Claims are often called the “moment of truth” in insurance. It’s where the customer most often uses the product and that is generally in the form of indemnification. For insurers, indemnification means paying claims, and how economically insurers pay claims whilst still ensuring a good outcome for the customer is a determining factor in profitability.
One way to understand how well you are paying claims is to benchmark your book or portfolio. However, no two books are the same. This means that, to be certain you are drawing the right conclusions and understand the insight you gain from benchmarking, you need a confident understanding of the moving parts. If you are not clear on the differences and similarities at the input stage, it is likely you will be unclear on the outputs.
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1. The importance of claims benchmarking
It’s well known nowadays that data holds the key to optimisation and, therefore, the ability to effectively leverage data for insights is vital. Specifically for insurance, benchmarking allows businesses to assess their claims performance against market competitors and gain understanding into current market trends. Through the understanding of a company’s own position compared to the market, they can begin to identify the issues or opportunities that can lead to improvement and growth.
When benchmarking, the common focus is on key cost metrics – the most crucial data points that directly indicate how much claims are costing. Their significance comes from providing the ability to rapidly gain insight into performance, meaning they can be used to give an indication if further investigation is required into cost drivers. One driver that is often overlooked is the book of business. If ignored, it can potentially mask issues or indicate false opportunities when isolating key cost metrics in benchmarking.
2. What is a ‘book of business’ and why is it important?
A book of business refers to the customer base of a business; specifically, when looking at insurance claims it is the profile of the claims. It’s crucial that a company understands their book of business as this will allow them to better strategise, manage risks and identify growth opportunities, due to being able to focus on the product lines with optimal impact. More efficient initiatives will drive greater returns while reducing risk. Also, some opportunities are exclusive to certain characteristics, so understanding the profile of your claims may allow those opportunities to be unlocked.
It’s also important within benchmarking and performance evaluation as a company’s book of business will impact key metrics, therefore, if not accounted for they will influence insights derived from data and produce inaccurate decisions and prevent you from correctly capitalising on opportunities.
3. Understanding your book of business
The first step in understanding a book of business is knowing which factors of a claim influence the cost. Companies should use their industry knowledge along with an analysis of their data to identify different characteristics and their impact. The next step is to investigate the specific characteristics that are most common among your own claims, providing a view of the business’ claims profile.
As an example, we can look at motor repair claims. In most instances, an older vehicle will be cheaper to repair than a newer vehicle. Reasons for this include the lower presence of expensive technology which increases repair cost and time, the ability to replace parts with generic (non-OE) equivalents, and the higher availability of green parts options. Therefore, if a motor insurer has a book of business largely consisting of newer vehicles, they would likely see higher repair costs than insurers with older vehicles. However, there are other factors which can also elicit the same result; for example, if the insurer runs a manufacturer scheme it is likely that all vehicle repairs in this book, regardless of age, will be mandated to use new original parts, meaning potentially two of our three lower cost reasons have been excluded and potentially the repair costs will be higher than a similar aged book without this constraint. Understanding this, the insurer can begin to tailor their approach to analysis to account for this information.
4. Employing an understanding of your book of business
Without any additional methods or processes, the basic knowledge and understanding around your book of business will instantly begin to create a clearer picture of what is influencing data points, therefore aiding insight.
However, to gain the most accurate performance indication, optimal use of benchmarking is required. To do this, you will need to use the performance metrics along with the impactful characteristics for each claim. One of the first, and most common hurdles encountered is in the availability of data. We’ve often seen, important and impactful characteristics not being tracked in claims data. This means that insurers are essentially missing pieces of the puzzle with their performance benchmarking. For example, within motor repair, insurers often don’t capture damage severity as a measurable metric (e.g. high, medium, low) which reduces the accuracy of insights due to its potential significance to repair costs. Higher damage severity will mean more time taken to repair damaged parts or parts may even be unrepairable, meaning replacement is required, which can often be more expensive than repair. Higher severity also generally means more affected parts and often more mechanical checking (e.g. axel geometry) which all adds to cost. For this reason, we recommend that, once impactful characteristics are identified, you ensure that they are all captured for every future claim.
A common method for benchmarking includes analysing key performance metrics while also separately analysing metrics relating to the book of business. This is useful because, as previously stated, it will begin creating a clearer view behind the performance metrics, giving more context to the analysis, however, this method is limited as it fails to quantify the level of contribution from the book of business.
One of the simplest methods to account for differences in books of business (and therefore increase accuracy for insights) is to utilise weighted averages. By taking a weighted average using claim costs from a different insurer weighted against claim volumes in different categories of your own book of business you can get a view of how they would perform having your book. While still not perfect, this will provide a much more accurate benchmark in terms of how well you are performing and whether there are opportunities or issues that need to be addressed.
5. Key takeaways and Procurato’s view
In summary, data-driven optimisation through benchmarking is crucial for assessing market competitiveness. In this article we have highlighted the often-under-appreciated impact of the peculiarities and detailed data points within a company's book of business on benchmarking accuracy, emphasising the need to understand how specific claim characteristics influence costs. This is because they can produce inaccurate insights, therefore preventing opportunities from being utilised correctly. We advocate for tracking these factors and suggest using weighted averages to adjust for variations in books of business, enhancing benchmarking precision. By integrating these insights, businesses can make informed decisions, capitalise on opportunities, and drive sustained growth.
One of the strengths of being a consultant at Procurato comes from the volume of different portfolios we see and how much raw data we are exposed to. This offers heightened insight into data points and key metrics, and the ability to spot both trends and gaps more quickly. Additionally, due to seeing many different books in a year, we can more quickly draw comparisons and spot points of difference. There are also benefits of having your analysis conducted by independent experts: we can avoid the natural bias of familiarity, where analysts may overlook elements due to being aware of their existence. Also, we are more likely to ask the awkward or difficult questions that probe at the underlying issues, with these difficult points often being drivers of performance issues and improvement opportunities.