Claims leakage occurs when the amount an insurer pays for a claim exceeds the amount it expected to pay or should have paid. Although claims leakage may stem from many sources, it most often boils down to one core problem: inefficient claims processes.
Claims Leakage Is Costing Insurers
Claims leakage accounts for roughly 5 to 10% of total claim payments across all lines, costing the U.S. insurance industry billions every year, according to many sources. One consulting firm estimates that claim leakage could be as high as 20-30% for some P&C claims firms.
The U.S. property and casualty insurance sector cannot afford to let claim leakage go unchecked while it’s also shouldering the cost of increasing natural disasters and rising replacement costs driven by inflation.
S&P Global reports that the U.S. property and casualty insurers saw a net combined ratio of 102.5% in 2022 and of 101.7% in 2023. As insurers work to return to underwriting profitability, controlling claims leakage is a priority.
Claims leakage may be cause by several scenarios, such as:
- Paying fraudulent claims. The claims may be entirely fraudulent or mostly legitimate but exaggerated in a fraudulent way. For example, an auto insurance policyholder might stage a crash or report a crash that never occurred. Alternatively, a policyholder who has been in a real crash might add pre-existing damage to the claim. Either way, the insurer ends up paying more than it should have.
- Incurring losses that another party should have paid for. Insurers may issue payouts they were not responsible for. For example, an auto insurance policyholder might submit a claim for damage caused by a pothole. The insurer might pay the claim under a comprehensive auto insurance policy, even though the city or private property owner responsible for maintaining the road is liable for the cost. If the insurer never recoups this loss, it is paying more than it should.
- Mistakes made by claim handlers. Claim professionals work hard to ensure accurate payments. However, they’re human, which means they make mistakes. Sometimes, those mistakes might result in the insurer paying claims it shouldn’t or paying too much for claims.
With so many ways for claims leakage to occur, insurers might wonder where to focus their efforts. Claim process efficiency is a great place to start.
Five Ways More Efficient Processes Help Contain Claims Leakage
1. Catch more instances of fraud.
When you’re busy, it’s easy to miss things. As a result, you may fail to notice fraudulent claims.
Fraud is a huge problem for insurers. The Coalition Against Insurance Fraud says insurance fraud occurs in approximately 10% of all property and casualty insurance claims. Every year, insurers lose more than $300 billion to fraud.
Many instances involve fraudulent claims. In fact, Value Penguin found that 35% of auto insurance policyholders and 33% of home insurance policyholders have submitted claims for pre-existing damage.
When claims handlers are dealing with an inefficient claims process, they’re wasting their time on things like data entry and trying to find the information they need. This may mean they don’t have any time left to assess claims for signs of fraud. When claims processes include time savers and automations, claims handlers have the time they need to fight fraud.
2. Optimize subrogation opportunities.
To expedite claims for policyholders, insurers sometimes need to pay claims that are actually the responsibility of another party. They can then recoup the payout through the process of subrogation. However, insurers sometimes fail to follow through on subrogation, which means they end up eating the losses.
A more efficient claims process reduces the risk of this happening. By capturing data and simplifying reporting, it’s possible to capture more subrogation opportunities, which is good for an insurer’s bottom line.
3. Prevent mistakes in the claim handling process.
An efficient claims process that leverages automation reduces the risk of human error, which, in turn, reduces the occurrence of claims leakage.
Every time your file handlers have to enter information into the claim system, there’s a risk they will make a mistake. When policy data populates automatically, and claim data pulls through from one part of your claims system to another, file handlers don’t just save time – they also reduce errors.
If you are managing claims for many different clients, and you can set up custom rules and processes for each client that carry through to each of that client’s claims, the process becomes even smoother.
4. Prevent burnout.
If your file handlers are overwhelmed, they’re probably not performing at their best.
Burnout is a serious problem in the insurance industry, leading to significant losses in the form of turnover and lost productivity. According to Gallup, a lack of employee engagement costs companies $8.8 trillion in lost productivity.
Claims handlers experiencing burnout may not pay enough attention to their cases to prevent claims leakage. By implementing more efficient claims processes that reduce tedious, manual labor, insurance companies make claims handling jobs more enjoyable and prevent burnout.
5. Reduce litigation.
When claims are litigated costs increase significantly. Policyholders may turn to lawyers if they feel they aren’t getting a fair deal. This may happen when claims take longer than expected, when communication is not transparent, or when the payout seems unfair.
These issues often come down to inefficient processes. When file handlers are busy, they may not update claimants regularly or take the time to set reasonable expectations. This leaves claimants in the dark, resulting in an adversarial claims process.
When claims processes are efficient, there’s more time for quality communication and analysis. For example, a process that leverages automatic claimant updates keeps claimants informed throughout the process without requiring extra work from the file handler. An efficient process enables file handlers to devote more of their working hours to personalized service and ensuring the process goes smoothly.
How Much Are Inefficient Claims Processes Costing You?
If you’re using an inefficient claims process, you may be losing more than you realize. In addition to claims leakage, you’re also missing out on the opportunity to recapture time that you could use to grow your company.
Use the ROI calculator to see how much a more efficient claims system could save you.
