Outsourcing Claims Functions

Recent discussion on social media sites suggests claims outsourcing may be a new trend; however, industry experts say outsourcing some or all aspects of claims handling may be attracting interest but it isn’t new – it has been tried with varying results.

Dave Mandt, the owner of Professional Claim and Loss Consulting in Elma, Wash., said that the idea of claims outsourcing has been around for years. He was with a company that considered doing just that several years ago.

“At one point, roughly around the year 2000‑2001, we looked very closely at outsourcing the entire claims operation at Safeco to Crawford and Co. For whatever reason we concluded, it just wasn’t workable. Ten to 15 years later, I guess, it’s maybe starting to blossom a little bit more, as people put a little more control and thoughtfulness into what they want to outsource,” said Mandt.

According to Kevin Quinley, founder and principal of Quinley Risk Associates, claims outsourcing tends to be considered as a cost saving mechanism, although sometimes that doesn’t pan out in the long run.

“Well, it’s not a new concept. Periodically, insurers decide that claim departments represent an expense and a function they can outsource. They may outsource and even find that they save some money in adjusting costs. After all, they don’t have to pay the salary, the benefits and the retirement for employees. Instead, the claims are serviced by outside independent contractors. Sometimes this works, but I can also say sometimes the romance can be short‑lived, that the companies later find, even though they’re saving money on the transaction side, they can incur more seepage and leakage on the indemnity or claims side,” Quinley said.

Karlyn Carnahan, principal at insurance research firm Novarica, agrees that outsourcing claims functions is not a new trend. She said there are four reasons a carrier might resort to outsourcing.

“It’s either that they’re trying to reduce their costs, or shift some of the fixed or variable cost base, or they’re trying to free up some of their people, or they don’t have enough people,” Carnahan said. “I don’t think that it’s increasing tremendously. I think that it’s one of those areas that carriers are always looking at, ‘Can I do it better and more efficiently outside the organization?’”

Quinley offered questions companies should ask when considering outsourcing the claims function:

• Who is going to watch your pennies more closely, an employee that you have control over or an outside vendor?
• Who is more likely to know and understand and absorb your claims philosophy, an employee or a third‑party administrator?
• Who is most likely to identify with the aims of your company, provide loss control and safety and underwriting feedback responsive to your needs, an employee or an outside vendor?
• Who is more likely to deliver personalized service, someone over whom you have control ‑ through performance evaluations, hiring/firing decisions, salary determination ‑ or an outside vendor?

According to Mandt, an insurer should consider the rationale for outsourcing the claims function. Mandt added more questions:

• Why does it make sense for this line of business, this company or this account?
• What are the reasons that we would think about this?
• What are the reasons that we want to do this?
• What are the controls we’re going to put in place to be able to manage that business, both from the standpoint of the customer and the standpoint of the insurer, so that it’s a good relationship?

“I guess the real thing we need to look at is, are we outsourcing a particular book of business? Are we outsourcing a geographic area? What are we doing there, and what are the controls we can put in place, as an insurer, to be able to manage that to an appropriate result,” Mandt added.

According to Carnahan, carriers may want access to vendors with specialized knowledge, as well as to free up employees for other tasks.

“I think the two areas that carriers are looking at are vendors who focus in specific areas really do end up often having better methodologies, better tools and using best practices. The key reason to outsource is to get access to those better methodologies,” said Carnahan. “I think the other thing for carriers to be thinking about as they’re outsourcing is whether or not utilizing external staff will allow them to free up their own key resources for their own initiatives or whether it allows a carrier to focus on their core business competencies. There’s a variety of things for a carrier to consider also in outsourcing. It’s definitely an area that can provide tremendous advantage, tremendous benefits for a carrier. Carriers should be thinking about which of these areas will generate the best return.”

According to Quinley, the questions answer themselves.

“Savings and adjusting costs can be ‑ I emphasize ‑ can be illusory or short‑term if there’s longer‑term degradation in the quality of results or the caliber of the service rendered,” Quinley said.

This article is part one in a three part series on outsourcing claims handling. Read part two, Trend of Claims Outsourcing Driven by Finance Execs, New Managers, tomorrow. Read part three, Risks of Claims Outsourcing Include Vendor Control, Brain Drain, on Thursday. Listen to the podcast interview with Kevin Quinley.