Magazine article Risk Management

Is Self-Administering Claims Right for You?

Magazine article Risk Management

Is Self-Administering Claims Right for You?

Article excerpt

Ever more self-insured companies are evaluating the pros and cons of installing an in-house self-administered unit to process their workers' compensation claims. The potential benefits and costs of doing so need to be compared with the advantages - and disadvantages - of continuing with traditional third-party claims administrators (TPAs). While this process involves a review of various factors, the final decision to internalize the function most often will be based on a philosophical view: the degree of autonomy that a company wishes to retain in processing claims.

Companies that have implemented self-administered units within their organizations report several advantages. For instance, in-house claims managers tend to better understand the company's operations, and senior management is afforded a closer view of claims management functions. Additionally, an in-house claims administration unit improves communications between manufacturing and management, which fosters not only a team effort but also, more importantly, quicker resolution of claims and a reduction of claims costs.

Through salary and benefits incentives, an in-house arrangement may help stabilize turnover of claims personnel. Conversely, TPA claims examiners may change companies as often as every six to 18 months, usually under the pretext of "professional advancement." This high turnover rate in the claims industry can cause serious problems that increase expenses. Complex claims can be voluminous, and an examiner may spend months just trying to understand a newly assigned case.

Self-administration also provides greater accountability. Both an in-house unit and TPA understand that the goal of an effective workers' compensation delivery system is to distribute benefits efficiently and humanely. But an in-house unit better recognizes a company's goals and objectives in protecting itself from claims that are not warranted.

SELF-ADMINISTRATION LIMITATIONS

Although self-administration generally offers a variety of advantages over a TPA, it also carries with it some disadvantages. In the decision to self-administer claims, the question arises as to where the function should reside within the organization. Manufacturing may argue that it is best to place claims under its management since the losses are a direct component of the production process and reflect productivity levels. At the same time, the human resources people may believe that the administration of benefits falls within their area of responsibility. The legal department may assert that the statutory nature of claims administration and the delivery of benefits, a process that in the case of workers' compensation may be extremely litigious, can impact the corporation's assets and therefore should be subject to careful legal scrutiny. Meanwhile, those in charge of the treasury and finance functions may deem that the claims administration role is primarily financial in nature; after all, this role involves the delivery and reserving of large sums of the corporation's working capital and should be monitored as would any fiduciary responsibility.

Regardless of where the claims function is ultimately housed, a degree of care must be taken by the organization to adequately insulate the claims role in fulfilling its reserving responsibility. Reserving should be performed by experienced professionals most familiar with the various components associated with the particular insurance coverages, the issues of liability, damage estimates and expenses associated with adjusting the claim. Although the claims examiner should not operate in a vacuum, the process should remain objective. Without adequate insulation from other management functions, the claims department may be subject to pressure from various contingents whose own performance may be adversely affected by the reserving process.

In order to preserve actuarial soundness in reserving practices, a separation of manufacturing, legal, finance and accounting pressures in claims reserving disciplines must be maintained. …

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