The Colossus Phenomenon and Using Market Research to Increase Profits

Two very interesting topics on the agenda today: (1) What is really going with insurance companies' evaluation systems? (2) I will explain the importace of market research and review how you can use surveys to dramatically improve your business.

OK, on to the good stuff. Many litigators know that a number of insurance companies rely on claim evaluation software to assist adjusters in determining their offer range. Over the last year, I had the opportunity to present to and interact with sr. claims executives and in-house legal counsel at over 50 major insurance carriers, TPA's and corporations. During my discussions I asked about Colossus because it was relevant to how a company would prospectively use Cybersettle. I have also met with a number of claims/litigation vendors, including Computer Sciences Corp. (CSC), the company which created Colossus. Lastly, I had conducted considerable independent research on this subject, while running Cybersettle's marketing department to make more informed marketing decisions about the best course for the business.

What is fairly common knowledge, particularly among plaintiff's lawyers, is how conservative and restrictive some of the tools are. Some auto carriers have dealt with considerable criticism and I believe even some bad faith suits related to the use of this type of product.

What is not as well known, is that while some personal auto carriers use these products, it is virtually unheard of for a commercial insurer or corporation to use a claim evaluation tool like Colossus or Claims Outcome Advisor today. So, why do auto carriers use them? The bottom line: carriers that use them are more profitable than ones that pay claims faster. My research found that years ago, a major consulting company (which I won't name), conducted a major study with a national auto insurer (which I also won't name) that found it to be in the company's financial interest to fight even meritorious claims aggressively and that allowing files to age, typically a costly activity, would be more than counterbalanced by the reduction in indemnity / payout.

I have independently confirmed this correlation, through intimate knowledge of insurer financial profitability ratios (public information in the AM Best book) and direct knowledge of which carriers use claim evaluation systems. These carriers regularly refused the adoption of early settlement intervention tools like Cybersettle, while commercial carriers, which have greater incentive to satisfy larger policy holders, were considerably more likely to "play nice" with the opposition.

How can it be cheaper for these companies to litigate than to settle? It is cheaper, because tens of thousands of plaintiff's attorneys throughout the US choose to settle for the amounts put out by these claims evaluation systems than to litigate. Many carriers have advanced systems that allow their adjusters to determine which lawyers/firms are tougher and present a greater risk and which ones are pushovers and will take the figures put out by the evaluation systems.

If more plaintiff's lawyers litigated meritorious claims against auto carriers, there would be higher outcomes for their clients, more business for plaintiff's lawyers and more business for defense counsel. Today, plaintiff's lawyers have access to financial services and litigation outsourcing support that can level the playing field, so one solution for countering a reduction in claims is to make more with the ones that exist.

So, I argue that the challenge here lies not with the insurance companies. Jurors dictate the value of settlements, not computers. The issue is that less than aggressive plaintiff's lawyers are driving settlement value down by accepting lower payout that is offered by these particular carriers. Very often, more experienced lawyers refer these smaller cases to younger peers starting their practice. These lawyers need cash flow, so they sometimes accept less than they should, because they cannot afford to wait years for a pre-trial mediation yielding a considerably larger settlement.

Interestingly enough, despite the financial success of several large carriers with the system, bad faith suits and adjuster resistance have caused many other carriers to have a very negative outlook on these evaluation systems. Many carriers will insist that they merely use evaluation systems as baselines, or starting points. Nevertheless, the ones that have seen the most bad faith suits and negative publicity, have been the most rigid with the application of these systems. Again though, the problem is that these same rigid auto carriers have also seen extremely high profit margins / financial ratios.

Recently, CSC has developed a new product called PrecendentID, which allows users to reference actual historical settlements by carriers. This seems to be an attempt to offer additional information to help adjusters in their decision making process and seems like an effort to leverage more realistic data. So far this is a new product offering and to my knowledge does not yet have the market penetration of some of the traditional evaluation tools, so it remains to be seen what impact this will have in the long term.

OK, this takes me back to marketing and the tip for today:

Tip: Master market research to give your business a huge leg up on the competition.
There are 2 things I can tell you about a business that does not conduct appropriate market research prior to launching a product or service: (1) I am not handling marketing there and (2) it has considerably reduced its chance for success.

Do you know why 86% of new businesses fail in this country? Because people launch businesses based on gut feelings. Mike thinks to himself: "I can cook well and come from Italian heritage, so let me open an Italian restaurant - I can rent Tina's vacant commercial property down the street."

In addition to the many business / financial concerns one must be prepared for when starting a business, there are numerous critical marketing questions that must be resolved. In this instance: how many other restaurants exist? How many Italian restaurants exist? What is the market demand for Italian food in the area? What do patrons of Italian restaurants in the area look for in a restaurant? Does the competition have shortcomings? What are the shortcomings? How critical are the shortcomings? Can I excel in those areas where my competition cannot?

One of the best ways to find out the answers to these types of questions and many others, as would be applicable to your business is by conducting a formal survey of your prospective clients. I have never launched, nor recommended the launch of a new product or service offering without suggesting some form of market research as a preliminary first step.

As you probably have existing clients and chances are small that you are looking to launch new products or services, I will focus on the importance of client surveys in this post.

A client survey serves a number of purposes:
1) It lets the client know that you care about their opinion of your business.
2) It gives you vital insight into ways you can improve your product and/or service
3) It enables you to elicit additional client needs that may be met through new offerings
4) It strengthens your business brand and gives you greater credibility
5) It may give you competitive information that you were not aware of

Guess what, even if you are the managing partner of your firm or CEO of your company, you get to have a performance review. The client survey IS your performance review.

As a plaintiff's lawyer, what better way to remind a claimant that you appreciate his or her referral than sending him or her a post settlement survey?

Defense counsel, this is indispensable in your line of business. Your in-house lawyer or adjuster clients will greatly appreciate regular efforts by you to stay on top of your firm's performance. I promise you that conducting this one cost-effective marketing initiative properly, will yield tremendous financial returns for your firm.

Business vendors, why do your litigation clients use your product versus your competition's? What change can you make today that would cause 20% of the clients using another company to leave and do business with you? What enhancements are your clients looking for that may allow you to develop an alternative source of revenue?

I highly recommend that when conducting a survey, you trust someone experienced to help you set this up. As I mentioned, a well crafted survey is a VERY POWERFUL marketing tool. An experienced marketer will help you draft quantifiable, appropriate questions and help you avoid major pitfalls that a novice might make such as mistakenly attempting to sell under the guise of research -AN ABSOLUTE NO-NO.

My next post will discuss events/conferences and I will explain why I think that 95% of organizations are leaving big amounts of money on the exhibiting table each time they attend.