Portfolio Management

In some of areas of insurance, the process of paying claims for insured events is relatively straightforward. For example, in life insurance, a simple death certificate is all that is needed as the benefit amount is provided in the contract terms. However, in non-life areas such as property and casualty insurance, the process is much more complex. Think about even a relatively simple insured event such as automobile accident. Here, it is often helpful to determine which party is at fault, one needs to assess damage to all of the vehicles and people involved in the incident, both insured and non-insured, the expenses incurred in assessing the damages, and so forth. The process of determining coverage, legal liability, and settling claims is known as claims adjustment.

Insurance managers sometimes use the phrase claims leakage to mean dollars lost through claims management inefficiencies. There are many ways in which analytics can help manage the claims process, Gorman and Swenson (2013). Historically, the most important has been fraud detection. The claim adjusting process involves reducing information asymmetry (the claimant knows exactly what happened; the company knows some of what happened). Mitigating fraud is an important part of claims management process.

One can think about the management of claims severity as consisting of the following components:

  • Claims triaging. Just as in the medical world, early identification and appropriate handling of high cost claims (patients, in the medical world), can lead to dramatic company savings. For example, in workers compensation, insurers look to achieve early identification of those claims that run the risk of high medical costs and a long payout period. Early intervention into those cases could give insurers more control over the handling of the claim, the medical treatment, and the overall costs with an earlier return-to-work.
  • Claims processing. The goal is to use analytics to identify situations suitable for small claims handling processes and those for adjuster assignment to complex claims.
  • Adjustment decisions. Once a complex claim has been identified and assigned to an adjuster, analytic driven routines can be established to aid subsequent decision-making processes. Such processes can also be helpful for adjusters in developing case reserves, an important input to the insurer’s loss reserves, described in the following subsection.

In addition to the insured’s reimbursement for insured losses, the insurer also needs to be concerned with another source of revenue outflow, expenses. Loss adjustment expenses are part of an insurer’s cost of managing claims. Analytics can be used to reduce expenses directly related to claims handling (“allocated”) as well as general staff time for overseeing the claims processes (“unallocated”). The insurance industry has high operating costs relative to other portions of the financial services sectors.

In addition to claims payments, there are many other ways in which insurers use to data to manage their products. We have already discussed the need for analytics in underwriting, that is, risk classification at the initial acquisition stage. Insurers are also interested in which policyholders elect to renew their contract and, as with other products, monitor customer loyalty.

Analytics can also be used to manage the portfolio, or collection, of risks that an insurer has acquired. When the risk is initially obtained, the insurer’s risk can be managed by imposing contract parameters that modify contract payouts. In Chapter 3 introduces common modifications including coinsurance, deductibles, and policy upper limits.

After the contract has been agreed upon with an insured, the insurer may still modify its net obligation by entering into a reinsurance agreement. This type of agreement is with a reinsurer, an “insurer of an insurer.” It is common for insurance companies to purchase insurance on its portfolio of risks to gain protection from unusual events, just as people and other companies do.

[raw] [/raw]