Technology

The Severity Wolf & Auto Insurance Claims Technology

| by Val

At left: Sally stays away from the severity wolf!

Is the technology that is utilized for auto insurance claims processing driving consumer costs up? Isn't technology supposed to make things efficient - and therefore less costly in the long run? For auto insurance providers costs must be contained, and severity must be controlled. If these two things are not done, premiums increase unduly. 

The severity subject is foremost for every player in the auto insurance business. 

Severity can be generally described as the problem of the actual costs of losses incurred by customers and therefore paid out by the insurance company. The most obvious reasons for controlling the extent of severity, is to allow for continued lower premiums for customers and in addition to that - to also allow for some return on investment for those who are on the board; they are usually shareholders.

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The severity problem has an ebb and flow for most auto insurance carriers. This is due to the variable nature of actual losses that are incurred by customers on any given month, and is also due to the fact that costs in general will rise.

For the insurance companies that outsource components of their overall claims process / operations, the severity wolf is on the prowl. The only way to gain protection from exponential increase in severity that can occur over a short period of time, is to disallow any outsource component that charges undue percentage of estimate to the facilities who are providing repair. 

It might be better to utilize companies who set a flat rate for all of the services that are provided. Flat rate fees should be the standard in a perfect world, if one wants to control severity to the highest degree. At times, outsourcing companies who provide (claims process, start to finish handling) bundled services to insurance companies - hide the fact that they will be charging percentage of estimate to repair facilities during the overall processing of a claim.

Any fee model that includes percentage of repair estimate charges (to the repair facility) does some potentially negative things. That type of fee might encourage a rather quick increase in severity which will be immediately passed on to the insurance carrier, and it might also result in less earnest review of the repair costs - if review of the repair estimate charges is part of the offering that is being outsourced by the insurance company; this scenario crops up when auto insurance companies utilize bundled services that are provided by outsourcing companies. 

Think about it. Why would the outsourcing company (that is charging percentage of repair estimate amount for services provided on a claim) go the extra mile to catch all discrepancies in the cost of the repair estimate - in order to reduce those costs? Especially since that outsourcing component which is doing the estimate review is also in the position to get a percentage of the repair estimate amount from the repair facility doing the repairs? 

What about how the repair facility handles the percentage of estimate charge? The repair facility might not like these percentage charges, but they need to stay in business and usually play nice with the differing networks that have these charges simply because of increased exposure for more business. My guess would be that the repair facility owner shrugs his or her shoulders with regard to the percentage of estimate charge that is being levied against them by some outsourcing company who is doing the insurance companies bidding. I imagine the body shop owner is wondering why the insurance company does not know that the inflated costs from percentage of estimate fees will cost the insurance company in the end.

The percentage that is charged by the outsourcing company to the repair facility is passed on to the insurance company - simply included in the cost of the repair. The repair facility cannot swallow the percentage charge levied by the outsourcing company - because the overall repair costs have already been closely considered during review processes that have included utilization of estimation platforms; this type of process has already reduced the repair facilities ability to realize the profit of old. It appears that, in any inflated percentage fee model utilized by some outsourcing companies, significant profit might be realize by the outsourcing company alone - the one that is supposed to be reducing severity for the insurance company by keeping costs under control.

Doing the math... 10% of $3500 repair estimate is $350. If the outsourcing company charges a repair facility a %10 or $350.00 service fee above and beyond repair costs - for essentially performing a function via new technology that allows processing of the claim between involved parties on the web; please know that performance of that function costs the outsourcing company a minuscule fraction of $350, thanks to technology.  In the end, it is clear to see that any outsourcing component which charges an overly high percentage of estimate - any time from point of loss to completion of repair - can significantly increase severity for any insurance company in a short amount of time.

When the severity wolf bites, we all get it in the end! I just hope that those in the board room and in the executive offices might understand with great increase - the good outsourcing business models - and reject the ones that don't make sense for their company. There are a lot of good outsourcing models out there who want to provide what the market needs and will bear - so that all may benefit. Many outsourcing companies simply want to do what is right for their clients.

 

I do have involvement in a desk review company. One that just tries to do the kind of business that makes sense. We determine what our actual costs are in order to provide service - and charge a flat rate to our clients. We know that the insurance market will only bear inflated costs that contribute to increase in their severity, for a short while.