Risks of Claims Outsourcing Include Vendor Control, Brain Drain

This is part three in a three part series on outsourcing claims handling.

Outsourcing claims is not without its risk, sources say.

“Things to look out for, things to be cautious about, would be a diluted ability to control an outside vendor versus the ability to control an employee, the less likely that the claims person will be imbued with the corporate philosophy and see things from the vantage point of the client. I would see less interaction with safety personnel and underwriting personnel to provide underwriting feedback that may be germane and material to pricing and underwriting decisions. When it’s in‑house, claims people can walk down the corridor, pick up the phone, huddle with the underwriting people. It’s still possible on an outsourced basis, but it’s a little more awkward,” said Kevin Quinley, founder and principal of Quinley Risk Associates.

He also pointed to a potential for degraded customer service.

According to Dave Mandt, the owner of Professional Claim and Loss Consulting in Elma, Wash., an established relationship with the outside vendor or third party administrator (TPA) will help avoid risks.

“Whether or not you’ve got a relationship with the TPA or the outsource provider that is long enough and wide enough that you, as the insurer, really have control of it and can manage the process and thereby manage the expense to achieve the results you want. I don’t think that it makes sense, for example, just to say, ‘OK, in the state of Missouri, all the claims are going to go to X, Y, or Z, simply because we don’t have people there or we don’t want to open a claims operation there or we don’t have sufficient volume,’” said Mandt.

Yet another risk is conflicting loyalties, Mandt said.

“Do you have any conflicting loyalties that are either beneath the surface or, as an insurer or as a TPA, for example, that you need to do research in your own due diligence before you proceed with the outsourcing arrangement,” said Mandt. “What if a TPA has been handling claims for a business competitor of your insured? Does that enter into the picture? Is there a possibility of conflict there? Should somebody disclose that? Should somebody make the effort to find out whether it exists? Does the TPA or the outsource provider have service standards similar to what the insurer wants and if not, how is that going to be worked through?”

Kevin Hromas, a Texas-based executive general adjuster, said there is the risk of brain drain.

“Well, as part of this urban flow of the usage of outsourcing the claims, every time you go through that cycle of reducing the usage from the carrier aspect…there’s a brain drain that goes on. Those people maybe have just gotten tired of that roller coaster ride from a financial standpoint have looked for something else. That creates the cycle, or perpetrates the cycle, of not having sufficient numbers of experienced trained adjusters during major events,” said Hromas.

Oversight Concerns

Whether claims outsourcing is successful can depend on the amount and effectiveness of the oversight of the program.

“Customer service is really what needs to be the first issue you deal with. The question you have to ask in the front end is, ‘Is this going to work for the customer?’ Part B of that question is, ‘Is this going to work for the insurance company?’ Once the program is in place, all else being equal, if you decided you want to go ahead with a program like that, then you need to very quickly get in and be digging beneath the surface and seeing what’s going on with a fairly in‑depth and pointed audit program, just to make sure and satisfy yourself that everybody’s sleeping comfortably at night,” said Mandt.

While customer service is first and foremost on Mandt’s mind, he points to other important factors to measure like loss ratios, closing ratios and pending claims status.

Benefits of Claims Outsourcing

To determine the benefits of outsourcing the claims function insurers need to consider some oversight concerns – cost savings, loss ratio, claims closings, customer service – over others.

“If you don’t have management in place that recognizes some of the unique demands of the claims that come in your front door, and you’ve got a general theory that outsourcing is a good thing, I think there are some real traps there,” Mandt said. “I think that outsourcing can be a good thing, and it can also be a minefield. If you don’t know where you’re walking and you haven’t gone out with your mine detector and looked to see what’s in your path, things can blow up on you. It’s a process that recognizes, I think… that a claim is not a claim is not a claim. There are property claims. There are liability claims. There are inland marine claims. One size doesn’t fit all.”

While many factors should be considered, financial measurements will likely be measured first.

“One of the problems I see is that the financial metrics ‑ which are very important ‑ are relatively easy to measure, versus customer satisfaction, which seems soft and fuzzy and very squishy. I think that any insurance company outsourcing claims has to take pains to manage and exercise vigilant oversight of the outside vendor,” Quinley said.

Claims outsourcing audits should include long term tracking.

“It’s also important to track changes and trends over time, to see if there are developing problems or issues, if outsourcing makes sense, or if any interim changes in management efforts need to be made to bring things on track, both from a financial standpoint and a customer‑satisfaction standpoint,” Quinley added.

This article is part three in a three part series on outsourcing claims handling. Read part one, Outsourcing Claims Functions. Read part two,Trend of Claims Outsourcing Driven by Finance Execs, New Managers. Listen to the podcast interview with Kevin Quinley.