Insurers face the claims challenge

Never has there been a more pressing time for insurers to control claims. The need for profitable underwriting is high for both the industry and individual competitors alike, following a long spell of weak investment returns and price-based competition that have led to heavy underwriting losses.

Datamonitor found that disastrous results have fuelled the current hard market conditions, where some lines of insurance have fared better than others.

In 2001, the motor sector continued its rate hardening and improved its underwriting loss from £916m to £123m, fuelled by a 16.2% increase in net written premium (NWP). Property underwriting halted its decline into further unprofitability, by reducing its underwriting loss from £679m in 2000 to £274m, again benefiting from a 9% rise in NWP.

However, it will come as no surprise that the general liability sector fared badly in 2001. Here, despite a dramatic 60.5% increase in NWP, the underwriting loss worsened, plummeting from £358m to £566m in 2001. This underlines the desperate situation facing liability insurers and helps explain the current crisis in the market.

Datamonitor's analysis found that simply raising rates would not be enough to deliver long-term profitability to the insurance industry: insurance companies must find a balance between revenue and expenditure. Investigation into the underwriting accounts revealed the claims bill to be the greatest burden on outgoings and thus a major problem. Therefore it was imperative for insurers to tackle the claims issue if they were to achieve sustainable profitability.

Claims incurred in the motor sector increased by 4% in 2001 compared to 2000. This was marginally less than the average growth rate of 4.8% per annum since 1997. This indicates the one area where insurers are managing to stem the rising growth of claims costs. The property sector witnessed an encouraging 2.9% reduction in claims costs, compared to the 2.5% increase in 2000. It is clear that the main driver of this improvement was the milder weather conditions of 2001, contrasting with the heavy flooding seen the previous year.

The most shocking statistic also comes from the liability sector. Despite a dramatic rise in NWP, claims costs rocketed by 76.4% in 2001, almost single-handedly wiping out premiums before other costs are factored in.

Costs escalation

Datamonitor found that the real problem was not the frequency or number of claims coming through, but rather the cost of claims. Costs have escalated due to a variety of factors, including the decrease in serious road traffic accident injuries and increases in compensation costs.

There are, of course, factors driving up costs that are beyond insurers' control and it is therefore vital that insurers do everything they can to rein in costs.

The Datamonitor report examined the key issues facing claims managers. In 2001 and 2002, insurers almost stood still in the fight against claims inflation. The issue of fraud remains a thorny topic, yet few insurers have yet to grasp the nettle and the industry seriously lags behind its retail banking counterparts, who may pose a threat as their presence in the general insurance market continues to grow. Fraud must become more than a buzzword if the insurance industry is serious about reducing claims costs.

Steady progress is being seen in supply chain management, where insurers are continuing to control costs by squeezing margins and forging close supplier relationships. In outsourcing, there is a split between the large competitors managing the claims function in-house, while smaller players are forced to outsource, due to a lack of scale and skills as they bid to remain competitive.

A select number of insurers are positioning their claims services as brand differentiators, although most competitors are found to be aiming to provide value for money claims service, thus controlling costs while fulfilling customer expectations. There is one key area worthy of note, however: the adoption of advanced technology.

Integrated technology

Insurers are focusing on business-to-business technology, although the take up of integrated claims processing systems has not been as healthy as vendors may have wished. Insurance companies appreciate the tangible benefits that technology can deliver, such as real time information sharing and reduced paperwork, but cost pressures mean that budgets for large IT projects are not easily found.

There is also the point that there are a glut of vendors trying to sell claims systems with little apparent differentiation, meaning that insurers are not buying into the concept of the `revolutionary' new products, whose core functions are principally the same. Further scepticism comes as insurers have doubts concerning the track record of vendors and the longevity of new systems among others.

However, insurers must bite the bullet if they are to achieve real savings. Datamonitor believes a culture change is needed, particularly as it is becoming clear that other financial services industries are more advanced in their use of processing technologies.

Not only do insurers risk being left behind, but also banking competitors moving into the insurance field may just prove too competitive.

Analysis of individual competitor claims data shows that some are faring better than others, although the liability sector expectedly reveals the poorest results.

Motor claims costs will be driven by the increasing growth of the compensation culture, the rise in NHS recoverability and the associated cost of vehicles and parts. The total claims bill is expected to grow by an annual average of 3.7% until 2006, reaching a total value of £8bn.

This growth rate is lower than that experienced between 1997 and 2001, showing that motor insurers are expected to improve their claims performance in the next few years.

Property claims are difficult to predict, owing to the nature of weather-related claims. The cost of claims is forecast to rise steadily at an average rate of 2.5% a year, reaching £4.9bn in 2006. This will be fuelled by weather and fire-damage related claims, while much will depend on the provision of flood defences in the UK.

Datamonitor's interviews with leading insurance executive revealed the view that the liability situation would get worse before it got better. Thus, claims are forecast to reach a total value of £2.3bn, increasing at an average rate of 5.6% per annum, with strong growth up to 2004 before reductions in 2005.

All in all, the key is to control claims factors that are within insurers' sphere of influence. Risk management will be instrumental in achieving this and will be insurers' main weapon. Customers will find they have to adapt or pay the price, while insurers who make the most of risk management will be the winners in the claims stakes.

Liz Hartley is a financial services analyst at Datamonitor

Datamonitor's report Claims Management in UK General Insurance 2003 is now available, along with many other insurance and financial services reports, in addition to bespoke consulting services. To purchase or for further information, call 020 7675 7487