Cost Strategies

Adapting Cost Strategies to Manage Social Inflation and Legacy Claims

Key Findings

Globally, there is a 14-percentage point increase in insurers identifying legacy claims as a challenge to profitability and efficiency.
44% of Australian insurers are enhancing risk assessments and modifying coverage limits as part of their current pricing and underwriting strategies in response to the impact of social inflation on coverage levels.
62% of Australian insurers are increasingly employing alternative dispute resolution methods as part of their claims settlement strategies.

An uptick in the impact of legacy claims

Longtail exposures can have a substantial impact on an insurer’s financial reserves, and in today’s increasingly challenging market, this impact appears to be compound.^[¹^] This year, 76% of insurers globally identified legacy claims as a barrier to organisational profitability and efficiency, marking a 14-percentage point increase from our 2024 report. Interestingly, Australian insurers feel the weight of this issue even more acutely, with 90% reporting that legacy claims remain a key challenge.

These concerns have made legacy claims a primary focus for insurers regionally and worldwide, many of whom are assessing the effectiveness of their current support and long-term strategies to manage legacy claims. The focus also extends to systems and processes that no longer align with modern technology and ways of working, which is a cost-intensive issue to address. Over time, the resources dedicated to handling these systems diminish, causing additional strain on business resources.

For organisations that are familiar with these challenges, working with a strategic partner is a cost-effective way to open the door to greater efficiency and enhanced technology. As legacy portfolios begin to close out, leveraging the value of a strategic partner and award-winning technologies becomes even more important to identify and unlock growth opportunities.

Optimising legacy claims with strategic partnerships

To manage the growing challenges of legacy claims alongside in-house teams, Australian insurers are leveraging partnerships with third-party administrators. These partnerships enable insurers to enhance their legacy claims management, improve data management efficiency, and integrate systems more effectively.

As technology rapidly advances, many insurers find themselves constrained by outdated claims systems. These legacy systems pose significant integration challenges, compliance risks, and inefficiencies in claims management. By leveraging advanced data analytics, insurers can gain actionable, data-driven insights into legacy claims, uncovering hidden patterns and emerging risks. This allows for informed decision-making, optimised workflows, and proactive management of challenges unique to legacy claims.

Additionally, access to performance benchmarking metrics help insurers set realistic goals, track progress, and align strategies with industry best practices. This approach fosters a culture of continuous improvement and enhances the overall efficiency and effectiveness of legacy claim portfolio management.

Social inflation driving premiums up

In times of economic volatility, social inflation poses a growing challenge for insurers across all markets. This global trend, fuelled by rising litigation costs, inflation and the evolving regulatory landscape, is driving insurance losses upward.^[² ^]

While controlling social inflation remains challenging, insurers are opting for various strategies to help navigate its effects. Across Australia, 34% of insurers are increasing premium rates as part of their strategy to manage pricing and underwriting in response to the impact of social inflation on coverage levels. However, this represents a 17-percentage point decrease from our 2024 survey results, with insurers now shifting to other means to address concerns, including risk assessment enhancements (44%), coverage limit modifications (44%), and updating pricing for litigation costs (40%).

These adjustments further reflect a broader

industry effort to balance the financial sustainability of insurance offerings with the evolving landscape of risk and coverage demands. As social inflation continues to influence the cost of claims and coverage, insurers are proactively adapting their approaches to ensure they can continue to provide comprehensive and effective insurance solutions.

Streamlining claims settlement

In direct response to the impact of social inflation on the cost and complexity of claims, nearly half of insurers in Australia are allocating resources toward litigation management. The most prevalent response, for 51% of global and 62% of Australian insurers, is opting for alternative dispute resolution methods as part of claims settlement strategies.

By adopting alternative dispute resolution methods, insurers can streamline the

claims settlement process, reduce litigation costs, and achieve more efficient and equitable outcomes. This approach helps manage the financial pressures associated with social inflation and enhances the overall claims experience for policyholders by providing faster and potentially less adversarial resolutions.

Fostering strong relationships with legal experts and investing in comprehensive training for claims adjusters can help organisations effectively navigate the complexities of modern litigation. By building these relationships, companies can also gain access to valuable insights, expertise, and guidance that help in addressing nuanced legal challenges.

^{[1] Smith, Ian, and Kenza Bryan. “}^{The Uninsurable World: How the Insurance Industry Fell Behind on Climate Change}^,”^{Financial Times}^{, 02 Jun 2024.}
^[2]^{https://insurers.gallagherbassett.com/insights/six-strategies-for-managing-social-inflation/}