Insurance companies have management that set objectives for performance of their claims adjusters. A short explanation of management by objectives is the following:

Management by objectives (MBO), also known as management by planning (MBP), was first popularized by Peter Drucker in his 1954 book The Practice of Management. Management by objectives is the process of defining specific objectives within an organization that management can convey to organization members, then deciding how to achieve each objective in sequence. This process allows managers to take work that needs to be done one step at a time to allow for a calm, yet productive work environment. In this system of management, individual goals are synchronized with the goals of the organization.

An important part of MBO is the measurement and comparison of an employee’s actual performance with the standards set. Ideally, when employees themselves have been involved with the goal-setting and choosing the course of action to be followed by them, they are more likely to fulfill their responsibilities.

…the system of management by objectives can be described as a process whereby the superior and subordinate jointly identify common goals, define each individual’s major areas of responsibility in terms of the results expected of him or her, and use these measures as guides for operating the unit and assessing the contribution of each of its members. MBO refers to the process of setting goals for the employees so that they know what they are supposed to do at the workplace. Management by Objectives defines roles and responsibilities for the employees and help them chalk out their future course of action in the organization.1

I was thinking about this while reading an insurance claims industry white paper, The Analog to Digital Transformation of Property Claims Handling. The paper never mentioned a KPI that provided performance measures that ensured the customer was fully and promptly paid all benefits due. Instead, the discussion was about how to reduce the amount paid in indemnity or claims administration costs. Here is an example:

Some claims handlers attempt to cut costs by attempting to reduce severity. There is merit to doing this, such as when SIU units combat cases of fraud or overinflation of damages. No one would argue that this is a necessary aspect of claims spend mitigation, however it is a losing battle to attempt to reduce severity in the case of legitimate claims with policyholders that need to be indemnified. In these instances, severity is not the best metric to measure claims handling success. Instead, in the case of many claims, it can be more effective to instead combat the spend on expenses.

Until claims management is willing to reward ethical behavior of prompt and full payment instead of reduction of severity, unethical claims conduct will be encouraged. If you are interested in this topic, I would encourage you to read Thoughts On Claims Incentive Goals—Where Is the Goal To Not Overlook All Damages?

Thought For The Day

You’ve got to change incentives for good behavior as opposed to just disincentivizing bad behavior.
—Gavin Newsom
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1 Wikipedia. Management by objectives. Available online at https://en.wikipedia.org/wiki/Management_by_objectives (last viewed 09/09/2022).