With many insurers still using legacy systems to deal with their claims automation, for fear of the weakened competitive position a system upheaval may create, they are putting themselves at odds with TCF guidelines, writes Tim Murphy
Last May the Financial Services Authority announced that an increased commitment was needed by senior management to the principle of treating customers fairly. To underline how seriously it would be taking firms' adherence to the guidelines, the regulator warned that any firm failing to engage with TCF would face tough action.
With TCF set to be a major theme in 2008 and beyond, the whole area of claims service will not only come under greater scrutiny but could also face a serious challenge from the principles set out as part of this initiative. To avoid regulatory intervention, the FSA states that firms must demonstrate they have allocated appropriate resources and responsibilities, developed plans and processes and created the capability to ensure customers are consistently treated fairly.
Taking 'the allocation of appropriate resources' as an example, this is found to be at odds with the systematic cost cutting, driven by competitive forces, seen in insurers' claims departments over many years.
Mixed claims service
TCF is very much part of the regulator's 'phase two' - having moved to a principles-based approach where firms must apply these maxims to the way their businesses operate. And while great strides are being taken in the claims sector by some, for others the service provided to customers remains far from ideal.
The reasons for this poor state of affairs generally include outdated technology, poor supply chain management and a collective lack of will to tackle deep-seated issues. But is any of this likely to count for much in the regulator's eyes as old systems struggle to deliver customer value?
At its most basic level, problems stem from the inability of many insurers' systems to communicate with each other. These systems were originally designed to deal with premium collection and risk - not claims management - and are now fundamentally at odds with modern requirements. Legacy IT systems, therefore, prevent automation from becoming a reality.
When it comes to automating claims, UK insurers appear to be at different stages of development. Yet such automation is not only the key to better claims efficiency but also better customer service. Most of the smaller insurers that are unburdened by legacy systems have concluded that setting up in-house infrastructure is not worth the investment; they use third party administrators instead. By putting the risk with a specialist TPA, which is geared up for claims, insurers are able to deploy and retain technical expertise in revenue-generating and value-adding areas of the business.
Nevertheless, addressing the fundamental issue of renewing old systems is a fraught one for the more established players. These insurers fear the upheaval a complete system change would cause - specifically a weakened competitive position while the changes are carried out.
Although this is understandable, from a pure business point of view, can insurers really say they are treating customers fairly if their processes are dictated by outmoded technology?
Current claims practice is not just growing out of step with FSA requirements. The Ministry of Justice's proposed process reforms - while not yet set in stone - revolve around quick and challenging deadlines for claims settlement. Yet many insurers currently struggle to settle claims within their own self-imposed timescales.
While the logistical difficulties in grappling with IT claims issues are an overriding reason why so many avoid them, this stalemate ultimately puts the customer second. Furthermore, if it gets to a stage where current practices are found to be harming customer service, these reasons would not be acceptable. No one disagrees with treating customers fairly, but if legacy systems are preventing this then the problem must not go unaddressed. However, the industry seems to be waiting until regulatory pressure forces the issue.
With TCF becoming a regulatory preoccupation, insurers have the luxury of being able to pre-empt the FSA - and they ought to seize the opportunity. That said, some are already embracing technology that brings the maximum value from their legacy technology. A range of providers - indeed, a whole industry - has grown up to help insurers get closer to the holy grail of automation.
Other insurers have sought to address the problem by embracing the maturing TPA and business process outsourcing sector as a way of avoiding the perils of an in-house overhaul. By outsourcing or optimising existing systems, treating customers fairly and delivering value to shareholders need not conflict with each another.
It is not only for reasons of efficiency, delivering superior customer service and staving off the threat of regulatory intervention that claims processes need to be improved. Claims inflation and leakage also need to be better controlled. The more people 'touching' a claim, the greater the cost and time it takes to resolve. External repair networks, engineers, credit hire, credit repair and personal injury are just some of the costs now inherent in the claims supply chain. Efficient supply chain management can help to not only fix these costs but prevent and limit adversarial influences that add cost to the process brought in by third party claim service providers.
Insurers have never had more choice about how they automate processes to rectify claims shortfalls. And that does not mean advocating that customer service become a dehumanised process - precisely the opposite. Automation gives customers swift resolution and allows service staff to be fully involved when things go wrong and, therefore, add value rather than cost.
With a number of options available insurers must decide which route they want to go down now and pre-empt the regulators. TPA and BPO services are maturing, and while some initial misapplications have rightly drawn criticism, a new generation of applications are emerging that will cut costs, improve service and alleviate insurers' legacy IT headaches. With TCF now a major theme for the FSA - and MoJ reforms likely to hasten claims settlement times - these add further impetus to insurers to collectively drive claims service into the 21st Century.
- Tim Murphy is assistant vice president at EMR.
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