Chapter 5Claims and the ‘Moment of Truth’

For the customer, the most critical part of their relationship with their insurer is at the point of making a claim. Insurance is, after all, a promise to pay a claim subject to agreed terms and conditions, and legally endorsed by a contract. The way that the claim is handled affects the customer's propensity to buy at renewal, to purchase additional products and to recommend an insurer to a friend or neighbor. With customer advocacy representing a major part of the decision to buy, the claims experience becomes a critical part of the mix.

For an insurer, the situation may be somewhat different. Claims expenditure often represents the largest or second largest element of an insurer's expenditure (the other being reinsurance costs). Described as the ‘loss ratio,’ claims expenditure is generally expressed as the total losses incurred (paid and reserved) in claims, plus claims management (adjustment) expenses divided by the total premiums earned. In other words, if an insurer pays out £60 for every £100 earned in premium, then the loss ratio is 60%. Commonly the loss ratio will range from 50% to 70% although much depends on the mix of business, external conditions (e.g. weather) and the quality of the management team.

Claims savings go directly to the bottom line so there is considerable pressure on the claims team to avoid claims ‘leakage,’ an expression used to describe payments beyond the strict obligation of the policy. These claim ...

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