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Business Process Management in Insurance APRIA 2003_Warrier & Preeti


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Business Process Management in Insurance APRIA 2003_Warrier & Preeti

  1. 1. BusinessProcessManagementinInsurance| 1 APRIA conference June 2003 BUSINESS PROCESS MANAGEMENT IN INSURANCE RAMA WARRIER & PREETI CHANDRASHEKHAR INTRODUCTION All enterprises of the modern era operate in an environment of high risk exposures. One of the critical areas of exposure is the vulnerability of the processes. Most of the conventional manufacturing and service industries are built on process intensive operations models. Insurance industry is no different. The stability of an insurance company depends heavily on the strength, consistency, reliability and integrity of its processes. This paper is aimed at ways of analyzing the process risk exposures of an insurance company and the ways of efficiently managing it. A general definition of business processes (Hammer&Champy, 1994, Kueng & Kawalek, 1997), defines a business process as a set of partially ordered activities aimed at reaching a well- defined goal. Examples of goals in insurance could be:  Closing a sale i.e. converting a proposal into an insurance contract.  Paying the promised amount on the happening of the contingent event. Some business process types (activities) that aim at reaching these goals are:  New Business process  Claims process Business processes would have clear start or trigger events and have a pre- defined sequence of tasks and decisions to be performed by nominated actors in a pre-determined order. The standardization of processes in a company is usually a good measure of the quality and efficiency of its operations. Problems in viewing this document ? Check out on Check out TL on for more articles on insurance& Risk Mgt
  2. 2. BusinessProcessManagementinInsurance| 2 Business Process Management – a key to business agility Business process management does not mean aligning technology to the business objectives. Outdated or moribund processes not only restrict the manoeuvrability of business processes, but also render any technology applications in that direction redundant. Granted, that an effective IT strategy provides the leading edge to a company in a highly competitive market. But the key issue is the ability to identify, understand and communicate the changes in business processes that this technology assists. “Major systems investments yield little return unless they are accompanied by equally major business change.”2 A top-down approach towards processes and operations gives a more holistic view and helps in managing activities to increase productivity and profitability. Listed below are some of the advantages of an effective business process management. “Claims processing” has been chosen for the purpose of illustration, since claims costs can account for anywhere up to 80% of the insurer’s costs depending upon how efficient the process is.  Reduced Costs: Since claim costs contribute to high management costs and hence affect the margins, an efficient Claims Management process would enable the company to leverage its resources (both technology and human resources) more effectively.  Operational efficiency: Impediments to an effective Claims management involve among others paper-based workflow processes, collation of disparate or poorly aggregated data, disparate data standards. Effective claims management involves reduction in cycle time. This reduction can be achieved through various means -in the form of using imaging technology to reduce paper work or the ability to automate complex transactions. Studies have shown that an effective BPM reduces the cycle time for processing Claims in the range of 50 to 75 percent.  Improve quality: A well managed business process helps in deriving meaningful results from quantitative data that is reliable. This helps in the iterative process of continuously improvising and improving the business process. Reports on benchmarks, key performance indicators, and other criteria provide insights on how well the units are performing, in their own work and as part of a larger process.  Increase customer satisfaction: Persistency in business is the hallmark of any insurance companies’ ability to retain customers. An efficient business process, particularly in the area of Policy Owner Servicing and Claims Management increases customer satisfaction, repeat business and hence the margins for profit.  Increased agility: A rigid business process reduces the companies’ ability and ease to respond to market conditions. An efficient business process adapts quickly to changing needs at moderate costs.  Collaboration: Standardization of business processes within and beyond the enterprise furthers
  3. 3. BusinessProcessManagementinInsurance| 3 interaction and improves relationship management with both business partners and customers. Business Process Management removes boundaries, thus enabling inter-departmental, intra-enterprise and inter- enterprise workflow which seamlessly moves through-out the process. Such workflows improve efficiency and control. It facilitates uninterrupted movement of data and information between different business software applications and data sources. Business Process Analysis The pressure of competition and falling costs is steering companies towards increased automation and integration or re-engineering of various business processes. Given these kinds of changes in the system, the biggest challenge that senior managers face is ensuring that they have effective and efficient controls over the key business processes. A systematic approach to understand and analyze process is the first step towards effective process risk management. Business Process Analysis provides a flexible and systematic approach to assessing the adequacy of controls on the business process in a constantly changing environment. One possible method is analysis of the risks associated with the business process. An effective analysis of the process based on the process risks helps the management in taking informed decisions. The various steps involved in the analysis are :  Business Process Identification  Business Process modelling  Business Process Risk Management Business Process Identification The logical point to start is by comprehensively identifying all the processes which constitute the business model of the company. At a broader level, the business processes can be classified as  Operational and
  4. 4. BusinessProcessManagementinInsurance| 4  Financial A top-down approach is usually very effective in the identification phase. The operations of the company could be split broadly into functional areas and each one of them could further be drilled down to processes. A rule of thumb would be to map the business processes at three levels: Level 1 would be the highest level – the total number of business processes at this level being around 8-10. For an insurance company, the business processes at this level are:  New Business  Channel Management  Compensation Management  Policy Owner Services  Claims Processing  Corporate Accounting  Reinsurance  Client Relationship Management  Actuarial Processes  Product Development Level 2 would breakdown the Level 1 processes into more granular details. Again, taking the example of Claims Processing, the various sub-processes would be:  Claim Initiation  Claim Verification  Claim authentication  Claim authorization  Claim payment Level 3 would involve getting down to the atomic level of each of these sub- processes represented by activities. These activities in turn, could be activities that could be automated of have to be manual. After having identified the various activities that logically make up the business process, the next step involves depicting the business process in the form of a model. Business Process Modelling Business Process Modelling involves analyzing the internal activities of an existing business process to improve it, usually by eliminating non value- adding activities. Some obvious benefits of business process modelling are:  Process Documentation  Process improvement  Process Risk Management  Knowledge management  Workflow management  Activity Based Costing  Technological improvisation The various steps involved in Business Process Modelling are:  Business process mapping  Process Risk identification  Process Risk Measurement Business Process Mapping One of the preliminary steps for business process analysis is to map the processes. Some methods of business process mapping are:  ER diagrams  Data flow diagrams  Flow charts  Workflow models  Event driven process chains  Rapid Application Development  Object Role Modelling If one were to try to map the claims process for an insurance company, the process would require to be broken into small sub-processes and then into
  5. 5. BusinessProcessManagementinInsurance| 5 activities/ tasks .Each step of the process would be modelled on three parameters: • Actor – The person / department/ system which performs the activity • Activity – The business content of the step • Pre & Post conditions A typical property claims process could be mapped as shown below: Process Risk Management Process Risk identification After classifying and modelling of the processes, the risks associated with the processes need to be identified. Identification of risks is a very critical and important activity which often does not get as much priority as it deserves. Identification is an activity which would require a good combination of process knowledge, past risk experience and ability to pinpoint trouble spots. This involves collecting and analyzing the data to assess the inherent risks to aid in informed decisions. Process Risk Identification and modelling help in analyzing the process from a strategic, operational and tactical perspective. A few of the operational process risks in the claims process mapped above could be the following areas: • Inaccurate prima facie liability determination leading to legal issues • Lack of clarity in identification of claims for investigation • Over or under provisioning for claims leading to accounting / regulatory issues Each of these risks can be identified as ranked according to the numerical value (or probability) associated with them. Some typical high risks associated with ‘Operational Processes’, which are general in nature, are: • Product service failure • Business interruption • Performance gap. Some low risks are: • Obsolescence • Service cycle time • Redundancy Using a numerical value for a process risk is both preferable and desirable for ranking the risks. This would be in the form of “impact” or “magnitude of loss” or “potential opportunity cost” associated with the process. The impact would either be measured in financial terms or qualitatively using a subjective measurement scale. Process Risk Measurement The crux of modelling a process to measure the risks lies in the ability to match the business process model to correspond to what is going on in the real world. There are various ways in which business processes and the associated risks can be modelled. The method chosen will depend upon: • Existing documented information about the business process. • Intended use of the model – whether the model intends to o Increase the level of process maturity o Create a basis for process analysis and reengineering.
  6. 6. BusinessProcessManagementinInsurance| 6 o Create a basis for building computer support systems. The most used models in the insurance industry (depending upon the nature of the process and the associated risks) are: Individual risk models where the total claims on a portfolio of insurance contracts is the random variable of interest. Collective risk models which are used when we need to model several claim occurrences together. In this model, an insurance portfolio is viewed as a process that produces claims over time. The variables that can be modelled in both the above approaches are • Frequency of claims • Severity of claims: A rather simplistic way of representing the aggregate loss is in the following form: C = X1 + X2 + X3 + … XN Where N is the frequency distribution And X is the severity distribution And C is the aggregate loss distribution Diffusion models / stochastic processes These kinds of models are used while assessing how the risk has evolved over time. The models may be in continuous time or discrete time. They are typically used in financial processes while assessing the strategies in investment options and the risks associated with them. Some other models are: • Multi-state models • Cash flow models Some Aids for BPM Process Risk Management activities include the analysis of various options available. Some important aids in this analysis are: • Balanced score card – Some elements which aid in business process risk management are: o Processing time o Waiting time o Process frequencies o Process costs o Time to market • Benchmarking - Helps in delivering quantitative results rather than qualitative comparisons. • Six Sigma quality - This would primarily aid when the aim is to increase the level of process maturity. It aids in focusing quality control audits on those processes that have the maximum impact on the bottom line. Role of IT Technology plays a very important role in process risk analysis and management. The role of technology would be mainly in the following areas : • Standardization of processes System implementation automatically standardizes the processes and the exceptions. Existence of a comprehensive IT application would help to standardize processes across the organization and across geographical units. Standardization is one of the best
  7. 7. BusinessProcessManagementinInsurance| 7 ways to considerably control the risk exposure. The fact that standard processes deliver results within expected range helps to minimize the risk. There are many areas in insurance operations where process standardization could bring dramatic effects. For example, claims is an area where companies want to give a lot of flexibility for exceptions. This could degenerate into lose processes exposing the claims process to higher risks. • Ensuring compliance by building in system checks and balances: Even the most standardized process requires good checks and balances as human mind can always find the easier route which may not always be the best route. A well designed software application would have regular check points to keep tab of the process as well as to ensure that the risk points identified from experience are covered. For example, if claims provision is a risk aspect identified, checks could be built into the system to match the pattern of the current claim to similar claims in the past and verify the provision given. In case the variation is high, the system could alert the user or even block further processing without specific approval from an appropriate authority. • Develop effective alert mechanisms Alert mechanisms could be a measure to invite the attention of the user to the risk at the appropriate time. Alert mechanisms could be built into more effective decision support tools by providing facility to assist the user to make the right decision when alerted. • Maintain metrics of process risk exposure measurements • Provide support/tools for process risk analysis and modelling • Improve audit trails for risk monitoring • Capture information once and at the source. Translating the business requirements into appropriate IT application is more difficult than it appears. It is the problems with this step that renders many innovative BPM ideas useless. Requirements Gathering has been identified as the biggest challenge for any Information Technology initiative. The need to get it right the first time is often in conflict with the pressure to start programming “now”. A typical response to this issue is to “just automate what we do now”. This leads to systems which just pave over the cow path. Conclusion Business Process Management is a concept which gained clarity with the advent of automation of processes, though the concepts are equally applicable to organizations with different levels of automation. BPM aims at defining, designing, managing and automating processes to ensure smooth workflow between various business entities participating in the execution of a process. Technology is the key aid for achieving this objective. Insurance industry of this millennium is faced with two very critical pressures – cost and service efficiency. Both these are direct functions of the status of the processes in the company. Hence, time is ripe of insurers to focus
  8. 8. BusinessProcessManagementinInsurance| 8 on managing their processes in the most and cost efficient way by suitably re-engineering the processes and leveraging the options provided by technology. References: 1. “Modelling in the Australian Practice - Preliminary Results from an ACS Survey” -Michael Rosemann, Queensland University of Technology, Centre for Information Technology Innovation Auckland, 20 February 2003 2. Michael Hammer, “How to Sell Change,” Optimize Magazine, December 2001 3. “Risk Measurement in Insurers”, Presentation at Fields Institute, Toronto Stuart Wason, FCIA March 27, 2002 4. “Business Process Management and its Value to the Enterprise”, An executive overview, HandySoft Corp. Authors could be reached at or
  9. 9. BusinessProcessManagementinInsurance| 9 Appendix