Is Self-Administration Ever the Right Answer?
November 2008
A decision to leave the security of
insurance for the world of self-insurance is a major decision. Opting to
self-administer takes self-insurance to another level and requires both a
leap of faith and a great deal of analysis.
by Glenn Brown
Albert Risk Management
Consultants
The State of California clearly believes self-administration is a
decision that should not be made lightly as they will not entertain the
notion until an employer has been self-insured for at least 3 years.
Many excess insurers are wary of providing coverage when claims are
self-administered. Some will outright insist on the use of a professional
third-party administrator (TPA) as an assurance that the claims will be
properly handled. If insurers whose coverage attaches at an elevated dollar
level are worried about self-administration, that's a pretty good indication
that the self-insured should move cautiously and be certain that their
decision will result in claims handling that is better than what any TPA
could provide. An expectation of unparalleled claims handling is critical to
the self-administration decision since the self-insured employer will pay
for the large losses within their retention on top of their large investment
in a claims department.
This article will explore the decision-making process along with the
risks, possible rewards, and challenges of administering your own claims.
Costs and Concerns
Overhead is a core issue that must be fully addressed when considering
self-administration. Overhead analysis includes a look at startup costs, but
it is more than just a one time startup calculation that needs to be
considered. The startup costs would include hiring costs, salaries,
benefits, office space, office furnishings, computers, reference materials,
and a Claims Management Information System. The initial cost of these items
can be calculated and certain of the items can be depreciated and spread
over a number of years. However, some of the items are nowhere near static
and will fluctuate greatly over time. While furniture and computers have a
set cost and will hopefully last 5–10 years without replacement, personnel
costs are very dynamic. Benefits such as health insurance have been
increasing at double-digit annual percentage rates. Beyond this, if the plan
is to attract and keep good people, there will have to be annual salary
increases, possibly bonuses, and provisions for continuing education and
seminars. Given the changeable nature of the investment, a 5–10 year pro
forma should be evaluated.
The personnel issue is particularly tricky for self-administered claims
operations. The whole point of self-administration is to put together a
claims operation that provides better handling than what can be purchased
from a TPA. To assemble an excellent team, it will likely be necessary to
pay a premium to attract the best adjusters. Beyond a competitive salary,
the best adjusters are often looking for opportunities for advancement. Most
self-administered claims departments are relatively small with very few
layers of management and therefore have limited opportunities for
promotions. This leaves salary, bonuses, and benefits as the only carrots
available to retain good employees. The result of these carrots over time is
a cost structure that just keeps growing and growing. In a relatively short
period of time, the actual overhead investment will look nothing like the
initial calculation.
While self-administration costs typically grow over time, TPA fees tend
to remain fairly static due to extreme price competition. The premium being
paid for the self-administered claim handling edge is ever increasing. The
price competition among insurers and TPAs can lead to cost controls in their
claims departments that can have a big impact on quality. One cost control
involves the issue of turnover. Claims operations profess to take great
pains to limit their turnover because they know it is a sore point with
their customers. The truth is that claims departments can only charge so
much for their services due to competition, and therefore they keep their
costs in check by replacing experienced (expensive) employees with less
expensive and less experienced adjusters. While they may not want to lose
their best, most productive employees; turnover is a means of keeping
expenses under control.
Another cost control area is related to adjuster caseloads. Claims
operations will assert that their adjusters handle a limited caseload to
ensure that they have the time to do quality work. In reality, the adjusters
at a TPA often handle some multiple of the number claimed in order to keep
the staffing level (expenses) to a minimum. Typical adjusters harbor no
illusion about keeping their heads above water; they work to see how close
they can come to the surface. The result of all this is that there is a real
opportunity to assemble a better claims team than can be purchased from a
TPA, but this team will likely cost substantially more—particularly over
time.
Beyond the direct personnel costs, there are indirect costs and other
challenges presented by employing your own claims department. An investment
of time is required to search for, interview, and hire employees. If an
outside vendor is used to identify qualified candidates, then this indirect
cost also becomes a direct cost. Of course, there is no guarantee that the
hiring decisions will always be perfect. This can cause problems that are
not seen with a TPA. If a TPA assigns an adjuster who is not a good fit, the
problem is remedied by a simple request to replace the assigned adjuster. If
a bad hire is made internally, it can lead to morale problems in the
department and messy situations where the employee must be fired.
Another challenge is presented by self-administering claims in multiple
jurisdictions. If the claims will be handled out of one state, but the
company has operations in multiple states, it becomes very difficult to hire
and keep adjusters that have experience in the other states. It is rare to
find adjusters who have multiple jurisdiction experience. This makes it
difficult to hire adjusters to handle the states outside of where the
department is located. While this is less of a concern with general
liability or auto liability, since civil judicial systems are quite similar
across the country, it is a major concern with workers compensation where
the laws and formwork vary greatly from state to state. For multistate
self-administration to work, it may be necessary to offer relocation
packages to experienced adjusters or the company may be forced to hire
employees who need substantial on-the-job training. Suffice to say that the
personnel issues associated with self-administration are many.
Possible Positives
Having explored some of the costs and challenges of self-administering
claims, we can move on to potential positives. A major reason to assume the
handling of your own claims is to gain full control. I can use my own
situation as a claims consultant to illustrate the issue of control. One of
the great frustrations with my role as a consultant is that I review and
advise on a large number of claims, but I must then rely on others to carry
out the recommended plan. The frustration comes when the plan isn't carried
out, isn't executed in a timely manner, or is changed without good reason.
Overseeing the work of a TPA who doesn't execute satisfactorily can be
similarly frustrating, but the frustration is compounded by the fact that
the TPA's poor performance costs your company money in inflated claims. I
may get frustrated professionally, but your frustration takes money out of
your pocket. Self-administration puts the claim handling function in the
hands of someone who truly has a vested interest in achieving successful
claim outcomes. This can pay dividends in the form of reduced claim costs.
Self-administration also allows a company to extend its corporate culture
to its claims operation so that the two are in sync. Oftentimes there is a
disconnect between the culture of a TPA and its client. Every TPA will
promise to handle claims in the manner desired by the client, but the
reality is that the TPA's own handling bias often shines through.
Self-administration allows an employer to take a very soft approach with its
employees and to extend this approach to its injured employees. It would
also allow another employer that has strict, unbending employment guidelines
to administer its claims in that manner as well. Either approach can result
in the effective management of claims, but it may take self-administration
for the chosen strategy to be consistently employed.
Conclusion
If a team can be assembled that possesses expertise and drive that
exceeds what is provided by a TPA, there is a chance for successful
self-administration. Most would define success as a reduction in the total
cost of risk through superior claims handling. Assembling and maintaining a
team that can deliver this type of result is a challenge and for a
multistate exposure (particularly for workers compensation) it is an
enormous challenge. The decision to self-administer is seldom made in order
to save on the cost of handling claims. The expense of self-administration
will most certainly exceed the cost of hiring a TPA. Also, the decision to
self-administer is not easily reversed so this is no casual decision. Opting
for self-administration requires careful analysis and yes, a leap of faith.
It's clearly not the answer for everybody, but for some, it may represent an
opportunity to achieve a significant decrease in the total cost of risk.
*The
Albert Risk
Management Consultants claims management team (Glenn Brown, Lisa
Hartman, William Quinn, Jr., and David A. Tweedy) contributes articles on
claims topics. You can reach Glenn Brown at
gbrown@albertrisk.com.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author’s employer or IRMI. This article does not purport
to provide legal, accounting, or other professional advice or opinion. If such advice
is needed, consult with your attorney, accountant, or other qualified adviser.