Cutting Through the Noise: Eliminating Inconsistency in Claims Handling

This article was originally published in The Fintech Times.

This article contains statements, paraphrases and conclusions from Kennedys Fostering Innovation panel, ‘Cutting through the noise: improving decision making in claims’. The panel considered how ‘noise’ within the insurance and legal sector impacts the consistency and accuracy of the claims process, and the solutions available.

To provide skilled and accredited advice to a shared and consistent standard is the mission statement of any professional services organisation. Weiss and Shanteau in 2003 provided a scholarly definition: “Like a good measuring instrument an expert…must be both discriminating and consistent”. 

But recent studies, including the acclaimed 2021 book “Noise” by Daniel Kahneman, have probed a phenomenon that threatens to derail expectations of consistency within human decision-making. The effect of “noise” has been shown to have a significant impact on the financial performance of insurance firms.

What is noise?

Noise is the difference that we see when two experts, presented with the same facts, make different judgements. Two teachers reviewing the same student work, coming up with two different grades. Two doctors reviewing the same symptoms for the same patient diagnose two different conditions. Two claims handlers, reviewing the same claims facts, reserve two different values for the claim, find two different liability positions.

During our panel, we ran a simple survey that asked participants to indicate the recommended temperature for being comfortable in an office and naturally we found variance. For claims handlers, at a company level, this difference when translated into professional judgement can run into millions of wasted indemnity spend.

Crucially, noise is not the same as bias, although bias is perhaps what we’re all more familiar with. If a lawyer, judge, or claims adjustor is biased toward a certain measure or risk, they would apply that bias consistently in their decision-making. Noise is far more widespread and random; as such, it is much harder to account for within outcomes.

The impact of noise

And yet noise, when measured, clearly has an impact on client outcomes for insurers. In his publication, Kahneman reported on noise in the processes of a US based insurer: a senior executive at the company estimated the annual cost of noise to be in the hundreds of millions of dollars.

What is to be done?

Some would see noise as an unavoidable consequence and just a part of doing business. But as our panellist and Partner at Kennedys, Martin Stockdale, pointed out in the session, where we have identified a problem, we have a duty to try and resolve it. Clients have a right to expect the greatest possible consistency.

Critics would say each case must be assessed on its merits alone; that is merely a comfort blanket. While each case may be different, there are still consistent facts which translate across all our work, and we must account for and reduce “noise”.

The first step is to understand the scale of the issue. This is why Kennedys IQ has been a strong proponent of ‘noise audits’ to identify the areas within claims handling where noise can have its biggest impact. The survey we conducted in the seminar is a basic example of the more complex claims audits we run for our claims partners.

Secondly, we must carefully analyse the results of ‘noise audits’ and implement solutions to the problems identified. This includes utilising technology to rapidly or even in real time audit our decisions. Our panellists agreed that it is little use for an auditor to approach a claims adjustor months after a decision has been made, asking to explain exactly what influenced their decisions.

Real-time technological audit, especially with AI capabilities, can rapidly access large databases and provide comparators, helping claims teams better see the historic patterns and requirements.

Understanding noise: a call to action

Our current claims process and the system for auditing claims is not set up to combat noise. If we are to mitigate this risk and make our claims system more effective, then the insights we are capturing need to become part of an industry wide conversation. A firm grip on “noise” in claims handling has the potential to save money, provide insured with a reliable service that they can trust as well as increase the efficiency of claims departments. It is time for insurers, clients and service providers work together to reduce noise.