The State of Digital Transformation

It’s no secret, the insurance sector has been slower to adopt digital technologies, but we are seeing a promising trend where carriers are increasingly recognizing the need for change. Carrier innovations have mainly focused on data and analytics, but other areas of this $6 trillion industry1 remain ripe for disruption.

In an SMA survey, only 37% of commercial carriers and 32% of personal lines carriers included payments in their digital transformation plans.2

Despite being an essential aspect of the insurance experience, the process of disbursing claim payments continues to rely on antiquated, paper-based methods.

The Moment of Truth in Insurance

The claims experience is perhaps the most crucial step in the overall insurance journey, serving as the key ‘moment of truth’ for policyholders — where the promise of their insurance coverage is fulfilled.

The claims experience has a direct correlation to customer retention and renewal.

About half of policyholders who are satisfied with their claims experience are likely to renew their policy, compared to just a third of those who are not satisfied.3

The outbound claim payment process is the final step in the end-to-end claims experience and must be part of any effort to optimize and digitize claims.

POLICYHOLDERS WHO ARE LIKELY TO RENEW BASED ON CLAIMS EXPERIENCE

The Opportunities of Digitized Claim Payments

By offering a modern and easy-to-use payment process, carriers can enhance the customer experience, reduce costs, improve operational efficiency, and safeguard disbursements from disruption.

1. Meet and Exceed Consumers’ New Expectations

The payments landscape has evolved significantly in recent years. Consumer preference for traditional methods like checks and cash continues to decline,4 and nearly nine in 10 Americans now use digital payment methods.5

To ensure they are meeting and exceeding policyholder expectations, insurers can provide the same expedited payments process for claims as customers experience with other transactions. According to a Federal Reserve survey, 74% of respondents said they used faster or instant payments in 2023.6

In all, dissatisfaction around the claims experience could represent up to $34 billion in premiums annually.7

2. Minimize the Costs of Issuing Claim Payments

Checks are not only outdated but they are also costly. According to the 2022 AFP Payments Cost Benchmarking Survey, the median per-transaction cost of a check ranges from $2.01 to $4.00. The same survey found that digital payments offer a more cost-effective solution for insurers, with some options as low as $0.40 to send.8

Additionally, checks lengthen claim cycles due to the slow nature of their physical delivery. Plus, ongoing postal delays9 are compounding the problem. The longer a claim is drawn out, the higher its financial burden typically becomes. Further losses might come into play because of increased living expenditures or the need for rental vehicles.10

Some treasurers are going further by looking to monetize payments.

The opportunity to use virtual cards to pay vendors can represent a multi-million-dollar opportunity for some carriers.

3. Reduce Combined Ratio through Internal Efficiencies

Digitizing the claims journey and enabling instant settlement can also help reduce internal overhead. Checks must be handled manually. And manual processing and reconciliation is time-consuming, expensive, and susceptible to human error.11

Digitizing claims payments can also reduce the volume of status inquiries as instant payments are settled instantly, reducing the likelihood of claimant inquires. Responding to payees manually requires time and resources to be spent on tasks that can happen digitally.

Efficient approaches which help reduce internal costs are also preferred by policyholders.

According to J.D. Power research, customer satisfaction is highest when claimants receive an email, text, or mobile app updates and falls significantly when claimants need to contact the insurer to ask additional questions.12

4. Create Resiliency to Payment Disruption

Natural and catastrophic disasters have increased in frequency and intensity over the past decade. Such events challenge the traditional check payment method, especially when infrastructure is compromised, or homes and businesses are destroyed. During the COVID-19 pandemic, carriers struggled to get checks printed and mailed, but digital payments continued uninterrupted.

Future disruptions are inevitable. Digital payments offer a resilient alternative, ensuring continuous operations even when disaster strikes.

The Challenges of Digitizing Claim Payments

While the benefits of digitizing claim payments are great, insurance companies face a myriad of challenges from both internal and external forces.

1. Several Payment Methods and Options

New payment methods and channels regularly enter the market in today’s world. For example, the FedNow real-time payment scheme went live in the U.S. in 2023,13 and digital wallets and push-to-debit transactions are becoming increasingly popular ways for claimants to receive disbursements. Insurers must know when to offer which payment options, have the capability to manage customer preferences, and ensure appropriate fraud controls for each payment option, especially given some of these payment methods are irrevocable.

2. Low Enrollment Rates Among Vendors

Business-to-business payments have been notoriously challenging to digitize across all industries. Approximately 50% of insurance claim payments are typically to business or vendors (e.g., autobody shops, attorneys, builders).14

Vendor claim payments can be digitized only with a well- established vendor network specific to the insurance ecosystem and proactive recruiting of recipients.

Historically, each insurer has maintained its own provider network, which can be costly and time-consuming to manage and resulted in low vendor enrolment rates.



3. Complex Insurance Use Cases

Complex insurance claim payments (e.g., multi-party payments and lienholder payments) require various approvals based on different thresholds, involve multiple recipients, and necessitate splitting payments across parties. This complexity often leads insurers to resort to paper checks as the only way to process these payments.

Solving these challenges requires bespoke solutions tailored to the insurance industry.

4. Compliance with State Regulations

State regulations require certain claim payments to be made in specific ways or within strict timeframes. For example, workers’ compensation payments have different regulatory requirements in each state, with some jurisdictions requiring digital payments. Alternatively, some states require paper checks to be an option for receiving claim payments, with the added requirement to be able to cash a check within that state. Insurers must stay compliant with all the regulations, no matter how frequently they change.

5. Security of Sensitive Data

On top of adhering to insurance industry regulations, disbursements must also be processed in accordance with Payment Card Industry Data Security Standards (PCI DSS).

Given the highly sensitive nature of data involved in the processing of claim payments, this compliance burden increases when carriers store payment data on their own network.

6. Treasury Funding, Reporting, and Reconciliation

The introduction of more real-time payment methods, while providing an opportunity to delight customers, has challenged the traditional treasury funding model, which has historically been a 7 a.m. to 3 p.m., Monday to Friday task.15 Real-time payments (and the associated funding) happen 24 hours a day, 7 days a week (including weekends).

These new payment types, and the differences in how they are settled and reported, also cause downstream impacts complicating reconciliation and accurate reporting.

7. Customer Support and Payment Tracking

Customer service representatives (CSRs) often lack real-time data on payment statuses, leading to customer dissatisfaction when the CSR is unable to answer their questions.

Insurers need to expose payment status in service channels to improve service levels.

8. Adjuster Training and Adoption

Insurers are faced with training and retraining adjusters. Carriers must find ways to make it easy for the adjuster to issue digital payments. This is impossible if the payments are not linked to the insurance company’s core claim system.

Strategies for Success

Despite the inherent challenges, there are avenues insurers can take to help them successfully digitize claim payments. This includes integrating payment processing into core claims systems, adopting solutions that provide customers with choice for how they receive their claim payments, having a plan to use the network effect to drive high enrollment into digital payments, and working with a payments partner that understands both the complexity of payment processing and the unique nuances of the insurance industry.

Digitizing insurance claim payments is no longer an option but a necessity for insurers aiming to stay competitive and meet customer expectations.

You can learn more about how J.P. Morgan and One Inc have partnered to help insurance carriers transform claim payments by visiting https://partners.jpmorgan.com/oneinc.html.

Endnotes
  1. Statista – https://www.statista.com/topics/6529/global-insurance-industry/#topicOverview
  2. Strategy Meets Action (SMA) – https://portal.resourcepro.com/advisory/researchReportDetails
  3. Bain & Company – https://www.bain.com/insights/how-to-improve-customer-retention-in-property-and-casualty-insurance-snap-chart
  4. Federal Reserve – https://www.frbservices.org/news/research/2024-findings-from-the-diary-of-consumer-payment-choice
  5. McKinsey & Company – https://www.mckinsey.com/industries/financial-services/our-insights/ banking-matters/consumer-trends-in-digital-payments
  6. ABA – https://bankingjournal.aba.com/2024/08/instant-payment-use-cases-gaining-traction-to- meet-growing-demand/
  7. Accenture – https://newsroom.accenture.com/news/2022/poor-claims-experiences-could-put-up-to-170b-of-global-insurance-premiums-at-risk-by-2027-according-to-new-accenture-research
  8. AFP – https://www.afponline.org/training-resources/resources/articles/Details/choosing-the-right-payment-method-the-pros-and-cons-of-each
  9. Government Executive – https://www.govexec.com/management/2024/02/usps-institutes-network- reforms-mail-delivery-hits-three-year-low/394388/
  10. Celent – https://www.celent.com/insights/195157483
  11. AFP – https://www.afponline.org/training-resources/resources/articles/Details/choosing-the-right-payment-method-the-pros-and-cons-of-each
  12. J.D. Power – https://www.jdpower.com/business/press-releases/2023-us-claims-digital-experience-study
  13. One Inc Internal Data
  14. Federal Reserve – https://www.federalreserve.gov/newsevents/pressreleases/other20230720a.htm
  15. J.P. Morgan internal data