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Richard F. Denning

Richard F. Denning is President of Shelter Island Risk Services, a leading RMIS consulting firm based in Shelter Island, New York. You may contact Rick at (631) 749-1535.

"The Role of Information Technology", 1993

"From being organized around the flow of things and the flow of money, [the economy] is being organized around the flow of information."

Peter Drucker

In the future, the luxury of learning from experience will be lost. Events are happening so fast that learning from analysis rather than experience is essential. For the insurance/risk management industry used to managing by reaction -- not pro-action, this change will not be easy. Yet one clear implication, this transition will accelerate our dependence on information technology in all aspects of our business.

Success or failure of loss management will increasingly depend on the quality of the information provided. Those firms that apply technology to their best advantage will emerge winners. This article addresses some of the new information-based services that are rapidly becoming essential in today's management of losses and exposures.

The insurance industry has a particular dependence on information technology. Insurance was one of the first industries to apply computers transaction processing -- to handle the vast number of claims, reserve estimates, payments, codes, etc. required. Examples of this data processing commitment began in the 1950's.

Not long into the information revolution, we recognized another need: to make sense out of this mass of data! Hence the origins of Management Information Systems (MIS) in the 1970's. The goal of MIS was to consolidate data into meaningful reports. Yet these reporting systems were often paper-intensive and provided a weak basis for decision--making. The reporting volume can overwhelm. Even today, many insurers and large third-party administrators print millions of pages of loss runs (claim listings) each month. Bury a nude photo (or 100 Pound note) in the middle of one of these reports and will rarely hear of it! Something better was required.

Pony Express or Telegraph?

The insurance industry today might be compared to the U.S. Pony Express service that in the 1860's provided a 'high-speed' private mail service. It required just ten days to move mail 2,000 miles between St. Joseph, Missouri, and Sacramento California. The feat required riding day and night and changing horses every seventy-five miles.(2) Yet for all the heroic effort and romantic bravado, the Pony Express was driven out of business after less than two years by a strand of copper wire: the telegraph.

The Pony Express people faced a grim future because they could not incorporate the new information technology. Improving on the horses or the riders would have had little impact on stemming the tide of electrical communication. Fortunately, the insurance industry can embrace technology and adapt it for its particular services.

However, we must face up to the 'telegraph' technologies of today. Our information services must make a commitment to:

Flexibility - generating exactly the information desired in the most compact way;
Exception reporting - so that only those conditions that need attention are extracted: ie, large claims, with questionable reserves, etc.; and,
Decision-support - usually loss or claims data alone do not provide a complete picture. Instead one has to have access to underwriting and exposure information -- even to demographics on the possible claimants.
On-line access to the data - The willingness to accept processing delays is rapidly disappearing. When an executive wants information, he wants it now.
Access to more than numeric and character data - as Figure 1 shows(3) , reliance on only numeric or character data ended in the 1960's. Today, risk management/insurance applications should (must) consider voice, images of documents, notes, photographs, video and graphics.
Participation in the loss adjusting process - insurers, loss adjusters, etc. are not the only parties with and involvement in the loss management process. Deductibles, self-insurance and various alternative financing plans have put more of the financial responsibility directly on the organization. Hence, the demand for participation.
In 1993, for the United States commercial lines market, Sedgwick estimates that 43% of such premiums are in alternative markets ($56.5 billion) (4). Not surprisingly, access to adjusters' notes and electronic mail has become a common requirement in corporate risk management specifications.
Empowerment - Most data processing focuses on the endusers, not the workers in the process. What is missing is that workers in the process want the information to allow them to do a better job.
Organizations routinely charge "insurance" costs directly to their field operations. Accordingly, these people want timely access to causes, trends, exposure-weighted performance to guide them to take action. Equally, the adjusters need to have information access to measure their performance. The revolution in claims adjusting will come when we give such line people the systems with which they can create their own success.

BUILDING A RISK MANAGEMENT INFORMATION SYSTEM

Automating What Should Be

New technology should not be limited to automation what is done today. The Pony Express was replaced by a paradigm change in the technology to move data represented by the telegraph. Real improvement comes from using technology to re-design the process. For example, there is a growing use of the computer to store documents and pictures that can be quickly retrieved on the computer screen. The loss adjuster has become the key user of this electronic file and it is eliminating traditional paper-based files.

One new technology for data entry is telephonic reporting of claims. Instead of relying on workers manually completing various forms, they can pick up a telephone and report a loss. A knowledgeable operator, supported with computer screens, obtains answers to detailed questions appropriate to the particular event. Speed, simplicity and accuracy justify this approach, particularly when dealing with high claim frequencies generated from diverse locations (for example, a chain of fast-food restaurants). The benefits in the short term are getting adjusting help to the sane quickly and in proportion to the potential loss. In the longer term, this approach provides the cause of loss data critical to eliminate future losses. by faxing (or electronically interfacing) with the adjuster, one has better, more complete data to start the adjusting process--and one eliminated normally redundant data entry.

The starting place for defining adequate data is to anticipate all the applications. Figure 2 is a overview of the data required. The fundamental problem is the most basic; defining that the problem is. One must identify why data is collected to insure that the effort is justified. Some key reasons for data collection are:

regulatory/administrative requirements
monitor the adjusting process
model the loss reserving/settlement process
eliminate future losses by analysis of current causes

There is good reason to ask 'why' when evaluating data collection plans.

Acquire the Resources

Software

For most, using existing software is a far better idea than developing a new system. Keep in mind that risk management/insurance software has been commercially available for almost twenty years. Even the largest organizations rarely can justify investing in a 'do-it-yourself' system. Indeed the software itself is only a small part of your total needs. Training, account service, data quality control, are equally necessary to complete service and need to be considered.

While you may find information services bundled with adjusting or brokerage services, recognize the negatives: this can produce a fragmented system and no system at all if you change service vendors. Bundled services make sense if they are delivered with flexibility, independence and on-going service commitment to address these concerns.

Some recommendations are:

Choose software that offers flexibility to do the broadest possible risk management/insurance applications. Training and maintaining user skills are expensive. Minimize these costs by using a common family of software with identical 'look and feel'. Equally fundamental is to integrate data into a single Risk Management Information System. There is major frustration when systems that do not talk to one another.
While you should take full advantage of the computer revolution in smaller processors, do not be naive. One can clearly cut processing costs by moving applications to appropriate PC, PC-LAN and Client/Server modes. But remember that most system costs are not in processing, but in labor, communications, etc. In any event, there remain applications that demand larger computer processor power. For example, in comparing one organization's loss experience with the collective data of its overall industry or when you must link data from many geographically dispersed operations. Flexibility includes having access to all the computer power you may ever need. Be sure your vendor has such an option.
User friendly software and powerful analytical capabilities are opposing features. As one commentator summarized: design software that any idiot can use, and only idiots will use it. The answer is another form of flexibility: allow advanced users to depart from the menu path to invoke complex commands on the analysis.

Identify All Users

The complexity of loss management is that a very wide range of users are involved. They range from the CFO of the organization who is concerned that a catastrophic loss is properly reserved to Operating Managers who are focused on the losses being charged to their plant, etc. And as Figure 3 shows, one cannot limit users to those internal to the organization. The reporting needs of a far larger group should be considered.

Measuring Performance

For the insurance field generally, there is a clear need to define standards for measuring loss performance across industries. These standards will allow companies to make informed decisions about investing in reducing their expenses for various property or casualty losses. A lower cost of risk than the industry average gives that company an economic cost advantage. With the cost of risk reaching five percent (5%) of total revenues in some industries, there is significant potential profit from good risk management.

Reporting/Analysis

Data without effective analysis is a wasted resource. To invest in improving data logically requires an equal commitment to putting such data to work. The challenge is not computer software. Our computer technology today can answer nearly any question. The effective limitation is the expertise to make logical decisions based on interpreting the computer's output. In short, we have not learned to ask the right questions. And, even with the right question, Risk Management/Insurance Departments often lack the time to pursue them. People, not computers, are key to effective analysis.

As insurance is essentially a financial concept, financial administration reporting is a basic output. There are, however, other major reporting categories summarized in Figure 3. As the industry moves to proactive approaches to risk management, these other outputs will grow in importance.

Decision Support

Analysis must lead to decision-making. Nothing changes without deliberate action. Here are some specific decision-support applications to address:

Performance Monitors. DR. Deming puts measurement at the center of management. When Risk Managers and their service providers have measurable goals, the information system is the logical place to 'keep score'. The speed in achieving claim settlements, accuracy of loss reserves and the number of claims per employee are three examples. Creativity will lead to many more.
Allocation of Cost. If an organization views losses and related costs as external, unmanageable expenses, then Risk Management's role is limited to insurance buying and bookkeeping. When they are viewed as manageable expense, then the information can be re-cast in understandable operating terms (cost per hour; rate per unit produced, etc.) There is then an opportunity for communicating continuos improvement.
Financial Risk. Large organizations should not purchase excess insurance before calculating what such protection should cost. These calculations, though intricate, can be performed when one has good data and competent risk analysts. While the conservative one, the decisions in both cases should be based on a comparison of the cost of retention versus the cost of transfer.
Benchmarking. If cost of risk is a manageable expense, then management should be comparing its performance with its peers. Such comparison are simple in theory, but quite complex in practice. Never-the-less, the effort is worth it. The RMIS is the best place to start building the consistent rules that will allow organizations to consistently compare their relative cost of risk.

CONCLUSION

Good risk management, like good detective work, is never limited to 'by the book' procedures. Creativity and analysis remain at the core of our profession. However, good data and the tools to manipulate them are the silent, but critical, partners of successful risk management and insurance professionals.

Footnotes: (1) B. Love, Enterprise Information Technologies - Designing the Competitive Company (Van Nostrand Reinhold, N.Y., 1993) p. 1.; (2) A. Penzios, Ideas and Information - Managing in a High-Tech World (W.W. Norton & Co., 1989) p. 23.; (3) Gartner Group, "Managing the Chaos of Change", Conference Presentation (1993) p. 7.; (4) Insurance Market Trends and Developments 1993, "Alternative Market" (Sedgwick, N.Y., 1993) p. 24.