Claims management is set to become a key battlefield for insurers as they fight to retain customers in the face of rising premiums, claims a report from market analysts, Datamonitor.

The report 'Claims Management in UK General Insurance 2000', says controlling claims costs is becoming vital if insurers are to restore profitability to poor underwriting results.

Datamonitor analyst, Muriel Oatham, said: "Faced with rising claims costs from an increasingly litigious society, court rulings on damages payments and the ever unpredictable weather damage, insurers are having to take radical steps to control their cost of claims."

Datamonitor found that average motor claims costs have risen 30% in the past five years, while premiums have increased only 10% in that time. This has driven the market for third party claims handling and enabled insurers to offer a wider range of services at a lower cost than could be achieved internally.

The quality of insurers' claims services is also increasingly important. Customers have come to expect a phone helpline service, despite the fact that less than 0.5% of claims are recorded outside working hours. Other third party claims services, such as rehabilitation programmes, are helping to boost insurers' business volumes and keep costs low. Another benefit of third party claims management organisations is they can specifically focus investment and technology on claims handling.

This leads Datamonitor to predict the potential for a virtual back office based on the internet. "With the expertise of claims handling removed and insurance being marketed and distributed through an increasingly diverse range of providers, the traditional insurance company may disappear," the report said.