Claims - February 2012

an easy target. With disgruntled claims
personnel who are overwhelmed with
claims and paid little compared to their
peers in other vocations, the public sees
what is happening: claims that are not
owed get paid; legitimate claims are re-
sisted. each day, hundreds, maybe thou-
sands of advertisements for tort lawyers
air on television. What do the insurance
companies show us? Pretty girls handing
out coverage boxes, or a lizard crossing a
parking lot, or some other foolish non-
sense. What are the CeOs of these com-
panies thinking? The public knows: Those
insurers are thinking “if we pay a bunch
of fraudulent claims, we can just pass the
costs along in the next premium.”
Medicare and Medicaid fraud is ram-
pant. Instead of investigating claims
before a payment is made, Centers for
Medicare & Medicaid Services (CMS)
pays first and checks later, if ever. CMS
has probably been ignoring subrogation
for some of their payments as well.

Audits by Regulators

State and federal insurance regulators need to understand an insurer’s claims philosophy if they are to do a proper job for the citizens. State insurance commissioners get involved with individual claim files when there is a complaint against the insurer made by an insured or third-party. When the commissioners are looking at an insurer’s overall claims data, the assets, the liabilities including reserves, claims philosophy can be an important aspect of that auditor’s evaluation. Regardless of what the insurer may be showing as premium income, investments, surplus, and all the positive side assets, the claims side will reveal whether that insurer is healthy or on the brink of disaster, and whether the rates will be fair, adequate, and non-discriminatory.

Factors such as the ratio of open to closed claims are one key item. If for any fiscal year the volume of open claims or claims in litigation has expanded greatly from previous fiscal years, then there may be a philosophical problem. Why is the insurer not closing its claims expeditiously, or why has the number of litigated claims increased? This factor generally indicates a problem, either too small a staff, or an attitude of resisting claims that ought to be settled.

It is also necessary to determine the av-
erage value of all the closed claims in any
one book of business, such as personal
auto-injury liability. If the average cost
of the closed cases, including any litiga-
tion or other allocated expenses, is, say,
$5,750, then what is the average reserve
of the open claims? Suppose examination
of those reserves indicate that 80 percent
of the files are reserved at $2,500. Is there
a reasonable explanation for such an
average reserve? If the insurer has a re-
insurance treaty that pays for any claim
amounts over $2,500, then the reserve
may be Ok. That, however, is generally
not the case—the reserves are simply too
low. When the amount of the reserves are
set against the assets it may become clear
that the insurer is in deep trouble.