The motivation for this memo comes from the recognition that ICBC is at a critical point in its history. Dramatic improvements to Corporate function are urgently required. It is hoped that the comments provided here will assist in identifying the problems and potential solutions.
The good news is that such solutions are immediately attainable. The Corporation already has the benefit of a skilled work force, an effective organizational structure, and a solid history of good Corporate performance. However, a complete revision of the overarching claims management philosophy that was adopted in 2008 is clearly required at this point.
Properly implemented, such a revision will restore positive Corporate outcomes in terms of:
- Quality claims settlement
Factual content for this memo is derived principally from “A Review of the Insurance Corporation of British Columbia, August 2012” prepared by Internal Audit and Advisory Services, Ministry of Finance, together with the content of the attachments to the 31 August 2015 letter from ICBC to the British Columbia Utilities Commission supporting ICBC’s latest rate increase request.
The Corporation’s approach to the settlement of bodily injury claims is a major determinant in its ability to deliver both affordable insurance and timely and appropriate claims compensation.
Affordable insurance delivering timely and appropriate claims compensation is now and has always been the fundamental mandate of this Crown Corporation.
Eight years ago ICBC began the implementation of significant changes to its strategic approach to the settlement of bodily injury claims. Given that these changes have taken several years to be fully implemented, and that the effect of these changes has taken several more to work their way through the thousands of pending claims, their actual effect can only now be clearly viewed and appropriately analyzed.
The conclusion of this review is that, as a direct result of fundamental changes to the overall management philosophy of the Claims Division begun in 2008, the cost of insurance is significantly higher than it should be, and the delivery of compensation has become burdened with unnecessary delay and process based costs.
The first part of this memo is a brief, fact based summary of the outcomes of these changes in terms of four key indicators of Claims Division performance:
- Impact on Premium Rates – (affordability of insurance)
- Pending – (number of unresolved injury claims)
- Severities – (average cost to settle claims)
The second part of this memo provides an analysis of how those outcomes were produced in the context of the same four key factors.
The third part provides recommendations for positive change.
PART 1 – SUMMARY OF OUTCOMES
Premium Levels – Affordability of Insurance:
Premiums in 2012 increased by 3.6%. The overall average premium increase per year in the ten years previous was .8%. ICBC is currently before the BCUC with a request for further increases in the amount of 11% over 2012 levels in terms of Basic Insurance.
Premium increases between 2001 and 2011 averaged at 1.6% for Basic, -.3% for Optional for an overall average premium increase of .8%. In 2012 ICBC advised the BCUC that an 11.2% increase in Basic Insurance premiums together with a -6% decrease in premiums for Optional Insurance, resulting in an overall premium increase of 3.6% was necessary (see table on page 7 of the Internal Audit and Advisory Services Review of ICBC of August 2012). The impetus for the 2015 overall rate increase request from ICBC is also based mainly in the need for revenue to supplement Basic Insurance Operations.
The acceleration of premium increases since 2011 is attributable to the financial performance of Basic Insurance Operations.
Pending – Number of Unresolved Injury Claims:
The average pending injury exposure count per adjuster has gone from 218 in 2006 to 245 in 2012. There is every indication that now in 2016, average pending case-loads range from 250 to 300.
Given that roughly the same number of new claims come into the system each year, increases in the number of unresolved or pending claims document the fact that individual claims are taking longer to resolve.
On the affordability side, higher pending case-loads lead directly to greater operational costs and higher settlement values. Investigations on coverage, liability and quantum issues are delayed, leading to reduced quality of information necessary to assess risk and missed opportunities to mitigate the incidence of process based inflation of settlement outcomes.
“Process based inflation of settlement outcomes” refers to the increase in the legal value of the claim proportionate to the length of time it is in the litigation system; as opposed to the intrinsic value of the claim based on the effects of the injuries claimed for.
Timeliness of settlement is also important from the perspective of delivery of compensation.
Two obvious examples are those who are suffering income loss and/or are in need of rehabilitative services not provided for in the Accident Benefits coverage. Not so obvious but equally important is the fact that injuries suffered by people cast in the role of ‘victim’ by the nature of the tort system in which ICBC operates, have a psychological component.
Unresolved litigation leaves people in a position of conflict and uncertainty which exacerbates the psychological component of the injury thereby increasing the settlement value.
Severities – Average Cost to Settle Injury Claims:
Bodily Injury claims costs have increased by 33% for claims under $40,000 and 45% for claims over $40,000, between 2008 and 2014. Inflation over the same period would only account for a cumulative increase of 12%.
The following information is drawn from ICBC’s own submission to the BCUC in support of their latest request for a rate increase.
BI Claims Costs, excluding litigation costs, for claims under $40,000 in 2008 are 300 million, which is increased to 395 million in 2014, an increase of 33%. If litigation costs are included they go from 339.3 million in 2008 to 431.1 million in 2014, an increase of 27%.
BI Claims Costs, excluding litigation costs for claims over $40,000 in 2008 are 641.1 million, which is increased to 928.6 million in 2014, an increase of 45%. Again if one includes litigation costs, they go from 825.7 million to 1.1948 billion in 2014, also an increase of 45%.
We know that the Courts adjust awards for the rate of inflation. The most prominent example of this is the regular adjustment of the ‘rough upper limit’ for non-pecuniary damages. Inflationary increases pertinent to wages and the cost of health care indirectly lead to rising levels of compensation for related losses. That accounts for only 12 % of the 33% and 45% increases (above and below the $40,000 valuation marker previously noted) in the rate of injury claim payouts. This difference that is unrelated to inflation needs to be addressed in terms of what contributing factors within the Corporation’s control can be better managed.
Work Force Efficiency – Employee Morale:
The more knowledgeable an employee is about injury assessment and settlement, the lower the level of Corporate engagement. Employee disengagement ranges from two thirds to over 90% depending on which segment of the work force is surveyed.
ICBC’s Annual Report for 2013 (the latest one available on their web site as of January 2016) shows only a 34% engagement rate among employees generally. I understand the rates in the Claims Department are lower, down to as much as 8% at the most senior levels of technical staff. Later surveys show better results but apparently the questions asked were revised to effect this positive result.
It’s axiomatic that the more inspired and enabled any work force is the more productive it becomes.
PART 2 – ANALYSIS OF OUTCOMES
Affordability of insurance:
The BCUC rate increase application presented by ICBC in 2015, like the one presented in 2012, calls for the use of surpluses achieved in the Optional Insurance Operations division of ICBC to subsidize losses sustained in the Basic Insurance Division. This indicates that the problem lies primarily in the management of the type of injury claims encountered in the Basic Insurance Division.
The Basic Insurance Division deals primarily with soft tissue injury claims where improvements to risk management practices within the control of the Corporation would lead to reductions in Pendings and Severities.
Pending – Number of Unresolved Injury Claims:
When the number of files in a case load exceeds the adjuster’s ability to complete investigations and respond to medical rehabilitation and settlement opportunities in timely and technically appropriate ways, operational costs and loss settlement amounts go up.
Soft tissue injury claims, often referred to as “whiplash claims”, the stuff of Basic Insurance Operations, are essentially the physical and psychological pain experienced by an individual as a result of injuries that have minimal obvious physical manifestation.
There is ‘no broken bone to x-ray’ so severity and duration are defined through subjective complaints and expert opinion. The value of soft tissue injury claims is based therefore, on the recognition afforded through litigation of the extent of this pain and suffering together with consequent loss of ability to earn income, and the requirements for medical treatment and rehabilitation.
The longer soft tissue injury claims are left both in terms of treatment and settlement discussions the more entrenched they become in the individual’s life, within the medical records, and thus within the legal construction. In other words, time equals money.
Adjusters can only handle so many files. As pendings increase files are left for increasingly longer periods of time in terms of file management. It’s often the case that, due to a lack of funding, medical treatment is also delayed resulting in missed opportunities to achieve greater levels of recovery.
Current pending levels exceed practical file management capacities and are continuing to climb.
To understand why pendings continue to increase, one must first make note of the fact that an integral piece of the directional change in Corporate strategy begun in 2008 involved a drastic reduction in the level of discretion previously held by the professional staff directly involved in the management of claim files.
The adjusters who handle the files on a day to day basis, who interact either directly with the public, or indirectly through plaintiff lawyers, went from an ability to make decisions at their own discretion on most of their work day tasks, to a requirement to meet with, and/or write reports to, various levels of management, on almost all of their files.
This has the effect of at least doubling and more likely tripling the amount of work they are required to do to handle the same number of files. Additionally, authorized decision makers are frequently not available when needed. There’s not enough of them individually and certain matters procedurally now require committees of decision makers. The logistics of organizing committee meetings creates further delays. This then bottlenecks both the investigative and settlement processes and leads to further increases in pendings and delays in settlement.
Now that the problem has become impossible to ignore, rather than improving efficiency through devolution of authority back down to technical staff, in February 2016 management posted for an additional 225 injury adjusting positions. This will only result in an even larger work force ensnared in excessive and unnecessary red tape.
If the current management approach is extrapolated, then once these adjusters are actually hired this could likely be seen by management as yet another opportunity for more micro-management, which will eventually lead to yet another call for more staff.
Severity – Average Cost to Settle Injury Claims:
No matter how much documentation has been accumulated, no lawyer worth their salt will guarantee a trial outcome. It is by nature unpredictable. The more embedded the litigation process becomes in any particular claim, notwithstanding the discovery of outright fraud (a rare occurrence), the more it costs to manage, and the greater the litigated value. Even after extensive document discovery and oral examination, each litigated file still has a significant level of unpredictability in terms of trial outcome.
All insurance claims divisions, but particularly those that are publicly mandated, have an essential duty to handle funds entrusted to them responsibly and competently. This involves the concurrent application of two disciplines that are theoretically in apposition to each other, Accounting and Risk Management.
Accounting requires that ideally each expenditure is documented. Risk management involves weighing the advantages of settlement opportunities in the present against possibilities in the future and acting on that assessment, most usefully before substantial amounts of documentation and process related expense and value are in fact accumulated.
Healthy claims divisions are characterized by a well-adjusted balance between the two. At present, accounting practices enjoy an unhealthy prominence over risk management techniques at ICBC.
The actual production of a great deal of these documents requires the services of lawyers, ones acting on behalf of the plaintiff and others that are billing the Insurance Corporation. Consequently, and again drawing from ICBC’s own submission to the BCUC in 2015, the legal representation rate in 2013 was 48%, up ten basis points, or more than 20%, from the 2008 level of 38%. 2008 was a time when emphasis on Accounting began its ascendancy over Risk Management.
The presence of legal representation is driven by many factors however the over-documentation of files is a significant one. Claimants need lawyers to develop the documentation that ICBC now demands.
Over-documentation also leads to significant disbursement and legal fee expenditures that could simply have been avoided were responsible risk management practices more prominently employed.
The more extensively a matter is explored through litigation the more value related credibility it builds within the system. The presence of legal counsel in turn, leads directly to a greater incidence of process based inflation of settlement outcomes in other ways. Remember there are no black and white manifestations of soft tissue injury claims so their value is largely a matter of interpretation of subjective complaints combined with often partisan, expert opinion.
The cost of obtaining this documentation leads to a greater vested interest in the prosecution of the claim and thus greater motivation to maximize the value.
Extended litigation creates delays in settlement that embitter injured people and turn their focus away from rehabilitation and onto compensation.
All of these factors upwardly influence the value of soft tissue injury claims, which are the essence of the Basic Insurance Operation, which is where the greatest impetus for higher premium rates originate.
Work Force Efficiency:
Claims professionals, like other professionals, are involved in a lifetime of skill development. They take pride in what they do. They see their work as meaningful.
Unnecessarily taking away their proven ability to manage their case-loads is seen by adjusters as both demeaning and stressful. Add to this the consequent degradation of work product outcome and accordingly, the high levels of disengagement documented in recent surveys result. A further indicator of the negative effect of the 2008 strategic changes in claims settlement approach then can be seen in terms of employee morale.
Injury adjusters are dealing with people who have suffered traumatic events that have significantly and negatively affected lives, so what adjusters do is important. The positions they adopt can have serious consequences on both the Corporation and the injured party. All of this occurs within the tort environment, which is by definition, adversarial.
This inefficient use of the professional capacities available within the Claims Division work force, with its concomitant deteriorating outcomes in an adversarial world, results not just in low morale, but also in poor claims service and increased costs; these eventually translate into higher premiums and a perception of unfairness amongst injury claimants; which is inexorably creeping daily into the psyche of the general public.
PART 3 – RECOMMENDATIONS FOR THE FUTURE
Over the last nine years the number of people getting injured as it relates to available premium payers, and the law that governs the parameters of settlement, has not changed substantially and yet the demand for premium increases not only continues, but since 2011 has begun accelerating. The key to reversing the trend is a set of changes involving leadership, work force efficiency and litigation strategy.
The philosophy behind the recommended changes noted here is essentially to make better use of existing resources through a devolution of decision making authority to the public interface together with a greater emphasis on risk management. As such, the recommendations do not require an increase in the size of the existing work force, nor significant revision of the current organizational structure.
The following is an overview of how real, constructive change can be accomplished in the immediate future while avoiding the expense and disruption that is commonly associated with significant corporate change.
The mandate of the Corporation can be succinctly put as
affordable insurance delivering timely and appropriate compensation
This mandate needs to be prominently expressed and actively endorsed in all areas of the Corporate work force, starting with the upper levels of leadership, i.e. the Minister, the Board, and the CEO and the Vice President of Claims all the way down to the entry level clerk, particularly in the Claims Division; and in all phases of Corporate activity from operational matters to strategic initiatives.
Work force efficiency:
Responsible, audit based management supervision of technical staff coupled with a process where authority to investigate and settle injury exposures is methodically devolved back down to the adjusters actually managing case-loads must replace the current, overly bureaucratic micro-management model.
The current situation in the Claims division is analogous to a military operation where front line soldiers must rush back to the General for a new bullet every time they fire their rifle.
It must also be recognized that part of the ‘work force’, paid for in some instances directly and in others indirectly, by the Corporation goes beyond management and union staff at ICBC.
It includes the health care professionals that provide treatment and prepare reports. Engineers, accountants, actuaries, and other professionals that provide expert opinion used in litigation; as well as private investigators, independent adjusters, defense lawyers and mediators that provide related professional services. Relationships between ICBC and these entities have deteriorated and need to be redefined and rebuilt.
Ancillary entities not paid for by ICBC but integral to the resolution of claims such as the police, and court house facilities and personnel, and the plaintiff bar also need to be recognized as playing important roles in the efficient resolution of injury claims with due attention paid to those relationships as well.
Leadership and the implementation of work efficiency improvements, together with a restoration of an appropriate balance between accounting and risk management practices, will make possible a major shift in litigation strategy. Such a shift, if properly executed, will reduce operational costs and the process based inflation of actual settlement values as well as increase the incidence of timely and appropriate injury compensation.
Litigated and non-litigated negotiation of injury settlements are inextricably linked by virtue of the fact that ICBC operates in a tort world. A properly managed litigation strategy, in conjunction with an enabled and inspired technical staff, and better integration of ICBC into the relevant communities, will also enhance non-litigated settlement activity to the benefit of both the Corporation and the claimants.
From this base there are dozens of specific steps that can add to a positive momentum in areas affected by the operation of the Insurance Corporation.
On a final point, beyond ICBC specifics, it should be noted that the Insurance Corporation of BC is the elephant in the world of civil litigation. It sets the tone for other civil litigation. Right now the effect of its policies over the last eight years has been one of polarization, which has affected all areas of civil litigation. If you care to research court use statistics you will see that the waiting time for trial dates, the incidence of bumping, the expansion or need for expansion of court facilities and personnel has all increased over that eight- year period.
About the Author
There is a full biography on my web site but here are the salient parts that I think explain the motivation and qualification to write this paper.
My first experience with automobile insurance was as an Information Officer in Winnipeg in 1971 taking phone calls from the public to assist in the introduction of government owned, universal automobile insurance. I did the same thing again at ICBC from November 1973 to February of 1974.
On 1 March 1974, at 9:00 a.m. in Campbell River I opened ICBC’s very first claim file.
From 1975 to 1977 I was the Resident Adjuster in Port Hardy, which in real terms meant that I was the personification of ICBC in an isolated community. That experience taught me how citizens view and respond to policy changes in claims handling.
From 1982 to 1984 I ran an injury desk in ICBC’s Out of Province Claims Department which forced me to think about claims settlement beyond the culture and statutory framework of our home jurisdiction.
I have also held first level management positions in material damage and bodily injury centres. This piece has given me further understanding of how administrative decisions impact on customer service and severity control at the public interface in an urban setting.
In October of 1989 I resigned from ICBC to start my own independent adjusting company, contracting my services back to a wide range of casualty insurers. For the next ten years a number of Head Office Claims Examiners at ICBC and I developed a collaborative and cost effective approach to the settlement of catastrophic injury claims. Since 2000 I have acted as a mediator in well over 2,000 files, about 80% of which involved ICBC as the defendant insurer.
For the past three years, in addition to my active mediation practice, I served as a member of MediateBC’s Roster Committee. Currently I am the Vice President of the Commercial Mediators Association.