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UNDERWRITING STRATEGIES

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A little-recognized problem is occurring at many property/casualty insurers, and it may be costing those companies a bundle.

The problem, which stems from a popular form of underwriting, involves policy deductibles that go uncollected because of inadequate tracking of claims and policy information, insurance executives and others say.

A particular concern is third-party deductibles, where the claimant differs from the policyholder. When a company makes a claim on its own policy and the insurer pays the claim, billing to collect the deductible is straightforward: It typically goes to the same entity.

But, when a third party-for example, someone who suffers a loss insured under the company's general liability policy-receives a claim payment, the insurer's claims staff may not have sufficient information to determine whether the policyholder owes a deductible and how to bill for it.

A few hundred dollars on a claim here, a thousand there, and over time the uncollected third-party deductibles add up to significant amounts , industry sources say.

How much money is going uncollected? Industrywide, "$100 million is a fairly safe bet," said John Gradowski, assistant vp-commercial insurance group at USF&G Corp. in Baltimore.

"Insurance companies are large and very difficult to coordinate. You've got underwriting, claims and accounting departments. If procedures aren't in place to coordinate those areas, money can fall through the cracks very easily," he said.

Paul Reid, regional claims officer in Sacramento, Calif., at CNA Personal Insurance, a division of CNA Financial Corp., agrees. He encountered uncollected third-party deductibles a few years ago when he worked in commercial lines at CNA.

"Underwriting would sell the (deductible programs), but it was never clear who was responsible for collection," he said. "We found clearly, over time and all over the country, it really came down to an accounting nightmare. (Deductibles) change, insureds cancel coverage and grow. It's hard to keep up with."

Deductibles go uncollected largely because of a lack of communication among the claims, underwriting and billing areas and antiquated computer systems that were not designed to keep pace with underwriting changes, two software experts say.

"It's a classic case of the underwriting department developing a concept. The problem is, nobody checks with the accounting tail of the dog and says, 'How are we going to account for this?'*" said Ron Morris, president of JDWarren & Associates, a Carnegie, Pa.-based software service company that helps insurers recoup uncollected deductibles.

"The type of policy with deductibles is complex. The products appear very nice when you sell them. There's a lot of appeal to it. But the bookkeeping for it is not easy," explained Mike Lopes, executive vp at JDWarren.

Mr. Morris, who co-founded JDWarren in 1994 to develop software for manufacturing companies with Mr. Lopes and a third partner, didn't intend to get involved in insurance industry software. That same year, however, an insurance executive approached him at a trade show. Hearing how the company couldn't collect certain deductibles, JDWarren began developing software to solve the problem.

The software company since has helped two large insurers collect nearly $5 million.

"It's real money. It's money that goes right to the bottom line," Mr. Morris said. "It's a lot of money to be just floating around out there."

The problem of outstanding deductibles is relatively new. The commercial property/casualty industry did not begin offering deductible insurance programs widely until 1990, Mr. Gradowski explained. As market competition grew, more underwriters began offering deductibles to share risk with the policyholder, which reduces the buyer's premiums, he said.

Third-party deductibles are most common in general liability, auto and workers compensation policies, Mr. Gradowski said. "A third-party deductible is attractive for insureds that are serious about reducing their loss experience," he said. Third-party deductible programs "can be designed and tailored to the specific needs of the insured."

In 1996, USF&G estimated it had about $2 million a year in uncollected third-party deductibles on a $600 million book of auto liability and general liability business, Mr. Gradowski said.

"Most of the major property/casualty insurance companies have run into the same problem," he said.

USF&G assigned its claims department to work on the problem, but after learning of JDWarren though word of mouth, the insurer sought the software company's help, Mr. Gradowski said.

"Smaller vendors (like JDWarren) can respond more rapidly to a problem than we can," he said, adding that he knows of no other vendor that specifically handles uncollected third-party deductibles.

Since October 1996, JDWarren has collected about $250,000 a month for USF&G, Mr. Morris said. Similarly, JDWarren has helped CNA collect several million dollars since 1994, he said.

JDWarren runs claims data from its insurer clients through a software program that flags claims filed under policies that may have deductibles. By mining the data, the software company identifies claims needing further investigation, Mr. Lopes said.

Once uncollected deductibles are discovered, JDWarren's customer service staff members, who are used to solving software problems over the phone, contact the policyholder on behalf of the insurer. It has been very successful so far, according to Mr. Morris. "We've never alienated a customer," he said.

Mr. Gradowski agreed. "The people they (JDWarren) talk to say:

'Gee, I know I owe this money. I just didn't know who or where to pay.'"