Choosing whether to keep claims management in house can be a complicated business for a captive insurer. Bermuda Captive examines the options available.
It is a generally acknowledged truth that no two captives are the same. Given that they cover the risks of individual companies, it stands to reason that they are all different. This means that there are few right or wrong answers when considering how to structure the company—just considerations that need to be made about its individual circumstances.
This is particularly the case when deciding whether to keep claims handling in house or to farm it out to a third party administrator (TPA). There are several judgements that need to be made surrounding a company’s needs, argued Paul Ross, business development director at claims management fi rm, Sedgwick.
“Management have to consider each situation individually,” he said. “First they need to establish what their captive’s claims volume is: does the amount of claim merit outsourcing the handling of those claims? They also have to consider the geographic spread. For example, if they are a single state employer in the US with a couple of hundred claims a year, then it might make sense for them to deal with those claims in house. But if you take that same employer and scatter them across all 50 states, it can be very difficult to control such a programme in house.”
Lisa Hartman, director of claims and loss control at Albert Risk Management, pointed out that using a TPA provides economies of scale and greater access to expertise. “It allows for a wider group of people to tap into, with professional expertise in a wide variety of areas. They will have a better capacity to investigate the claims,” she said.
Chad McGee, claim analytics manager at consultancy Artex Risk Solutions, agreed. “When you’ve got a large footprint it is hard to have one or two people versed in the nuances of every single state or jurisdiction around the world,” he said.
“They all have so many subtle differences in their statutes that it would be hard to have an in-house team that covered just the US, which has 50 states. In contrast a smaller company might cover fewer jurisdictions, so might find it easier to handle claims in house.”
Whether a Bermuda-based captive is covering business in the US or around the globe, it is crucial that they understand the nuances of eachjurisdiction that they are working in, argued McGee. “Everywhere is different, whether it’s countries around the world or just different states in the US. Whereas some jurisdictions have a lot of requirements, others are a lot more liberal,” he said.
“European states tend to have a lot more government regulation and involvement in the way that things are done, meaning that there a lot of differences that need to be acknowledged. This also means that captive insurers don’t have as much creativity, because it is already laid out for them.” Working in other jurisdictions also requires the right legal advice and contacts, argued Bill Whitehead, vice president of captive and alternative risk at Lexington Insurance Company. “Captives need to consider who their attorney in Bermuda is and what their access points are,” he said.
“Is their firm tied in, or does it have other operations in the various jurisdictions where their company operates? I would start with a law fi rm in Bermuda, because if the captive is there, when there are globalissues to discuss there is no better resource than to do it through the local law firm.
“They will really dig into the requirements and regulations for each of the jurisdictions in which you are involved. And a Bermuda fi rm is likely to have working relationships or tie-ins with a host of companies globally.”
Whitehead also said that captives must also consider the lines of business that will be covered, when choosing whether to deal with their own claims or to have them dealt with by a third party.
"When you've got a large footprint it is hard to have one or two people versed in the nuances of every single state or jurisdiction around the globe."
“If it is a large company with its own robust internal risk management operation and it’s a highly specifi c type of line that’s being underwritten, internal management of those claims may be a very appropriate way to handle it,” he said. “As long as they have somebody checking the compliance issues within the jurisdictions in which they administer those claims, that’s fine.
“However, if it is more far-reaching and broad-based, such as global auto coverage, then that might not be the appropriate approach to take. It’s very specifi c to each of the customers, their situation, their needs and the coverage they’re talking about.”
Ross agreed that the line of business being covered is a crucial consideration, with an example being product liability cover. “That will pretty much always be something that a company will want to deal with in house,” he said.
So whether a captive chooses to keep its claims management in house or to outsource it, what characteristics is it looking for in a claims manager? First, there is the need for an analytical mind, argued Ross.
“By having a captive, companies are insuring and taking on their own risk, so they need to have a claims manager who can look at data, develop strategies on a pre and post-loss basis to mitigate losses, and identify trends within the claims,” he said.
McGee agreed, adding that a good claims manager needs to be able to effectively interpret those trends. “They can look for trends in the exposures that their company has, for example several cases of a certain type of claim or even a particular branch that might have poor management. A big claim could point to a systemic problem that a certain location or state could have in its management,” he said.
Ross noted that a claims manager should have a strong backgroundin insurance, and the knowledge to go with it. “They are going to have a large voice in what the captive does, and the captive is an insurance company,” he said. Hartman also noted that communication skills are very important. “As a claims manager you have to be able to communicate with everybody throughout the organisation, whether they be attorneys, claimants or on the shop floor,” she said.
McGee pointed out that an effective claims manager should be both aggressive in managing their captive’s or client captive’s money and able to see the big picture. “You’ve got to be aggressive when managing your money, you’ve got to keep things organised and also understand the big picture of how the captive works, how the dollars work and how it fl ows back to the company,” he said.
“If you’ve got a risk manager who is just focusing on the claims, that doesn’t include the big picture. You need someone who can see things from all angles in a captive scenario, so when they make a decision on this side of the table, they understand how it is going to affect things on the other side of the table.”
Finally, Whitehead added, integrity is everything. “The only way you’re going to be able to measure that as you’re going about and looking is through a very rigorous and thorough referral process,” he said. “You need to get a list of referrals from the risk managers that you’re considering. I would also include in that list of referrals accounts that are no longer with that client, if you can get them. People part ways not always for bad reasons, things just happen, but it’s important to get a perspective from former clients or employers, depending on whether you are farming the work out or keeping it in house.”
Bermuda, claims management, Sedgwick, Albert Risk Management, Artex Risk Solutions