The insurance industry is grappling with a widening gap between claims costs and premium revenues. Underwriting losses are forecasted to persist through 2025, and factors such as inflation, supply chain disruptions, escalating weather events, and natural disasters are driving up claims costs. Reinsurance rates are also projected to rise between 30-50%, adding further pressure on insurers.
In response, the industry is increasingly looking to advanced technologies to improve combined ratios by enhancing claims processing efficiency and reducing loss expenses. However, the move toward claims automation is complex; without effective fraud and risk management strategies, automation could lead to a rise in fraud by up to 30%, negating efficiency gains.
To truly improve combined ratios, insurers need a holistic approach beyond automation. Artificial intelligence (AI) can be strategically integrated across the policy and claims lifecycle—encompassing fraud detection, underwriting, subrogation, and recovery—to address losses, manage risks, and support long-term financial health for both insurers and policyholders.
Leveraging AI during underwriting and at the point of sale can minimize premium leakage by identifying risks related to applicant misrepresentation and uncovering complex fraud schemes like ghost broking and policy hijacking. According to Shift’s data, targeting organized fraud networks—which have loss ratios over 500%—before they enter an insurer's portfolio can save millions in future claims and reduce operating costs associated with downstream fraud, ultimately improving profitability and premium retention.
Missed subrogation opportunities cost the insurance industry over $20 billion annually, largely due to the tedious, manual nature of the process. Given current economic pressures, optimizing this area could notably improve combined ratios. Shift's research indicates that AI-powered subrogation can help insurers recover up to 7% of a claim's value, potentially improving combined ratios by around 2 points—offering a direct way to offset rising loss ratios and support profitability.
Insurance fraud costs the P&C industry billions annually, but AI-based fraud detection offers a powerful tool for improving combined ratios by increasing process efficiency and managing loss payments. According to Shift’s 2023 Claims Fraud Benchmark Report, AI-driven fraud detection helps property insurers prevent an additional $60,000 per 1,000 claims and auto insurers $43,000 per 1,000 claims. For an auto insurer handling three million claims annually, this translates to over $120 million in fraud savings, potentially improving combined ratios by 1 point.
Read the full article: The Combined Ratio Problem: Closing the Gap Between Claims Costs and Premiums using AI
This is the first in a series of commentaries on the combined ratio problem facing the insurance industry. For further discussion of this topic and how the application of AI is addressing this challenge throughout the policy lifecycle, continue reading.