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Claims settlement causes the largest outflow of money from an insurance company. In fact, claims expenditure for insurer’s accounts for approximately 80% of their total costs. Needless to say, the battle is on to develop a market leading and cost effective claims service in a rapidly changing and increasingly competitive market environment. Insurers are under increasing pressure to improve the level of claims service. After price, poor quality of the customer claims experience is generally the most common reason for policyholders to change their policy to another insurance carrier. After all, a policyholder only really finds out how good their insurer is when they have to make a claim, and it is critical that insurers handle claimants both with sensitivity and efficiency in their hour of greatest need.

Today the critical challenge for the management of insurers is achieving an optimal balance between improving bottom line profitability and enhancing customer service and responsiveness. Leading insurers are responding by examining each aspect of their claims value chain from notification through to subrogation , understanding their capabilities and establishing opportunities for improvement / value generation within each segment. Overall ensuring that claims service is an integral component of the insurers broader proposition is now central to a deepening and retainable relationship with customers, whilst providing leading edge claims service is increasingly seen as a key differentiator.

For the reasons mentioned above, claims management is important as it is key to protecting the insurance company’s market share, shareholders funds and the funds created by the premiums paid by the policy holders. As we handle claims, we need to be aware of the regulatory environment which dictates the parameters within which each claim must be handled. However in this global economy, claims may arise anywhere in the World and the claims handler will need to be sure that they comply with the rules in that part of the World too. The handling of claims is a key part of an insurer’s business. It is after all the promise to pay which has been purchased by the policy holder. It is that promise which is tested when a claim is made to the insurer. In handling claims, the key principles which a claims handler should bear in mind are to conduct business with integrity, due skill and care and diligence and to treat customers fairly.

In a competitive market place, treating customers fairly is an important element in determining the success of a firm in acquiring and maintaining the customer share. It is just as important as service levels, pricing and customer satisfaction. Fair treatment entails that customers receive clear information during the claims process, that the policy performs as they were led to expect and that there are no unreasonable barriers to submitting a claim. It also means that the policy holders who suffer a loss gets an appropriate indemnity. At the same time, payments must be justified. When a claim occurs, this is often the first contact a customer will have with the company since inception of the policy. Perceptions of a company gained at this point are difficult to eradicate. Even if a claim is paid in full, customers can be dissatisfied if the experience is less than what they expected. A quality claims service should therefore provide at least the quality that the customer expects. This requires that the claims must be handled in a consistent, yet flexible and fair manner that is transparent, accurate and timely.

As we handle and settle claims, the claims handlers should not ignore the Leakage aspect, which has huge impact on any insurer’s profitability. Claims Leakage is no joke and is a very costly experience that consumes millions and millions of dollars to the insurance industry. And that affects everyone. Although estimates vary widely, it is generally considered that insurers could reduce their overall claims cost by up to 20%, a significant proportion of which result from reducing claims leakage. Leakage can be defined as moneys lost through claims management inefficiencies that ultimately result from failures in existing processes (manual and automated). In other words, it's the difference between what is actually spent and what should have been spent on a claim. The cause can be procedural, such as from inefficient claim processing or improper/errant payments, or from human error, such as poor decision-making, customer service, or even fraud.

Identification of Claims Leakage can be accomplished through an audit of closed claim files. Analyzing the results of the closed claim files (i.e. how they were settled or closed) by comparing them against a number of leakage factors to determine the accuracy of the closure will show how bad the leakage is. For example, how consistent were the settlement decisions made when compared across the claim organization? Were proper reserving and settlement guides used? Was investigation sufficient to reduce the likelihood of fraud? Were subrogation/third-party recovery attempts made consistently and effectively across this sample of claim files? A review of any overpayment is a useful tool in the development of a more efficient claims handling process, since it is likely to identify areas for improvement. Identifying overpayments requires a review of the handling of a claim through various stages. This can be conducted through using an insurer’s internal resources or by employing the services of external consultants to perform a review on its behalf. Once this review has been conducted, and an idea of the extent of the leakage has been determined, then the organization will be in a position to decide on the next course of action.

Analysis carried out in the past has categorized the course of the leakage as process issues and human issues.

Process Issues:

  • Inefficient claim processing
  • Improper/errant payments (which can result in fines and penalties) Human Issues:
  • Poor decision making (missing the opportunity of settling a bad claim early in its life cycle)
  • Poor customer service (unreturned phone calls, longer claim processing time)
  • Fraud Of course, hiring good claims people utilizing efficient processes is a logical and time-tested solution for the problem of claim leakage.


Leakage can be categorized as either hard or soft . Hard leakage is relatively easy to identify for example failure to apply a deductible. On the other hand, soft leakage is relatively difficult to identify for example failure to negotiate third party costs adequately, failure to make appropriate adjustment for wear and tear . The main sources of claims leakage in terms of quantum vary from one insurer to the next. One common theme is a failure to detect fraudulent or over inflated claims which when coupled with an excessive reliance on manual processes resulting in the inevitable human error and the potential for the build up of processing backlogs can give rise to significant pressures in the early stages of the claims value chain.

Excessive levels of litigation or a tendency to litigate rather than reach an early out of court settlement at more economic levels will inflate overall claims expenditure and delay claims resolution while inconsistencies in the claims handling approach case reserving and settlement values across individual claims handlers within an organization will increase the level of uncertainty around eventual claims out turns and result in unnecessary over-payment on valid claims. Finally, missed or late reinsurance recovery, identification, reporting and collection coupled with reinsurer failure can adversely impact the bottom line as can the poor recognition of potential third party recoveries and salvage opportunities . For reinsurers, claims leakage can arise from all of the above sources on the part of the cedants and the right to audit cedants claims files provide the primary opportunity to establish the sources and extent of over expenditure and to seek remedial action as a consequence. Other common sources of leakage for reinsurers include poor internal controls , poor workflow management resulting in missed opportunities to influence the out turn of very large or complex losses; and the incorrect application of exchange rates, deductibles, numbers of reinstatements and indexation clauses.

Examples of leakages are:-

  • Paying claims for which the insurer has no liability
  • Missing cases of potential fraud
  • Failing to pursue recoveries
  • Incorrect salvage deductions
  • Overpaying for credit hire
  • Overpaying for salvage
  • Incurring unnecessary costs for third party claims handling
  • Incorrectly allowing or disallowing no claims discount at renewal
  • Settlement delays resulting in soaring credit hire and storage costs


To quantify the overpayment, the reviewer has to judge what should have been paid to make acceptable payment according to the policy terms, and then compare that with what was actually paid. While most insurance companies aim to keep claims leakage at a rate lower than 3%, according to the last forensic audits conducted during the past three years, claims leakage averages around 11% of total cost of claims settled.


The negative impact of the leakage can be addressed through the effective use of technology. Leading insurers have adopted a number of different techniques to reduce or eliminate claims leakage. Some of these have centered on IT-enabled controls environments or the use of cutting edge technology, whereas others have resolved through easily implemented step changes to the underlying process. Some of the more common uses of enabling technology have included the implementation of the latest generation rules based claims handling systems for high volume low value claims.

The use of technology and techniques for the identification of fraudulent claims including access to industry fraud databases ;

E-procurement of vendor services via insurers extranet with sourcing taking place in real time or near real time;

E-procurement systems have the added benefit of ensuring adherence to the most up to date panel of preferred suppliers and the identification of volume discounts due;

the use of new software tools which generate indicative case reserves on the basis of the key parameters of the claim with such tools leveraging wither internal information from the insurers claims universe or though external benchmarking ;

A move towards systems driven reinsurance and third party recovery identification and online recovery advice issuance and collection Reducing the amount of leakage has become one of the most important areas of strategic concern to insurers, and the ultimate client: the policyholders. Claims leakage can be controlled by first of all identifying leakage points;

streamlining procedures; Implementation of effective anti-fraud strategies and harnessing new technology to automate time-consuming, but routine, manual processes.

The latest generation rules based claims systems represent a huge advance for insurers looking to eliminate or significantly reduce claims leakage. Whilst effective case strategy development loss adjusting and negotiation; can result in significant savings to the insurer in the context of very large or catastrophe claims’ in practice high volume low value claims generally represent the bulk of an insurers overall claims cost. As a result, rules based claims systems have evolved to such an extent that lower value claims, which are notified on line, are capable of being investigated, validated, adjusted and settled with little or no human intervention.

Even where a cutting edge state of automation has not yet been achieved by a given insurer, a claims handler is now able for example to ensure that a preferred supplier within a close geographical proximity to the claim site can be identified briefed and deployed with minimal effort. By underpinning all consumers touch points with such a system and integrating it with all other internal systems and extranets a significant speed of resolution and efficiency gains as well as enhanced levels of service can be achieved. By linking all of an insurer’s key suppliers and outsourced service providers into the insurers claims system via a web enabled technology real time information on the status of a claim can be made available to both the claimant and the insurer as well as the enhancement to the insurers knowledge of the performance of different suppliers. Whereas such systems have become increasingly widespread among personal lines insurers and commercial lines insurers covering the SME markets insurers of much larger risks have not generally embraced such advances to the same extent, primarily given to their different mix of claims by value band.

This notwithstanding; the continued commoditization of the external loss adjusting services for lower value commercial claims we consider that cost savings and efficiency gains are achievable through the adoption of such technology for all types of claims. At the very least such systems allow decisions to be recorded more effectively as well as reducing substantially the time spent on the administrative aspects of claims of all sizes. The system also enhance the quality of the data being retained which provides to insurer with better MIS on which to base all aspects of the management of the claim and the policy.


Increasing demand for even higher levels of customer service and satisfaction has required insurers to reconsider their claims strategies and overall customer proposition. Where insurers have sought to reduce the extent of claim leakage this has provided an offset to the additional cost of the enhancements to the customer experience. The real prize for insurers is to continue to provide a differentiated claims service while significantly improving the bottom line through a combination of higher revenues via improved customer retention and reduced overall claims outgoing.

Controlling claim leakage is an important method in reducing a company's ultimate cost of risk. And for the claim organization, it is a way to differentiate itself from other providers as a superior organization. Proper usage of claim systems, basic reporting analysis, and advanced tools such as predictive analytics can be valuable allies in reducing this cost.


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