Regulators prepare to examine insurers' auto claims-handling software.
The use of software to process auto claims is coming under broader and closer scrutiny from insurance regulators. And thanks to a $10 million settlement with Allstate, insurance regulatory staffs will be better trained to see that insurers use claims-settling software appropriately.
The Allstate settlement is the result of the National Association of Insurance Commissioners' (NAIC) first multi-state market conduct examination of a national personal lines insurer due to its software use for claims handling. As one of the nation's top private passenger auto insurers, the Chicago-based, Fortune 100 carrier operates in 38 states, has $133 billion in total assets and is rated A+ by the A.M. Best Company.
Allstate has until April 4, 2011, to adopt specific claims practices and procedures outlined in the settlement, according to the New York Insurance Department, which led the NAIC study along with the Florida, Illinois and Iowa insurance departments. Additionally, Allstate must demonstrate the appropriate use of its auto claims software, Colossus.
As a result of the investigation, regulators concluded that the insurance industry's use of claims-handling software can provide "significant benefits to the public in increased objectivity and efficiency" but that such use can also "present special regulatory monitoring issues." Hence, the $10 million fund to help regulators spot insurers inappropriately applying software to settle claims.
"The hope is that there will be heightened scrutiny of programs to make sure claims are handled properly and consumer interests are protected," said Steven Nachman, deputy superintendent for frauds and consumer services for New York state's Insurance Department. The department has already begun preliminary examinations of other auto insurance companies that operate there, Nachman said. New York has about 250 such carriers.
"We now have sufficient expertise and knowledge that we can [examine]," he said. "We do want to use the [Allstate] settlement as a template for further investigation of property casualty insurers' use of these programs and potentially secure agreements along the same lines," he added.
Other regulators are following suit. "Insurers should be aware that we are watching for these types of issues," said Steve Parton, general counsel for the Florida Office of Insurance Regulation.
Allstate Under the Microscope
In 2009, regulators began looking at Allstate's use of Colossus to determine settlements for private auto passenger liability claims. Developed by Computer Sciences Corp. (CSC), Colossus is a rules-based program with about 600 injury profiles that help adjusters determine damages for bodily injury claims.
"Colossus is a bodily injury evaluation tool that can help increase consistency and reduce subjectivity in the claims evaluation process," said Ed Charlton, a vice president in CSC's Property & Casualty Insurance Division. The software is used by nearly 25% of the top 100 insurers in the United States.
Adjusters enter detailed medical information into Colossus, which identifies inconsistencies regarding injuries, treatment, results and prognosis. Using a methodology that assigns trauma severity points to injuries, the program calculates a monetary value range for damages based on dollar values assigned by the insurer for each severity point. The software does not assess or revise special damages, liability issues or offsets.
The Consumer Federation of America has come out with its own complaint that Colossus and similar software fail to estimate damages such as past or future bills related to the insured event or losses of or reductions in wages resulting from the injury.
Colossus is occasionally "tuned" or updated by insurers so the monetary value connected to trauma severity reflects recent settlement data for similar claims. Regulators found Allstate did not properly tune Colossus consistently among regions, Nachman said. Other insurers may be having the same problems.
Besides paying $10 million for insurance department training, Allstate must meet several requirements regarding its tuning process, audits, claims manuals, how adjusters are to properly use Colossus, and the role of regional managers in tuning Colossus.
Allstate was given 180 days to comply with the settlement's requirements. For the next five years, the insurer will be examined annually by the lead regulators to assure compliance. The settlement is in effect until Dec. 31, 2015.
"[The examination] did not find convincing evidence that the insurer was using Colossus to systematically lowball claims," said Robert Hartwig, president of the Insurance Information Institute. Nachman of New York said the settlement does, however, necessitate better management oversight of how Allstate uses the software. The settlement clarifies that Allstate does not admit, deny or concede fault, wrongdoing or liability relating to the facts or allegations in its practices, "but considers it desirable that the matter be resolved."
Allstate declined invitations to interview with Claims Advisor on how it is implementing the settlement requirements, but an October 2010 news release from the insurer stated it "cooperated fully with the examination" and was "pleased" that regulators found no "institutional issues" of claims underpayment.
Under the Microscope
Regulators decided to investigate Allstate due to what Nachman said was a "cottage industry" of lawsuits and accusations by claimants and trial attorneys that Colossus was ultimately being misused by Allstate to deny claims or lower claims settlement amounts.
"The issue was instigated by a small group of consumer advocates," Hartwig said.
Parton said the Florida Office of Insurance Regulation was concerned Allstate might be "manipulating Colossus" in an attempt to avoid paying claims. The thought was, if the company were doing it in Florida, it could be doing it in other states, he said.
"Obviously, any time there is a suggestion that an insurer may be manipulating claims, we are concerned," Parton said.
"Allstate had historically been reluctant to discuss Colossus and reveal details of its claims process changes in the 1990s, which they did with McKinsey & Co.," Nachman said. "They had incurred fines for refusal to turn over records." In 2008, Allstate began to reverse course and posted 150,000 records online to show they had nothing to hide, he added.
The regulators' examination comprehensively reviewed Allstate's bodily injury claims practices from the mid-1990s to the present. Allstate turned over electronic data and claims information for nearly 2 million separate bodily injury claims. Examiners reviewed more than 1 million pages of documents—including claims manuals, training materials, complaint data, claims related to market conduct exams and company records.
"Insurers have every right to attempt to bring consistency and uniformity to their claims management processes and oversight," Nachman said. But Allstate needed a process for better internal control. Regulators wanted to make sure Colossus was a guide and not a "controlling factor" in claims settlements.
Another concern was that claims denials and settlement amounts were inconsistent on a regional basis. Allstate's regional managers, Nachman said, had too much discretion to "tune" and "re-tune" the software to reflect recently resolved claims. As a result, some entered unnecessary data while important data, such as jury verdicts, were omitted.
These kinds of errors and inconsistencies could be widespread, regulators fear. Adding to the oversight problem has been the complexity of the software system. The money set aside from the Allstate settlement should help regulators get and stay up to speed on some of the more prevalent systems and undertake a broader and more detailed review of auto insurers nationwide.
"Regulators would be remiss if they did not pay attention to that (piece) of the process," the I.I.I.'s Hartwig said. "They have to keep up with the way insurance is being done."
Annmarie Geddes Lipold is a contributing writer to Claims Advisor.
Key Allstate Settlement Requirements
The Allstate settlement agreement provides guidelines for using software programs, such as Colossus, for claims adjusting. According to the agreement, "proper and appropriate practices" include:
- Notifying claimants that Colossus might be used to adjust bodily injury claims.
- Consolidating claims practices in a single "casualty claims practice manual" and ensuring it is available electronically to all claims personnel.
- Establishing a policy to not require claims personnel to settle claims based solely on Colossus recommendations.
- Establishing a policy to disallow incentives that would encourage claims personnel to settle claims above or below Colossus values.
- Documenting reasons for not adopting a Colossus update.
- Having adjusters who use Colossus rely on an Allstate-prescribed evaluation range for negotiating bodily injury claims.
- Establishing a separate tuning process that shows the relationship between impairment ratings and regular trauma.
- Sampling claims to confirm they were properly evaluated.
- Tuning analysis with specific sampling and management oversight practices every 12 to 18 months to ensure Colossus recommendations reflect current regional values. The goal is to meet a payment rate as close to 1.00 as possible with no more than 50% of closed claims above the Colossus recommendation.
For instance, Allstate's claims-tuning audit must include all closed claims processed with Colossus except claims:
- That show a "zero" loss payment
- In which the loss payment is less than or equal to special damages
- That show presence of comparative negligence
- That contain a contribution
- In which the disfigurement amount is greater than or equal to $5,000 or disfigurement is 50% or more of Colossus's general damages recommendation
- In which the loss payment amount equals or exceeds the policy limit.
The settlement also requires Computer Sciences Corporation, which developed Colossus, to make adjustments to the tuning curve, if necessary. These tuning recommendations should be as close to a payment rate of 1.0 as possible with no more than 50% of loss payments above the retuned Colossus recommendations. A scatter graph and tiered analysis of closed claim data must be provided.
Potential Response from Consumers
The Consumer Federation of America is recommending that insurance consumers follow some guidelines to protect themselves from unjustifiably low claims offers. Here are some of their recommendations:
- Determine if the offer is generated by a computerized software program, such as Colossus or similar systems.
- Ask to see the high and low offers the methodology generated before the adjuster made your offer of settlement.
- Don't accept any offer that falls below the high end of the range.
- If the insurer refuses to provide compensation from that high end, look to the state insurance commission or consider the services of an attorney.
Source: Consumer Federation of America, www.consumerfed.org/pdfs/Claims_Consumer_Alert_12-8.pdf