UK: Insurance Market Update: The Deloitte View for Non-Life Insurers - September 2010

Welcome to the September 2010 edition of the Insurance Market Update in which we focus upon issues in the general insurance industry. In this issue we look at a technique that could reduce expenditure and improve the reported results of the industry.

General insurers are operating in a challenging market in terms of their ability to generate sufficient returns for investors. Claims indemnity spend is the largest component of an insurer's expense base. Focusing on reducing this expenditure could offer material rewards to insurers with an associated impact upon investor returns.

In this article Erik Johnson and Jonathan West explore whether insurers can reduce any unnecessary claims spend - claims leakage – without impairing policyholder confidence. Performing a closed claim file review quantifies leakage at an overall level and then analyses the reasons into component parts. Once identified, appropriate actions can be taken to prioritise future process change. In many cases, insurers will be able to make quick wins to capitalise from such a review and improve profitability.

As always, we look forward to receiving your feedback; your views, comments and suggestions for future themes or topics are most welcome.

Kevin Elliott


General insurers are operating in a challenging environment, with the market overall struggling to generate consistent underwriting returns. Recent available data from the Association of British Insurers (ABI) indicates:

  • for UK general risks, premiums fell by 8.8% and claims rose by 1.2% in 2009;
  • a ten year average return of 4.3% on worldwide general business assets; and
  • the 2009 general result being the lowest worldwide insurance trading profit since 2003.

Whilst the fall in premiums may reflect some insurers transferring business "off shore", the general trend is one of falling premiums and rising claims. These market dynamics combine to paint a challenging environment for the UK general insurance market in terms of its ability to generate sufficient risk adjusted returns for investors.

Focusing on reducing indemnity spend is a way for insurers to drive material improvement in their financial performance and improve their returns to shareholders.

Claims indemnity spend is the largest component of an insurer's expense base. Even a small percentage change in claims indemnity spend can have a significant impact on insurer profitability. For instance, in 2009 for UK risks net claims amounted to £21.2 billion; a decrease of 3% would have saved insurers £636 million. On this illustration, UK risks could have generated a net underwriting loss of (£124 million) compared to an actual underwriting loss of (£760 million), a significant improvement for insurers' shareholders.

The gearing effect of reducing claims spend on insurer profitability is significant. The above analysis demonstrates how a reduction in claims indemnity spend of 3% in 2009 would have reduced the net underwriting loss by 84%. While reducing claims management costs also has benefits, the lever with which insurers can use to drive significant increases in profitability is through reducing unnecessary claims indemnity spend – "claims leakage".

What is Claims Leakage?

While there are several definitions of claims leakage used in the market, a simple definition is that leakage is "the difference between what is spent to settle a claim and what should have been spent". When considering claims leakage it is useful to consider leakage as either avoidable or unavoidable.

In an ideal world, insurers would aim to reduce claims leakage to zero. However, due to cost, human error, customer service and customer retention considerations, some leakage is unrealistic to avoid when balancing these costs to the benefits of reducing leakage to nil.

What is the Cost of Claims Leakage?

Consistent market statistics on claims leakage are not readily available. However, it has been estimated that UK insurers may experience leakage of up to 20%. Our own claims leakage assessment project experience in the personal motor and home insurance market has found claims leakage between 8% and 16%, with an average of 13% across a range of UK personal motor and home insurers. Similar levels of leakage have been reported in the commercial property insurance sector.

Best practice can reduce leakage to 2%-3% of claims indemnity spend, with some insurers stating that they have achieved this level of leakage. Achieving leakage lower than this level is generally uneconomical to pursue or may contradict an insurer's claims philosophy, through for example, damaging its customer experience. Based on net UK motor and property risk claims data from the ABI and our average claims leakage estimate of 13%, UK motor and property insurers may have lost an estimated £1.8 billion to claims leakage in 2009 on these risks. If instead over this period, these insurers had achieved best practice and reduced claims leakage to 3%, eliminating avoidable claims leakage, they would have benefited from a reduction in claims spend of approximately £1.4 billion with an equally positive increase in results.

Estimating the Size of the Problem – Closed Claim File Review

Claims leadership teams have few tools at their disposal that are more powerful for the long term control of claims leakage than the outputs of a Closed Claim File Review (CFR).

Performing a comprehensive annual CFR quantifies leakage at an overall level and then analyses it into component parts; for example, the cost of the failure to identify recovery opportunities or correctly apply policy limits and deductibles. Done well it can identify the people, organisational, process and technology root causes of leakage leading to specific improvement opportunities to address these weaknesses.

Building the skills and tools required to run these reviews within existing claims audit teams, coupled with gaining the commitment and buy-in from claims operational management to the outputs and recommendations, is key to the sustainable control of claims spend. In addition there is rarely a stronger business case for capital investment in general insurance than one for "Claims Process Transformation" that has been underpinned by a robust CFR. Adding CFRs to the annual "business as usual" claims audit agenda is therefore key to achieving claims excellence.

At the highest level the approach to performing a CFR is simple and for a single product line (e.g. personal lines motor) it can be planned, executed and reported on within 5 weeks:

  • Specify and extract data: sizing the sample and making it representative of the entire claims population is important in order to maintain the integrity of the output data and allow conclusions to be drawn on the entire claims population to an agreed level of statistical certainty.
  • Build the review questionnaire and database: the questionnaire is the data capture sheet that file reviewers will complete for each claim. Once built, it can be re-used and re-defined for future reviews. All captured data needs to be stored for later analysis, so setting up a simple database with an electronic data questionnaire feeding into it can save a lot of time.
  • Perform the review: review all of the claims files in line with the review questionnaire.
  • Quality assure the data: review the data for obvious anomalies, missing data and check a sample of the reviews for quality and consistency of judgement.
  • Analyse the data: once the initial data set has been quality assured the data can be analysed in detail to identify overall leakage levels as well as specific issues, trends and impacts across a number of variables (for example, perils or process failure points).
  • Report on findings: following the data analysis the next step is to present the findings in a meaningful and clear report format for the claims leadership and finance teams.
  • Recommend improvements: one of the greatest areas of value in the whole exercise is the identification and quantification of tactical and medium term process changes as well as longer term process, organisational and technology changes that can be made to claims operations to reduce leakage levels.

This approach can be supplemented with more in-depth process reviews and more statistical and actuarial techniques as required.

Reducing the Problem and Realising the Savings

With these outputs it is possible to see how effective a claims operation has been at controlling leakage over one 12-month period versus another and what impact any changes to processes, technology or people have made on leakage levels. In addition, and critically if an insurer is running a CFR for the first time, this information can inform and help to prioritise future change activity.

In our experience at least 30%-40% of claims leakage that has been deemed addressable by the insurer can be eliminated through relatively simple changes to processes, changes to the claims supply chain and through the short-term up-skilling of staff. The remainder, typically, is achieved through the end-to-end re-engineering of the claims process, including changes to claims technology.

These numbers make the case for using CFRs to drive a claims operation's change and continuous improvement agenda all the more compelling. Leading organisations use this process as a key feed into their annual financial planning and project portfolio planning processes.

Even where there is no budget to make significant technology changes the insurer has the data needed to understand the cost implications of not making the investment.


By regularly conducting CFRs, insurers can embed continuous improvement into their claims handling and quantify the impact of operational and strategic changes on claims leakage. It is possible to complete a CFR in a relatively short timescale, allowing insurers to identify leakage reduction opportunities quickly. In many cases, insurers will be able to begin to capitalise on the CFR's findings and generate a return on investment almost immediately. As UK general insurers work to increase their profitability in this challenging operating environment, the quick wins that can be achieved by regularly conducting CFRs provide them with a cost effective tool to increase profitability, while becoming "best in class" insurers in terms of managing claims leakage.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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