ILC ARTICLE

In or out: the claims department debate

11th October 2022

It seems there are two types of people in the world – those who think an insurer should outsource its claims department and those who don’t.

This recurring debate within the industry was the topic of a compelling back-and-forth session at the inaugural MGA Claims Conference, organised by ILC in association with Managing General Agents Association, at 155 Bishopsgate, London.

Arguing the case for outsourcing was Simon Gallimore, CEO of the EDAM Group, while Peter Edgar, Head of Motor Claims Operations at RSA, offered a staunch defence for insourcing.

Ultimately there is no right or wrong answer, with claims volumes, staffing levels, and business models all influencing a company’s approach. But here we consider some of the key factors that can impact the decision, and examine them from both sides:

Costs

Essentially, cost underpins every step a business makes, and it’s certainly true that for an insurer to manage their own claims department requires significant commitment. The question is, at point does it begin to offer a return on investment?

Simon said, “To manage your own claims from day one is really difficult. It’s very expensive and you have to staff to meet client demand – but you don’t control client demand. And how many claims do you need to have make it sensible to have your own inhouse claims department? We asked ourselves this question before this debate and our answers ranged between 20,000 and 40,000 a year to make it cost effective. So outsourcing is a good option from day one at least, and then you can work with your partner to model it from there.”

Peter agreed with this, but only up to a point.

He admitted that creating a claims department can be challenging as resources need to be in place immediately to support future volumes, and said that on occasion – during surge events, sudden business growth or periods of high staff attrition – then going to the outsource market could be beneficial.

“You don’t want to lose control of the claim and get into a backlog situation,” he admitted. “That will ruin the customer journey.”

However, he believed the long-term gains offset whatever short-term hardships there may be.

He said, “Claims departments provide great careers and talented people who will support business growth and development. They will also protect your business going forward, because management controls and regulations go up year on year and you can’t outsource that responsibility. Also, when it comes to indemnity, who would you trust to spend your money more than yourself?”

Data

Another key advantage, Peter argued, of keeping claims in-house is the insights it provides that can steer risk management, claims pricing and claims control.

He said, “You will learn an awful lot about your product from the claims you receive, you will also learn a lot about the claims journey and how it works for your customer. When you outsource your claims department you don’t have the same visibility of what happens.

“At RSA, the actuarial team is very keen to understand why patterns change and the fluctuations around motor especially are very hard to spot. If you manage the claim yourself you will have better data for them, and can build better relationships – that helps your pricing, your productivity, and your efficiency.”

However, Simon suggested that Peter was arguing only from the perspective of a large insurer, and pointed out that many smaller insurers might actually benefit from taking insights from a third party who aggregates data from multiple customers.

Service

Another area of contention was customer service. Research has proven that the customer’s experience during the claims journey is the number one reason why they seek alternative carriers, so getting this area right is increasingly a point of difference within the sector.

Peter said, “Claims aren’t easy, it’s a complex process, but how we manage claims for the customer is the most important thing we as insurers will do. It is our product and it is the time when our customers need us most, so why wouldn’t we want to manage that journey?

“Yes, you should always look outside and determine if you’re doing the job as well as the market, but often if you work with a third party then what you get on day 1,000 is the same as what you get on day one, and you need to continue to evolve.”

Simon was not convinced. He said, “Insurers think they offer the best service, but as someone who works in the supply chain and offers those outsource services, I’ve never been more motivated to offer excellent service because my next contract relies on it.

“Claims are complicated and its difficult for an insurer to have all the expertise from day one. By outsourcing, they can plug and play straight away.

“It’s also fair to say that claims departments need to fight for investment, while third parties are agile and motivated to be the innovators in the market.”

Scale

This seemingly plays into the hands of a large insurer, who has the weight of numbers behind it to drive better deals within the supply chain. Furthermore, insurers who manage their own claims department are directly responsible for skills and staffing levels, enabling them to scale up with the business.

However, Peter believes that an insurer’s size is both an asset and a hinderance, especially in the current environment.

He said, “I agree that scale is everything in this sector and you can drive the best deals – insurers have driven down prices in the supply chain for years and years. But as we’re seeing now, when things get tough a third party has the agility to be more flexible on pricing than a big insurer, while still offering accesses to established supply chains.”

Best of both

Of course, both insourcing and outsourcing brings advantages and disadvantages, and perhaps the solution is more complex than a simple either/or.

Peter spoke of a hybrid approach, with third parties stepping in to handle claims in extreme circumstances or within niche markets. Another possibility also exists that could enable the best of both worlds – insurers outsourcing claims but using their clout in the supply chain to negotiate better prices for third party partners.

It’s not something that happens yet, but watch this space.

The ILC MGA Claims Conference was supported by gold sponsors Claims Consortium Group, Clearspeed, Davies Group, DWF360 and EDAM Group, along with silver sponsors Robertson & Co, Vitesse PSP and Wiser Academy.