A Risk-Free Way to Boost an Insurance Carrier’s Profits
Insurance carriers lose hundreds of millions of dollars each year from “leaked” or “missed” billings on 3rd-party commercial deductibles. The problem is pervasive. Since our founding in 1994, we’ve helped hundreds of carriers identify and recover leaked deductibles. More importantly, we have yet to encounter an insurer without a significant leakage problem. The vast majority believe their operations are rigorous and disciplined, and they are often surprised to learn of the magnitude of the losses they are incurring.
This problem shouldn’t be brushed aside. Missed deductibles, like any missed billings, erode profits and diminish cash flow. They also undermine the purpose of deductibles, which is to better align risk between carriers and insureds. Our experience shows that carriers leak on average 10–15% of all third-party commercial deductibles.
Deductible leakage stems from many sources. The causes can be internal or external, caused by people or by technology. This paper highlights the leading causes of missed deductibles and Paragon Deductible Recovery’s solution to this challenge.
Most insurance carriers are unaware of the scope of their deductible leakage.
Why Do Insurers Leak Deductibles?
Deductible leakage is a side effect of the complex systems and processes inherent in modern commercial insurance. Although our experience has shown every carrier suffers from missed deductibles, most teams are unaware of the issue and scope of the problem, believing they already have strong processes in place to identify and bill third-party commercial deductibles. Others are aware they may be suffering from this issue but lack the internal resources to investigate and cure the leakage. Deductible leakage occurs for a multitude of reasons, in both complex and straightforward claims. It is rare that any single team or system is responsible.
More Complexity, More Human Error
The complex variety of deductibles used by underwriting teams means human error is hard to avoid. When writing the policy, underwriters have the discretion to add or adjust the deductible to suit the prospective policyholder’s tolerance for premiums. They can also create customized manuscript endorsements, which result in unique deductibles tailored to meet the insured’s needs. As such, deductibles vary significantly. They may apply per occurrence, per claimant, or not at all. The dollar amount may be small or range as high as $250,000. They may cover expenses and/or indemnities, and attorneys’ fees may or may not be recoverable.
In fact, human error is a major source of leakage at virtually every touchpoint. When a commercial policy with a deductible is issued, the underwriter or coding team may incorrectly enter it into the carrier’s system. Errors may also occur during first notice of loss, a process that many carriers outsource. This can lead the adjuster to believe that the policy does not include a deductible or includes a different, smaller deductible.
The Nuts and Bolts of Third-Party Deductibles
Third-party deductibles are included on many commercial insurance policies including general liability, auto liability, professional liability, workers compensation, business owners, and excess and surplus lines of business. With commercial claims, the insured and claimant are not the same entity, so the loss payments cannot be paid less the deductible. Instead, the claimant needs to be made whole and paid in full, so the carrier must invoice the insured for their deductible owed. Billing these types of third-party deductibles requires coordination throughout the policy, claims, and finance departments—which is why they are often missed.
Adjusters and TPAs are Focused Elsewhere
Adjusters focus a significant amount of time and energy on claims settlement and customer satisfaction. For many carriers, adjusters are also responsible for the identification of deductibles as part of the settlement process. However, it is difficult for adjusters to be experts in deductibles. Of the hundreds of coverage codes and payment types they are selecting on a given claim, adjusters often aren’t aware which will have a direct impact on whether the deductible will be billed. The result: the claimant gets paid, but the policyholder is never billed for the deductible. Third-party administrators (TPAs) miss deductibles for similar reasons and are another source of leaked deductibles.
Technology’s Role in the Problem
Carriers often utilize a centralized system that automatically identifies and invoices third-party deductibles. However, the technology that underpins these processes can contribute to leakage. Claims and finance employees must navigate disparate platforms—for claims, finance, recovery, underwriting, and so on—rather than a single platform that efficiently facilitates their work. Additionally, mergers and acquisitions within the industry can introduce more complexity, such as systems that fail to communicate with one another, heightening the potential for errors.
Even Worse Than it May Seem
With so many systemic leaks, losses can add up quickly, particularly for carriers that are writing policies with large deductibles. But because policyholders accept large deductibles with the goal of reducing premiums, the carrier’s losses are compounded by the lower upfront revenues. Moreover, carriers use deductibles to manage risk. By having “skin in the game,” the policyholder is incentivized to take measures to prevent claims. This incentive is diluted when deductibles go uncollected.
Once you consider the purpose of deductibles—to help insurers offer competitive premiums and manage risk—the impact of missing deductibles is even worse than the headline dollar losses may seem.
How Paragon Deductible Recovery Can Help
Paragon Deductible Recovery can help any insurer identify and recover missed deductibles and improve its deductible billing processes for the future. We begin with a five-year historical lookback, known as a DART (Deductible Analysis Recovery Test), that identifies missed deductibles from closed claim files. Carriers simply provide Paragon Deductible Recovery with historic claims and policy data, and we do the heavy lifting with a very low-touch, high-tech approach.
During a DART, we apply a series of data mining tools (including focused business rules, predictive modeling, and inference algorithms) to the historical data. This allows us to flag claims where a deductible should have been billed. After this data mining process, Paragon Deductible Recovery reviews each flagged claim to validate whether the policyholder truly owes funds to the carrier. It is this combination of technology and experience that results in a superior deductible identification service.
Paragon Deductible Recovery then delivers a DART Report to the carrier’s leadership team. The DART Report highlights deductible leakage trends by policy year and line of business. Additionally, we estimate the gross dollar amount missed over the five-year look back along with our projection of what can be recovered. With the client’s approval, Paragon Deductible Recovery then works with the carrier to invoice and secure the missed deductible balances. We do this in a customer service-focused, business-friendly manner to protect the carrier’s relationship with its existing and former policyholders.
Recovering Missed Deductibles, Risk-Free to Carriers
Our DART service is entirely performance-based. Carriers pay us a contingency fee based on actual funds recovered. There are no commitments, retainers, hourly fees, or hidden costs. Either we recover your missed deductibles, or we don’t earn revenue.
In a typical DART engagement, Paragon Deductible Recovery recovers around 75% of the deductible balances that a client approves for pursuit. Every carrier we have worked with since our inception in 1994 has been found to be leaking significant deductibles.
Administering Deductibles to Prevent Future Leakage
Once we have completed a DART, Paragon Deductible Recovery is positioned to ensure the carrier’s deductible program is handled correctly in the future. Our Deductible Administration Program is a turnkey, ongoing solution for the entire third-party deductible life cycle, including identification, qualification, billing, recovery, remittance, and management reporting. We become the carrier’s deductible administration division. When administering deductibles, Paragon Deductible Recovery typically recovers 95% or more of billed deductibles.
By applying Paragon Deductible Recovery’s expertise, economies of scale, and unique deductibles technology to this typically underserved process, carriers can gain significant benefits. These benefits include enhanced cash flow, reduced asset aging, prevention of future deductible leakage, and elimination of internal costs associated with running the program themselves.
Our Unique Deductibles Solution
We know of no other firms that offer this service. As the senior vice president for claims of a large mid-western carrier wrote in our most recent customer satisfaction survey, “Simply put, Paragon does it better than we do.”
Another client wrote, “Overall, the quality of Paragon’s services is a product of their knowledge and expertise, as well as frequent and clear communication.”
Paragon Deductible Recovery is a company of ARMStrong Insurance Services.