1 January 1970Cayman analysis

Increasing litigation oversight

With the world and the captive sector growing increasingly litigious, the need for close attention to claims handling is all the more pressing. Central to a sound understanding of the claims process, the costs involved and the potential savings that can be achieved is a commanding view of the process. That is the opinion of Gary R Markham, Chief Executive of LSG, a leading information technology provider to the captive sector.

As Markham explained, “Litigation is a massive issue for the captive insurance industry—one that erodes a significant amount of profitability in the sector. And litigation is on the increase—certainly in the US and in the UK—and is a growing concern in the captive space.” The economic downturn has also played its part, said Markham, with people more likely to turn to their insurance policy to prop up ailing businesses. As he explained, there is a correlation between the level of fraudulent claims and litigation, and the economic health of the economy, with the temptation to pursue moral hazard rising during a downturn. The current financial crisis has raised the spectre of company failures, making it all the more pressing that captives pay close attention to their claims process and connected litigation. “Accountability for managing costs and litigation has increased,” said Markham. “In good times, managing costs isn’t too much of an issue, but the downturn has driven firms to improve accountability and measure performance.” The question then becomes, how can captives seek to better understand and get a view of the litigation process?

For Markham, the answer is “education, education, education”. In order to understand the litigation process and its impact on the bottom line, captives need to be able to understand, measure and take steps to strengthen the outcome of litigation. Software can play a key role in making this a reality. As Markham explained, captives have traditionally relied upon decentralised paper-based systems and information from third parties—be they third party administrators (TPA), lawyers, carriers or brokers—in order to get a handle on the claims and litigation process. This creates a number of evident inefficiencies when captives are trying to understand and measure the success of litigation. “You might have a captive in Cayman, a TPA in the US, a law firm anywhere in the world, books of business all over the world, and a captive owner with a low level of visibility. Drawing information together from such a multitude of sources is a major challenge, so centralising captive information and doing it on a web-based platform that can be accessed from anywhere is key.

“Paper-based workflows and varying methodologies for measuring the success of litigation will result in an incomplete picture of the process. By moving from paper to electronic systems, centralising information and then allowing web-based systems to enable people to keep tracks of metrics and statistics online and globally, captives can gain a much deeper understanding of the litigation process.”

"The company has sought to educate the market about the potential to drive down the cost of litigation by taking a more proactive approach to its control."

One of the issues raised by Markham is the fact that captives too often leave claims handling and litigation in the hands of TPAs, whose methodologies may conflict with those of a captive. “A TPA makes its living out of handling claims and their approach to business is typically dictated by volume or severity of claims. But captives’ needs aren’t necessarily best served by such a model.” In many instances TPAs are simply not aggressive enough when it comes to pursuing claims, said Markham. “It is not their money, they are simply facilitating a process, and they are not concerned about the underwritten risk”. For captives, they are looking for greater attention to be paid to the underlying risk, but by leaving litigation in the hands of TPAs they “aren’t necessarily getting the best bang for their buck or the ability to control those litigation dollars in the most effective way”.

“Captives need to take charge of the risks to their business as it relates to who is managing their litigation, and if it is a TPA, get it to try to be more rules-driven in its approach. Having processes in place to measure performance under service level agreements is incredibly beneficial and that is where technology comes in, because measuring performance using a paper-based system is extremely difficult to do.”

Technology can help captives benchmark the success of litigation, with IT playing a key role in providing telling oversight. Systems can help captives examine claims in a number of ways, said Markham, with costs versus damages—generally a function of the amount of time spent in litigation—the relationship between costs and results, and the ability to adhere to budgets all important metrics to be considered. Simply being able to monitor and analyse these performance characteristics has “a strong sentinel effect on the cost of litigation”, said Markham, with such analysis even able to positively affect the indemnity result—something he described as “nirvana in the claims litigation world”.

As Markham explained, systems such as LSG’s Advocator System can also enable captives to monitor and keep track of workflows as they pertain to the claims and litigation process. The system enables the captive to examine its interactions with its TPA, carrier and broker and allows the captive to introduce modifications to the workflow that can help streamline the litigation and claims process, flagging up issues, bottlenecks and possible cost savings along the way.

LSG’s system is specifically designed for the captive market, lending still greater oversight to the process. LSG’s systems are already being used by a host of captives—from large single parent entities to group captive formations representing SMEs—and the company has sought to educate the market about the potential to drive down the cost of litigation by taking a more proactive approach to its control. Markham admitted that convincing all members of a group captive of the benefits of such systems can at times prove a challenge, but as he explained, once those with the highest risk exposures have come to see the value of such systems, then others in the group entity often follow suit.

“Educating the client about the fact that they may not have been getting the best deal out of their claims function and making them aware of tools that are readily available is our role. Systems can really help captives improve their bottom line and gain visibility about their business that they would never have had under a paper-based model.” And as captives grow increasingly sophisticated, so too will their need to understand, streamline and maximise the return from their business. The claims and litigation function will necessarily form an integral part of this.

Gary Markham is chief executive at LSG. He can be contacted at: