Claims leakage
The gap between what an insurer actually paid on its claims and what it should have paid with optimal handling, through overpayment, missed recoveries, undetected fraud or delay.
Claims leakage designates the share of payments that would not have occurred had claims been handled optimally. It does not stem from an underwriting error but from a handling failure, and its sources are well known: indemnity beyond what the policy provides, a deductible or sublimit not applied, a recovery against the liable third party not pursued, undetected fraud, poorly managed adjustment, repair or legal costs not negotiated, delays that increase business interruption or interest. It is measured through audits of closed files, comparing the actual settlement with the technically justified one, and common estimates put it between a few points and around ten percent of claims costs depending on the line. For an insurer, it is a considerable source of profit, since each point of leakage reduced goes straight to the combined ratio. For a reinsurer or capital provider, it is a discreet counterparty risk, which justifies access to records clauses and audits of delegated claims handlers. Automated file analysis tools are today one of the most profitable uses of artificial intelligence in insurance.
Textbook case: an audit of 500 closed motor claims finds that 12 percent involved a recovery not pursued against the liable third party's insurer, and 8 percent a repair billed above the schedule. Applied to annual claims costs of 200 million euros, the leakage thus measured amounts to about 10 million, or five points of loss ratio.
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