On 22 July, the Financial Conduct Authority (FCA) issued a press release following their multi-firm review of motor insurance claims and the claims handling arrangements in the home and travel sectors. This sheds light on rising motor insurance premiums, attributing the hikes primarily to external cost pressures. However, the FCA also emphasised the need for insurers, particularly those in the home and travel sectors to improve their claims handling processes to ensure better customer outcomes. In this article, we examine the drivers of poor claims handling and what action firms should be taking to drive better customer outcomes.
Understanding the Drivers of Premium Increases
The FCA’s analysis revealed that the surge in motor insurance premiums is largely driven by factors beyond insurers’ control. These include higher prices for cars, parts, labour, and energy, as well as more complex cars and supply chains. Additionally, the cost of hire vehicles, the number and cost of theft claims, and the prevalence of uninsured drivers have all seen significant increases.
The Imperative for Better Claims Handling
While external cost pressures are the main culprits behind premium hikes, the FCA identified several areas where insurers need to improve their claims handling practices. These include:
- Lack of Oversight of Outsourced Services: This has often led to poor customer outcomes, delays in settling claims, and high complaint volumes.
- Insufficient Management Information: This has resulted in failures to promptly identify and resolve claims handling issues and delays.
- High Rejection Rates for Storm Damage Claims: Only 32% of storm damage claims made to a sample of firms in 2024 resulted in a payment.
- Inappropriate Use of Cash Settlements: Cash settlements were used without sufficient consideration of their suitability for the customer.
However, it doesn’t stop there. The FCA’s Consumer Duty, which came into force on 31 July 2023, places significant obligations on insurers, particularly in how they handle claims. Under the Duty, insurers must deliver good outcomes for retail customers, and this includes the entire claims handling journey. This goes beyond compliance with rules and process and requires insurers to consider the actual experience and outcome for the customer. This includes identifying and preventing claims handing practices that could cause harm or delay, such as excessive information requests, unclear communications, or slow decision-making.
For insurers, embedding these principles into every part of the claims journey, from first notification to final settlement is crucial.
What action should firms take?
The claims handling journey remains a critical touchpoint for customer satisfaction, operational efficiency and the delivery of good customer outcomes. Effective claims handling not only enhances customer trust but also optimises the insurer’s resources and reduces costs.
These findings present a unique opportunity for insurers to differentiate themselves in the market by enhancing their claims handling processes. Therefore, insurers should consider the following strategies to improve their claims handling practices:
- Streamline Documentation and Processes: Simplifying the claims process starts with minimising the paperwork and documentation required from policyholders and between stakeholders. By reducing the administrative burden, insurers can expedite the claims process and improve customer outcomes. Implementing digital solutions for document submission and processing can further enhance efficiency, removing unnecessary friction and ‘sludge’.
- Leverage Technology and Data Analytics: The use of technology, particularly AI and data analytics, can significantly improve the accuracy and speed of claims processing. AI can help in automating routine tasks, identifying fraudulent claims, and providing real-time updates to policyholders. Data analytics can be used to monitor outcomes, identify areas for improvement, and ensure fair value in claims settlements.
- Enhance Communication and Transparency: Transparency and proactive communication are key to building trust with policyholders. Insurers should provide real-time updates on the status of claims through multiple communication channels such as SMS, email, and mobile apps. Clear and jargon-free communications that customers understand, both at point of sale and during the claims journey, helps in managing policyholder expectations and reduces misunderstandings.
- Invest in Staff Training and Development: Well-trained staff are essential for efficient claims handling. Insurers should invest in regular training programs to equip their employees with the necessary skills and knowledge to handle claims effectively and empathetically. This includes training on new technologies, regulatory requirements, and good customer outcomes.
- Ensure Sufficient Operational Capacity: Insurers should adequately resource claims handling functions by ensuring sufficient operational capacity – whether that’s through in-house teams, outsourcing or third-party administrators. And don’t forget to undertake surge planning to consider how you would handle sudden seasonal surges in claims.
- Implement Robust Oversight Mechanisms: Effective oversight of outsourced services and internal processes is crucial for ensuring that claims handling practices meet the required standards and deliver good customer outcomes. Insurers should undertake outcomes testing on the end-to-end customer journey, supplemented by comprehensive data and management information to promptly identify and address any areas of actual and potential customer harm in the claims journey.
- Foster a Customer-Centric Culture: A customer-centric approach to claims handling can transform a traditionally adversarial process into a loyalty-building opportunity. Insurers should prioritise the needs and concerns of policyholders, ensuring that the claims process is as smooth and stress-free as possible. This includes setting clear timelines, providing transparent information, and offering personalised support.
- Embrace Digital Transformation: Digital transformation is no longer optional but a necessity for modern insurers. By adopting digital tools and platforms, insurers can streamline their claims processes, improve data accuracy, and enhance customer experience. This includes the use of mobile apps for claims submission and AI-driven chatbots for customer support.
Conclusion
To stay ahead in the competitive insurance market and build lasting customer relationships, it’s crucial to enhance your claims handling practices. The future of claims handling will be shaped by those who act decisively today. If you would like to discuss how to improve and optimise your claims handling practices, including the provision of expert claims handling resource, please contact us at: hello@square4.com
Darren Fisher – Senior Advisory Director (Insurance)
