THE COST OF PURSUING SMALL CLAIMS

Many insurers suffer from a high frequency of low severity claims, such as small fires or burst pipes, which erodes the premium needed to fund larger losses. Such attritional losses are worsened by low policy deductibles.

Do low deductibles always benefit policyholders? The trade-off may be more than just paying higher premiums. Insurance companies use deductibles to ensure policyholders have skin in the game and will share the cost of any claim. The better managed operations are more likely to accept higher deductibles and all too often we see higher risk operations press for lower deductibles.

Insurers bear the cost of investigating and settling insurance claims. Although loss adjusters fees cut into an insurance company's bottom line, they pay them to receive an independent opinion, ascertain liability, quantify loss amounts and to avoid paying fraudulent claims. Loss adjustment expenses and legal costs only represent a portion of an insurance company’s costs of investigating and adjusting losses.

There are additional unallocated claims handling costs incurred by insurers for the routine operations of the claims department like salaries and other expenses.

Insurers in the UAE continue to provide allied and additional perils extensions under property policies at little or no extra premium, and deductibles remain modest. The cost of servicing small claims may involve months of investigations and hundreds of email exchanges between client, loss adjuster and insurance company and all too often the cost of adjusting a claim exceeds the adjusted claims settlement amount.

It make little sense when the cost of pursuing a small claim costs more than the amount an insured would end up recovering. Understanding the costs of low deductibles is not as simple as comparing the impact of premium movement. There is a multitude of additional costs and challenges and the insurance market should become more skilled at designing deductible structures and strategies that reduce claims expenses and eliminate attritional losses from being passed back to the insurer.

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