Who’s Got Money to Burn?
Complaints and market conduct exams prove powerful in managing claims compliance risk.
When it comes to regulatory compliance, it seems the same key issues continue to present challenges for insurers, and they surface during market conduct exams. Claims handling and processing are regular culprits, while many companies also experience fundamental processing challenges that cross or blur lines between claims, licensing, and underwriting departments.
Reviewing market conduct exams and any associated fines, fees, and penalties that other companies have incurred can be a great way for insurers to help identify their own compliance risk exposure and take active steps to improve claims handling processes.
Criticisms: A Constant Concern
Managing claims compliance risk has never been more critical for the insurance industry. Apart from insurers’ institutional mandate to process claims in accordance with policy provisions and regulatory requirements, there is the ever-present scrutiny of claims practices by market conduct examiners and enforcement staff in the state insurance departments.
Research conducted annually by Wolters Kluwer Financial Services breaks down the top-10 list of criticisms from U.S. insurance market conduct exams, which can serve as checklists for insurers in helping to minimize compliance risk exposure.
In 2012, for property and casualty insurers, claims compliance criticisms continued to be a dominant area of concern. Similarly, life and health insurers’ problems with claims processing were very much evident, taking the top spot away from noncompliant policy forms, which was reported in 2011 as the biggest compliance issue. Failure to pay claims properly in accordance with policy provisions was fifth on the 2012 list for life and health insurers, moving up a full four spots.
The top-10 list identifies areas of concern at both the regulatory and company level and indicate compliance risk areas that require additional scrutiny and evaluation. The most common market conduct compliance criticisms specifically related to claims include:
Failure to properly acknowledge, pay, investigate, or deny claims within specified time frames
Failure to process total loss claims properly
Failure to provide required compliant disclosures in claims processing
Failure to pay claims properly in accordance with policy provisions.
Improper or incomplete documentation of claim files
Failure to adhere to required claims appeal processes (this criticism applies only to health insurers)
Failure to adhere to adjuster licensing requirements also is a seemingly perennial issue for property and casualty insurers. Collectively, these detailed findings can help insurers understand where the greatest problems exist so they can prioritize audits of internal processes.
As regulators increase their focus on compliance with laws and regulations related to claims handling, the financial risks to companies also increase. Despite having resources that can be spread very thin, state insurance departments often are conducting more audits and also may be assessing steeper fines and fees, in some cases.
In addition, multistate audits are becoming more and more popular. As states join forces to do a consolidated review of companies, there is potential for more severe or compounded penalties reflecting the laws of each of the participating states.
Assessed market conduct fines from state insurance departments can range from a few thousand dollars to multimillion-dollar penalties, with the latter typically associated with recent multistate exams targeted at life insurers’ unclaimed property issues. Recent examples of penalties include a $1.5 million fine assessed against a property and casualty insurer in California for underwriting and rating noncompliance, as well as a New York life insurer fined $1.1 million for policy forms and replacement violations. Apart from these direct penalties, insurers also bear the examination costs—yet another aspect of compliance risk’s financial impact.
A Root Cause
While some of these issues are company-specific or situational for a particular claim, a fundamental root cause of some criticisms is a failure to manage regulatory change and implement new requirements into the workflow. Claims staff cannot comply with the law unless they know what the most current law is and can quickly incorporate the legal requirements correctly into their workflows.
Overarching challenges faced by claim departments in managing regulatory compliance/market conduct risk itself can include:
Difficulty in ensuring that the claims department has a complete and thorough process for receiving notice of all regulatory changes affecting claims. It is not unusual to have in excess of 12,000 new legislative bills and agency regulations proposed for the insurance industry in a given year, with a significant number of those impacting claims, often varying widely by state and line of business. Sometimes claims departments do legal research and get regulatory news in their own department. In other cases, a central compliance or legal team may handle regulatory change management for the whole company. In either scenario, claims compliance liaisons and day-to-day claims handlers need assurances that they are receiving notice of updated laws as soon as possible so that they can implement required changes and integrate the laws into their processes.
An unclear process for updating claims policies and procedures. Often, there is no specific person dedicated to updating policies—either someone is not dedicated or the person who is dedicated to it takes on that responsibility amid other duties that may get higher priority. Notice of new laws may come in, but they might not be incorporated into the workflow.
Staffing and workflow management inefficiencies. These can result from heavy handler workflow or claims volumes burdened further by older, outdated claims and accounting systems. As a result, there is frequent duplication of work processes and multiple steps to accomplish tasks.
Lack of or few solid controls over TPAs and claims vendors, with no consistent method or process for ensuring that agents acting on behalf of the company are in compliance. Indemnification and hold-harmless agreements are not enough to protect the company in the face of a market conduct criticism, which can have reputational, sales, and marketing impacts beyond just a pure statutory fine or fee for noncompliance.
Key Steps to Improvement
So what can insurers do to correct these problems? Better yet, how can they prevent them in the first place?
First, they should consider re-examining and cataloging into a master list all strategic, legal, compliance, and personnel risk from a high-level, enterprise risk management-type perspective and evaluate whether there are sufficient controls in place to mitigate each item. The National Association of Insurance Commissioners’ (NAIC) Market Regulation handbook is a helpful guide as to what risks or issues regulators focus on most when they are reviewing claims handling, and it comes complete with sample test audit questions. Regular review of the handbook can help companies ensure that they have all of the appropriate internal controls deemed important by regulators.
Companies also may choose to survey claims-related market conduct examinations published in key states to look for trends and document/survey where penalties have occurred most. Many DOIs publish market conduct findings, and there also are compilations on the NAIC level and available through third-party services. Examine market conduct compliance reports for competitors as well and get an appreciation for the true magnitude of potential penalties. Looking at the actual penalties imposed may help the insurer better prioritize issues or controls.
Reviewing state and NAIC data regarding consumer complaints also can help indicate where there are claims issues that could later give rise to a market conduct criticism.
Additionally, re-examining all claims-related policies and procedures at minimum annually can be a beneficial exercise. It may uncover policies that are duplicated, half-finished, or outdated. These might not be assigned to someone with specific responsibility for updating the policies, or that person may have left the company. Set automated diaries for regular updating, particularly on hot-button issues that examiners seem to focus on over and over.
Finally, consider auditing claims activities more frequently. Some companies set out to conduct peer or management audits, but often this well-intended plan falls by the wayside due to the heavy workloads of day-to-day claims handling and management. Get the internal audit department involved, if necessary. Outside auditors and consultants with claims experience also can be well worth the cost, especially in light of the significant noncompliance penalties currently being imposed by regulators. Be proactive.
Claims professionals clearly have significant challenges in managing the many compliance risks that confront them every day. Carriers need to ensure that complaints or market conduct exams are not the triggers that pinpoint potential and/or actual areas of noncompliance. Armed with information on the industry’s risks and issues faced and failed, insurers have a far better understanding of where the greatest problems can, and do, exist. Knowing those key areas of concern can assist insurers in establishing and prioritizing internal audits and any applicable external claims processes. With a regimen such as this, coupled with regular review and analysis of state market conduct exams, companies can more easily establish, confirm, or update their controls on claims compliance risks.