This article is going to make a bold statement that some of you may not agree with, but if you read to the end, you may understand my logic: The product of the insurance marketplace is not the policy—it is the promise that covered claims will place the insured back into a preloss state, paying no more and no less than what is owed to repair or replace the property or to defend an insured in a liability claim. And the only department in the insurance company that can fulfill that promise is the claims department.
Currently, there are two types of insurers. I am not speaking of the insurer's classes of business; I'm talking about the business model itself.
Insurers that see their claims department as the cost center of the company
Insurers that see their claims department as the profit center of the company
The latter was the model for the first 20 years that I have been in the industry (1975–1995). Slowly, however, the belief changed from being a profit center to being a cost center. I do not know the reasons why, but when the governing board began to focus more on the fact that a corporation should solely return profits to its shareholders—no matter the cost to staff or customers—I believe that the results were a reduction of coverage, training, personnel, and market share.
The Roles of Insurance Company Departments
The underwriting department is not the profit center. In evaluating, accepting, or rejecting risks on behalf of the insurer, the underwriter decides if an applicant is eligible for coverage. In some instances, the underwriter may write the actual policy form (a manuscript policy), but this is not where the rubber meets the road. The underwriting department's product is the carrying out of the board's risk tolerance by accepting or rejecting an insured.
The actuarial department uses data analytics and guidelines to analyze the likelihood of a loss and its costs, both in indemnity and in loss adjustment expenses (LAE). Its product is the price of the policy (premium).
The same is true of the sales department or marketing departments—they create images and positioning. They bring customers into the company, but they do not deliver the promise to indemnify a policyholder for covered losses.
The product being sold is "insurance," which is a service that provides protection against a possible loss. The claims department determines whether the contractual promise is fulfilled through policy interpretation. From a capital perspective, claims management ultimately shapes whether an underwriting margin materializes or erodes. The claims organization is the insurer's front window: Every dollar ultimately paid—or avoided—flows through its reserving, settlement, and litigation management decisions. It is not a back-office cost center; it is a capital-impact function whose structure, supervision, and expertise directly influence indemnity, LAE, and reserve stability. The claims department is the only place that produces this product.
Where Does Profit Come In?
Most corporate investments are evaluated on timelines that roughly match their payoff. A new system, distribution channel, or pricing model is designed for short-term profit in 1–3 years.
Short-term financial gains achieved by constraining claims staffing, lacking claim supervision, adding absolute exclusions, or adding contract language that reduces indemnity due to depreciation, therefore, do not represent true profitability. Instead, these responses create the following systemic downstream costs.
Poor or inconsistent early investigations
Delayed or inaccurate first reserves
Missed recovery opportunities
Higher litigation referrals
Greater adverse development
Claims do not behave this way.
The Role of Governance
This creates a persistent governance problem. Boards and executives review calendar-year loss ratios and expense ratios, yet the claims decisions driving those numbers may have been made by a department handling overloaded desks with limited training years earlier. When results disappoint, the instinct is often to focus on the claims department's performance rather than system design. After all, it is true that the claims department is where the money leaves the insurer's coffers, affecting the invested cash with demands on liquidity.
However, when the insurer's governing board views the claims department as a cost center, which is the current trend, their natural inclination is to control costs, increase profit, and reduce demands on liquidity. This is self-defeating, and I have the data to back it up.
Earlier in my career, I had the privilege to audit a public transportation insurance book of business. Adding staff, cutting caseloads, and reorganizing claims operations reduced cases and incurred but not reported (IBNR) reserves and generated a total of $17 million in savings over a period of 3 years. This averaged out to be $5.67 million in annual savings.
Across the sources reviewed, the following three patterns recur.
Claims severity, especially in auto and liability, is rising faster than general inflation.
Frequency is often flat or down; losses are being driven by size, not count.
Reserve development volatility closely tracks how well an organization recognizes and manages severity in real time.
Severity is not an external fate alone; it is shaped by the quality of early investigation, evaluation, negotiation, and litigation management. All of those depend on staffing: how many files each adjuster carries, how cases are triaged, and whether supervisors have the capacity to review and mentor work.
When an insurer treats adjuster staffing and training as a discretionary expense, it increases the risk of exactly the outcomes that the board fears most: unstable loss ratios, adverse development, and surprise "runaway verdicts."
Claims Should Not Be Shuffled to Attorneys
In an effort to be more cost-conscious, many liability insurers send claims directly to attorneys for handling under the misguided belief that counsel's work is privileged. It is not.
If the attorney is performing a routine claim investigation, that is not protected work product, and the insurer paid a much higher per-hour cost for the investigation. Attorneys are not trained to investigate losses; they are taught to litigate lawsuits. The result is a claim that languishes, even if a lawsuit has not yet been filed. Attorneys can no more develop a claim in 90 days than fly to the moon and back, which, given today's discovery timetables, might actually be successful sooner than later due to the courts' backlog of cases.
However, the claims department is trained to investigate and determine coverage quickly. In fact, many of the states' unfair claim settlement practices speak to this timeline.
Investing in Claims Pays Dividends
A policyholder's experience with the claims organization is a strategic asset because the handling and payment of covered claims fulfill the policy's promise. For the insured, this is the moment that the product proves its value.
Even modest improvements in claim settlements can produce outsized returns, including the following.
A 1–2 percent reduction in indemnity plus LAE on high-severity lines
Fewer litigated claims
Improved reserve stability
If claims capability materially influences ultimate loss cost, reserve stability, and litigation exposure, then governance oversight must extend beyond traditional volume metrics, such as pricing, reinsurance, and growth strategy. For governing boards, the strategic choice is not between controlling claims expense and protecting profitability; it is between managing claims capability as a core financial asset or allowing long-tail risk to accumulate outside the visibility of short-term metrics.
Conclusion
Organizations that recognize claims staffing and education as investments—measured, governed, and reviewed alongside other capital deployments—are better positioned to manage severity trends, stabilize earnings, and protect surplus in an increasingly volatile legal and social environment. Those that do not may find that apparent savings today are offset by materially higher costs tomorrow, when the true economics of their claims decisions finally emerge.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.
This article is going to make a bold statement that some of you may not agree with, but if you read to the end, you may understand my logic: The product of the insurance marketplace is not the policy—it is the promise that covered claims will place the insured back into a preloss state, paying no more and no less than what is owed to repair or replace the property or to defend an insured in a liability claim. And the only department in the insurance company that can fulfill that promise is the claims department.
Currently, there are two types of insurers. I am not speaking of the insurer's classes of business; I'm talking about the business model itself.
The latter was the model for the first 20 years that I have been in the industry (1975–1995). Slowly, however, the belief changed from being a profit center to being a cost center. I do not know the reasons why, but when the governing board began to focus more on the fact that a corporation should solely return profits to its shareholders—no matter the cost to staff or customers—I believe that the results were a reduction of coverage, training, personnel, and market share.
The Roles of Insurance Company Departments
The underwriting department is not the profit center. In evaluating, accepting, or rejecting risks on behalf of the insurer, the underwriter decides if an applicant is eligible for coverage. In some instances, the underwriter may write the actual policy form (a manuscript policy), but this is not where the rubber meets the road. The underwriting department's product is the carrying out of the board's risk tolerance by accepting or rejecting an insured.
The actuarial department uses data analytics and guidelines to analyze the likelihood of a loss and its costs, both in indemnity and in loss adjustment expenses (LAE). Its product is the price of the policy (premium).
The same is true of the sales department or marketing departments—they create images and positioning. They bring customers into the company, but they do not deliver the promise to indemnify a policyholder for covered losses.
The product being sold is "insurance," which is a service that provides protection against a possible loss. The claims department determines whether the contractual promise is fulfilled through policy interpretation. From a capital perspective, claims management ultimately shapes whether an underwriting margin materializes or erodes. The claims organization is the insurer's front window: Every dollar ultimately paid—or avoided—flows through its reserving, settlement, and litigation management decisions. It is not a back-office cost center; it is a capital-impact function whose structure, supervision, and expertise directly influence indemnity, LAE, and reserve stability. The claims department is the only place that produces this product.
Where Does Profit Come In?
Most corporate investments are evaluated on timelines that roughly match their payoff. A new system, distribution channel, or pricing model is designed for short-term profit in 1–3 years.
Short-term financial gains achieved by constraining claims staffing, lacking claim supervision, adding absolute exclusions, or adding contract language that reduces indemnity due to depreciation, therefore, do not represent true profitability. Instead, these responses create the following systemic downstream costs.
Claims do not behave this way.
The Role of Governance
This creates a persistent governance problem. Boards and executives review calendar-year loss ratios and expense ratios, yet the claims decisions driving those numbers may have been made by a department handling overloaded desks with limited training years earlier. When results disappoint, the instinct is often to focus on the claims department's performance rather than system design. After all, it is true that the claims department is where the money leaves the insurer's coffers, affecting the invested cash with demands on liquidity.
However, when the insurer's governing board views the claims department as a cost center, which is the current trend, their natural inclination is to control costs, increase profit, and reduce demands on liquidity. This is self-defeating, and I have the data to back it up.
Earlier in my career, I had the privilege to audit a public transportation insurance book of business. Adding staff, cutting caseloads, and reorganizing claims operations reduced cases and incurred but not reported (IBNR) reserves and generated a total of $17 million in savings over a period of 3 years. This averaged out to be $5.67 million in annual savings.
Across the sources reviewed, the following three patterns recur.
Severity is not an external fate alone; it is shaped by the quality of early investigation, evaluation, negotiation, and litigation management. All of those depend on staffing: how many files each adjuster carries, how cases are triaged, and whether supervisors have the capacity to review and mentor work.
When an insurer treats adjuster staffing and training as a discretionary expense, it increases the risk of exactly the outcomes that the board fears most: unstable loss ratios, adverse development, and surprise "runaway verdicts."
Claims Should Not Be Shuffled to Attorneys
In an effort to be more cost-conscious, many liability insurers send claims directly to attorneys for handling under the misguided belief that counsel's work is privileged. It is not.
If the attorney is performing a routine claim investigation, that is not protected work product, and the insurer paid a much higher per-hour cost for the investigation. Attorneys are not trained to investigate losses; they are taught to litigate lawsuits. The result is a claim that languishes, even if a lawsuit has not yet been filed. Attorneys can no more develop a claim in 90 days than fly to the moon and back, which, given today's discovery timetables, might actually be successful sooner than later due to the courts' backlog of cases.
However, the claims department is trained to investigate and determine coverage quickly. In fact, many of the states' unfair claim settlement practices speak to this timeline.
Investing in Claims Pays Dividends
A policyholder's experience with the claims organization is a strategic asset because the handling and payment of covered claims fulfill the policy's promise. For the insured, this is the moment that the product proves its value.
Even modest improvements in claim settlements can produce outsized returns, including the following.
If claims capability materially influences ultimate loss cost, reserve stability, and litigation exposure, then governance oversight must extend beyond traditional volume metrics, such as pricing, reinsurance, and growth strategy. For governing boards, the strategic choice is not between controlling claims expense and protecting profitability; it is between managing claims capability as a core financial asset or allowing long-tail risk to accumulate outside the visibility of short-term metrics.
Conclusion
Organizations that recognize claims staffing and education as investments—measured, governed, and reviewed alongside other capital deployments—are better positioned to manage severity trends, stabilize earnings, and protect surplus in an increasingly volatile legal and social environment. Those that do not may find that apparent savings today are offset by materially higher costs tomorrow, when the true economics of their claims decisions finally emerge.
To read more about this topic, see The ROI of Claims Staffing and Education: How Skilled Adjusters Make Carriers More Profitable by Chantal Roberts, which goes into this topic in greater detail.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.