Alex Isted explains why actuaries need to involve claims professionals to price and develop products properly
For both pricing and product development, it is important that actuaries use available resources to get the price and the product right. Does this happen? Do actuaries get the most out of their analysis of claims experience. Do they discuss it with the claims professionals? Getting this interaction right is not just central to obtaining new business but it is essential for ensuring profitability.
When analysing claims, actuaries working in product development, marketing, pricing and valuation need to take into account the practical lessons learnt by claims managers. Claims managers have a central role in ensuring the right insurance product is developed, both in terms of the contractual wording and, importantly, the price.
Once the business is on the books, claims managers should also be integral to how the emerging experience is analysed so that appropriate reserves are set up. There are a number of questions for actuaries:
? When developing products and considering policy conditions, is sufficient weight placed on claims managers' practical experience?
? Do actuaries realise the impact that areas such as the ABI Code of Practice have on claims experience?
? Do actuaries fully understand the potential impact of the Ombudsman or legislative reform upon eventual claims experience?
? Is there a process that allows feedback from claims managers or for lessons to be learnt in the business? For example, is a process triggered when data shows that the claims experience is different from that expected or when there has been a disproportionate number of early claims?
? Are claims managers aware of the pricing basis? The pricing basis may be a 'fat' one that enables a broad view of claims or a 'finely priced' one requiring closer claims control.
Life and health insurance premiums (both insurer and reinsurer) are so finely priced in the UK that there should be a clear emphasis on appropriate integration of claims experience into the business. This means ensuring claims managers are involved in all business areas within their organisation. For example, they should be feeding back lessons learnt into product development - so that products are fair and also comprehensible; they should be involved in pricing - so that actuaries are able to better understand trends in experience; and they should be involved in underwriting to improve application forms.
This is especially relevant with the development and management of health portfolios. Let's look in more detail at how the skills of the claims managers can help the actuary's understanding of these portfolios.
Claims management and the product development actuary
A product development actuary will want to ensure that the final product and associated policy wording meet the concept underlying the product. This should be done by involving all relevant stakeholders, including input from claims professionals. Unfortunately, this is not routine in all companies. What are the possible consequences if this doesn't happen?
Well, lack of involvement probably means we are likely to see greater numbers of customer problems. Conversely, if claims professionals are involved, they can help ensure the policy wording will have an appropriate 'Treating Customers Fairly' approach that can be applied to interpreting a policy at the time of claim.
From their day-to-day experience in handling claims, assessors can look to remove ambiguities in the wording. This should also help reduce the number of cases where the Ombudsman may otherwise have become involved with disputed claims. Lack of involvement in claims is likely to lead to challenges being aired in the public arena, with a consequent adverse impact on the company's media image.
Claims management and the pricing and valuation actuary
We know that the trends underlying past disability claims experience can be seen from CMI data as well as a company's own experience. The actuarial study of this data and the assumptions resulting can be one-dimensional. Input from experienced claims professionals can help a pricing actuary to better understand the data based on day-to-day experience rather than simply considering raw statistics. This is something that proactive insurers already do.
Imagine a pricing actuary with a lot of data suggesting that inception rates and claims durations on a portfolio of IP claims were improving - and, on this basis, pricing a new tranche of business. However, the data is analysed without bringing claims professionals into play.
From previous practical experience, they would have been able to advise that an apparently subtle shift in the criteria underlying the definition of disability would lead to greater and longer claims.
Examples of where the skill of the experienced claims professional can help the pricing actuary include understanding why: trends with disability claims in certain occupational groups are worse than in others; termination rates have worsened in recent years across some age groups; and the impact of possible future legislative changes on claims experience.
Whether a portfolio is properly priced or not can be seen in two simple ways. If the business is under-priced, the insurer might sell a lot of business but run the risk of doing so on an unprofitable basis. If the pricing is too conservative, then not enough business will be sold. Neither is good for an insurer.
Claims professionals should also form part of the valuation process. If the valuation assumptions are incorrect, then a disability portfolio can be either under- or over-reserved - both of which can prove to be expensive for a business.
As an example, when valuing a disability portfolio, is this done on a broad approach, looking at a whole portfolio, or does the valuation take into account the different estimated durations of claim for individual cases?
Claims management and the marketing actuary
Claims management is an underplayed factor in the protection industry but one
that is constantly emphasised in the advertising of non-life business. It seems strange that this is the case, since the customer's claims experience with life and health business is perhaps the most important one for anyone with insurance cover. The desire of the customer for claims to be handled efficiently, fairly, transparently and promptly is overwhelming. So why aren't claims handling at the forefront of the marketing message?
What examples can we glean from
general insurers? The opening paragraph
of a major motor insurer's web page states: 'Last year, we helped 15,000 people replace what they knocked, smashed, bumped, splashed or cracked with our accidental damage cover. Find out more about our claims statistics.'
A building insurance provider simply states: 'We like to keep your claims simple.' What is evident about these general insurers is that neither of these statements is buried within the policy to be discovered only when a claim occurs some years later - they are all highlighted at the outset. Do we make enough of this type of message when selling life and health products?
Claims managers may need to do a stronger selling act within their organisations, but actuaries should also be more proactive in engaging with that profession.
Lastly, it is interesting to compare the perceived role of claims management in the life and health sector with that in non-life business. In the latter, claims management is fully recognised to be central to the eventual profitability of the portfolio - this is not yet the case in life and health. It is worth asking 'Why not?'.