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Managing claims inflation: challenges insurance leaders face

date: 11 January 2024
reading time: 4 min

What can insurance companies do to change their insurance models? How can they not only leverage the knowledge of their current staff and C-suite members, but also from those from other industries to help solve the issue of rapid claims inflation?

Recent world events, such as the war in Ukraine and COVID-19, have been major contributors to the rise in inflation across the globe. The knock-on effects of these issues have resulted in supply-chain bottlenecks, higher energy and transportation costs, as well as a mass labour shortage across many industries.

US inflation was at 3.7% for September 2023 when compared with the previous year, the UK was at 6.7% and 4.3% for the European Union. While these numbers are seeing a slow decline, inflation is still a serious issue and with the world’s geopolitical stability balancing on a knife edge, another serious event could tip the scales once again towards rapid inflation.

Almost all industries across the world are feeling the effects of inflation, not least those in the insurance space. Awards for general damages have increased, wage rises have strongly impacted the cost of settling claims, and simply providing long-term substantial compensation for the care of seriously injured individuals suffering from catastrophic personal injury claims becomes significantly more challenging.

In order to keep up with these rapid changes that are driving inflation, insurance companies are obligated to take drastic and innovative steps so as to ensure the long-term profitability and sustainability of their business model.

While innovation is very much needed in the insurance industry at this time, it doesn’t come easy, with many companies struggling to find their way in a rapidly changing landscape.

Future Processing met with Manjit Rana as part of our IT Insights InsurTalk series to discuss these issues and get his views on what could be done. With many years of experience at the forefront of the innovation industry, Manjit Rana is an Insurance Innovation Thought Leader, Innovation Expert, Venture Builder and GM U.K., EMEA & APAC at Clearspeed. Manjit is highly experienced when it comes to innovation in insurance and we discussed many of the current issues facing the insurance sphere and how they might be approached.

In this article, we take a deep dive into some of the insights gained through our conversation with Manjit in our ITInsights InsurTalk interview and go through how innovation plays an essential role for insurers in managing claims inflation, as well as look at how best to foster innovation in new and effective methods in order to keep up with the rapidly changing business models of companies in other industries.

The biggest current challenges for the insurance industry

Claims inflation is a huge issue for a number of reasons. In addition to the labour shortage, cost of living rise and fuel costs, the general availability of materials across various industries is low, which is also driving up the costs to insurers.

One pertinent example of this is in the automotive industry. Cars are becoming ever more sophisticated, so much so that it’s becoming more difficult to take new and complicated vehicles to local garage shops to get them fixed. Instead, people are obligated to go to main dealerships, which can be much more expensive.

Managing this as an insurance company can be difficult, as these extra costs were not necessarily calculated into the original premiums. Paying out extra funds for claims has seen insurance companies averaging as high as 110% COR (Combined Operating Ratio), according to Manjit. This means that for every £100 the company collects in premiums, they’re spending £110. Obviously, this is not sustainable.

The impact of these rising costs is felt not only by the insurance companies themselves, but also by all third-party vendors. Insurance companies do not work in isolation, they have a symbiotic relationship with all other industries that they provide insurance coverage for, so any financial impact to the insurer is also felt strongly by other businesses as well. The cost of parts is rising, as is the cost of logistically transporting those parts from one place to the next. Some lines of businesses are suffering more than others, but there’s no doubt that all lines are feeling the impact one way or another.

Predicting the rising costs of claims inflation

The rapid rise in costs could not have been foreseen. The knock-on effects of the Ukraine war and Covid-19 have seen a drastic increase in fuel prices and the emergence of the “working-from-home” phenomenon respectively, both of which have had a huge impact not only on costs, but also on customers’ expectations.

In particular, responding quickly to insurance claims while working from home has been especially difficult for insurers. Fully digitising systems and processes while still providing fast and effective claims support has been difficult, leaving many companies struggling to keep up. At best, they are treading water by simply doing enough to stay in touch with the latest twists and turns in the industry, but everyone is struggling to get ahead of these issues.

Working from home has had a big impact on consumer behaviour as well. As people are often home all day, products such as contents insurance tend to be seen as less important, as customers feel that being home reduces their odds of being burgled, for instance. On the other hand, being home all day can result in a greater number of accidental damage claims for incidents that occur in the home. This is just one example of a change in consumer needs brought on in recent times.

For insurance companies, trying to predict the knock-on effects that an issue will have on other areas of their business is extremely difficult. Nothing happens in isolation, so when one area or industry is impacted, there is a trickle-down effect that impacts many other areas, too.

The role of technology in mitigating claims inflation

Technology plays a pivotal role for insurers in mitigating claims inflation. While the labour shortage has left companies short of staff, businesses are obligated to look inwards and redistribute their most valuable resources, humans, to the most important tasks and utilise technology to cover the everyday repetitive and mundane jobs.

When there are fewer people working, it doesn’t make sense to assign those valuable staff members working in the company to tasks such as checking receipts, filling out forms or confirming the validity of supporting documents for claims to human workers. These types of processes can all be achieved through the use of automation software, freeing staff up to cover the most important tasks that drive business value, such as speaking directly with customers.

Technology can cover tasks that don’t need a human touch and that involve a lot of data, leaving staff free to interact with customers, listen to their concerns and best help them through the claims process. After all, customers pay a premium for their insurance products, and while they hope to never be in a situation where they need to make use of their insurance plans, incidents do happen, so having a human being on the other end of the line who can empathise and help them through their difficult situation is extremely valuable. The rest can be automated and left in the hands of technology.

Read part 2 of our IT Insights InsurTalk article on managing claims inflation, where we look at how insurance leaders can foster a culture of innovation, what the future of claims might look like, and how companies might make effective use of experts from other industries in order to innovate and revolutionise the insurance landscape.

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