Navigating claims today: A modern approach provides specific industry advantages

Recently, claims management has had a hard and unmissable shove into the future. With the growing emphasis on digital transformation and the rise of InsurTechs, it’s nearly impossible to manage claims—or even exist—in the property/casualty insurance industry without having at least a base understanding of the technological evolution growing within it. Or coming face-to-face with it in a realistic capacity.

The technological era of claims management is no longer on the horizon. It’s here. Innovate. Integrate. Modernize. That’s the mandate. The future is now, and it waits for no one.

Yet still, studies have shown that some p/c insurers have been measurably and noticeably slow to adapt to the newest technological advancements, invest in Insurtechs, update their legacy systems—rife with neglected IT infrastructure—and generally display a reluctance to fully modernize.

So, it’s worth diving into the specific modern factors that the digitization and technological upgrading of claims management solves in the first part of 2023. New wrinkles—some which we never could have been predicted would impact the claims space until they landed at its door—are addressed by a modernization of the process that’s crucial as we approach the mid-2020s. Let’s look at the claims-management issues digitization specifically tailors and helps solve today, and why this modern approach provides advantages for insurers, and by extension their agents, that can no longer be missed.

An unheard of complexity

According to global reinsurer Munich Re, the insurance industry currently is experiencing a period of “virtually unprecedented levels of complexity.” In relation to other tricky historical periods insurers have faced, and there have been many, how can that be?

Well, even a terse examination of the factors in today’s industry and world reveals it’s nearly impossible not to reach that conclusion, without going far beneath the surface.

At the heart of the claims-management process is the collection of data to gain a comprehensive understanding and details of a claim (e.g., angles, influences, evidence, background, faults, and information) ideally from end-to-end. Unsurprisingly in 2023, the amount of data available has exploded exponentially. Literal terabytes of information exist, and it may need to be culled, applied and made sense of, from a number of sources, which impacts a spectrum of new types of claims that pop up daily.

The interconnectivity of the digital age has made unlimited knowledge accessible at our fingertips. However, it also has created an infinite haystack of information to be interpreted, adjusted and categorized. The world is smaller, but the mountain of information grows every day. Compared with even 20 years ago, the sheer magnitude pales by comparison. Digitization is crucial to manage this vast breadth of data.

With this boundless and unavoidable data-heavy world now required to be navigated and interacted within, cyberrisks have become more prevalent, complicated and dangerous. Collecting the necessary information to compete in the p/c industry means wading deeper into the digital waters, and that means opening insurers and their agents to greater risks.

A 2022 report by third-party cyber risk intelligence provider Black Kite found that of the top 99 U.S. insurance carriers examined, only roughly 26% were graded “A” for their cyberposture, while the approximately 73% remaining were more vulnerable to cyberattack.

Reluctant to update, insurers often employ outdated and neglected IT infrastructure as a remnant of old industry standards. Yet, when examining solutions to these problems that often require full-system overhauls to solve (i.e., updating entire legacy systems in one fell swoop to keep up with times) their solution frequently has been to pile newer technology fixes atop their legacy systems. Yes, it may save on budget now, but it also opens firms to greater cyber risk vulnerabilities, which could be catastrophic and cost more down the line. The modernization of core systems to keep up with the digital age is no longer an option, it’s a requirement for insurers today.

Coinciding with these complexities are the geopolitical impacts of the world (more on these later in this article). Inflation, banks changing interest rates, values of fixed-interest securities, international conflicts, the supply-chain crisis and fallout from a post-pandemic world all impact balance sheets, rates and a near-infinite amount of additional data points for insurers to analyze actionably. It’s far too much to risk with anything resembling analog.

In short, the most advanced technological solutions are needed as more data needs to be collected. How these factors impact the claims-administration process—even for smaller insurers—goes beyond the global scale and borders on galactic. Technological modernization to account for it in the claims process is integral.

The other side of the pandemic

As we emerge from the COVID-19 crisis and into post-pandemic life, the world we find ourselves in is undoubtedly full of more open-air experiences than our cave-like prior surroundings. That is positive. But of course, the issues lingering from it will have reverberations for a while, in many avenues and industries, insurance included. One of the most prominent and chronic has been the supply-chain crisis.

This ongoing turmoil has wreaked havoc for three years now, impacting supply and demand, shippers and shoppers, wallets, and everyday life. The situation has been stubborn and catastrophic. But finally, there is cause for positive expectation. As experts have examined the situation from all angles, conclusions have emerged that the solution lies in rapid digitalization and wholistic and real-time data analytics. As evidence, in a 2021 McKinsey report—over a year ago now and at the heart of the onset of the crisis—93% of companies surveyed across various industries already had stated that they “intended to make their supply chains far more flexible, agile, and resilient.”

The ripple effect this has on the insurance industry and claims management can’t be overstated. With the evolving digitization of the supply chain and transportation ecosystem, the result is real-time data capture, analysis, insight and most importantly, reaction. Real-time operational risk management is moving as close to financial risk transfer as it’s ever been.

That means if insurance companies can’t keep up with this new warp speed of analysis and insight, they won’t survive.

All of this points to loss control, underwriting and real-time operational risk and claims management as solutions to this rapid financial risk transfer. Looking to the future, it is clear signs point to this connection between real-time data and insight, loss control and underwriting as the next horizon insurers must have on their technological to-do list.

That’s not all. Additionally, fallout from the pandemic has left the economy—and all unfortunate suffering parties—with losses on such a grand scale that the holes will need digging out still for the foreseeable future. That leaves the insurance industry with a need to manage and process claims with as much speed and accuracy as possible, as claims continue to mount. Digitization and technology solutions to the process are the best ways to ensure both are accomplished as efficiently as possible.

Hurricanes and climate change

Climate change has had an expansive and magnifying effect on the p/c industry. It has resulted in not only a larger volume of disaster-related claims corresponding with these events, but also events that have higher impacts on economies and claims processes as well. With these higher impact events—and increased frequency—comes an increased scale in complexity of claims. These rising trends across the board have made ensuring state-of-the-art capabilities and utilizing digital solutions for insurers a necessity, not an option.

Unfortunately, these trends are growing, not declining. McKinsey research shows that the value at stake from climate-induced hazards could, conservatively, increase from about 2% of global GDP to more than 4% of global GDP in 2050. With this climate risk escalation comes the predicted (and evidenced) occurrence of more floods, wildfires, hurricanes, and other catastrophic events. It’s a surge that p/c insurers must prepare for with every tool at their disposal to account for a steadily increasing amount, and diversity, of claims to be managed.

Tragically, hurricanes have come to the forefront recently, and they are their own specific category of claim-impacting disaster. In 2022, Hurricane Ian became Florida’s costliest storm since Hurricane Andrew in 1992. Its tragic devastation resulted in estimated losses between $28-$47 billion. While total losses still are being assessed—that would make it one of the 10 costliest storms in U.S. history (six of which will have come since 2012).

Hurricane disasters of that magnitude bring widespread flooding, wind damage, and varied property insurance claims resulting in exposure estimates. Not to mention the monumental task of simply calculating the damage in total. All of which falls on insurers.

As insurance companies are inundated with record numbers of claims filed after an event (like Ian) from claimholders picking up the pieces of their lives, the claims are unpredictably complex and diverse. The risk is bottlenecked and overloaded with large-volume claim management such as this. Accomplishing it alone is an impractical task. To do it without the most modern and up-to-date tools is impossible.

Of course, not every insurer will face claims management on an event to the magnitude of Hurricane Ian—which could take multiple years to settle the resultant personal property and commercial claims. However, in looking at the frequency, the recent multiplying amount, and the severity of these events—plus the calculable effects from climate change—disasters on some level likely will present themselves. Digitization, scalable technology, and optimized infrastructure is required to handle the complexity of claims management resulting from disaster.

Inflation

Inflation was one of the most dominant stories of the past year. It was impossible not to feel its impact in nearly every facet of everyday life, every industry, and every news report. As inflation rates reached their highest levels in many markets in 50 years, 2022 saw the U.S. Federal Reserve raise interest rates seven times by the end of 2022, and the U.S. braced for a recession.

The insurance industry wasn’t immune. As central banks hiked rates to counterbalance inflation, insurer and reinsurer balance sheets were impacted. Additionally, inflation rates for key loss components for insurers (e.g., construction costs) often have higher rates than standard inflation. This can make the effects especially hard to handle.

Insurers and agents have been forced to examine the most cost-effective ways to operate business as a targeted solution. The priority has been efficiency and financial optimization. Digitally managing claims is proven and by far the most efficient method. It saves money in the long run through process, and measurably saves resources on process administration through streamlining. In short, digital optimization is optimal.

Inflation also has caused an increase in premium costs, which has led to more shopping amidst policyholders who prioritize lower costs. Insurers and their agents have had to react accordingly to keep pace and stay competitive within the industry. Utilizing tech solutions to reduce their own in-house claim management costs, enabling lower price points to keep with market competition, is a premium that digital solutions afford.

That being said …

The modernization of claims management is immensely important. It provides process advantages and benefits—both fiscally and efficiently—that cannot be ignored by those in the insurance industry. Yet, there are some traditional claims-management processes that still belong in the industry in a crucial way and remain presently effective.

Software advancements are not a catchall. Some traditional services can help bring the job home in ways that digitization—at least today—can’t fully accomplish solely. In those ways, general knowhow, decades of industry expertise, and classic methods will never go out of style.

There is value in finding a merging balance between legacy core systems and newer technologies working hand-in-hand. That could make business process-outsourcing critical to managing a high volume of claims, underwriting, or commercial distribution. In policy administration and claims management, the right combination of both is what gives insurers and agents a true best recipe for success.

In any case, it’s best to have all bases covered.

This article originally appeared in the March 2023 issue of PIA Magazine.