Allstate's new claims processing system aims to cut costs while keeping customers happy.

Mary Hayes Weier, Contributor

April 20, 2007

5 Min Read

Claims processing is the center of everything for insurance companies. Done well, it cuts costs and keeps customers happy. Done poorly, it bloats the business and provides grist to those who claim insurance companies rip off their customers.

Allstate, the country's second largest provider of personal insurance, is halfway through a $125 million claims-processing system overhaul designed to strengthen its "you're in good hands" motto, shorten claims-processing time, and produce more consistent payouts. The company even hopes that it will be able to settle uncomplicated claims, like fender benders, with one phone call.

One of Allstate's goals with the new system is to bolster its reputation as a company that consistently pays out the "right" amount to every claimant. In the tug-of-war between insurance companies and their customers, the right amount often depends on who's doing the tallying. Last week, a federal jury decided Allstate hadn't paid a Louisiana man enough for damages to his home during Hurricane Katrina, and ordered the insurer to pay $562,000 for wind damage, plus $2.25 million for not paying fast enough. Allstate says it will appeal.

The new system, called Next Gen, is designed to improve the way claims are managed, accessed, and routed. It includes a company-wide software application Allstate built to replace dozens of apps that claims processors and adjusters previously used to handle claims. As a part of Next Gen, most claims information has been consolidated onto an Oracle database, eliminating the need for employees to access data residing in many different servers and mainframes.

Next Gen is built on a service-oriented architecture, using Tibco Enterprise Application Integration, which supports standard Web services protocols. The architecture, Allstate says, makes it easier to feed information from other systems into the database without a lot of integration. It also facilitates data mining and analysis to spot problems that could lead to discrepancies in payouts or slow down claims processing.

Allstate's property business has been on Next Gen since last year, and it plans in June to start to move its auto business on to the system, region by region, over the next year.

The biggest benefit from Next Gen will be improved customer satisfaction, says Mike Jackowski, Allstate's VP of claims technology services. Property insurance customers already are benefiting, says Jackowski, a former consultant at Accenture, who was hired to lead development of the new system in 2004. "In many cases, we can schedule an appointment right there on the very first phone call and have an adjuster come out, do an appraisal, and look at the damage in the home," he says. But every case is different; theft, for one, is typically less complicated than fire damage. "We're not looking to go so fast that the customer doesn't get exactly what is owed for the policy," he says.

Claims accuracy is a sensitive area for insurers and has been a problem for Allstate. Hurricanes Katrina and Rita in 2005 cost Allstate $3 billion in payouts. And while it has rebounded from a money-losing quarter in late 2005--its net income last year came in at $4.99 billion, up 182% from 2005's $1.77 billion--the company still is dealing with the negative publicity from several lawsuits.

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Allstate also is the subject of a recently published book by trial lawyer David Berardinelli called From Good Hands To Boxing Gloves, which alleges that consulting firm McKinsey & Co. helped the insurer develop processes in the 1990s, called Claim Core Process Redesign, that ensure that it pays out as little as possible on claims and denies customers legitimate benefits.

Much of that redesign focused on improving Allstate's profits, says Paul Newsome, an insurance analyst with A.G. Edwards & Sons, noting that lawyers weren't happy with that effort because it eliminated existing financial incentives for customers to include them in the claims process. Next Gen is more about improving the underlying technology that supports the processes, Newsome says, which will boost profits but also will help customers get claims assessed faster.

Allstate already has a reputation as one of the most efficient claims handlers, Newsome says, and Next Gen is "probably more evolutionary than revolutionary." Still, it will help keep Allstate at the head of the pack. "A good insurance company is going to relentlessly try to improve its claims processing, because it's the most important part of the business," he says.

What's more, while the earlier redesign improved processes, it led to a technology monstrosity that Jackowski and his team are resolving with Next Gen. The 1990s process redesign was a typical case where the business requirements were handed over to IT with little consultation, according to researchers at MIT's Sloan School of Management. Next Gen, Jackowski says, "starts with the capabilities of technology" and includes the necessary give and take among business and IT people.

The data consolidation that happened as a result of Next Gen reduces a lot of the IT labor costs associated with maintenance and integration of many different applications. Next Gen also includes new content management systems for unstructured data, including those that manage document images, eliminating much of the paper shuffling and overnight mailing of documents among offices.

Perhaps more important, the system's service-oriented architecture makes it easier to create and alter business processes as needed. Allstate can quickly change workflows so that more tasks can be handled by claims processors and don't land on the desks of highly paid adjusters, creating unnecessary labor costs and slowing down the process.

Next Gen also lets Allstate more easily analyze claims to ensure consistency among similar cases. That may result in lower payouts for some customers, Newsome says, but it's balanced out by faster service. "People seem to be happier with less money right away, than more money after a lot of hassle," he says. "There's a lot of evidence that suggests the faster a claim is adjusted and resolved, the lower the cost of the claim to the insured." When people wreck their cars, for example, they may have to pay out of their own pockets to for a rental while the claims process is under way.

For an insurance company, "claims processing is the most critical contact with customers," Newsome says. "Long-term growth is dependent on how well you do it." That's exactly what Allstate is aiming for with its Next Gen system: happy customers and a growing business.

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