Milliman Datalytics-Defense: A new approach to understanding defense costs

For many companies, the cost to defend medical professional liability claims is actually higher than the cost of indemnity payments. In many cases, two-thirds to three-quarters of defense costs can come from defense attorney fees. Milliman Datalytics-Defense analyzes the huge amount of data in the line items on attorney bills and provides a new insight on the actual source of defense costs.

Video transcript

Milliman Datalytics-Defense™: A new approach to understanding defense costs

The rise of defense costs in medical professional liability

Chad Karls (Milliman principal, consulting actuary): Historically, going back maybe fifteen, twenty years or so, the indemnity costs were approximately double the defense costs. Defense costs have always been significant, maybe been one-third of the totals with indemnity costs at two-thirds of the total or so. The last two to three years, those lines have crossed, and for many companies the cost to defend claims is actually higher than the indemnity payments that they're making.

When you think about it, the insurance industry has sort of an entire department created to mitigate or manage the loss costs, the indemnity payments, and rightly so, because they're significant; but on the defense costs side, there really isn't a department set up to do that and there's just a dearth of data available to look at and to analyze. So what we set out to do was to help answer the question why defense costs were going up. Since two-thirds to three-fourths of the defense costs really emanate from defense attorneys, we look to the defense attorney bills to try to extract that data out of their invoices.

Turning information into data

Chad Karls: Most insurance companies have either monthly or quarterly billing set up with their defense attorneys, depending upon how frequent they want to do it. So it's not unusual for a defense attorney bill to be eight to 20 pages long, and on each of those pages they might have 10 to 15 individual line items. The granularity of this data is impressive, it really adds up in terms of the amount of information that's in there. It almost becomes too much information to analyze.

We're trying to turn this information into data because data is something we can use, something we can analyze, something we can look for trends in, something we can use to identify the reasons why defense costs are going up and begin to develop strategies or best practices around the data.

Complementing professional experience

Chad Karls: Milliman Datalytics Defense is complementing the claims adjuster with analytics, because the claims adjusters have twenty years perhaps of professional judgment, professional experience and that's quite valuable, it's nothing that we can replace. But what we think we can do is complement that professional judgment with analytics.

There are three primary features of the product. One is an auditing feature, another is a management reporting feature, and then the third feature is a predictive analytics part that will ultimately be able to produce sort of a best practices for defense.

Of course, claims handling is arguably the most important, most critical function that an insurance company does, it's fundamentally what they're in business for. To the extent that we can give them a tool to allow them to do that part of their job better, it will result in a competitive advantage for those companies that are able to complement their professional judgments with the analytics that can come from a system like this.