that signature, and it bothers you.

Insurance buyers feel the same way. Even though we will tell you we are their “trusted advisers,” the reality is that customers more often than not (and no matter how much they like their agent) can’t answer the question, “What do I pay my agent for?” That’s a problem. Distribution should look at ways to be more transparent, to help customers clearly understand what they are paying for and what they can expect to receive and when. More importantly, customers should feel like we appreciate their purchase. Often, they ask us to bind, and the next thing they see is a bill (even before a binder). How about a “Welcome to our company,” “Thank you for your trust” or, even more importantly, “Tell us about your experience.”

Allow customers to benchmark costs and give them a level of comfort that what they are paying is in line with others — and, if not, why. It’s a simple question that deserves a simple answer. For us to have the vast data stores that we have and not be able to answer a simple benchmarking question is nothing short of unforgivable.

Just a Promise to Pay?

Customers want more than just a promise to pay, and distribution could provide meaningful value to the customer beyond the policy placement.

Does the customer have conditions that are raising their price or limiting their ability to get coverage? Educate them, provide tools, help them become a better business and, by extension, a better risk. In that way, we drive value to them instead of wasting valuable time.

Look for ways your products could help them sell more and gain a competitive advantage. Take risk out of growth and provide overall out-of-the-box solutions. Provide them with tangibles, even if it is as simple as a portal where they can manage what they have, manage their exposures and communicate with their account team.

See also: How to Redesign Customer Experience

Conclusion

It’s clear that customer experience is the key to success. By giving your customers some control over the process, you can remove the typical painful buying experience and make your customers feel good about their purchase.

How to Optimize Nurse Case Management in Workers' Comp

Traditionally, in workers’ comp, nurse case management (NCM) services have been widely espoused yet misunderstood and underutilized. The reasons for underutilization are many. Tension between NCM and claims adjusters is one. Even though overburdened, adjusters often overlook the opportunity to refer to NCM.

Also to blame is the NCM process itself. In spite of professional certification for NCM, the process is poorly defined for those outside the nursing profession. More importantly, NCM has difficulty measuring and reporting proof of value.

Underlying issues

Continuing to do business as usual is not acceptable. NCM needs to address several issues to qualify as legitimate contributors. First, NCM needs to articulate its value. To do that, NCM must computerize and standardize its process and measure and report outcomes, just like any other business in today’s world.

Too often, computerization for NCM is relegated to adding nurses’ notes to the claim system. However, such notes cannot be analyzed to measure outcomes based on specific nursing initiatives. 

In most situations, an individual NCM interprets an issue, decides on an action and delivers the response. The organization’s medical management is thereby a subjective interpretation rather than a definable, quantifiable product. 

Granted, the NCM is a trained professional. But when the product is unstructured, variables in delivery cannot be measured or appreciated. A process that is different every time can never be adequately defined.

It's crucial to establish organizational standards about what conditions in claims require referral to NCM—without exception. This will remove the myriad decisions made or not made by claims adjusters to involve the NCM. The referral can be automated through electronic claims monitoring and notification. NCM takes action on the issue according to organizational protocol, and the claims adjustor is notified.

Measure

When the conditions in claims that lead to intervention by NCM are computerized and standardized, the effects can be measured. Apples can legitimately be compared with apples, not to oranges and tennis balls. Similar conditions in claims are noted and approached the same way every time, so the results can be validly measured.

Results in claims such as indemnity costs, time from DOI to claim closure or overall claim cost can be compared before and after NCM standardization. Comparisons can be made across different date ranges for similar injuries going forward to measure continued effectiveness and hone the process.

Measuring outcomes is the most essential aspect of the process. Value is disregarded unless it is defined, measured and reported.

For non-NCMs, the dots in medical management must be connected to see the picture. Describe what was done, why it was done and how it was done the same way for similar situations and in context with the organization's standards. Then report the outcome value. Establish a continuing value communication process.

NCM constituencies should be informed in advance of the process and outcome measurements. Define in advance how problems and issues are identified and handled and how results will be measured. Then proceed consistently.

Recognized NCM value

Even as things now stand, NCM's value is being recognized. American Airlines recently reported it is adding NCM to their staff and will refer all lost time claims. The company cited a pilot project where nurse interventions were documented and measured, proving their value in getting injured workers back to work. 

Christopher Flatt, workers’ compensation Center of Excellence leader for Marsh Inc., wrote in WorkCompWire (http://www.workcompwire.com/), “One option that employers should consider as part of an integrated approach to controlling workers’ compensation costs is formalized nurse case management. Taking actions to drive down medical expenses is an essential component to controlling workers’ compensation costs.”1

Industry research and corporate or professional wisdom regarding risky situations can supply the standardized indicators for referral to NCM. American Airlines uses the standard that all lost time claims should be referred to NCM. But there are many, sometimes more subtle, indicators of risk and cost in claims that can be identified early through computerized monitoring and referred for NCM intervention.

Another example of developing standard indicators for referral is based on industry research that shows certain comorbidities, such as diabetes, can increase claim duration and cost. These claims should also be referred to NCM. Yet another example is steering away from inappropriate medical providers who can profoundly increase costs. 

As a long-ago nurse and a longer-time medical systems designer and developer, I believe the solution lies in appropriate computerized system design. The elements need to be simple to implement, easy to use and consistently applied. Only then can NCM offer proof of value.

1 Christopher Flatt: The Case for Formalized Nurse Case Management

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.