Viewpoint: Reserving accuracy is key for managing complex claims development in 2023

Businesses around the country have battled several large-scale events over the past few years, from the coronavirus pandemic and the ongoing impacts of climate change, to the more recent heightened geopolitical risks and impact of inflation.

For insurers, the effect of inflation and rising prices, particularly on legal costs and claims payouts, is having a direct impact on the costs of claims; and this is not just for one class of cover; it is affecting all classes.

To overcome these spiralling costs, insurers are seeking to gain control of their overall claims exposure; however, navigating new and emerging risks is no small feat. New trends are not always easily modelled and trackable, which can pose great challenges for insurers, especially when it comes to accurately reserving against historic books of business that are affected by evolving trends today.

While there are hopes inflation will ease in 2023, the recent spike in prices will be felt by insurers for some time; for carriers dealing with complex and historical claims, taking a proactive approach will be key

Part of the focus of these defence mechanisms has been on developing and embedding operational resilience into everyday business operations. From a claims point of view, this focus leads itself into ensuring operational efficiency, whereby the effective and efficient triaging of complex claims and proactive management can help insurers save costs and even help offset the impacts of inflation.

This is a current issue for many insurers but it does not just involve rising legal and claims costs of new incoming claims. The rising cost of servicing historic, long-tail claims from an administration, legal and end payout perspective is also furrowing brows, prompting many insurers to revisit their reserving policies to ensure they are still accurate and to top them up if necessary.

For 2023, the sectors most in need of focus in regards to this development include mesothelioma claims, sport-induced head injury claims development and claims linked to safeguarding and abuse cases. A combination of heightened media attention and the resulting time lapse between injury (or exposure in the case of asbestos-related claims) and the subsequent health-related damage are the leading causes of increased claims activities in these areas.

Balancing act

For complex and historic claims, keeping costs down while ensuring fair settlements for claimants is vital, especially when one considers the huge amount of resources dedicated to individual cases. For asbestos-related mesothelioma claims, claimants have recently been given a lifeline in this regard, thanks to the recent availability of Nivolumab and Ipilimumab on the NHS.

These two immunotherapy drugs first began appearing as part of treatment plans for mesothelioma claims in 2015/16; however, they were only available privately. Considering the number of asbestos-related mesothelioma claims is expected to rise over the next few years, the NHS availability of Nivolumab and Ipilimumab could result in significant cost savings for liability carriers. And it is a win for victims too, as it opens up another route for comparable treatment, which could be better and possibly even faster than private options.

While this is welcome news, it is important for insurers to bear in mind all mesothelioma victims have the right to seek privately funded treatment and, as a result, liability carriers need to ensure they have adequate reserves for private treatment options, especially as new treatments and combination treatments cases are likely to emerge over the coming years.

Safeguarding claims

Other historical books of business insurers need to keep an eye on in 2023 are those relating to safe­guarding cases. High-profile media attention has helped raise awareness of these instances and is likely to encourage further victims to come forward. For many of these claims, victims will seek compensation for any personal injury arising from emotional, physical and sexual abuse (in addition to the act of abuse itself). Such cases, understandably, require sensitive and expert handling and can take up huge resources.

To ensure claimants receive appropriate damages, whether for historical or recent claims, insurers need to ensure they have the right expertise to hand, especially when it comes to keeping check of spiralling costs. As was seen in a recent safeguarding case, unreasonably high solicitor rates can be challenged and reduced, which can be a positive – and sometimes significant – saving on insurer costs.

Another influx of claims expected over the coming years involves sports-related head injuries. While the sports sector has always produced liability claims, a different type of claim is now unfolding; one where victims are seeking compensation for the onset of neurological conditions, such as dementia, that has been caused directly by sports-induced head injuries.

Research into this debilitating condition and its link to contact sports, such as football, rugby and boxing, has been brought into the limelight recently, with many professional players facing the reality of living with the disease. However, developing neurological conditions from head injuries is not confined to professional players, with amateur players also at risk, which means the number of potential claimants could be significant.

To weather this impending storm, insurers need to understand what their potential exposures might be on a historic basis and they need to ensure they have adequate and accurate reserves to deal with them.

Increased media coverage is also having an impact on another class of claim: vicarious liability. Recent high-profile cases have resulted in an amendment of the testing mechanisms for vicarious liability, with a focus on two “close connection” assessments, both of which must be satisfied for vicarious liability to be established.

The two tests focus on the relationship between the principal tortfeasor and the defendant (Stage 1) and the relationship between the tort of the principal tortfeasor and the role and/or duties assigned to them by the defendant (Stage 2). From a defendant’s point of view, these changes mean defendants now have viable avenues to reject claims where the factual matrix allows, potentially saving thousands in costs.

Proactive approach

While there are hopes inflation will ease in 2023, the recent spike in prices will be felt by insurers for some time; for carriers dealing with complex and historical claims, taking a proactive approach will be key. Automation in reserving and optimised claims management systems (specifically designed to meet the challenges presented by complex exposure-based claims) are central to Pro’s approach to managing claims to ensure liabilities are accurately reserved.

From treating policyholders fairly and paying claims quickly, to keeping admin costs down, there is a lot that will be expected of insurers in the coming months. To succeed they will need to triage claims properly and proactively across books of business, engage with experts to help for instance with expert resourcing in cases of a spike in claims activity, to ensure business-as-usual can still proceed and make sure their reserves are as accurate as possible so they do not face an accounting black hole.

But while we are no doubt living in a world where digital solutions and innovative technology can help improve daily business operations, no one expects insurers to conquer these challenges alone. Whether for policy management, back-office operations or even claims management, seeking out partnerships and ecosystems will be integral to success.

Michael Mackenzie is head of specialist claims at Pro Global