For property and casualty insurers, the persistent and vexing problem of claims leakage can be effectively curtailed by applying digital technology with cutting-edge clarity.

1. Property &
Casualty:
Deterring Claims
Leakage in the
Digital Age
Change is on the horizon for one
of P&C’s most stubborn problems.
Here’s how insurers can ready their
organizations — and capitalize on
the benefits.
Executive Summary
The insurance industry estimates that leakage,
defined as the difference between what is paid out
on a claim plus expenses and what should have
been paid, is from 5% to 10% of claims paid annu-
ally. Leakage is attributed to a lack of adherence
to industry best practices — in other words, mis-
steps committed by the adjuster handling the file.
Closed file reviews, today’s chief line of defense,
are effective at identifying where leakage is occur-
ring and which behaviors need to be reinforced.
However, since these reviews are conducted after
the fact, the dollars are already lost.
New technologies can help. Advancements in big
data, text analytics and business rules technolo-
gies now allow claims executives to deter leakage.
Namely, they can audit claims in progress against
a broad range of criteria, to identify missteps as
they’re occurring and allow for course correction
prior to settlement. Moreover, insurers can decide
which audit criteria are important to them, and
they have the flexibility to make changes without
IT support.
This white paper will explore the main factors
contributing to claims leakage, the growing com-
plexity of claims handling, and how to leverage
the new generation of big data platforms and
advanced analytics to reduce claims leakage.
Cognizant 20-20 Insights | April 2018
COGNIZANT 20-20 INSIGHTS

2. Property & Casualty: Deterring Claims Leakage in the Digital Age | 2
CLAIMS’ LONG AND WINDING —
AND BUMPY — ROAD
Claims organizations are set up to follow an
orderly sequence of steps: Claims are investi-
gated, evaluated and then settled. This linear
sequence is often lengthy, with room for nuance
— and error. For example, adjusters might approve
medical treatments without following the guide-
lines to first seek a second opinion. They might
engage a third-party expert when it’s not called
for — or fail to hire one when it is.
Claims leakage results from a disconnect between
those orderly steps. Leakage is the difference
between two important points: the cost of actual
claims paid plus expenses, and the amount that
should have been paid plus expenses had best
practices been followed. It’s a stubborn problem
that costs insurers hundreds of millions of dol-
lars annually. In the P&C industry, conventional
wisdom puts the yearly tab for leakage between
5% and 10% of claims paid.
At the root of the leakage? The independent
nature of claims handling. While adjusters are
pivotal to claims’ success and expected to follow
best practices, they typically work autonomously,
often shouldering the twin pressures of large
caseloads and mandates to move claims expe-
ditiously. The fast pace of the claims workplace
can stymie the coaching efforts of even the most
dedicated claims managers.
1
Complicating mat-
ters, most carriers’ legacy systems offer limited
visibility into adjusters’ behavior.
UNDER PRESSURE, BEST
PRACTICES BECOME
CASUALTIES
As a result, shortcuts along the claims lifecycle
can seem necessary, and so best practices often
become casualties. The outcome is unneces-
sary costs in allocated loss adjustment expenses
(ALAE), unallocated loss adjustment expenses
(ULAE) and indemnity (see Figure 1, next page).
Mistakes can happen. In our work with insurers,
they tell us that failure to adhere to best practices
is the most common driver of claims leakage. File
missteps range from incomplete investigations
and lax vendor management to hastily prepared
settlement strategies. For example, an adjuster
might sidestep developing a formal negotiation
strategy in favor of settling at the top end of
the range, or approve treatment for a workers’
compensation claim without first obtaining an
independent medical evaluation (IME).
Adjusters aren’t the only ones under pressure.
Claims organizations perennially feel the heat to
do more with less, regardless of how well they
perform against targets or execute claims-sys-
tem upgrades and other resource-consuming
transformation initiatives. Given P&C carriers’
modest 3% CAGR,
2
the call to reduce costs is a
steady drumbeat, and claims organizations are
typically the focus. For claims executives, there
are three certainties: death, taxes and the neces-
sity to do more with less.
Leakage is a stubborn problem that costs
insurers hundreds of millions of dollars annually.

3. Cognizant 20-20 Insights
Property & Casualty: Deterring Claims Leakage in the Digital Age | 3
Drivers of Leakage
ALAE
Engagement of Third-Party Services
• When not required given loss facts.
• No business case and no identification of benefits.
• Failure to engage in cases where recommended.
Selection of Non-Preferred Vendor
• No business case.
• No engagement letter to confirm rates and responsibilities.
Vendor Management
• Failure to manage proactively.
• Inadequate communication and follow-up.
ULAE
Workload Management
• Inadequate visibility into adjuster workload.
• Re-acclimation of loss facts and prior discussions.
• Task assignment to inappropriate skill/cost resource.
File Reassignment
• Missed loss facts at notification.
• Ineffective segmentation/file assignment schema.
Productivity Drags
• Ordering unnecessary reports and time spent on review.
• Errors and reworks.
• Unnecessary approvals.
INDEMNITY
Coverage Determination
• Failure to escalate potential coverage issues.
• No investigation of other potential available coverage for the insured
and other parties.
• Failure to address incoming risk transfer requests.
Attorney Representation
• No timely contact with insured or claimant.
• Poor relationship-building.
Liability Determination
• Incomplete investigation.
• Decision without supporting documentation.
Missed Subrogation Opportunity
• Missed referral.
• Lack of thorough investigation.
• State of file doesn’t support subro arbitration or litigation.
Source: Cognizant
Figure 1

4. Cognizant 20-20 Insights
Property & Casualty: Deterring Claims Leakage in the Digital Age | 4
THE FIRST LINE OF DEFENSE:
PROMOTING THE RIGHT
BEHAVIORS
Claims organizations’ first measure against
leakage remains advancing best practices.
Well-documented policies and procedures elimi-
nate guesswork among managers and adjusters
and help promote the right behaviors to drive the
right results.
Traditional closed-file reviews are the next best
action. They identify errors and trends, and
allow managers to refocus training and mento-
ring efforts. During the review process, internal
QA teams probe claims files for, say, evidence of
proper documentation for an independent anal-
ysis on liability. They audit for establishment of
a business case prior to engaging a vendor, and
evidence of proactive vendor management. Did
adjusters apply sound judgment or simply go
through the motions? Is there evidence of strate-
gizing for a successful outcome?
The reviews are useful, but most are manual and
typically conducted on only a small number of
files. Carriers often engage independent third
parties to perform more comprehensive leakage
studies on larger claims samples.
Closed-file reviews and leakage studies add value,
yet both types of audit share the same weakness:
They focus on claims that have been paid. They
examine what has happened rather than what is
happening. The dollars are already out the door.
CLAIMS ADMINISTRATION
SYSTEMS: SMALL STEPS IN
THE RIGHT DIRECTION
Claims administration (CA) systems offer a mea-
sure of assistance for deterring leakage. These
systems’ core focus is workflow automation and
assigning the right activity to the right skill set.
By minimizing human involvement, they bene-
fit claims organizations on the lookout for cost
efficiencies. But they open only a limited window
into potential missteps on in-progress claims.
In many respects, the systems serve as the back-
bone to optimizing the claims management cost
structure. The carriers that derive the greatest
benefits are those that have taken the time to
understand how adjusters spend their time, and
that redesign claims-handling processes to route
activities to resources with the right level of skill.
They’ve formally delineated roles and responsibil-
ities between adjusters and processors so the CA
system shifts work to the lowest-cost resource.
One unintended consequence of CA systems is
that they create an environment in which the
claims process can feel mechanical. Our clients
tell us that, while useful, CA systems contribute
to adjusters’ decreasing emphasis on outcomes.
Rather than strategizing on how to generate suc-
cessful results, adjusters tend to focus on the
steps that the system assigns. The emphasis is
on clicking buttons and closing out activities,
especially among junior adjusters. Too often a
successful outcome is merely one in which all the
boxes are checked.
Closed-file reviews and leakage studies add value,
yet both types of audit share the same weakness:
They focus on claims that have been paid. They
examine what has happened rather than what is
happening. The dollars are already out the door.

5. Cognizant 20-20 Insights
Property & Casualty: Deterring Claims Leakage in the Digital Age | 5
EMERGING TECHNOLOGIES
CONVERGE TO REDUCE CLAIMS
LEAKAGE
Perhaps paradoxically, emerging digital technol-
ogy can restore the focus on human-centered,
successful outcomes — and prevent leakage
errors. Digital technology is already helping
claims organizations quickly evaluate new solu-
tions’ benefits. Now it’s opening a real-time
window into claims files.
For P&C carriers, the change is dramatic and long
overdue: The new technologies enable carriers
to perform digital audits on in-progress claims
with the same rigor and discipline as closed-file
reviews — but before settlement. What’s more,
while closed-file reviews are limited to a dozen or
so claims per adjuster, digital audits provide real-
time visibility into thousands of ongoing claims.
What’s behind the breakthrough? Three core
technologies converge to make it possible:
• Big data analytics: Big data refers to data sets
so large and complex that traditional data pro-
cessing software is unable to capture, manage
and process the data within tolerable time-
frames. Advancements in data management
platforms allow such large data sets, common
with P&C claims, to be searched for patterns,
trends and associations — especially relating to
human behavior. That’s good news for claims
organizations. For years, their only option
was to run reports and then manually pore
over them. Big data platforms enable them to
perform the same tasks on in-progress claims
quickly and efficiently. Analysis becomes more
strategic, technical and specialized.
• Text analytics: Advances in text analytics
maximize the utility of claims organizations’
voluminous stores of data. Analytics tools can
search through and extract words and phrases
from anywhere in a document, whether the
data is structured or unstructured.
Claims audits get a boost from text analytics
in two key areas. One is the review of adjuster
file notes to search for key words to identify
issues or to assess if meaningful progress is
being made on a file.
Text analytics also boosts the ability to
burrow through the unstructured data that’s
abundant in P&C claims. When digitized,
information submitted through medical bills,
records and ACORD forms converts from
unstructured to structured data. It becomes
searchable. In a workers’ compensation claim,
for example, text analytics can search medi-
cal records for treatments unrelated to the
workplace injury, such as comorbidity and
preexisting conditions.
• Customizable rules engines: The advent of
digital rules engines enables carriers to quickly
and easily audit any condition for which data
is available. For an auto claim, for example, an
insurer might audit for file inconsistencies,
such as the insured being deemed more than
50% at fault even though the other vehicle
was making a left turn. Equally significant
for claims organizations, rules engines work
separately from CA systems’ core application
code. Business users can modify rules without
disrupting the application code — and with-
out the need for IT skill sets. That efficiency
is a key advance for claims organizations.
Claims executives can write the rules that are
important to them, and make changes with-
out having to take a number and get in line
behind other pressing demands placed on IT.
New technologies enable carriers to perform
digital audits on in-progress claims with
the same rigor and discipline as closed-file
reviews – but before settlement.

6. Cognizant 20-20 Insights
Property & Casualty: Deterring Claims Leakage in the Digital Age | 6
LOOKING AHEAD: HOW
CARRIERS CAN START
PLUGGING LEAKS TODAY
The convergence of new technologies for real-
time digital audits will help P&C carriers achieve
the cost reductions they need to improve bot-
tom-line performance. It closes the gap between
strategy and action.
What can your organization do today to deter
claims leakage and prepare for the advent of dig-
ital audits?
• Examine the causes of leakage in your orga-
nization, and begin identifying the issues
you’ll want to audit for. Digital audit flexibil-
ity means your organization’s claims function
can prioritize any leakage areas it chooses.
(For some of the most common, see Figure
1 on page 3.) If there’s data for an attribute,
it can be audited. Looking for evidence of
adjuster engagement? By spotting key words
or string text within file notes and data fields,
text analytics can audit for well-thought-out
plans of action (POA) and continued progress
at 30-, 60- and 90-day intervals. Similarly,
multivariate data analytics can audit for
inconsistencies that indicate errors in analy-
sis, judgment or data entry. The unstructured
data that’s abundant in P&C claims becomes
searchable when digitized, so claims functions
can audit medical records for, say, treatments
unrelated to workplace injuries.
• Start preparing your managers. The rebal-
ancing of claims managers’ priorities is
overdue. It’s not uncommon for today’s manag-
ers to have 10 adjusters reporting to them, and,
depending on the line of business, responsibil-
ity for more than 1,000 claims. What’s more,
while industry best practices recommend man-
agers spend four to six hours daily reviewing
direct report files, studies show most devote
fewer than three hours.
3
Digital audits are set
to be a catalyst for positive change, providing
managers a more comprehensive, data-driven
approach for identifying problematic claims.
How will managers reboot their workdays?
• Keep coaching a priority. Managing claims
in the digital age won’t be just about tech-
nology. Promoting the right behaviors that
drive the desired results will remain carriers’
primary path to optimal claims outcomes. Dig-
ital technology will aid that effort, providing
greater visibility into adjuster strengths and
weaknesses and helping to create a continu-
ous cycle of assessment, measurement and
improvement that stands in stark contrast to
today’s reliance on closed file reviews.
• Consider small improvements along the
claims lifecycle to stem leakage losses.
Based on our client engagements, we esti-
mate carriers’ 5% to 10% leakage breaks
down as follows across the claims lifecycle,
although it can vary by carrier:
ĔĔ 2% – 4%: ALAE
ĔĔ 1% – 3%: ULAE
ĔĔ 3% – 4%: Indemnity
Given that leakage costs can total hundreds of
millions of dollars, even small improvements rep-
resent significant savings. Carriers can begin to
whittle away at leakage by promoting behavioral
changes among adjusters, such as more appropri-
ate, proactive selection of vendors. Quantifying a
business case for vendor engagement is the kind
of routine practice that’s often overlooked. Rein-
forcing such practices can help carriers begin to
trim leakage costs.

7. Cognizant 20-20 Insights
Property & Casualty: Deterring Claims Leakage in the Digital Age | 7
Digital audits are set to be the
catalyst for positive change,
providing managers a more
comprehensive, data-driven
approach for identifying
problematic claims. How will
managers reboot their workdays?

8. Cognizant 20-20 Insights
Property & Casualty: Deterring Claims Leakage in the Digital Age | 8
FOOTNOTES
1 www.propertycasualty360.com/2016/12/13/here-are-the-results-of-the-2016-claims-salary-sur
2 www.iii.org/presentation/p-c-insurance-industry-overview-and-outlook-082316
3 www.towerswatson.com/en-SE/Insights/Newsletters/Global/emphasis/2015/how-to-become-a-triple-threat-pc-claim-department
Mark Wassel
Claims Leader,
Cognizant’s Insurance
Practice
Mark Wassel is claims leader for Cognizant’s Insurance Practice,
responsible for the mobilization of digital claims solutions. Mark has
over 15 years’ management consulting experience, architecting and
leading business transformation initiatives for P&C claims. He can
be reached at Mark.Wassel@cognizant.com.
ABOUT THE AUTHOR

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