Insurance agencies, especially smaller ones are finding themselves facing with Errors & Omissions (E&O) situations. With an average severity of $40,000+ for all E&O claims, the average homeowners is around $35,000, while for personal auto it is around $22,000. The legal actions relate to dereliction of professional duty, ranging from inadequate coverage, misrepresentation, delays in processing, and others. Consumers are showing an increased willingness to dispute denied claims and claim their insurance money. Agencies also have to bear a huge cost and loss of productive time in efforts required to assemble documents, make statements and provide proof, going to trail and defend the case. Statistics show that compared to past where twenty insurance companies would report an E&O claim incident, the number in recent years has risen to one in 10 companies. What is worrying for brokers is the severity, not frequency of E&O claims, which has shot up by 10% year on year which is not good for the brokers & insurers.
What causes E&O risks?
Many factors contribute to E&O risks as shown in Figure 1.
One major reason for E&O claims is the pace of product innovation. To thrive in today’s insurance marketplace, insurers need to offer differentiated products, available through numerous channels, to customers who want convenience and personalized service. At the same time, insurers need to bring down costs, closely manage risks, and ensure compliance with a dizzying array of regulations.Insurance industry constantly introduces new and more complex coverage. Changing social & political scenarios require newer product to be introduced at a very fast pace and brokers have to train their staff to internalize the sales and marketing pitches to sell the policies rightly. Consider the case of millennial who may like to own a home, move across cities faster and open to sharing economy. Newer product introductions must be managed right from appropriate training, certifications and support to ensure no mis-selling.Training the CSRs on new products is often limited or some time given a go bye, and it is left to agency personnel to determine the applicability of coverage and impact on customers. Sometime, insurers expect new product Introduction to increase coverage, but it may actually result in a contraction of coverage for the insured.
Changing relationships between carriers and agencies are also affecting the E&O claims. With rising likelihood of consumers and business completing their transactions over the internet increasing, undisputed role of brokers and agents is being threatened. Growth in percentage of services conducted online has increased from 9.6% in 2013 to 18% in 2018, Carriers have found alternate channels to cover the markets. J.D. Powers 2018 Insurance Study states more auto insurance shoppers preferring more services provided by online today versus five years ago. However, reliance on agents was stronger amongst the first-time shoppers. Small commercial buyers looked to their agent to recommend which carrier to go on. With emergence of alternate channels, opportunism has crept into the carrier and broker relationships. In recent years, approximately 7% of the E&O claims involve agent being sued by the carrier.
The life insurance value chain is increasingly losing share to Insurtech who are using newer technologies to disrupt the incumbents. With proliferation of internet, mobile and other technologies Insurance companies are expected to serve customers across different generations and provide an omni-channel hassle-free self-managed process that can meet the request in seconds. Some consumers may prefer to walk in and chat with an agent, while others would prefer self-service. If speed of service trumps accuracy, an E&O exposure may arise.
Klaus Schwab, Chairman of the World Economic Forum, famously said, “In the new world, it is not the big fish which eats the small fish, it is the fast fish that eats the slow fish”. About 90% of U.S insurance agencies are still family owned and their numbers have declined from 44,000 to 42,000 in the last four years according to a study by Independent Insurance Agents of America. Insurers have historically been slow to change since their business is built on stability and risk aversion. Product development have stretched years and IT upgrades follow a sequential “catch” the wave slowly approach. Waves of M&A across agencies led to disparate agency management systems (AMS) and data integrity issues with data residing in silos. Most Agencies suffer from discrete, disparate systems that are costly to manage and integrate and even more challenging to maintain. With shrinking IT budgets, and demand for newer feature additions growing, sustaining reliable IT Infrastructure is a challenge. If IT resources and infrastructures are not updated, an E&O exposure may arise from security breaches, poor data base management, etc.
For many years, insurance agencies had limited resources to manage their work. According to a report by the Manpower Group, 46% of US Insurance companies say they can’t find the people with the skills they need. Industry needs to bring at least 60,000 new agents and brokers each single year just to maintain the current size of distribution. Industry studies indicate Millennials interest in Insurance job is pretty weak. Companies using temporary staff rose from 12% in 2018 to 18% in 2019. Inadequate training, limited product knowledge and unfamiliarity with AMS can lead to E&O exposure.
Miscommunications or incomplete transaction are the major reason for E&O claims. In agencies where the policy life cycle is managed through a manual process, many people are involved in a transaction and hence more likely something will not get done as it should. Anther reason for E&O claims is lack of standard operating procedures (SOP) and uniform practices. Without written guidelines, agency personnel adopt an ad hock approach based on their own judgement. The result, agencies may end up with many ways of doing its business, some of which may or may not be appropriate. Even if agency has standardized process, if agency personnel fail to adhere to these standards, an opportunity for E&O claims gets created. Many agencies realize the real reason for E&O claim happens when persons involved simply did not have enough time. Given the industry’s chronic backlog problems, many agencies witness a rush job. Insurance practices are rooted in traditional manual practices simply are not set up to move at high velocity. Many insurance activities are repetitive and prone to manual errors. Industry insiders realize renewals happen 365 days and seven days a week and most risk managers and brokers consider 30 or 60 days before renewal, termed crunch time in the industry to be critical. However, missing information, poor communication, errors cause delays in renewals or rushed quote that does not provide the best results.
Insurance practices, rooted in traditional manual practices simply are not set up to move at high velocity. Many insurance activities are repetitive and prone to manual errors. Many a time lower costs, high volume policies are missed or delayed due to manual intervention leading to lapsed coverage or customer abrasion. Initial data entry process, data integrity and non-standard process also contribute to high TAT.
Finally, since the premium of small policies is less, many agencies opt to cut down on the operating costs by reducing CSRs and support staff required to manage the operations. Many agencies do not do E&O risk assessment post policy issuance, especially for small business. These policies are typically renewed with the same carrier every year and E&O exposure gets compounded leading to huge claims.
Automation of Policy checking
The best coverage against E&O risk is to automate the insurance process by investing in smart Insurtech solutions that completely reduce/eliminate manual efforts. Automation of the policy life cycle, from data input to payment, has the potential to streamline policy management, as well as boost its efficiency and accuracy. When done right, digitization will result in both lower costs and better customer experience. Incumbent insurance agencies can successfully compete against new entrants and grow their business by leveraging digital technologies.
Insurtech solutions for policy checking, including Exdion Policy Check, broadly work as shown in Figure 2. Once an agent logs in, they can see options to Upload Documents, View Dashboard and View Checklist icons. The solution allows CSRs to upload Automatic Renewal Policies & Marketed Renewal policies to check for any discrepancies. The solution compares Current Term, Prior Term policies, Endorsements & any three documents from Proposal, Carrier Quote, ACORD App, Binder or Schedule. Smart solutions like Exdion Policy Check allow CSRs to search policy checklist by client name, policy number, line of cover or job id. The solution vectorize and enrich document content by highlighting any discrepancies and account managers can then make note of the action required to address each discrepancy. Finally, the solution creates a separate section for Forms and Endorsement checklist. Advanced solutions like Exdion Policy Check can help policies from any carrier against your proposals, for more than 20 questions and can customize checklist across small, mid-market and large business.
Automated policy checking: Monetary and non-monetary benefits.
Chief financial officers (CFO)s use a tool called Total cost of ownership (TCO) to evaluate the benefits of a new technology over incumbent ones. TCO analysis not only considers the direct cost of any investment (or option), but also the indirect costs and indirect benefits. TCO analysis usually considers a life-cycle analysis of costs and benefits over time periods, usually 3 or 5 years.
To assess the advantages of automated policy checking solutions like Exdion Policy Check, we considered two scenarios. First one is where US based companies have invested with an internal team to manage policy checking. Second option is that of an outsourced partners of a US based agency.
For the internal team we considered 100,000 policies per annum managed by 75 employees. They deliver about 450 policies in normal days and 750 policies during peak days. The agency hires temporary staff at $25 per hour to meet its peak requirements. The average salary cost of employees is about $45,000 and the annual attrition rate is about 5%. The cost of absenteeism per associate per annum is about $3600 and the total cost of replacement $6000 per resource which includes the cost of HR, commission to external agencies and training. The work is completely manual and hence rework cost hovers around $400 per month. E&O exposures are about 3% of the agency’s revenue, delays, and workflow change management costs an additional 3% of revenues.
For the outsourced team resource cost of $270,000 per year. A management cost (of reviewing and coordinating the vendor) of $95,000 per year which involves a mid-senior level manager or the owner herself to run the day to day operations and monthly reviews is considered. Attrition, delays, absenteeism and training do affect the throughput and these have been arrived from primary research. E&O exposures are about 3% of the agency’s revenue, delays, and workflow change management costs an additional 3% of revenues.
Table 1 shows the TCO analysis of Automated solutions Vs Insource and Outsource. Our TCO analysis reveals the direct savings from automated solutions like Exdion Policy Check, in case of an internal team is about $2,796,500 per annum and over three years the agency will be able to gain about $ 8,388,750. Automated policy checking also scores over the outsourced operations.
Advantages of Automated Policy Checking
Automation brings many advantages to insurers, as shown in Figure 3.
Deploying Automated checking tools for policy checking gives significant cost advantage. It costs much less compared to a Full-time employee (FTE) cost. Secondly, human errors which can range between 5 to 7% gets completely eliminated. Moreover, employees would be able to spend time on high value non-boring activities. Employee satisfaction increases and employee attrition’s nose dives. Importantly, customer experience is a manageable and predictable process as both front and backend operations work in tandem to seamlessly delight the customer. Automated policy checking tools like Exdion Policy Check offer insurers the flexibility to customize their automated policy renewal process and issuance to accomplish complete end to end business-specific policy renewal. Exdion Policy Check enables insurers to configure custom business process for renewal, including the capability to configure selection criteria for policy for renewal, one-time or multi-year recurring execution with comprehensive auditing and error free capabilities.
With smart solutions like Exdion Policy Check, Insurance agencies also gain a channel to serve high volume low value policies and pursue right cost-based delivery mechanisms to target different customer segments. This would enable brokers and underwriters to spend more time on higher risk and profitable segments. Automation of repetitive process involving both on demand policies with no touch or minimum touch reduces costs and results in improved productivity.
As insurance has become increasingly commoditized and consumer decisions more price oriented, brokers have found their margins squeezed. To maintain viability brokers must not only lower internal processing expense but also improve customer experience. Leveraging digital technologies to automate repetitive and rule-based tasks is the way forward. Newer technologies like Robotic process automation (RPA), and cognitive computing algorithms can seamlessly automate the renewal process. These technologies also enable companies to use analytics to deepen customer engagement and process management.
Policy administration and renewal need to stop being just a system of record but should transform into a system of engagement. Automated Policy Checking not only reduces costs, but more importantly offer improved client experiences. Upload, copy and movement of data within the Insurance policy life cycle becomes completely error-free and Agencies can make informed decisions based on data. Automated policy checking solutions have a very short payback period and the agency can accrue all gains in the first year of implementation itself. Automated policy checking solutions eliminate the overtime, weekends and late nights. These solutions help an Agency realize higher efficiencies and improve profitability.
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