Over two-third of insurance carriers report that economic factors and other market pressures such as higher settlement costs are driving claims costs higher, ultimately leading to increased premiums, according to the third edition of “The Carrier Perspective: 2025 Claims Insights” report by Gallagher Bassett. Additional drivers, such as the increased cost of reinsurance, regulatory shifts, climate change, and the frequency of natural disasters, are also contributing to higher claims costs across the globe.
A Hardening Market
In an exclusive Q&A with CLM, Joseph Berrios, managing director, carrier practice, Gallagher Basset, explains that, “in the increasingly fragmented property and casualty market, the frequency of catastrophic events has surged, leading to a rise in claims and creating a liquidity need for certain insurers. We have also seen a noticeable uptick in reinsurance volumes in 2024, following a less active year in 2023, with Bermuda continuing to be the preferred offshore destination for these activities,” he explains.
The anticipation of a hardening insurance market in North America over the next year, Berrios continues, is driven by several key factors. “[First], there is an increased frequency and severity of claims due to natural disasters, cyber incidents, and other catastrophic events, which have adversely affected insurers' profitability. Additionally, economic inflation has led to rising costs of goods and services, such as construction and healthcare, thereby increasing the cost of claims and prompting insurers to adjust premiums accordingly.
“Moreover, reinsurance costs have risen [due to] global loss events, leading primary insurers to face increased expenses that are often passed on to policyholders. Regulatory changes also play a role, as new regulations or modifications to existing ones can result in higher compliance costs and necessitate operational adjustments for insurers. Furthermore, low interest rates have diminished investment income for insurers, making underwriting profitability more crucial than ever.”
To maintain profitability, says Berrios, insurers may adopt stricter underwriting practices, which could lead to reduced capacity and higher premiums. “Collectively, these factors are expected to contribute to a hardening market, where insurance becomes more expensive, and coverage terms may become more restrictive.”
Top Contributors to Higher Claims Costs
Berrios states that in North America specifically, the biggest contributors to higher claims costs “are primarily rising settlement costs and climate change. Rising settlement costs are driven by increasing legal expenses and larger settlements, while climate change leads to more frequent and severe weather events, resulting in higher claims.
“Changing societal attitudes and increased mistrust of commercial businesses and other institutions have led to increased litigation and impact insurance affordability and availability across the country,” he adds. “Practices like insurance bad faith standards, time-limited demands, assignment of benefits, and third-party litigation funding are driving up costs associated with engaging in our country’s civil litigation system.”
Worldwide, however, Berrios states that “climate change remains a significant factor due to its global impact on natural disasters and severe weather-related claims. Additionally, data privacy and security risks are increasingly contributing to higher claims costs globally, as organizations face growing threats in a digital world, leading to potential data breaches and associated liabilities.” Indeed, according to the report, data and cybersecurity risks are the most cited business challenges by global (44%) and North American (45%) carriers, highlighting the increasing number of cyber incidents that impact both operations and client trust.
“Talent retention and engagement, while important for operational efficiency and service delivery, are less directly linked to claims costs but can indirectly affect them through the quality of risk management and customer service,” states Berrios.
Managing Costs and Maintaining Profitability
“Economic volatility, climate change, technological advancements, and evolving customer expectations are transforming the insurance industry,” according to the report. “Current market conditions have found carriers facing a wide range of challenges, from managing the financial impact of rising claims costs to navigating new regulatory requirements.”
In North America, carriers are employing several key strategies, with premium adjustments being the most common approach by over half of survey respondents. This is followed by “implementing stricter underwriting guidelines, enhanced claims management, and a strong focus on technology investment. Carriers are also paying close attention to credit rating agencies for potential downgrades or negative outlooks that could influence market strategies and competitive positioning.”
Berrios notes that managing claims costs effectively while maintaining profitability is crucial for insurance companies and that several strategies can be employed to achieve it. “Proactive risk management is essential, as implementing comprehensive strategies can help prevent claims before they occur. This involves conducting regular risk assessments, providing safety training, and implementing meaningful loss prevention programs. Additionally, utilizing data analytics and predictive modeling can help identify trends and potential risks early in the claims management process. This allows for more accurate pricing, better risk selection, and proactive claims management.”
Furthermore, continues Berrios, “efficient claims management is another key strategy, where streamlining the process through automation and technology can reduce administrative costs and improve customer satisfaction. This includes using digital platforms for claims submission and reviews, along with employing robust AI for initial claims assessment.”
Notably, Berrios adds, “carriers are increasingly collaborating with claims management partners to meet customer-focused regulatory requirements. Compared to Gallagher Bassett’s 2024 carrier survey, there is a 16-percentage point increase among North American carriers planning to work with trusted claims management partners. This year-over-year growth underscores the importance of partnerships in maintaining operational efficiency and customer trust amid rising compliance pressures.”
Fraud detection and prevention are also critical, states Berrios, as implementing “robust systems can help identify and prevent fraudulent claims, which can significantly impact overall claims costs. Typically, it involves using data analytics and machine learning to detect anomalies and patterns indicative of fraud.”
Other useful strategies Berrios suggests include developing effective negotiation and settlement strategies to resolve claims more efficiently and cost-effectively; Vendor management; establishing strong relationships with service providers and negotiating favorable terms to control costs associated with claims; focusing on customer education and engagement; and regularly reviewing and adjusting reserves ensures that they accurately reflect the expected cost of claims.
Managing Social Inflation
Insurance carriers are adopting a variety of strategies to tackle the challenges posed by social inflation, according to Berrios. “One key approach is the enhancement of underwriting practices. Carriers are refining their processes to more accurately assess risks associated with social inflation, utilizing detailed data analysis and predictive modeling to pinpoint potential high-risk areas. Performance analytics play a crucial role in facilitating more informed underwriting decisions.”
Furthermore, Berrios adds, “Carriers are implementing advanced claims management strategies to handle claims with greater efficiency and effectiveness. This includes early intervention in claims, employing strategic negotiation tactics, and utilizing highly trained, experienced claims adjusters to manage litigation. The use of alternative dispute resolution (ADR) solutions is also being explored to help mitigate costs.
“Policy adjustments are another method being employed, with insurers revising policy terms and conditions to lessen the impact of social inflation. This may involve modifying coverage limits, exclusions, and endorsements to better align with the current risk landscape. Alongside policy adjustments, pricing adjustments are being made to reflect the increased costs associated with social inflation. Insurers are developing more sophisticated pricing models that consider the potential for large jury awards and heightened litigation costs.”
To further support policyholders, Berrios explains, carriers are offering additional risk mitigation services aimed at reducing exposure to claims. These services include “providing training, resources, and tools to help businesses manage their risks more effectively. The involvement of specialized industry-experienced third-party administrators (TPAs) also aids in mitigating specialty risks.”
Carriers are also “leveraging advanced data analytics and technology to gain insights into emerging trends and patterns contributing to social inflation,” states Berrios. “This technological edge assists in making informed decisions and developing strategies to counteract these trends. Collaboration with industry partners, including brokers and policyholders, is also a key component, as carriers share information and strategies to manage the impacts of social inflation collectively.”
AI in Claims
“Artificial Intelligence (AI) is revolutionizing the insurance industry, particularly in claims management, by introducing innovative solutions that boost efficiency, accuracy, and customer satisfaction,” explains Berrios. “One of the key advancements is automated claims processing, where AI algorithms swiftly handle claims by extracting pertinent information from documents, evaluating claim validity, and even proposing initial settlement offers. This significantly cuts down the time and effort involved in manual processing.”
When it comes to fraud detection, Berrios adds, “AI systems excel by analyzing patterns and anomalies within claims data to pinpoint potential fraud. Machine learning models are adept at flagging suspicious claims for further scrutiny, thereby minimizing fraudulent payouts. Predictive analytics is another area where AI shines, as it can forecast claim outcomes and potential costs by examining historical data, aiding claims professionals in making informed decisions regarding reserves and settlement strategies.”
AI can also be used to enhance customer service and focus on more complex tasks. “AI-powered chatbots and virtual assistants are transforming customer service by managing routine inquiries and offering real-time assistance to claimants,” explains Berrios. “Image recognition technology is particularly beneficial in auto insurance claims, as AI can evaluate images from accidents or damage reports to determine the extent of damage and estimate repair costs.”
Another significant benefit of AI is Natural Language Processing (NLP), which is employed to “analyze and interpret unstructured data from claim forms, emails, and other documents, facilitating more efficient data extraction and processing,” says Berrios. “For instance, Gallagher Bassett’s Claim Summarizer has significantly improved the efficiency and effectiveness of reviewing reassigned or takeover claims for claims professionals by reviewing extensive claim notes and documents into a quick summary of the claim. Sentiment analysis further enhances customer service by assessing customer sentiment from communications, enabling the prioritization of claims that may require immediate attention or a personalized approach.”
Berrios concludes, “By harnessing these AI technologies, claims professionals can significantly enhance their capabilities, reduce costs, and elevate the overall customer experience.”