An old saying goes, when you are shopping for a drill, what you are actually looking to buy is a hole. What holes are to drills, claims are to insurance. When you buy insurance, what you are actually shopping for is the best claim (cost efficient, hassle free and quick).

“What do you mean my insurance claim is denied?!”

One of the most common frustrations for insurance consumers is that when you actually need it, it refuses to work. It’s like buying a drill for your future drilling needs; a year later, when you drill a hole in your bedroom cement wall, the drill breaks. You discover that the drill T&Cs state that it’s only suitable for drilling holes in wooden walls, no thicker than 3cm and only during daylight hours. You contact the manufacturer who wastes no time in telling you that you should have been more careful reading their documentation when you bought the drill rather than assuming that it’s a universal drill.

You bash the drill manufacturer and the store where you bought it…welcome to the world of insurance!

Insurance is full of unwelcome surprises and its not uncommon to either get a much smaller than expected payment or get a claim denied outright. Since this is probably THE biggest pain point in insurance, today’s post takes a closer look at the process of insurance claims and where it tends to go wrong. This is meant as an insiders guide to claims, which should hopefully help to highlight some of the opportunities for insurtech startups.

Insurance Claims Process

So something bad has happened and now you are frantically searching for your insurance policy document and googling how you actually submit a claim. You’ve managed to locate the claim form on the insurer’s website, downloaded, printed, and diligently filled out all four pages of it, put it in an envelop together with all the originals of supporting documents that are mandated. Then you either go down to the insurer’s branch or ask your agent/broker to submit it for you.

Upon receiving a notification of a loss (first notice of loss), the insurance staff types in all information into the system, scans the claims document you’ve submitted and assigns a claim team member (claims adjuster) to the case. The adjuster then uses your policy’s terms and conditions as a bible for determining “coverage” of the loss. When a new claim is received, the job of the adjuster is to compare the loss details to the policy terms to determine if the policy “responds” to the claim. From then on the adjuster starts to gather documents to determine the extent of the loss and how much of it is covered. The process is called claim adjudication.

Once the adjuster has an initial idea about the extent of the covered loss, he puts up preliminary insurer reserves to pay for the loss. Meaning funds are set-aside in liquid assets so that loss can be paid out to customer at a later date.

Claim flow


Claims Adjustment – Science or Art?

During the adjustment process, the claims adjuster looks to come up with the most accurate value of the covered loss. While it’s supposed to be an exact science, the coverage of the policy is rarely 100% clear and the claims adjuster typically starts with a lowest reasonable value based on their estimate. What is supposed to be a black and white process is, in reality, a highly manual process based on human judgment and is prone to errors.

Further complicating matters, insurance adjusters are scrutinized by the insurance company to ensure there was no unnecessary “leakage” of value (overpayment of claim). This leads adjusters to be extra cautious, asking for as many documents as they can get their hands on. There’s never been a punishment for asking too much or paying too little, so the incentive is clearly to go down that route.

Another thing that adjusters are really careful about is spotting any flags for potential fraud. This is serious business and there are professional fraudsters who make their living stealing money by manipulating insurance company claims. Insurance companies tend to treat every customer as potentially guilty of fraud unless proven otherwise. Not the best way to treat someone who has recently experienced a loss.

For most claims, the adjuster will also look to minimize any loss; for example if a person is claiming water damage to their home, the adjuster might recommend to quickly engage a cleaning company to avoid any further damage due to mold. Same goes with the disability or workers compensation which will both use on-staff nurses to try optimizing the treatment and spot any abuses, again to minimize the value of the loss and get the person back on their feet as quickly as possible.

For larger or more complicated claims, the insurance company will typically engage a third party professional adjuster company. These companies specialize in assessing complicated losses and determining the best remediation actions. For example, if an insured building is developing a crack and has a risk of further damage, a professional adjuster will spend time at the site and will develop the most cost efficient plan to fix/rebuild and estimate the true extent of a loss. Unfortunately, as the insurance company is the one paying for the adjuster, they get to influence the assessment so large customers typically also engage their own adjusters to validate the insurer’s loss assessment.

Protracted Time to Settlement

Finally, when the customer gets their proposed settlement, in the majority of more complicated cases, there will be a negotiation process where settlement value might get adjusted. As you can imagine, it’s a long and painful process for something that supposed to be a quick and hassle free.

For consumer claims, the average time from first notice of loss to payment is around one month for simple claims (unless you are in Korea where the regulator mandates a 3 day turn-around); for more complex claims, it would be three months and easily longer if there are uncertainties. Commercial claims take, on average, a year.

If the insurer and claimant can’t agree on the value of the covered loss, the case will be taken to the insurance commission or regulator who acts as a mediator. If it can’t be agreed, it then goes to formal litigation.

Role of the Agent/Broker

What role does agent or broker play in the process? They are largely a cautious messenger and a facilitator. They engage insurer to submit customer’s claim and facilitate collection of any requested documents, help to pass back any feedback as well as advocate a fair settlement. Its important to consider that there’s no money to be made in claims handling for intermediaries. In fact, it’s a pure cost and they will typically go only as far as needed to show the commitment and support to customer, in order to ensure they win the renewal business in the subsequent year.

Intermediaries are also very careful to avoid passing any judgments or interpretations, as that may easily leave them being stuck between a rock and a hard place. If for example they imply that the loss is covered and insurer refuses to pay, for a valid reason, intermediary can end up in a very delicate situation in which they may need to personally pay the claim out of their own pocket.

Root causes of Claims issues

If we distill it down, following are the fundamental issues with insurance claims, which translate into poor customer experience, together with the root causes.

Claims service issues - root causes

InsurTech Startups to the rescue

InsurTech startups have a real chance at improving the customer experience during the insurance claims while making it more operationally efficient. Claims typically account for up to a quarter of all insurance operating costs so insurance companies are usually keen to see how these costs can be brought down.

Agility, understanding of consumer expectations and technological know-how give startups an edge vs. an inhouse solution and even large vendor solution, which typically will aim to sell highly customized end-to-end solutions that end up largely replicating the manual processes.

Again the key advice there would be to avoid any kinds of integration with existing legacy IT systems, as that quickly snowballs into a multi-year and multi-million dollar endeavor that has a high risk of failure. Startups focusing on tackling a specific root cause and then moving onto other root causes will have a much higher probability of success and position themselves to quickly capture the partnership opportunities across insurers and geographies.

Thanks for reading and till next time,


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