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The controversy on the impact of "smart" claims systems has recently been in the news since the Consumer Federation of America has alleged that computerized claim systems used by many carriers intentionally serve to minimize settlement valuations, in this case to injured motorists.

At the heart of the issue is the impact of intelligent claims systems on the way claims adjusters investigate and judge the value of settlement. This issue is applicable in all bodily injury claims, though the CFA centered on vehicular injuries, and specifically mentioned the Colossus claims system, which is sold by Computer Sciences Corporation, and used by a significant number of large insurance companies.

A plethora of factors are involved in each bodily injury claim. These factors defy the substitution of a computer system for a claims adjuster. There is simply no way that computer programmers can produce a claims system with myriad complex algorithms needed to process the thousands of potential combinations of issues that can be encountered when dealing with a human being who has sustained a physical injury.

What smart claims systems can do is aggregate information that is input by adjusters on each case, and assist in identifying potential trends. This allows the claim to be profiled into various types that have certain similar data. This should, in turn, allow for more consistency in the evaluation of bodily injury claim settlement values.

In the Colossus example, the system contains hundreds of injury codes that are given a severity value. The higher the severity value, the more the settlement amount that is recommended. Colossus also takes into consideration the legal representatives and their predilection to either try or settle claims, as well as the court venue.

Inherent in each of these systems is the ability to identify claim "outliers," with some type of warning generated to the adjuster and management. Of course, the data extraction is only as accurate as the original information that is entered. Corrupt computer data information seems to be the bane of the industry from time immemorial. The "garbage in, garbage out" scenario was never more accurate than when applying a smart claims system to a claims adjusting operation.

The purveyor of Colossus is the first to say that the system wasn't designed to remove the claims adjuster from the equation. Rather, the objective is to provide normal disposition "ranges" with consistency based on like injuries and damages. The goal is consistency of case valuation within specific data parameters.

Fair or Foul?

Consumer groups often aver that the use of smart claim systems like Colossus intentionally strive to decrease the settlement value of the claims. They stress computer systems cannot take into consideration intangibles such as pain, mental stress, inability to participate in social activities, loss of consortium, etc. As a result, the system settlement recommendation is many times undervalued.

The myriad insurance companies who use intelligent claims systems (for example, Allstate, CNA, USAA, Met Life Home & Auto) opine that the analysis of many seemingly divergent data points helps to ensure that claims exhibiting similar fact patterns are handled and valued roughly the same. Therefore there is nothing inherently amiss from a moral, ethical or legal standpoint in employing these systems.

Obviously these are two divergent views. The "consumers" (including, one would think, the trial lawyers) on one side of the issue, and the insurance companies on the other side. Is one side right, and the other wrong? Or does the truth exist somewhere in between?

The Truth Hurts

In assaying the impact of intelligent claims systems on the quotidian activities of claims adjusters, one must keep in mind that none of the purveyors of these systems is claiming that their software makes the claims adjuster superfluous. The opposite is what they actually stress. Smart claims systems are designed to assist adjusters in their job duties, rather than act as a substitute for the claims professional.

For example, I distinctly recall the MIRA (Micro Insurance Reserve Analysis) software system. That product was developed specifically for the workers' comp claims arena. The purpose was to analyze data on each claim, and promulgate a reserve recommendation. The selling point was that MIRA would demonstrate accuracy over the entire book of reserves. However it was admitted to be potentially inaccurate at the granular level of individual claims.

In the sales presentation of MIRA, it was stressed that the reserve recommendation emanating from the system was only that; a recommendation. The adjuster always possessed over-ride capability. Of course, the hazard was that the adjusters would blindly accept the MIRA recommendation without any independent human analysis because it relieved them of the chore of having to analyze the claim themselves and formulate reserves for indemnity, medical and allocated expenses.

Now let us postulate that an intelligent claims system can make a recommendation for a specific reserve establishment, settlement value, or accuracy of a billed amount by a medical provider. There is no requirement that the claims professional adjusting the case adhere to the automated recommendations. Even more important is that if the injured party, or that person's legal representative, thinks a settlement amount is insufficient compensation, nothing is forcing them to accept what is offered. They retain the ability to reject the offer and litigate the matter.

One of the data values in determining settlement value is the profiling of the injured person's attorney. If that person has a demonstrated trend of taking cases to trial, the system will assign a greater settlement value to the claim. If the attorney habitually settles claims short of trial, that will also be reflected. Despite this information analysis, any attorney has the capacity to reject what he/she believes is an insufficient settlement offer for their client, and either negotiate for more, or try the case. What they do has no connection to the use of a smart claims system. It has everything to do with properly valuing the settlement of their cases predicated on the "generals and specials" which include the nature of the injury, permanent residuals, loss of wage earning capacity, pain and suffering, etc.

The truth, as far as I can tell, is that smart claim systems have both positives and negatives to the insurance companies who use them, and the injured parties and their attorneys. They do not give one side an unfair advantage over the other. They produce recommendations that the adjusters can follow, or not. The major negative for the insurance companies is that adjusters may stop actually analyzing the claims, and allow the system to do all the heavy lifting. But be mindful that if the adjuster decides to use the system settlement valuation "as is," the injured person (or their attorney) is free to reject the offer.

On the "consumer" side, I believe it is disingenuous to criticize the insurance companies who use Colossus by stating that the adjusters simply pass on the automated settlement valuation, which is lower than it should be. I find it somewhat ironic that one of the arguments the "consumers" make against these systems is they are used to "dial down" claims payments from what should be fair valuations. That line of critique inherently possesses a defect at its base. It assumes that the "low valuation" amount is routinely accepted by the injured parties (and the attorneys representing them). Therefore, they would have to exhibit the same type of behavior they accuse the adjusters of demonstrating (blindly relying on an automated settlement value) in order for their polemic to make sense. Of course, if an injured person is unrepresented, they may accept less than a fair offer that has been system generated to settle a claim, but that situation exists with regard to accepting a "low ball" offer with or without smart claim system involvement (I do not ascribe to the theory that smart claim systems institutionalize this type of behavior).

The "consumers" (plaintiffs bar?) complaints regarding unjust settlement amounts, or unfair advantages, through the use of advanced claim systems by the insurance companies can be addressed by simple behavior modification on their part. To wit, not accepting any proposed settlement (system generated or not) they believe is not in the best interests of their clients. They have an obligation to properly analyze and value each case, and recommend to their clients to accept a settlement offer when they believe it is in the best interest to do so. Of course, it is less work and much more facile to settle a case prior to trial. But the decision to settle a claim is not in the hands of the insurance company once an offer is made. That remains the province of the injured party and his/her attorney. Their decision to accept or reject a settlement amount cannot logically be blamed on the alleged problems of a smart claims system being employed by the carrier.

Decision based software is here to stay. Technological advancements will not be held in abeyance because of criticism levied by those who think the use of such systems confers an unfair advantage. The addition of such enhancements as neural networks embedded in these "expert" systems will only make these options more attractive to insurance companies over the long run. That said, claims adjusting will never be able to be reduced to a computerized exercise. The claims adjuster will always be part and parcel to the bodily injury claim process, and should continue to have significant input on how cases are investigated, reserved, handled and valued for settlement.

July 5, 2012

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