Chain Reaction
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Technology Decisions Magazine - September 2002
By: Michael P. Voelker
Supply chain management isn’t just for manufacturing
anymore—insurers are utilizing it to help reduce claims
costs and achieve significant competitive advantage.
Ask someone to explain supply chain management, and you’ll likely
get an answer in the context of manufacturing: A company making
product A needs to regularly schedule the receipt of parts B,
C, and D using technology to handle just-in-time scheduling and
obtain the business intelligence needed to manage relationships
with those suppliers.
Insurers also have a distinct supply chain when it comes to
the claims process. Much of the insurance claims chain includes
suppliers that provide their product or service directly to claimants—the
auto body shops, car rental companies, retailers, medical equipment
wholesalers, and contractors. And let’s not forget the litigators,
investigators, and medical review firms that deal directly with
insurers.
However, a critical difference between the manufacturing and
the insurance supply chain is insurers are often simply payers
in the process, one step removed from the actual product. “Our
supply chain isn’t like that of any other,” says Keith Dalgleish,
vice president of e-commerce at HB Group Insurance Management
Limited, Mississauga, Ontario. The HB Group writes employer-sponsored
auto and property insurance, and is a subsidiary of the Co-operators,
one of Canada’s largest insurers. “Manufacturers can outsource
their entire process if they wish,” he says, adding insurers don’t
have that option.
“In the traditional supply chain management approach, you set
up agreements ahead of time and optimize them when you’re ready
to roll out production,” says Neil Betteridge, director of product
marketing at Castek (www.castek.com), a Toronto-based insurance
administration software vendor. “In insurance claims, there is
a need for interaction between the insurers and one or more different
suppliers each time. Collaboration is the critical component.”
Chances are, however, that if you look closely at your current
claims process, you’re already incorporating supply chain management
in it. “Companies will tell us they don’t do supply chain management,”
says Andrew MacDonald, vice president at The Innovation Group
(www.tigplc.com), a UK-based claims management vendor with
U.S. headquarters in Danbury, Conn. “So we ask them what they
do when they repair a car. They realize they’ve worked out discounts,
and they’re doing [management] manually.”
Automating this manual process can have a significant competitive
advantage, and the stakes are high. “Seventy-five to 80 cents
out of every dollar goes into the claims settlement processes,”
Dalgleish says. Reducing claims costs—from the hard-dollar costs
of parts and services to the soft costs associated with faster
settlement and reduced friction in the process—has been a mantra
of claims departments, particularly in these troubled financial
times.
Before a technological solution is even considered, however,
insurers need to come to grips with the fact they have only limited
control over directing claimants to preferred service and goods
providers (see “Problems and Promises,” at right). As a result,
supply chain solutions in insurance claims have focused heavily
on automobile physical damage, where there is arguably less claimant
loyalty to specific providers and where claim scenarios are relatively
homogeneous. Consider the number of third-party providers that
have established a niche in the automobile physical damage valuation
and claims management realm: Mitchell International, CCC Information
Services, and ADP Claims Services Group, to name three.
“Sixty percent of the auto claim volume we have comes from physical
damage,” explains Mary Beth Riester, claim alliance director at
The Hartford. That’s one reason why the insurer built a custom
EDI link to CCC several years ago.
When all lines of insurance are considered, managing the service
chain that insurers themselves use directly is perhaps a surer
fit for a directed technological solution. Visibillity, for example,
has carved a market niche out of litigation management. And The
Hartford receives workers’ compensation medical bills, reports,
and attachments electronically from providers to the insurer’s
front-end claims system through a medical bill presentation clearinghouse,
P2P Link of Farmington, Conn.
“You have to look at ways to take cost out of the system” rather
than take care away from the patient, says Anthony Abate, corporate
procurement vice president at The Hartford. “Insurers have a great
deal of ability to help providers take cost out of the system
due to our size and scale. If we can reduce a good percentage
of the per-bill processing costs for The Hartford and for the
provider by eliminating paper, that’s a huge net savings.”
The insurer reports the P2P Link system has “significantly” reduced
the handling, processing and payment times, and associated costs
for complicated medical bills, although no specific metrics were
available because of the variability among various bills and attachments.
Three Steps to Better Results
There are three steps to service chain management in claims:
identification of providers with which to establish preferred
relationships, negotiation of those relationships, and collaboration
with the providers when claims occur. At insurance carriers, technology
has established a place in the first and third steps.
At The Hartford, the procurement department is responsible for
all supplier negotiations and management. The department uses
a composite systems approach to the process, mining its legacy
claims data to get both raw information and management reports
for benchmarking and capturing claims cycle time from the claims
administration system. They are rolling out a PeopleSoft solution
to process accounts payable in the claims department. The company
has also internally built a number of contract management systems
to help it evaluate and monitor providers.
“We build only when there’s no opportunity to buy, because the
investment to build and upgrade systems is huge,” Abate says.
“However, we have many business practices that make us unique
to customers and claimants, and if we were to have a vendor issue
a new product release based on our business practice needs, we
could lose an advantage. So no one tool has been a perfect fit.”
Insurers turning to technology to identify suppliers to target
have several options, from supplier relationship vendors—such
as PeopleSoft or SAP—or from claims management vendors that provide
a level of business intelligence within their platform.
“A key piece is optimizing supplier performance, so at any time
the supplier can know where they stand with insurers,” says Frank
Siderio, director of field operations for financial services at
PeopleSoft. “Embedded analytics show insurers how vendors are
performing, and vendors want that type of information; they want
to know how they’re being measured.”
Castek’s claim management tool captures response and cycle times
on per claim and global bases. “It will advise the adjuster if
times have been missed, so if, for example, a car rental company
promises a response within a half hour and doesn’t deliver, that
relationship can be managed and re-negotiated,” says Colin Smith,
vice president of e-claims at Castek.
This kind of business intelligence is critical for effective
negotiation. “I’ve seen a lot of insurance companies jump to the
negotiation stage because dot-com companies have said, ‘We can
negotiate for you and get you the lowest price, whether that be
car rentals or hotels,” says Paul Young, senior supply chain analyst
at SAP. “However, you might get a really great price, but you
have no concept of what you needed to buy. The negotiation shouldn’t
come [before the analysis].”
With your negotiated agreements in place (sorry, we can’t help
you there), it’s time to enable collaboration with your providers
and suppliers. The HB Group began using Castek’s InsuroCity, a
Web-based claims collaboration portal, in late 2001.
“When we completed the pilot, we were communicating with about
200 individual supplier locations,” says Dalgleish. With the HB
Group system, an adjuster takes all the claims information and
enters it in into HB’s claims administration system, a homegrown
AS/400 system. The adjuster then toggles to the InsuroCity dashboard
on the desktop to locate a preferred provider, and integration
between the two systems pre-populates claims data fields. The
provider either receives a notification immediately or by logging
on to InsuroCity, depending upon the connectivity of the shop.
The HB Group determined that this workflow best met its current
needs. “We looked at integration, but we didn’t want to spend
[that much] on the pilot,” Dalgleish says. “We wanted to do it
simply yet minimize the rekeying process.” Once a week, HB Group
does a claim extract from its policy and claims system and sends
an ASCII file to InsuroCity via encrypted FTP.
“Instead of it costing me tens of thousands of dollars [to integrate],
it cost us $2,500” to have a contractor write the file transmission
routine, Dalgleish says. “The worst-case scenario is that someone
would have added a coverage yesterday and has a claim today. We’d
have to check on that, but on the plus side, it would throw up
a flag to the adjuster because the claim was reported right after
the coverage was added.”
On the other end of the spectrum would be a complete integration
of supply chain management into an insurer’s claims management
system. The Hartford’s Riester believes relying on claims adjusters
to go to a separate system, making it part of the manual workflow,
won’t work. “If [supply chain management] becomes just another
process, another step, then the benefits won’t be achieved,” she
says. “Everything we’re doing is contemplating a link to our front-
and back-end system for that very reason. The Web is fine from
a purely functional standpoint [to achieve some collaboration
with suppliers], but as much as we can have that speaks directly
to our front-end system, the better value we have.”
Similarly, the HB Group plans an eventual integration between
InsuroCity and its own claims front end if the pilot continues
to meet expectations. The Hartford is also planning to migrate
its current auto damage EDI to an open, XML-based architecture.
“Today, we can only contract with auto body shops that use CCC
for them to be in our body shop network. CCC also owns the data,
and we have to pay for the data,” explains Abate. “With an [Internet-based]
enabler system, we’d buy one system and have eyes into any of
the estimating systems. It would be platform-agnostic.”
One other benefit to a Web-enabled supply chain solution, regardless
of the integration on the insurer’s end, is the ease of access
by providers and suppliers that represent varying degrees of technological
sophistication. Additionally, since claims are not always first
reported directly to the insurer, providing repair shops and retailers
with access to a supply system can speed the claims process.
ROI
Insurers that effectively manage their supply chain in claims
can expect an ROI of up to “the 20 percent range,” according to
Ramaswamy “Raj” Rajagopal, a managing director at KPMG Consulting,
Inc. But, as always, it’s up to the insurer to determine where
on the payback spectrum it falls.
“Generally speaking, we saved a day to a day-and-a-half rental
if a claim went to a preferred body shop,” says the HB Group’s
Dalgleish. “There were savings based on the agreement with preferred
rental companies, and having a customer at your preferred repair
shop speeds up the appraisal because it’s imaged right there and
we don’t have to send an adjuster out. But we did not see a noticeable
indemnity savings.”
However, with only part of true claims management costs associated
with real dollars, the actual impact can run much deeper. “We’ve
seen that somewhere between 40 percent to 45 percent of a handler’s
time is spent on activities that don’t impact the value of the
claim; rekeying information, faxing, and so on. We do think that
by effectively getting at some of that time, we can go after the
10 percent to 15 percent reduction in claims costs that’s possible,”
says Michael Costonis, senior manager in Accenture’s claims solutions
group.
Accenture’s charges vary depending upon the installation. “If
we’re hosting [the system], there’s a per assignment charge, when
the adjuster sends an assignment to a supplier. If insureds opt
to install the system themselves, the charge varies depending
upon the supply type and the services,” from $2 to $3 for a car
damage claim to a $15 to $17 fee for bodily injury assignments.
“Based on the results of the pilot, we increased our average
number of files per adjuster by five percent,” says Dalgleish.
“From the perspective of a repair facility connected to the
direct repair network, the process efficiency ranges anywhere
from a percentage point on the low end to a 10 percent improvement,”
claims Githesh Ramamurthy, chairman and CEO of CCC Information
Services. “The typical repair takes about 27 days, and we’ve seen
the number dropping to 13 days.” CCC’s Pathways collision damage
platform is sold on a subscription basis, per seat fee, with costs
anywhere from $4,000 per seat per year to $7,000 per seat per
year, based on the components purchased.
Perhaps the biggest potential benefit for both the insurer and
the repair facility is the increase in policyholder satisfaction.
“It comes down to the friction costs,” says Ramamurthy. As a claimant,
“I’m no longer in between my insurance company and the repair
facility. I’m not taking a quote from the repair facility to the
insurer and back to the facility.”
“Having a customer show up at a repair shop, having the contractor
show up at their house, and having all the information gives the
insured the impression there is a relationship, and the supplier
really is connected to the insurance company,” says Smith.
“We look to technology support that will collapse the time it
takes to handle claims, and we try to accomplish that same goal
regardless of who the vendor would be,” says Riester. “Our objective
is not only to reduce costs and streamline the process, but to
achieve a beneficial result for all parties in the claims process.”
Problems and Promises
Insurers looking to manage their claims supply chain need to
first realize what their weaknesses and strengths are in the process.
“Insurance companies are different. They are the payers to the
sellers, but they’re not perceived as buyers. Typically in the
supply chain, you have a buyer and seller,” says Ramaswamy “Raj”
Rajagopal, a managing director at KPMG Consulting, Inc. “In the
claims process, you have a buyer—the customer who takes in the
car, has damage to the house, or files the claim—and the seller
is the body shop, or a retailer. The insurance companies haven’t
had control in the marketplace, even though they’ve tried to address
it.”
But perhaps an even more fundamental problem lies within insurers’
reluctance to take control of the process. “One of the major problems
with collaboration is the competitive edge. Larger companies don’t
want to participate, because it means sharing their edge, but
smaller companies want to. Also, the old issue of antitrust comes
in again,” Rajagopal says.
Even with preferred relationships established and management
technology in place, insurers still face obstacles from claimants
themselves. The personal nature of medical claims makes them a
difficult push to aggressively manage in liability losses. But
even complications in the property process have an impact.
“We’ve established relationships with general contractors and
salvage facilities and hope to have our first contents replacement
vendor on soon,” says Keith Dalgleish, vice president of e-commerce
at the HB Group. “But it’s a funny thing in insurance. You get
the electronic store to give you a replacement value, and that’s
how you base your claim. But the insured isn’t ready to buy yet,
so you settle on an actual cash value basis until he or she is
ready. People also tend to rethink what they had and what they
wanted. If there’s been a fire or damage to furniture, they’ll
redecorate. So we’re much less successful in directing people
to those vendors than we’d like as an industry.”
Technological Underpinnings
Any supply chain solution will require information from an insurer’s
claims administration and management systems to be effective,
and that’s where one problem arises. “Legacy systems are supposed
to be large-scale processing systems to allow them to interact,”
explains Andrew MacDonald, vice president of The Innovation Group.
“However, often the claims handler is required to be the integrator”
between the admin system and a supply chain management system.
“They need to go to a separate system and rekey the information,
or IT shops have to build custom, point-to-point interfaces.”
If rearchitecting your legacy system isn’t your idea of weekend
fun, you’re not alone, and that’s why point supply solutions with
asynchronous integration have gained some traction in claims departments.
However, some level of integration is needed eventually to make
these systems truly useful at an insurer. “You need to share parts
of the transaction with the vendor so the vendor can actually
do work,” says Michael Costonis, senior manager of Accenture’s
claims solutions group. “The idea of sending an e-mail for collaboration
is not as powerful as sending data into the supply system. If
you exploit Web services to push data out of the legacy system
without rekeying, you’ll be able to develop these interfaces without
custom point-to-point and swap out” with other vendors. “There’s
a lot of heavy lifting involved.”
The bottom line is the more discrete data elements your claims
system captures and is able to send to the supply chain system,
the greater level of granularity you’ll be able to apply to the
management process. “Consider automated replacement of personal
property. In order to do that, you need to be able to capture
[such detail as] make and model of a TV set. Having that data
available at a detailed level is critical,” Costonis says.
And of course, vendors need a certain amount of technological
sophistication to be part of the automated chain. “We asked if
suppliers are technologically ready,” says Colin Smith, vice president
of e-claims at Castek. “Do they have access to the Net, and are
they savvy? And we’ve found the answer is yes. Just as an example,
when we moved onto the property side with [an insurer client]
and we surveyed their suppliers, 99 percent of their suppliers
had access to the Internet and were estimating electronically
or via e-mail with other companies.”
Michael P. Voelker is principal of Equinox Communications,
Inc. He can be reached at mvoelker@goequinox.com.
This article orginally appeared in the September 2002
issue of Technology
Decisions Magazine. Reprinted by Permission.