Monday, January 9, 2012

Bringing Claims In-House? The Cost-Savings Factor

“Show me the money!!” was wide receiver Rod Tidwell’s (played by Cuba Gooding) refrain in the movie, Jerry McGuire.

It is also often THE prime motivator for companies to decide to bring the claims-handling function in-house. In this blog series, let’s look at reasons why companies, self-insureds and risk managers are tempted to internalize the claims function rather than leave it to an insurer or a TPA.

Reduced costs often factors in as a prominent reason. At some break-even point, the risk manager finds the notion attractive to save money by bringing the adjusting function inside. By so doing, the risk manager buys the in-house services wholesale rather than retail. Whether shopping for Christmas gifts or claim services, wholesale prices are cheaper than retail prices. The costs for the self-insured entity or risk manager are then salary and benefits for the staff adjusters. These are fixed costs, however.

For example, if a company is paying, say, $750,000 per year in outside adjusting fees, the risk manager may figure that three quarters of a million dollars per year can buy a sizeable adjusting payroll, and still leave some money left over.

However, the company is now paying salary and benefits instead of adjusting fees. For a company which has less than twenty claims a year, hiring an in-house adjuster or claims overseer may not make economic sense.

However, if a company has a high volume of claims, then this option may start to look increasingly attractive. It is a “make or buy?” decision. As with any "make or buy" decision, making the service yourself is often cheaper, but you often lose some convenience. Many companies, however, become disenchanted with the billings and results of outside adjusting services. They are frustrated with turnover, superficial investigations, claim-handling lapses and unmet promises.

As a result, risk managers often believe they can do the same job better, and more efficiently. Whether or not their hopes for internalizing the claims function bear fruit is another story. This is, however, how it is supposed to work in theory.

What has been your experience in internalizing the claims function? Has it proved to be cost-effective? Did it attain the financial goals that drove the decision?

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