Many practitioners may think captive claim management is just like
"regular" claim management. While most process and practices are the
same or very similar, captives and alternative risk financing vehicles do have
nuances and unique features and requirements that dictate processes and
practices for this form of risk financing. Thus, this article will identify
those distinctive aspects of claim management critical to a well-run program.
A good place to start is the lines most commonly found in captives. They
include auto liability, workers compensation, general liability, medical
malpractice, professional liability, property, and product liability. There are
others, of course, and new coverage ideas emerge often, but these represent the
most common exposures covered in captive insurance companies. The choices of
coverage are driven by a variety of factors that include primarily frequency of
loss, the potential for catastrophic loss, regulatory rules, market pricing and
availability conditions, and, of course, the needs of the organization.
Regardless of the lines underwritten, when a claim strategy and program is
chosen, be sure that the program meets the needs and expectations of the
business and ideally follows industry best practices to produce the best claim
trends and outcomes.
When determining what to insure in the captive, expected losses should be
central. However, prevention and control tactics are the focus of exposure
control, both pre- and post-loss. Yet, despite a company's best pre-loss
initiatives, there will be claims, and you will be sued, so the best strategy
is to be prepared for both. Unfortunately, many captive programs have little or
no formal strategy or rigor, choosing instead to learn the hard way from a bad
loss experience and, sometimes, several bad loss experiences. Reducing both the
frequency and severity of losses will reduce the chances of significant
variations from budget and cost of risk expectation.
Claim issues to consider include the types of claims that need to be handled
in the program; the specific jurisdictions that will be involved and their
regulatory rules; the expected volume of claims, by type; the alignment of
claim strategy/philosophy with corporate culture and philosophy; and the
corporate expectations of the claim program. The type of administrative
structure and strategy that will be used offers the following common
options.
- Self-administration (large deductible or captive environments)
- Employed, internal staff
- Insurer (traditional insurance market)
- Claim employees of the insurer
- Specialty insurer (often subsets of large insurers)
- Third-party administrator
- Local law firm
Captive Claim Program Location
Jurisdictions and domiciles (i.e., country, state, county) play a major role
in determining the requirements for and the needs of the claim program. Claim
philosophy and expectation differ from domicile to domicile, with each
representing unique regulatory considerations. Process, laws, and statutes vary
as well. Other concerns include the local availability of claim professionals
and other supporting vendors to execute day-to-day operations (activities for
which insurers normally retain full-time staff).
Approach to Claim Management
Key strategic and tactical claim-related questions to consider include the
following.
- What level of involvement does the company expect from their claim
administrator?
- What are the expectations for communication methods?
- What is the frequency and time frame of regular communications?
- What is the agreed-upon claim philosophy?
- What type of financial and claim reporting will be done by whom and
when?
- Who should be involved in audits?
Captive Claim Management Staff
A successful captive claim program should include competent staffing to
specific skills and levels; consistent regulatory compliance; accurate policy
interpretation/coverage decisions; timely, appropriate reinsurance reporting;
internal and external audit compliance; consistent quality customer service;
and effective litigation management process.
Professional claim staffing is critical to a best practices captive claim
program. Important qualifications and competencies include the amount and type
of claims experience; the level of legal understanding and background; the
extent of the relevant industry knowledge; and the location of staff operations
and whether it will be centralized, dispersed, and/or virtual.
In defining what skills claim professionals will need and how the program
will operate, there are many considerations including what claim volumes should
be expected, what the standards for adjuster claim caseloads will be, the
nuances of the different types of claims to be handled, the complexity and time
requirements of the program, client meeting requirements, claim review
frequency, extent and source of field investigative work needed, severity of
claims, expectations of program for turnaround times, and required deadlines
and schedules. All claim professionals should understand and align with the
corporate philosophy and the characteristics of the parent company's
culture, customer service expectations, settlement philosophy,
customer-relation sensitivities, and brand/reputation protection.
Fraud Prevention
Captives are no more immune from fraud as any other insurer, and thus fraud
prevention is important to cover as part of a claim management process. It
requires clear policies, appropriate accountability and ideally a proactive
approach that includes background checks, enforced authority levels,
double-payment approvals, check distribution checks and balances, electronic
payment process, claim audit process, and a process for training and
reinforcement of necessary skills.
Regulation of Claim Captives and Legal Concerns
Regulatory considerations will be driven primarily by the domicile of
operation and license that may often be offshore and different from the
domestic regulation you may be used to. Regulatory issues that claim
professionals should understand include licensing requirements, continuing
education requirements, domicile requirements for reporting, audit extent and
frequency, your exposure to fines and penalties, and coverage-related issues.
This last item is addressed through different approaches that may include the
following.
- A fronted policy arrangement with an insurer that dictates some claim
handling expectations
- A large deductible program where there is more flexibility with the
interpretation of the coverage, and thus more flexibility for handling claims
within the culture of the captive facility
At the end of the day, all applicable laws are primary, and the policy
contract will be enforced by the relevant courts in the jurisdiction of the
claim.
Since captives are in effect "insurance companies" subject to many
of the same operating, legal, and strategic considerations as insurers in the
regular markets, the captive owner should be clear on what exposures they
intend to cover through the program. Among some of the more significant
vagaries of captive claims, the following questions should be answered.
- Do you understand vicarious liability and agency issues?
- Are unintended exposures addressed and coverage revised
appropriately?
- What might expand coverage beyond the intended?
- Are you using and interpreting endorsements correctly?
These are not necessarily all of the relevant questions that would be
necessary to operate a captive insurance company in a fully effective way, but
they are the ones most relevant to getting the claim function running well.
Reinsurance Issues
Reinsurance programs and levels are customized for the needs of the group
captive or captive owner. Many layers of reinsurance policies are usually in
force depending on the risk being insured. Reinsurance policies have their own,
often unique set of requirements for claims including the following.
- Reporting requirements
- Claim administration requirements
- Claim authority levels and authorization procedures for reserves,
settlements, and payments
The overarching focus here would be to be sure you understand the design of
and strategy attendant to how reinsurance will be used with your captive and
the nuances that will affect how claims should be handled as a result; this is
necessary if you expect reinsurers to pay when called upon to do so.
Audit Issues
Captive claim programs can be periodically audited for a variety of purposes
by the following.
- Fronting or excess/reinsurance insurers
- Captive managers or owners
- State regulatory agencies
- Other stakeholders (e.g., brokers, agents, accounting firms, rating
agencies, etc.)
Regardless of who performs the audit, the claim files should be handled
consistently, kept complete, and always contain accurate content. Some issues
of special importance related to captive claim audits include the
following.
- The depth and breadth of the audit process and focus
- The compliance expectations of the auditor
- To whom the findings and conclusions are shared
- The follow-up and closure expectations on findings
Claim Administration
A best-in-class captive claim program should be customized to the needs of
the parent organization and aligned with your overarching risk management
strategy. The type of claim administration strategy you use can be determined
based on a variety of factors that include the following.
- Jurisdictions and venues in which your claims fall
- The lines of coverage being handled, each having its own nuances
- The claim expertise and best practices needed to manage claims well
- The loss history results and trends you will experience
Recommendations and referrals for claim partners should be solicited and
reviewed from other industry players, and the reputation and financial
stability of the administrator should be reliably vetted and validated before
choosing your partner and/or staffing your claim function.
Measuring Captive Claim Program Performance
Finally, measuring captive claim performance and documenting results are
critical to sustaining management commitment to your captive strategy. Key
questions you should ask and answer include the following.
- How will you define captive claim success?
- How will you secure the resources needed to address the identified
negative trends?
- How will you minimize large loss "surprises"?
Captive claim program success metrics don't differ much from most other
regular market measures but should be designed in alignment with goals and
priorities of the captive strategy. Some typical metrics include the
following.
- Average paid Indemnity and expense
- Last reserve compared to the final paid per file
- Percentage of claims paid versus denied
- Turnaround time on payment processing
Ultimately, the overarching measure of success will be the effect of the
company's results on the total cost of risk. For traditional (hazard- or
insurance-focused) risk management, this remains a key metric for measuring
cost-control efforts for expenses related to insurance program elements. In
that claims are the biggest component of this metric, it highlights the
importance of managing the claim function with excellence. As captive claims
have similar potential to make or break risk management success, captive owners
should ensure that claim management is appropriately designed and prioritized
among other key captive program components.