Insurers across Australia are facing escalating claims costs, and they’re under pressure to develop strategies to counter this trend, according to Xceedance Australian client executive Martin Jones.
Jones said the COVID-19 pandemic has been a key driver of claims inflation, as it has caused delays in the health and justice sectors, as well as major disruption to supply chains.
Australia's hospital system was under strain from treating COVID-19 patients, leading to the postponement of many “non-essential” procedures. This has increased the cost of health insurance claims because delaying procedures is often costlier for insurers as claims take longer to be finalised and patients continue to be a burden on the health system until their issues are resolved.
“Some patients are currently wary of attending hospitals and medical centres, which exacerbates the problem,” Jones said. “My discussions with insurers confirm that claims inflation is a major issue for them now and spans across most product lines.”
Other factors that contributed to claims inflation in Australia were supply chain disruptions – with a surge in new construction and renovations creating material shortages that resulted in a dramatic rise in construction prices – and mandated court closures and delays in the court system due to unavailability of personnel because of COVID-19 infection or close-contact isolation.
In addition, social inflation in litigation awards in the court system had “set the bar high” and fuelled claimants' expectations about what payouts they were entitled to. In Australia, funded litigation has become prevalent, impacting class actions' frequency and the size of damages awards.
“Additionally, insurers' current litigation models, including extensive use of external law firms, are not always conducive to early settlements,” Jones said. “All these issues snowball into major claims inflation.”
As a result, Xceedance uses the skills and expertise of its third-party administration (TPA) business to help insurers lower claims costs by implementing strategies to achieve early settlements.
“Insurers need to change the model. To improve the outcome for plaintiffs and defendants, neither of whom wants a drawn-out process, insurers must examine the characteristics of a claim and deploy new strategies to close quickly before it becomes a runaway claim,” Jones said.
“The data is there to improve our ability to forecast a realistic claim payout, then deploy strategies to achieve early settlement. It's important to avoid unnecessary litigation costs – spending $2 in legal fees to save $1 of the claim settlement is illogical. Despite the prevalence of litigation, relatively few cases proceed through to court settlements.”
