There is a growing disconnect in the insurance industry and the public that cannot be ignored. It is a disconnect between what insurers advertise they deliver and what policyholders experience when they need the product during a claim. One recent discussion on this blog, “The Dirty Secret of Claims Handling: Why the System Is Failing Policyholders and Who Has the Courage to Admit It?” addressed whether the insurance claims system is failing policyholders. Another post revisited the concept of “leakage” and McKinsey-driven claims handling in “Leakage and McKinsey Claims Process Handling Still at Issue.” That post highlighted that the insurance industry has spent decades refining systems designed to control costs, often at the expense of the very people insurance is meant to protect. I suggest that if you step back and look at the broader data, this is not a new problem. It is a systemic issue that is at the core of why people are now questioning why they should buy any insurance.
A 2014 global survey by Accenture 1 found that 86 percent of policyholders who filed claims reported being satisfied with how their claims were handled. That sounds encouraging until you look at the statistics, which show that 41 percent of those same customers were still likely to switch insurers within a year. Think about that for a moment. Even when insurers believe they are doing a “good job,” nearly half of their customers are ready to walk away. That is not loyalty. That is quite a dissatisfaction with the insurance product. The same study found that speed, transparency, and real-time communication were the most important factors driving customer expectations. Yet, many claims processes remained opaque, slow, and adversarial.
Why? For decades, the insurance industry has been guided by a different set of priorities. A 1996 National Underwriter report revealed that insurers themselves believed that sales were driven primarily by low cost and efficiency rather than claims service and payment. 2 Claims service ranked third. That mindset and lesson for an insurance executive have not disappeared. It has evolved.
The concept of “leakage” was popularized through consultants associated with McKinsey. Leakage, in its simplest terms, refers to money paid out on claims that insurers believe should not have been paid. On paper, that sounds like prudent financial management. In practice, it often becomes a justification for institutional skepticism toward policyholders and a culture focused on minimizing payouts rather than ensuring that customers receive all benefits as quickly as possible. When claims departments are trained to view payments as “leakage,” the entire ethical framework shifts. Adjusters are no longer simply evaluating coverage and damage. They are, consciously or not, incentivized to find ways to reduce claim value. I suggest that this is where the insurance adjustment system begins to fail.
The failure is not always dramatic or obvious. It is not always bad faith in the traditional sense. More often, it is subtle. We see that delays in claims actions are tolerated. We find that excessive documentation requests are made after a loss and take time to evaluate. There are low initial estimates and partial payments. We find that experts retained by insurers seem to be reading the policy, and their reports are tied to policy language for denials and reduced payments. Insurance defense attorneys no longer question those reports and estimates – they are part of the system of low payment and denial. In general, there is resistance to fully honoring the policy promise, and a fight in the law to prevent accountability for failing to do so.
These practices may improve short-term financial results, but they erode trust. And trust, once lost, is nearly impossible to regain.
Insurance is not just another financial product. It is a promise of security, restoration, and good faith in the face of disaster. When that promise is diluted by cost-containment strategies masquerading as efficiency and leaders, including their attorneys, do not object to subtle processes eroding that promise for fear that they will no longer get business unless they go along with this culture of delay and denial, the entire system begins to lose legitimacy.
To be fair, insurers operate in a complex environment. Fraud exists, and cost pressures are real. Shareholders demand results. But none of these realities justify a claims culture that systematically undervalues policyholder interests. The solution is not complicated, but it does require a shift in mindset.
Claims should not be viewed as a cost center to be minimized. They should be viewed as the moment of truth. Transparency, fairness, and promptness are not just regulatory requirements. They are ethical imperatives that the public demands. If the industry truly wants to improve retention, rebuild trust, and differentiate itself in a meaningful way, it must return to first principles. Fully find what is owed and pay it. Do it promptly. Communicate openly. Treat policyholders as partners, not adversaries.
Anything less is not just bad business but erodes the trust people place in the insurance industry and undermines the very purpose of insurance.
Thought For The Day
“The true test of a man’s character is what he does when no one is watching.”
— John Wooden
1 Victoria Prussen Spears. “Satisfaction with insurance claims settlements not enough to keep customers loyal, according to Accenture survey.” FC&S (Oct. 14, 2014).
2 Dan Lonkevich. “Lower Cost, Not Service, Drives Sales, Survey Finds.” Nat’l Underwriter (Oct. 21, 1996).
