The insurance industry is facing a period where claims costs are outpacing premiums by a significant margin. In fact, according to the Insurance Information Institute, underwriting losses are forecast to extend throughout 2025 and the industry is expected to close out 2023 with an average combined ratio of more than 102%. Insurers have been significantly impacted by lingering supply chain issues and inflation which has driven up the cost to make policyholders whole following a claim. The increasing occurrence and intensity of weather incidents and other natural disasters is having a profound impact on the cost of claims and the number of policyholders seeking compensation. Reinsurance rates are predicted to increase by between 30-50%. Because we work with 6 of the top 10 US P&C insurers (among hundreds of others) and process more than 60% of US auto and property claims, we are seeing these impacts on insurers firsthand.
Despite having a solid grasp on the factors causing the issue, tackling the problem is proving elusive. Annual premium increases are controlled by regulators and cannot simply be raised to cover increasing costs. And yet, in the U.S. alone, insurance rates are forecast to increase 8.4% in 2023, almost double the inflation rate at 4.9%. Some policyholders are even seeing premiums that are greater than their actual car payments. We have seen major industry players pulling out of California and Florida as they report they can no longer afford to do business in those states. Globally, the situation is not much different. As such, insurers must look to both lower claims expenses and better manage loss payments, which have proven difficult in the face of these looming macroeconomic factors.
The Automation Conundrum
Since raising premiums or finding less expensive ways to settle claims can be difficult, the industry has sought other ways to improve loss ratios. Primary among these strategies are process improvements that fall into the general category of “claims automation.” Making the claims process more efficient is clearly one way to reduce the cost of claims. Yet, we also know that there is no one single solution to the problem and that claims automation alone is not enough.
Claims automation should be strategic, and paired with effective fraud and risk detection across underwriting and claims. The industry has long known that without proper mitigation strategies in place, claims automation has the propensity to introduce greater amounts of fraud into the process. Conventional wisdom puts that increase at up to 30%. When that happens, insurers offset any efficiency gains with increased claims fraud losses.
In the battle to improve combined ratios insurers need to be thinking bigger than just automation or fraud. Starting with the point of sale, insurers can mitigate the risk of writing bad policies. They can approach subrogation and recovery differently. They can apply modern techniques and technologies such as artificial intelligence (AI) to both the policy and claims lifecycle to improve combined ratios which is good for the insurers and their insureds.