Monday, August 29, 2011

Advantages of Cost Benefit Analysis

My son, like all 3 year olds is an avid chocolate and Candy lover. Today his attention at the supermarket was transfixed on a huge chocolate Mousse cake. I did not have the heart to blurt out an outright 'NO', so i put on my health conscious hat and tried to explain him, how chocolate is more harmful for him (as compared to momentary sweet savory pleasure gained after eating a piece of the yummy treat). A single serving has atleast 500 calories plus bad cholesterol, fats, Carbs, sodium etc - he looked at me like i was speaking Martian. This was followed by loud bawling and hands flailing.
I reminded him of my last dentist's visit where i had my tooth extracted and he had to see me in pain.
Cutting to the chase, end result of all this, i ended up buying the Cake + a Vanilla chocolate ice cream cone...go figure...
 
This was my version of a failed Cost Benefit Analysis discussion with a 3 year old.

Now on a serious note,
What is Cost Benefit Analysis?
Cost Benefit analysis is a technique we make use of in our professional life as well as personal life.
Learning to perform a proper CBA is a very important skillset that will benefit any and every project manager in his lifetime career.
 
Technically Cost Benefit analysis is a financial process of analyzing a particular product or activity (Let's call this a 'change') where all the factors impacting the anticipated costs incurred and the expected benefits to produce the end result are expressed and evaluated as a common monetary denominator.
One thing to bear in mind is, all the possible cost and benefit factors, external and internal that go on to produce or complete the project (or 'change') has to be laid out in Monetary terms, so that we compare apples to apples.
These factors are then presented before the executive board or the decision making committee so they can decide whether to go ahead with the venture or project or simply scrap the deal.
Thus CBA as is the popular acronym, is a widely accepted technique where the costs incurred in doing a change are substracted from the benefits associated.
 
There are several factors that have to be considered when coming up with a CBA on a change
1> Tangible vs Intangible factors
All factors have to be analyzed - tangible as well as intangible ones.
Costs and Benefits that are measurable can be easily used in the analysis, but measuring costs and benefits associated with intangible factors forms the biggest challenge in these type of activities and it is to be performed subjectively. Mainly it is you, the project manager (along with the other stakeholders) who has to live with that costs and benefits decision for the duration of the project and you should be convinced about it yourself before trying to convince the stakeholders committee.
e.g. In a new Vendor Procurement project, the intangible cost and benefit examples are - ramp up time of the new vendor resources, leading to productivity loss and advantages of more efficient business functioning due to employing a new vendor agency.
 
2> Time
Some benefits and costs are incurred over time.
For e.g. Consider the CBA performed for buying new computers for an entire Customer service department for an Insurance Organization. This will include Cost of buying, service and maintenance costs that occur over time. Similarly benefits can also occur over time. In the same example say. Initial few months of computer usage will be seen as training and onboarding with no productivity and as the use, acceptance and familiarity with the tool increases the productivity (or benefits) will also increase over time
 

Steps to perform a Cost Benefit Analysis
1> First the user should have an extremely well rounded or a 360 degree view of the change to be implemented.
  
2> Lay down all the tangible costs that will be incurred or expected to be incurred now or over a period of time if we go ahead with the change.
e.g. Fixed costs like equipment cost, Software and License fees, Training costs, Maintenance fees, Travel costs, Employee Salaries, supplier and vendor expenses etc
 
3> Lay down all the intable costs that will be incurred or expected to be incurred now or over a period of time. Subjectively analyze these and assign a monetary value
e.g. Production Downtime when implementing a system change, employee productivity loss when transitioning to a new software tool etc
 
 4> Similarly lay down all the tangible and intangible benefits as we did for the costs by coming up with a financial number for it.

5> Substract the potential costs from the anticipated benefits and complete your CBA.
Performing a Cost benefit analysis gives you a well rounded view of implementing the change. It gives a good perspective as to does it make sense to implement the change or not.
So in all, this process is very similar to the Pros or Cons analysis that we normally do in our personal life as well when we want to take any important decision and this analysis definitely helps clear the picture about the process.
Hope this article covers the important aspects of the topic. If you have any view or comments that are different than above or want to add any points to it do feel free to write your comments.
 

e.g of a Cost Benefit analysis
 
An Insurance Organization wants their claims department to interface to ISO ClaimSearch. So the Project Sponsoring committee has asked the department Business Lead to perform a complete Cost Benefit analysis, so they can decide does it make sense to go ahead with the project or not
 
Duration of Project - 3 Months
Costs
Tangibles
  • 2 Full Time BA Cost
  • 2 Full Time Developer Cost
  • 1 Full Time Tester Cost - (say) 50%
  • 1 Business SME involved - (say) 30%
  • 1 Training Lead - (say) 30%
  • ISO Account setup/Reporting Licensing costs

Intangibles
  • Total loss of Productivity in training resources
 
Benefits

Tangible
  • Costs to manually use ISO Site
 
Intangible
  • Claim operator time saved due to automatic reporting
  • 3 Operators - 30% time savings
Final decision - Benefits - Costs 
 

Thursday, August 11, 2011

IT Spend in Insurance

Gone are the times when Insurance companies viewed IT as a mere tool with no direct benefits from its implementation and usage. IT was looked upon as a MIS functionary - i.e. statistical and executive reporting toolbox with no potential and direct cost benefits to the business.
Fastforward to current times, despite the economic downturn all over the world, according to a recent study more than 50% of the insurance organizations are expected to revive their IT budgets.
After all companies that have a surplus balance have to make sure that money is well spent.

There are numerous reasons that leads organizations to improve their IT Infrastructure, Systems and processes

1> IT Industry Business expertise
Looking at the technological advances today, Insurance companies (or any other industry for that matter) have to compete and excel in the business arena.
There are so many IT vendors, application and solution providers who provide a wide range of applications and support that not only ease the way Insurance companies do business but also add to the overall bottomline.

This has only become possible for the IT Vendors becuase of their number of years of consulting and hands on experience in the Insurance domain, understanding and working on the customers business model, closely watching their pain points and business naunces.

2> Enterprise solutioning advantage
IT has become a very important function of Corporate strategy and solutioning, even though IT does not always have a tangible impact on business benefits, be it Policy, Billing or Claims Administration or overall Operations, Customer service, Underwriting, Adjusting, Claims Investigation or Financials like Payments, reserving, Quotations etc. IT is still one of the major functionary that can make a difference for a company to have an edge over its competitors.

3> Cost Benefits
In today's times cost of IT hardware, Software, Infrastructure and resource costs due to Competition, offshoring and Application managed services, hosting solutions and consulting solutions - has really made the entire realm very exciting thus helping your business in all ways possible.


4> Cutting edge Soulutions
With the number of IT solution vendors, service integrators, consultants in the market and the level and maturity of IT solutions based on the number of years of experience input, the solutions are really cutting edge in the sense they address all of end user and customer needs, they are very user centric and friendly and at the same highly customizable and scalable.
For instance a legacy Policy administration system that has been installed and developed 15 years ago compared to a current state of the art Policy administration System solution developed using Java, .NET technology solutions, using web services architecture having plugins, integrations, web service calls to enterprise level authentications, third party integrations like CLUE Reporting, ISO, Glass estimation solutions, Comparative rating engines etc. All of this at a very competitive rate too.

No prizes in guessing which solution wins hands down.

A lot of CIOs and IT senior exectives are now turning their attention to better front end processing and more competive software solutions that can be easily integrated to their current what i call the "Spaghetti IT architecture" and infrastructure and also provide much improved software benefits in the long run.

So what are the areas where companies are spending money on,
1> Data Warehousing applications -
Data warehousing is like the pulse of Insurance business. The data analysis reports indicate the financial health of a business and are indicative of times to come. They also prompt for corrective actions that can be taken by exectuves if and when required.
Data Warehousing spend is on Predictive analytic solutions, Data mining and Business intelligence solutions


2> Business Applications and Solutions
If Data Warehouse is the Pulse of a business then the applications that run the business is the blood and lifeline.
The better, functionally rich, efficient and powerful the applications that help you process your business, the more ease for you to do your business.
Increase spend for better applications and application management that would give companies a competitive edge allowing the Company to shift their focus on more important matters like running their core business competitively rather than worry about IT applications crashes, bugs and poor performances.

This requires increase budgets for more application development resources, better and more powerful infrastructure. More money spent on IT solutions like cutting edge Policy, Billing and Claims solutions, enterprise level CRM solutions which would help improve customer-carrier relationships etc
Another important factor that helps reap better IT benefits are business level process changes to better suit the business needs and aligning the features and functionality supported by a Product software with the business.
For example, i have worked for numerous organizations that would follow the traditional manual triaging and assignment of claims even though the daily average of new and reassigned claims volume was around 200. By making use of application generated diaries and automated assignment triggers, the organizations saved atleast 20% of their processing time due to the automated workflow solutions.


In today's world insurance companies can reduce their operational costs and processing costs using IT methods and in turn achieve better efficient operations and hence more profits.
Let me know if you have any special comments on this or have seen some other aspects that are not covered in this post.

Monday, August 1, 2011

Technology and Claims Fraud

Think of the science fiction movie - 'The Minority Report'. The movie concept is, certain humans with Extra Sensory Perception (called 'precogs'), prophesise about crimes that will be commited in the future and Police detective jump in action to arrest the criminals and thus prevent the future crime.
This is the theme of our post today.
 
A Typical scenario in today's Insurance Organization -
A fraud case is being investigated, an Insured has filed a claim for rear ending other vehicle. But it was detected by the diligent Insurance adjuster that this is a dubious claim.
How did he do this? He made use of software tools and techniques and found a similar trend of the insured's past claims.
 
The savvy adjuster has saved the insurance company possibly thousands of dollars just by detecting 1 fraud case. Think of the big picture - how careful investigation and early fraud prevention and detection techniques can save Insurance companies hundreds of millions of dollars.

Advnatages of early Fraud Detection

Following are the reasons why an insurance organization would detect or prevent fraud cases
 
 1> To reduce overall claims and associated policy costs

2> Guard against future adverse risk selection

3> Optimal and accurate product pricing due to saved costs

4> Pass the profits and revenue saved, to Shareholders and insured (via reduced premiums or dividends)

Insurance Organizations have always been hit by fraud claims and in the current economic scenario, they are trying their best to identify these fraud cases and thereby minimize their losses. Today literally tens of billions of dollars are lost by insurance companies due to fraud claims or due to over inflated claims.
 
Structured and organized Data is something that can help curb or prevent these fraud cases by providing uniform and superior claims information. There are several tools and software available in the market that will allow insurance companies to identify and reduce these fraud cases.

When an insurance company pays for a claim, it involves Indemnity payments and expenses (Legal + Claims Handling + Other). All this is paid on basis of its earned premiums and income from investments.
For e.g. If an Insurance company has an earned premium of $100 and pays out $80, it has a loss ratio of 80%. The rest of the 20% accounts for Administrative expenses, operating costs, profits etc for the Organization.
So logically if an organization eliminates or even reduces these fraud payments and associated expenses like legal costs, investigation costs etc, that would add to the profits of the organization.
 

Tools and resources to achive this
Normally organizations have experienced Underwriters, Adjusters, SIU departments that carefully scrutinize and help to identify and avoid dishonest claims and thereby save company money. They also make use of Third party investigators who specilize in handling and investigating certain types of Fraud cases.
Now these type of cases are not Line of Business specific and thus occur in every line of business (Auto, GL, Property, Workers Comp etc).
 
Fraud Indicators and Claim Ranking
Based on the company experiences + the historical claims data collected + analyzing fraud claims from various third party agencies, Insurance organization can come up with their own Predictive analytics solutions or make use readymade tools available in the marketplace which help analyze the data and come up with scoring models that help reduce the total claims outcome.

e.g. There are few red flags identified on a claim, the predictive analytics tool applies these to the claim and assigns it a claim rank or score.
These claims with a high score are then passed on to an investigator for further inquiry.
 
Red flags examples (but not necessarily fraud cases)
1> Insured uses several different mailboxes for addresses.
 
2> There are multiple claims filed by this insured and there is a specific pattern to the type of claims filed.

3> Insured has medical bills which are overinflated

4> Insured is on a medical disability leave and wins the National Marathon championship

5> Insured has a claim on property much above the actual cost of damage.

6> Insured has filed a theft claim for a high value and secured property like an antique picture.

7>  Multiple Claims for same occurrence filed with different insurers.

ISO ClaimSearch
There are some third party organizations like ISO ClaimsSearch which diligently collect P&C Insurance Claims data of hundreds and millions of Insureds. Insurance companies in turn make use of ISO ClaimSearch for a fee to research prior claims history of their insureds, identify claim trends and pattern. The Insurance companies then, will feed their Insurance data to ISO ClaimSearch so as to strengthen the ISO database.
 
The key to identifying and eliminating fraud is collaborated data - data that is clean, organized and structured. The more structured data that organizations have access to, the more these companies can use their experiences to analyze the data and make some meaningful reports out of this information anfd thus help eliminate fraud. So collecting and analyzing this data becomes the key to investigating this data.
 
How do companies get good and clean data -
  • By improving on their claims processes
  • Having Data Models that are well structured
  • Having strong Business rules and validations in place that identify every entry point into the system
  • Technology and process improvements are the key to good and clean data which will help in better analysis

Predictive analytics
Predictive analytics consists of data analysis techniques and methods which help to develop predictive models used for trend forecasting. These tools typically assign a predictive score which is very similar to an individual's credit score obtained from various credit bureaus. The credit bureaus also similarly look at various criteria for a consumer (viz Income, credit history, balances, loan etc) and come up with a credit score for that individual.
 
Process

Data Mining and Analysis
Data is first mined from various data sources within an organization along with the relationships between the data elements. This data is then analyzed with the help of various Predictive models this helps an organization in achieving its fraud curbing objectives.
The data that is obtained is analyzed for identifying trends and relationships which may point to some wrong doing.
 
What can companies do to move towards Predictive analytics?
1> Have consistent and structured data
 
2> Latest tools and technology

3> Budget and preparation throughout organization for implementation and have process changes for clean data entry points

Above post highlights the importance of having organized and structured data. The advantages are manifold, in all domain verticals and not just insurance.
Predictive analytics helps insurance companies identify potential fraud needle claims in all of its millions of claims haystack. In any case, all these are crime preventive and minimizing techniques.
 
Any other points you feel that should have been covered or added here please feel free to comment on those below.