Copyright held by The John Cooke Fraud Report. Reprint rights are granted with attribution to The John Cooke Fraud Report with a link to this website.
DOWNSIZING SIUS – A COST-SAVING MEASURE OR AN OPEN DOOR POLICY
By Tommy Short
This Shakespeare quote is from a line in the Julius Caesar play. Brutus is urging his comrades to seize a fleeting opportunity in an armed conflict: “There is a tide in the affairs of men. Which, taken at the flood, leads on to fortune.” Throughout the world, we are at war. The enemy is fraud. These sage words, written in 1599 about an event in 44 BC, are timeless. To throw down your strongest weapons during battle is to lose. To pick them up, to use them, keeps hope alive and the chance of victory strong.
If there’s one thing I’ve learned after 30 years in the insurance industry, it’s that cost containment is the constant mantra. Do more with less. Give exceptional customer service with the fewest people. Keep costs as low as possible while still doing the best job possible. Don’t let customer service slip. Ever.
Adjusters live and breathe for the primary purpose of delivering awesome service, knowing full well that a happy policyholder is a policyholder who will not only renew his policy forever, but one who will find the experience of dealing with HIS company so pleasant that he’ll buy additional lines of insurance himself, direct his children and grandchildren to hop onboard the company train, and even preach the wonders of the company to his friends, neighbors, and anyone else who will lend an ear.
And with this focus on customer service comes other hurdles. Adjusters and SIU personnel are charged with the duty of delivering that required stellar service at the same time they are sorting the wheat from the chaff; the legitimate claims from the questionable claims, the honest from the fraudulent. It’s a big job,: one that requires a cheerful attitude, the ability to do twelve hours of work in an eight-hour day, and the sixth sense of perfect judgment.
It’s a balancing act like no other. A dozen balls in the air at any given time — and suddenly the chainsaw of corporate politics and profits gets thrown into the mix. Herein lies the biggest hurdle; understanding the management mentality that is occasionally challenged by a sense of doing what sounds right at the moment and not giving enough thought to what the eventual outcome may be.
Consider the following scenario because it’s all too often all too real.
Let’s say that I’m Mr. Insurance CEO. My loss: cost ratio just went over the $1 mark and I need to trim my costs. Today, I am thinking out loud.
Where can I cut the most expense — and get the most benefit with the fewest existing or new problems?
Sales? I think not. That’s where the money is made. In fact, let’s spend more money to make more money. Besides, I used to be Mr. Big Shot Sales Manager. I had the best sales force in the country. We sold more policies with the lowest acquisition cost in the industry. No, not Sales. Bad, bad idea.
Still, since it’s necessary that I have need to save money by trimming costs,; but where do I go to do that? Oh, yeah! Claims! They spend all the money that Sales brings in. Yeah, I know, we have to have great customer service to help sell policies. Let’s see, I have the adjusters working 160 new claims a month,; that‘s about right. I’ve got my auto appraisers doing a car every 30 minutes. They might be able to squeeze in a few more. I have clerks writing checks as fast as they can submit them to the automatic check writing machine. But I need more. Much more. Where can I cut more expense?
It’s time to get tough. “Genevieve, get Mr. Claims Manager to drop whatever he’s doing and get into my office. Now! We’ve got work to do!”
Mr. Claims Manager is fighting his own battles. He’s dealing with performance audits, compliance issues, human resources troubles with two female adjusters out on maternity leave, a male Reservist adjuster called to active duty with the armed forces, another adjuster who just had an emergency appendectomy, three temps on a learning curve and an unexplained increase in incoming claims. Still, he marches into Mr. Insurance CEO’s plush corner office.
“Mr. Claims Manager, where can you save me money?”
“Well,” he replies, “how about if we trim the SIU fat? They’ve got a $5M budget. They have a bunch of men and women running around all over the operating territory, and I’m not really sure what they do. I get complaints from the Sales Managers that every time SIU gets involved, the claim slows down and customer service suffers. The customers always complain that they’re being accused of something they didn’t do. The adjusters seem to either love them or hate them — some have actually complained that they can not get enough lines closed to make their personal bonuses because the darn SIU guys are taking their sweet time to completely develop the case! I mean, seriously, how much fraud is really out there? We have an Underwriting Department that screens the risks after the agency force has done an excellent job of field underwriting. How can a crook get past that? The adjusters each get a couple of hours training on red flag indicators. What more do they need? And another thing, it seems like every time Claims denies a claim based on the information from SIU, we get a law suit.”
“Hmmmm. That $5 million could go a long way. We can beef up our Sales Department, sell more policies and increase our premium income all at the same time,” answers Mr. Insurance CEO. ” You just keep up that terrific customer service and our problems will be solved in no time flat! Consider it done, Mr. Claims Manager. Let’s cut the SIU! For the states that mandate we have an SIU, well, they’ve never really defined exactly what that means and I can’t remember the last time that any of them actually followed through — so let’s just hire a vendor to be our SIU on paper. That won’t cost much at all. Done – saved $5M. Good riddance to SIU.”
Two years later –
I’m still Mr. Insurance CEO (amazingly, given the circumstances of our current financial stats!), and have I got a problem. I’m thinking out loud again. My Casualty average net claim payment has jumped from $1500 to $15000. My average repair cost on auto claims has jumped up 50%. My homeowner losses from fire and theft have gone up 44%. The only line of business that’s still making a profit is life, and our life loss ratio is nearing the $1 mark. How did this happen? It couldn’t be claims handling. I have the claims adjusters writing checks as fast as they can and we’re allowing them to close files with a minimum of investigation. After all, our customers wouldn’t lie to us. We deny the 3rd party on the first go round, but when they complain, we pay so we don’t have the legal expense. Aren’t we covering all the right bases? What’s going on here? What did I do wrong? Why is this happening?
Have you seen that story before? Slightly exaggerated, I know, but still typical within the industry. Since many companies have experienced similarities situations similar to my fictionalized story, let’s talk about the answers to the questions that Mr. Insurance CEO just posed.
First, where does the Special Investigation Unit fit in and what is it’s value to the company?
I have always equated the SIU to police. When a city has a crime problem in an area of town, the police department increases patrols and dedicates extra services to the area. The crime goes down. When the crime goes down, the city fathers ask why the police department is spending so much money and time in that area; after all, crime is down x percent. The Police Chief is asked to conserve resources. He pulls the extra patrols and service. Next thing you know, the crime is back again at the same or increased levels.
Crooks know when and how to avoid detection and apprehension. They study us more than we study them. The insurance bad guys know which companies are easy marks and which companies go the extra mile to protect the company and customer assets. They know which companies have dedicated SIU departments and which companies are just going through the motions. They are just like you and me; they’ll take the path of least resistance to the highest return.
SIUs are a strange breed within the industry. Yes, the concept has been around for 30-40 years. Still the industry still looks upon it as, at the very least, a necessary evil. And the scenario painted above is not that far from the truth. A company with a dedicated, in-house Special Investigation Unit, properly staffed, managed and consistently exposed to ongoing education by the best of trainers, can save a company millions. It’s not a visible savings, but average claim payments are kept low by avoiding fraud.
Couple all that with the undeniable fact that the world economy has taken a plunge, jobs and disposable cash are in short supply and humankind is not too hep on stashing money in savings accounts, muni bonds, or even inside their mattresses. Still, unexpected things happen; the car needs new tires, Junior needs money for his class trip, Wifey falls down the basement steps and has to be off work for six weeks, and the air-conditioning unit bites the dust in the middle of July. It’s a statement of fact that otherwise honest policyholders lower their boundaries to coincide with the times and the demands of day -to- day living.
I’ve been in the industry for many years. I’ve seen almost every tactic and strategy taken by companies regarding SIU. But, perhaps the most visible proof of the value of an SIU was shown when I was working for a national P&C company in the mid-1990’s. The Casualty average net claim payment in a large territory had climbed to record levels. All normal procedures designed to contain costs were in place, but those costs were still rising. At the urging of the SIU, a strategy was adopted to involve SIU in all questionable casualty claims in order to investigate the claims in depth. Within 2 years, the ANCP had dropped nearly 25%. Numerous fraudulent claims were detected and defeated. Legitimate claims were being paid while those with fraud were being denied, abated, and even abandoned by the claimants. Medical providers, attorneys, customers, and claimants who wanted to make a dishonest dollar began to stay away from the company. Word got out that the company was no longer an easy mark and the bad guys went elsewhere.
Just like as with the police force, deterrence works. No, deterrence really can’t be measured, and in all my years in SIU, I’ve never found a valid way to measure the worth/value of an SIU. But I do know that when you cut costs by downsizing or eliminating the SIU, the crooks know it. You might as well just leave the door open because they’ll be coming in by the droves.
Is the short-term saving expenses fix of lowering expenses by pulling SIU resources one that will pay off down the road — or one that will critically affect the future profits of the company?
This is a question that needs to be addressed by any company considering an SIU downsize. History tells us that any such approach is NOT a smart idea. Ever.
Tommy Short is a recognized expert in the field of insurance fraud. He has spent over 30 years in the insurance industry, working for 3 major carriers. He was President of the International Association of Special Investigation Units, and has spoken before audiences in both the United States and Europe.