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Claims Management 03

Claims Management and Effective Risk Management

Christopher Mandel | March 20, 2020

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Businesspeople on a tangle of winding roads

The cost of claims has been at the heart of total cost of risk (TCOR) as a separate function since the inception of risk management and even before. The sheer magnitude of losses, insurable or not, defines so much of what risk managers focus on, and it tends to be what they report on most often as well.

The nature of mature, and by inference effective, risk management programs has claim management as a key focus as well. While risk maturity is directly correlated with risk effectiveness, this latter term encompasses a much broader perspective on things that matter.

Not surprisingly, many of these components of risk management maturity have some connection to effective claims management. Accordingly, it is appropriate to understand what these components are and how they dovetail with a more comprehensive view of effective risk management. Admittedly, this perspective relates most to the traditional hazard-risk-focused practice of risk management; however, failure in this realm will likely point to probably failure in other areas of risk management.

Components of Risk Discipline

To instill risk discipline, and by extension maturity, into claims management activity, one must set the tone for effectiveness across the spectrum of risk management activities and significantly feed overall risk management performance. By extension, this will influence the ability of risk leaders to act as "trusted advisers" to organizational decision-makers. This should be a key aspirational goal for risk leaders, critical to long-term effectiveness and functional sustainability.

The starting point for this subject is two key things: First, how one defines "risk" and drives a consensus among key stakeholders about that definition. Claims are, of course, the outgrowth of risk and exposure. This direct relationship is the essence of why claims and effective claims management has a direct relationship to effective risk management. Whether this aspect of the discipline gets done by insurers (as part of the insurance contract), insureds (as a part of a self-administered claim operation), or through third parties (e.g., independent adjusters, third-party administrators, etc.) makes little difference. Effective claim management feeds effective risk management.

The second issue involves the risks you focus on and where they fall on the loss curve. This may sound simple, but the reality is that many risk leaders have responsibilities for only a portion of the risks organizations face—often only the insurable risks. If that's the case, the need to focus on claim management is clear: one leads to the other.

The Basics of Effective Risk Management Maturity

If you are a risk leader with broader accountability for more or all risks, then the first question of "What is a risk to your firm?" requires total clarity. For the purposes of this article, a good definition of risk is "uncertainty" as it relates to the accomplishment of objectives. This simple definition captures the most central element of concern—uncertainty. However, the real challenge is determining the amount of uncertainty (such as frequency/likelihood), as well as the level of impact or severity. Each risk leader must make this choice and get it validated by his or her organization.

While many hazard-risk-focused leaders focus on risks at actuarially "expected" levels of loss, the challenge is how far out on the tail one should manage. While the possibility of loss becomes increasingly remote as you move out toward the tail of the curve, the impact of events become more destructive. Because the magnitude of loss in this realm can be catastrophic, the importance of both preventing and mitigating these events and their impact becomes critical. Central to after-loss mitigation is the claims management process. Related key questions that every risk leader must answer include the following.

  • What matters more to your organization: likelihood or impact—or are they equal?
  • What level of investigation should you apply to less likely risks?
  • How do you apply typically limited resources to remotely likely risks?
  • Do you have a consensus among key stakeholders as to what risks to focus on and how?
  • Do you have or need an emerging risk identification process?
  • Do you have a consensus on and clear understanding of how you define risk in your organization?
  • Have you educated your organization on the correlations among losses, claims, and risk effectiveness?

These questions are the starting point for ensuring risk management maturity. From your answers to these questions, you can chart your course for what this will mean to your firm. The answers will define the process elements of maturity that will be needed to achieve your desired state. But we need to define what risk maturity is in order to track progress toward this state and to ensure that stakeholders are aligned around the chosen components necessary to get there.

Understanding the attributes of claims and risk maturity includes the following.

  • Managing exposures to specifically defined appetite and tolerances
  • Management support for the defined risk culture that ties directly to the organizational culture
  • Ensuring disciplined risk and claim processes aligned with other functional areas
  • Creating a process for uncovering the unknown and/or poorly understood (aka emerging) risks
  • Effective analysis and measurement of risk and claims both quantitatively and qualitatively
  • A collaborative focus on a resilient and sustainable enterprise that must include a robust risk and claim strategy

Examples of Risk Management Maturity Models

One thoroughly developed risk management maturity model (RMM) comes from the Risk Management Society (RIMS). 1 While it was developed some 10 years ago, it remains a simple yet comprehensive view of the seven most important factors that inform risk maturity. When well implemented, these components should drive an effective approach to managing all risks within your purview.

The components of the RIMS RMM model include the following.

  • Adopting an enterprise-wide approach supported by executive management and that is aligned well with other relevant functions
  • The degree to which repeatable and scalable process is integrated into the business and culture
  • The degree of accountability for managing risk to a detailed appetite and tolerance strategy
  • The degree of discipline applied to using the elements of good root cause analysis
  • The degree to which a robust emerging risk process is used to uncover uncertainties to goal achievement
  • The degree to which the vision and strategy are executed considering risk and risk management
  • The degree to which resiliency and sustainability are integrated between operational planning and risk process

Like all risk management strategies, no two are exactly the same, and there is no one way to accomplish maturity. Importantly, every risk leader needs to do for his or her organization what the organization needs and will support.

Of course, RIMS is not the only source of risk maturity measurement. Others, including Aon, offer other criteria. Aon's model 2 includes the following components.

  • Ensuring the board understands and is committed to the risk strategy
  • Effective risk communications
  • Emphasis on the ties among culture, engagement, and accountability
  • Stakeholder participation in risk management activities
  • The use of risk information for decision-making
  • Demonstration of value

This is not to say that the RIMS model ignores these issues; they simply take a different emphasis between the models.

Another model worth considering is from Protiviti's perspective 3 on risk maturity as it relates to the board of director's accountability for risk oversight. A few highlights of their perspective include the following.

  • An emphasis on the risks that matter most
  • Alignment between policies and processes
  • Effective education and use of people and their place in the organization
  • Ensuring assumptions are supportable and understood
  • The board's knowledge of asking the right questions
  • Understanding the relationship to capability maturity frameworks

Certainly, good governance is critical to ultimate success, and the board's role in that is the apex of that consideration. If the board is engaged and accountable for ensuring their risk oversight responsibility is effectively executed, the successful execution of the strategy is likely, and by inference, risk and related claims will have been effectively managed as well.

Another critical aspect of the impact of risk and claims that should not be overlooked is their impact on productivity. If productivity is directly related to people's availability to work, then we can quickly agree that risks produce losses that affect both people and property, oftentimes together. We can readily agree that impacts on productivity are a frequent result of losses and the claims they generate.

Further, productivity impacts are not just limited to an on-the-job injury. Every car accident, property loss, or general liability loss that includes personal injury has implications for productivity in either the workplace and/or outside of the workplace. As a result, it behooves all risk and claim leaders to execute their roles by aligning their interests and driving their focus.

Finally, a few fundamentals that are important to understand in the execution of these goals include the understanding of the following.

  • How you handle claims will directly affect not just your TCOR but your overall risk management capability and effectiveness.
  • There is no one right approach to managing claims or risks; each organization must chart its own course aligned with its culture and priorities.
  • Risk and the claims they can generate must be treated as an integral aspect of organizational strategy.
  • Risk and claim management should be a focus on additive value.
  • Risk and claim maturity have shown that better results are achieved as a result.

In its simplest form, risk management is about preventing (or, on the upside, leveraging) financing and controlling risk and loss. Effective risk management is dependent on many elements, not the least of which is effective claims management. And, while claims are naturally focused on negative events that have already occurred, this activity is centrally critical to comprehensive, effective risk management.

How you prioritize claims and related activities will have significant effects on how you can contribute to organizational success. Doing both well will enable both risk and claim management effectiveness, demonstrated by measurable maturity.

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2 "Risk Maturity Index 2.0," Aon, 2019.