The P&C industry is undergoing significant challenges with increased claim severity in liability and physical damage claims. These increases are outpacing inflation and rate adequacy. According to the Insurance Information Institute, in 2009 the average private passenger auto BI claim was $13,891. In 2014, that average grew to $16,640 – an increase of almost 20%. The private passenger auto collision loss ratio has risen from 67.7% in 2010 to 78.3% in 2015 – a 16% increase. The loss ratio can be adversely impacted by claim handling, underwriting, and rate inadequacy with claim leakage as a primary cause of loss ratio deterioration.

Although the severity trend is indeed a challenge, the good news is a quality-driven claim organization can take action to do something about it.

Back to Basics
A quality-driven claim organization can improve the loss ratio by up to 4 points by getting back to basics – in other words, focusing on best practice technical and supervisory tactics which have a direct or indirect impact on the loss ratio. These tactics include applying fundamental claim skills in investigation, evaluation, and negotiations including comparative negligence; staffing and workload management; and implementing comprehensive quality review processes.

Fundamental Claim Skills & Comparative Negligence
Placing too much emphasis on closure ratios can lead to overpayment of claims, thus increased severity. Claim personnel must be thoroughly trained and be effective in liability and damage evaluation to properly evaluate BI claims – understanding both objective (medical & wage claims) and subjective (pain & suffering) components in the evaluation process.

Understanding the impact of Comparative Negligence and applying it properly to liability claims (BI & PD) at the evaluation stage will improve results – reserves, authority reviews, and dispositions. There are three negligence doctrines which vary by state: Pure Comparative, Modified Comparative, and Contributory Negligence – these doctrines indicate recovery for damages will be reduced by the percentage of fault attributable to each party. Under the Pure Comparative rule, a party can collect for damages even if they are 99% at fault. Most states have adopted the Modified Comparative rule which has two variations: the 50% rule and the 51% rule – meaning if you are 50% or 51% negligent, you will be barred from recovery. With the Contributory Negligence rule, injured parties may not collect damages if they are only 1% responsible for the accident.

We find that adjusters working in various jurisdictions are not always applying comparative negligence properly. Appropriately applying 15% - 20% of negligence on the adverse party will impact the loss ratio (for example, insured making a left turn in front of the adverse vehicle) vs. paying 100% to avoid confrontation with the claimant. If the adverse party is over 51% liable for the accident in a modified comparative negligence jurisdiction, the claim should be denied. If the adverse party is liable for the accident in a contributory negligence jurisdiction, a claim denial may be in order.

Staffing & Workload Management
There is a direct correlation with adjuster workloads and positive claim outcomes. The higher the workload, the less time to conduct proper claim investigations (e.g. statements and photos), prepare quality damage appraisals, evaluate and negotiate claims effectively, provide good customer service, and properly manage reserves. A best practice is to conduct quarterly staffing analyses to evaluate workloads and trends. The best claim organizations have manageable caseloads with established workload ranges for claim personnel by exposures (not claim files).

Span of control has a significant impact on a claim supervisor’s or manager’s ability to provide substantive and high-quality claim supervision. If the span of control is higher than six adjusters to one supervisor, quality is likely to suffer.

Quality Review & Reinspection Programs
Claim organizations require an effective claim audit process to properly evaluate claim trends at the adjuster, claim unit, office, and company level. A comprehensive Quality Claim Review (Audit) Program using best practice categories (e.g. Contacts, Coverage, Investigation, Documentation, Evaluation, Disposition, File Development, Litigation Management, Expense Control, Recovery, and Supervision) should be a core function in every claim operation. The process should be supported by technology and be able to trend data at a very granular level using intuitive analytical tools. This data can then be used as a basis for training and development.

An effective Reinspection Program for auto physical damage and property damage claims is essential to manage APD/PD (and rental) costs. It doesn’t take much of a dollar impact per claim to deteriorate a loss ratio.

Take Action
We recommend conducting an objective review of your claim organization to evaluate areas for improvement. Consider rating your claim organization in the following areas:

  • Best practice claims handling and supervision
  • Liability and damage evaluation
  • Applying comparative negligence
  • Workload and span of control
  • Audit and reinspection
  • Training

You will find opportunities to reverse the increased severity trend by optimizing these important fundamentals in your organization.

A version of this article also appeared in Claims Journal online in March 2016