Activity-Based Management in an Insurance Claim Department

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An insurance company’s claim section can reap the benefits of activity-based management. Insurance companies charge premiums to guarantee that they will pay for any losses covered by their insurance contract. An insurance company will pay compensation if a policyholder suffers a loss. There are many factors that can affect the structure and environment of a claim section. Many claim departments are fast-paced, structured with a combination of a central claim center and field staff. These types of processes can cause many problems, such as ineffectiveness, unbeneficial and slowness. In order to be competitive and profitable, insurance companies strive to lower overhead costs in their claim department. Management can use activity-based management to identify inefficient and costly processes that need further analysis.

For clarity, the insurance companies divide costs within the claim department in two categories. The first category is referred as ALAE – Allocated Loss Adjustment Expenses. ALAE can directly be applied to a claim for settlement payouts, defense costs, expert witness expenses, or investigator fees. The second is ULAE – Unallocated Loss Adjustment Expenses. These overhead expenses are not directly related to claims and include costs such as construction costs, claim adjusters’ salary, and staff coverage counsel cost. Because each state has specific reporting requirements, these costs must be separately classified.

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Identify Activity Centers
Many companies want to lower expenses in their claim departments. This is done by streamlining claims handling and eliminating unnecessary processes. Industry leaders use activity-based costing to identify areas where process redesign or elimination can improve. The first step to implementing activity-based costing in a claim department is to identify activity centers. Activities centers are processes in the claims department that take place from the initial intake of a claim through its eventual closure. These are the most common processes in claim departments.

Claim Department Processes

1. Intake, Assignment, and Setup
– Agent or insured submit claim to insurance
– Claim Support staff set up the claim in the system and electronically assigns it to an adjuster.

2. Locate and verify active policies
– Claim support staff verifies policy information to determine if it is still active.

3. Take a statement from the facts and contact the claimant/insured.
– Contact parties to the claim so that they can begin to gather the facts.

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4. Examine the claim and make statements to witnesses. Document the claim.

5. Verify the amount and cause of the loss.

6. Claim Conclusion

After identifying the main activities in the claim department, it is time to add costs. The second step, which is the most expensive part of the process (e.g. labor hours, file room expenses, paper costs, etc.). First, support staff will need to locate the policy and confirm that it is active. Next, staff will identify the coverages of the policy and determine if the claim could be covered under it. If the claim is not active, it is closed. A letter is sent to the submitter to inform them about the status of the policy. If the claim has been submitted, the claim processing process will begin and the policy verification process will conclude.

An employee who spends too much time searching for a policy will be noticed in the activity cost. Management can identify cost drivers by identifying the variables that affect activity-based costs. One cost driver might be the time taken by claim support staff to locate a policy. Managers can identify the cost driver and then look for ways to decrease the time it takes to search for policies. One solution is to scan all policies into one electronic database and then have the system give a summary of each policy. Streamlining the policy retrieval process can reduce labor time needed to search for a policy and free up resources for claim support that could be used elsewhere.

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