Steps to start a claims transformation journey

Since the COVID-19 pandemic, the costs of claims have risen dramatically. Many factors, including the global pandemic, climate change, inflation, and rising prices for repairs or replacement items, are driving up costs. While there is enormous pressure to reduce insurance claims costs, insurers face a difficult challenge: get out of the industry now or find ways to reduce claims handling costs.

According to congressional testimony from the American Property Insurance Association, last year, “insurers absorbed their worst underwriting losses in over a decade, contributing to a more than $73 billion contraction in insurer capital. In the first half of 2023, insurers spent 104.3 cents in claims and expenses for 100 cents of premium collected — and that’s before the Maui wildfire and Hurricane Idalia catastrophes this fall.” Similarly, the average family health insurance premium has increased 22 percent since 2018 and 47 percent since 2013, according to KFF.

The good news is that there are many technologies that help insurers reduce claims costs. The current focus is AI and cloud computing, offering tangible options that can have a dramatic impact. For insurers, harnessing the power of AI and cloud computing and combining it with rich data sets and low-code/no-code platforms provides a roadmap to reduce the cost and time required to resolve claims. The hidden bonus is that these technologies reduce costs and significantly improve the customer experience, bringing relief and optimism to the industry.

Leveraging these technologies to develop and implement a comprehensive multichannel strategy with agile, incremental capability delivery—what we call the “perform while transforming” journey—is critical.

Be aware of cost overruns

However, embarking on a claims transformation and cloud adoption can often lead to cost and schedule overruns. Migrating from legacy platforms to newer solutions is fraught with challenges, including dealing with complex business processes, manual, time-consuming tasks, and challenging integration issues. Additionally, shutting down legacy systems, saving valuable records, and finding ways to address integration issues across multiple claims platforms can be difficult. Doing any or all of these can affect running costs, although these costs are reduced over time.

Other internal processes that increase costs include the increased complexity of new platforms, which often operate in parallel with existing platforms, the continuous testing of new platforms and the shutdown of old systems, and the loss of institutional knowledge that occurs when employees retire or leave their jobs.

Transformation: Good and Evil

Digital transformation has been a buzzword for many years and with good reason. The potential improvements and savings associated with upgrading entire systems are tremendous. However, moving to cloud-based technologies means moving to usage or volume-based licensing/cost models.

For large insurers, these newer consumption-based cost models can lead to increased operating costs. The good news is that the additional costs can be offset by increased automation and improved customer experience and service quality. It’s also quite common for large-scale digital transformations to experience delays, hindering growth.

Understanding the potential problems is critical when going this route. Insurers must take a strategic approach to claims transformation to ensure short- and long-term success. Experience shows that using a modular plug-and-play architecture simplifies the transition. One strategy is to map out a series of micro-transformations in three- to six-month increments to complete the transformation in one or two years. Taking a “small approach” to transformation leads to better results both in terms of increasing productivity and creating a better customer experience. This strategic approach should reassure insurers and instill confidence in the transformation process.

In the short term, a key to improving customer experience is sourcing the right data across platforms to ensure it matches what troubleshooters see when answering customer calls, versus self-service portals or documents received through physical channels . The same goes for compensation payments – receiving payments in digital apps in real time instead of waiting days for checks to arrive in the mail leads to a better customer experience and improved customer retention.

Build a better data hub

The journey to claims transformation begins with a journey to create a robust data center that democratizes valuable data. All departments benefit from using a single source of data throughout the company. However, it is essential to establish access and control guidelines to ensure that the data generates positive results. IT leaders must design and implement data governance and access controls.

A key strategy is to adopt a data lakehouse architecture to create a single scalable platform deployed on cloud-based storage at lower cost that can efficiently handle the growing volumes of unstructured raw data used for machine learning and structured data for reporting and complaint analysis. A single platform approach provides a better return on investment than building a data warehouse for structured data and a data lake for raw unstructured data.

We are seeing increased adoption of new data sources (fire/smoke detectors, vehicle telematics, video, images) for claims and risk management. Unstructured data can also be used to train machine learning models with a wide range of applications, including fraud detection, automated payments, risk reduction and improved customer experience and faster claim processing times.

Over time, data centers can provide impactful training data for customer-facing AI solutions.

In addition to machine learning training solutions, data centers coupled with GenAI synthetic data generators can eliminate the need to use customer data for testing. Synthetic test data will improve test coverage and reduce defect leakage, while eliminating data security risks associated with using customer data in non-production environments.

Another key benefit of investing in a data hub is that IT departments don’t have to deal with the data access challenges of complex legacy applications while building new applications faster using low-code/no-code tools on top of the data hub.

The keys to success

While claims are not the most exciting part of the insurance industry and typically do not receive the lion’s share of budgets, claims are a critical part of any insurer’s overall success.

In today’s highly competitive insurance industry, company leaders who focus on designing and implementing a claims transformation increase their chances of financial success. Modernizing claims platforms, designed with incremental improvements to highlight stakeholder benefits, will put insurers on a better path.

While large-scale cloud reinvention and digital transformation may take several years, this agile approach significantly improves the claims ecosystem. It reduces costs, drives innovation, streamlines operations and leads to a superior customer experience.

Mukherjee is the head of insurance consulting in the US region for Wipro. He has over 25 years of consulting experience leading complex transformation initiatives with Fortune 500 clients globally.