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42 Cards in this Set

  • Front
  • Back

Claim function goals

Primary goals of the claim function. Complying with contractual promise - satisfy insurer's obligations to the insured (claims are expected by the insurer but experiencing a loss can be surprising for the insured). Providing fair, Prompt and equitable service.




Supporting insurer's financial goals - by managing claim expenses, setting spending policies and using appropriate providers. Overpaid claims can lower profits so the claims function should not overpay claims.

Claim information users

Marketing - needs information about customer satisfaction and timeliness of settlements. Claim handling process can be a source of new coverage ideas and innovations (lead to new business). Claim personnel often inform producers of court rulings affecting loss exposures or pricing (helps producers). Producers must have policyholder loss information to prepare renewal policies properly.

Claim information users pt.2

Underwriting - efficient claim handling enables underwriters to evaluate and select loss exposures, it also enables underwriters to appropriately price loss exposures based on consistent claims costs. Claim reps interactions with underwriters is not limited to providing loss information. When claim reps inspect accident scenes, they sometimes notice exposures not readily apparent in the insurance application (helps unserwriters).

Claim information users pt.3

Actuarial - need accurate information on losses that have been paid. Also need info on losses that have occurred and reserved for payment (reserve has been set aside b/c loss will be paid in the future).




Insured loss information helps actuaries: establish reserves for IBNR (incurred but not reported) losses and project development of open claims for which the reserves may change. Need info collected from claim personnel to update reserve information on insurer financial statements. If an actuarial dept fails to price the insurer's products correctly, losses could increase.

Claim information users pt.4

The claim department must interact effectively with outside contracts. Public (insurer's public image is determined largely by the claim department's behavior (PR)).




Lawyers (assisting insurer's lawyer by sharing claim details and information supporting the insurer's position). When insurer's need attorneys to defend themselves they will typically hire one from the same jurisdiction in which the claim is submitted.




State regulators (monitor insurers' claim handling activities, not all states currently license adjusters).

Claim department structure

A claim department can be organized in several different ways. Senior claim officer typically heads the claim dept.




Claim depts can also be found in large businesses that self-insure. Can also be found in thied-party administrators, who handle the claims of others.

Claim personnel

Claim reps include: Staff claim reps (employees of an insurer and they handle most claims). Independent adjusters (handle claims for an insurer for a fee, some are self employed but many work for adjusting firms, Insurers may use them when their staff claim reps are too busy).

Claim personnel pt.2

Claim reps also include: Third-party administrators (handle claims, keep records and perform statistical analysis, Often used by businesses that self-insure). Producers (insurers may give producers the authority to pay claims up to a certain amount such as $2,500).

Claim personnel pt.3

A public adjuster represents the insured in a claim in exchange for a fee. Hired by an insured (not a claim rep). Prepares the insured's claim and negotiates the settlement with the staff claim reps or independent adjuster. Not a type of claim reps.




Some states have statues governing services public adjuster can provide.

Claim performace measures

The loss ratio is one of the most commonly used measures of evaluating the insurer's financial well-being. Reflects percentage of premiums that are consumed by losses. An increasing loss ratio could indicate the insurer is improperly performing claim functions.




Formula: (incurred losses + LAE) / Earned premium.




LAEs are claim expenses. Higher the loss ratio, the worse for insurer.

Performance measures

Expense ratio uses underwriting expenses. Formula: Incurred underwriting expenses / written premium. Want this ratio to be low.




Combined ratio = Loss ratio + Expense ratio. Represents underwriting profitability. When loss ratio and combined ratio increases the claim dept (and other functions) is pressured to reduce expenses. Want less than 100.

Quality measure

Claim dept quality measures include best practices, claim audits and customer satisfaction. Claim dept best practices are often based on legal requirements specified by regulators, legislators and courts. Insurers use claim audits to ensure compliance with best practices and to gather statistical information on claims. Claim audits evaluate both quantitative and qualitative factors.




Qualitative accurate evaluation of the insured's liability.




Quantitative factors include Timeliness of reports, percentage of claims entering litigation and average claim settlement value by claim type.

Compliance measures

Insurers institute compliance measures to help: Ensure regulatory requirements are met with respect to claim handling. Enforce good-faith claim handling. Encourage claim personnel to provide complete and accurate information. Make the operation run efficiently and with sound expense management.




Insurer's typically spend slightly more on operations (claims and other expenses) than they collect in premiums. Managing investments wisely enables insurers to earn a profit despite a loss on operations.

Guidelines, policies and procedures (compliance measure)

Claim guidelines are instructions specifying how certain claim handling tasks should be performed. Set policies/procedures for claim handling. Includes steps for performing certain tasks. Can be used to train new personnel. Useful as reference for infrequent tasks. Also useful for defending a bad faith lawsuit.

Guidelines, policies and procedures (compliance measure) pt.2

Managers often use diaries (also called suspense) as reminders to review claim files and perform other activities. May be as simple as a note on a calendar. Claim information system may set automatic diary entry when a claim is reported.




An activity log is a record of all the activities and analysis that occur while handling a claim. Claim reps should carefully document every activity. Also can be very useful on claim audits.

Controls (compliance measure)

Electronic controls include: Claim reports (reviewed by supervisors to ensure claims were entered correctly, Include information such as claims in litigation, claims with reserves above a specified amount and unpaid closed claims). Access security (security setting that controls computer user's access to claim info system, includes password protection and limited access to certain information).

Controls (compliance measure) pt.2

Electronic controls include: Authority levels (refer to the reserve amount and payment amounts that claim personnel are allowed to set and make, experienced personnel may be able to set higher payment amounts). Claim information tracking system (captures details of claim changes that were made, prevents fraud and identifies training needs).

Supervisor and manager reviews (compliance measure)

During a claim review, supervisors and managers detect errors. Claim codes and payments are checked. Claim representative's reports are reviewed. Other documents are reviewed such as police reports and medical reports.




Claim reviews are essential to help claim personnel learn how to improve hob performance.

Claim audits (compliance measure)

A claim audit (after claim is closed) is a review of a claim file to: Examine technical details of settlement. Ensure procedures are followed. Verify appropriate documentation.




Claim audits can be internal or external. Internal ( claim audits are generally conducted by insurer's staff). External (conducted by outside parties, such as state insurance regulator, insurance commissioner). Insurance advisory organizations rarely conduct claim audits to study an insurer's reserve practices.




Claim audits can be used by actuaries to determine the accuracy of initial reserves.

Claim handling process

Steps in the claim handling process: Acknowledging and assigning the claim, Identify the policy and setting reserves, Contacting the insured or the insured's representatives, Investigating the claim, Documenting the claim, Determining the cause of loss, liability and the loss amount, Concluding the claim.

Acknowledge and assign the claim

The first activity in the claim handling process is acknowledge receipt of the claim. Some insurers acknowledge claims immediately upon receiving the loss notice by contacting the insured. Others acknowledge the claim after it has been assigned to a claim rep. For some types of losses, the claim rep may give the insured instructions to prevent further loss. An important aspect of acknowledging a claimant's liability claim, upon first contact, is to try to obtain information on the nature and extent of the claimant's injury.




State licensing requirements must be considered when assigning a claim. Some states require an adjusters license.

Identifying policy

Usually the claim rep first identifies the policy upon receiving the assignment. Must thoroughly read policy to determine the coverage that applies.




It may be apparent from the loss notice that coverage mus not be available for the loss. Claim rep must notify the insured of this concern through a nonwaiver agreement or a reservation of rights letter. Reserves insurer's rights under the policy (even though insurer may defend the insured under liability, ultimately the policy may not cover the insured's loss, the nonwaiver agreement is the insurance company telling the insured that the insurer is not waiving their rights, has to be signed by both parties, if it's not signed by insured, the insurer will send reservation of rights letter that doesn't need to be signed by insured).

Setting reserves

Methods of setting reserves: Individual case method (based on claim's circumstances and claim rep's experiencing in handling similar claims, case by case basis). Roundtable method (consensus of two or more personnel who have evaluated file, may prevent stairstepping ( when typically inexperienced claim rep will continually increase the reserve to pay the claim)). Average value method (predetermined dollar amount of reserve for each claim, usually based on data from past claims).

Setting reserves pt.2

Methods of setting reserves: Formula method (uses formula based on a ratio between ceratin costs, base reserve on a percentage of another reserve). Expert system method (software application that estimates losses and expenses, may prevent stairstepping). Loss ratio method (used to suggest standard reserves for similar types of claims or for a class of loss exposures, used when other methods are inadequate).

Contacting the insured

Initial contact with the insured reassures the insured that the claim will be investigated. If loss involves a third-party claimant, claim rep also contacts the claimant. Claim rep must be prepared to explain the policy terms and their meanings. In a first party property claim, the claimant is the insured.




Claim rep should tell the insured what is required to protect damaged property and document the claim.

Investigating the claim

Investigation can take many different forms, and all aspects of it must be documented. Claim reps begin investigating a claim as soon as its been assigned. Claimant investigation (taking claimant's statements). Insured/witness investigation. Accident scene investigation (useful in worker's comp claims). Property damage investigation. Medical investigation (conducted in all bodily injury claims). Prior claim investigation.

Investigating the claim pt.2

The insurer may have a right of subrogation. Right to recover payment made from a negligent third party.




Subrogation rights are established by the insurance policy and by law. Subrogation clause in most policies require insured to cooperate with insurer by assigning rights of subrogation to the insurer.

Documenting the claim

Documentation of the claim is ongoing throughout the life of the claim. The preliminary report may be the only thing in the file when claim is small, uncomplicated and settles quickly.Diary system (Calendar system allowing claim rep to work on a claim one day and then calendar if for review in future). File reports (Internal and external reports to various partied developed by claim reps to document claim activity). Status reports (tell the insurer how the claim is progressing on a periodic basis typically every 15-30 days).

Documenting the claim pt.2

Lawyers and state regulators can obtain copies of claim files, so file status notes must reflect: Clear, concise and accurate information. Timely claim handling. A fair and balanced investigation considering the insured's and the insurer's interests (unbiased). Objective comments about the insurer, insured or other parties. A thorough good-faith investigation.

Determining the cause of loss

The facts of the case determine the cause of loss and the liability for the loss. Property claim (claim rep investigfates the amount of damage to the property and the cost to repiar or replace it). Bodily injury claim (claim rep investigates the extenct of the injury and the amount of pain and suffering).

Concluding the claim

Claim representative must decide whether to pay the claim or deny it. Some indurers requre a claim manger's approval to issue a claim denial.




If the insurer and insured cannot agree on the claim value or coverage, they may resolve dispute in court. Alternative dispute resolution refers to methods for settling disputes outside the traditional court system.

Concluding the claim pt.2

Alternative disputes resolution methods: Mediation (neutral outside mediator examines the issues and helps participants reach mutually-agreeable settlement (not a decision like with arbitration), mediator doesn't dictate settlement nut helps parties come to a agreement on their own). Arbitration (parties use a neutral outside party to examine the issues and develop a settlement). Appraisals (appraisal provision is included in property policies as a form or ADR (alternative dispute resolution) cannot be used to settle coverage disputes, it can only be used to determine the amount of damages).

Concluding the claim pt.3

Alternative dispute resolution methods: Mini-trials (enables parties to test the validity of their positions and continue negotiations, may feature witnesses and experts (not a jury)) an advisory opinion may be issued by neutral third party however the opinion is not enforceable instead it can be helpful in influencing negotiation between the parties in the dispute. Summary jury trials (staged much like a regular jury trial, except that only a few witnesses are used to present the case and lawyers present summarized information).

Framework of coverage analysis

Coverage analysis is the process of examining a policy by reviewing all its component parts. Even experienced claim reps must read the policy carefully.




Framework (series of questions to ask) guides claim rep to the parts of the policy that may provide or exclude coverage. Ensures that all component parts are reviewed and decreases errors. Involved answering a series of questions.

Framework of coverage analysis pt.2

Systematic framework questions: Is person covered? Was loss during policy period? Is cause of loss covered? Is property covered? Is type of loss covered? Are the loss amounts covered? Is location of loss covered? Do exclusions apply? Does other insurance apply?




This order doesn't need to be followed but in general it is.

Is person covered?

Some policies only covered insured named or liseted on the policy. Policies typically define "insured" broadly.




Most policies limit recovery to the amount of a person's insurable interest. Anyone financially harmed by the destruction of property has an insurable interest. Insurable interest alone does not guarantee coverage, as person may not be an insured.

Was loss during policy period?

Many policies only cover losses occurring during the policy period. Policy period typically begins and ends at one minute after midnight.




Exception (loss of use section of HO policy). If fire occurs during policy period, insured can claim expenses for living elsewhere, even if policy expires next day.

Is cause of loss covered?

Covered causes of loss vary by policy. Specified causes of loss coverage (named perils) (covers loss only if the result of a named peril (if peril is not listed in policy, it's not covered)). Special (open perils) form coverage (covers all losses that are not specified excluded).




Causes of loss usually not defined in the policy. Subject to court interpretation that varies by state.

Is property covered?

A claim rep must determine if damaged property is covered. Auto policy (covered property includes named vehicle, newly acquired vehicle, owned trailer and certain other vehicles). Homeowners policy (covered property includes the dwelling and attached structures, as well as materials located next to residence).

Is type of loss covered?

Many property policies only cover direct losses. Direct loss (direct damage to property, dented fender on automobile). Indirect loss (loss of use or loss of future income).




Homeowners policies cover direct losses and some indirect losses.

Are the loss amounts covered?

Property claims (loss is typically based on cost to repair or replace damaged property, indirect losses may also be payable but many only cover direct losses). Liability claims (two types of damages: compensatory (reimburse for actual harm, typically the term "damages" refers only to compensatory damages) special damages (out-of-pocket costs) general damages (pain and suffering, represent an award for losses that do not involve specific measurable expenses like loss of limb, sight or hearing)). Punitive (punish a wrongdoer, not covered on some policies).




Liability policies may include coverage for defense costs and bail bonds.

Is location of loss covered? Exclusions?

The location of the loss must be within the policy's territorial limits. For property policies, the location must be shown on the policy as a covered location. Property policies cover buildings only at the location listed in the declarations however, personal property can be covered at other locations.




Some polices list exclusions. Exclusions apply even if other coverage requirements are met.