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.
To manage the impact of social inflation, 53% of UK insurers are planning to increase premium rates as part of their pricing and underwriting strategies.
As part of their claims settlement strategies, 47% of UK insurers are increasingly employing alternative dispute resolution methods.

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 compounding.^[1] This year, 76% of insurers across the globe reported that legacy claims posed a challenge to organisational profitability and efficiency. This is a 14-percentage point increase from the previous reporting year. UK insurers shared a similar sentiment, with 69% (up by 9-percentage points from 2024) reporting that legacy claims were a key challenge.

These concerns have made legacy claims a primary focus for insurers in the UK and worldwide. Many insurers 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 experiencing 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.

The rise of claims and risk management partners in legacy claims handling

To manage the growing challenges of legacy claims alongside in-house teams, UK insurers are leveraging partnerships with third-party administrators to provide IT support, manage legacy claims, and enhance data management efficiency. By utilising an external partner, insurers can accelerate legacy claims management and integrate systems more effectively. Insurers then have the capacity to focus on growing their core business and strategically invest resources while a partner addresses legacy files.

Balancing rising costs and litigation frameworks

According to our survey findings, 54% of global insurers report that litigated claims are settling at higher costs, reflecting the increasing complexity of disputes. In the UK, this figure is notably lower, with 36% of insurers citing higher settlement costs — a modest 3-percentage point increase compared to 2024.

This lower level of concern in the UK may be shaped by several mitigating factors within the UK's legislative landscape, including fixed tariff damages for low-value injury claims and the fixed costs regime for claims valued up to £100,000.^[2] These frameworks help to contain some settlement costs, particularly in lower-value cases,

even as other factors — such as rising repair costs and extended credit hire periods — contribute to inflationary pressures.

Advanced data analytics plays a crucial role in understanding the local legislative environment. By identifying trends in claims and enabling proactive decision-making, insurers can refine their risk profiles and reduce potential cost escalations. This approach underscores the importance of innovation in managing litigation effectively.

Social inflation driving up premiums

Social inflation poses a growing challenge for insurers across all markets during times of economic volatility. This global trend, fuelled by rising jury awards, monetary devaluation, and more lenient workers' compensation rulings, is driving insurance losses upward.^[³^]

While controlling social inflation remains challenging, insurers are opting for various strategies to help navigate its effects. Across the UK, insurers are updating pricing for litigation costs, increasing premium rates, and enhancing risk assessments as part of their strategies to manage pricing and underwriting in response to the impact of social inflation on coverage levels.

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, 51% of global and 47% of UK insurers are increasingly turning to alternative dispute resolution methods as part of their 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 address 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] “Fixed Recoverable Costs,” The Law Society, 03 Nov 2023.
[3] https://insurers.gallagherbassett.com/insights/six-strategies-for-managing-social-inflation/}