What is claims leakage?
Claims leakage is avoidable loss and expense on claims that were covered and paid. Reviewers measure it against a benchmark: what the claim would have cost if it had been investigated, reserved, and resolved to the carrier's guidelines and sound claims practice. The difference is leakage, whether it shows up in indemnity, defense costs, or other loss adjustment expense (LAE).
Fraud is a separate problem. A fraudulent claim shouldn't have been paid at all. Leakage happens on legitimate claims: a settlement above what the facts supported, a subrogation recovery nobody pursued, or defense spend that grew because nobody revisited the litigation plan.
What causes claims leakage?
- Subrogation (recovering the payment from the party at fault), contribution, or salvage that was available and went unpursued, or was pursued too late
- Coverage or liability positions that the policy language and the facts didn't support, or other responsible parties who were never put on notice
- Reserves that don't reflect exposure, so settlement and authority decisions rest on the wrong numbers
- Slow first contact, missed diaries, or missed statutory deadlines that let a claim grow in cost
- Defense counsel, experts, and vendors billing without an active budget or strategy review
Why is leakage hard to see?
Each leaking claim still closes, and most look reasonable on their own. The cost appears across the book: in loss ratios, in reserve adequacy, and in the claims data that pricing and underwriting teams use. Leakage usually comes from repeated handling habits, so one adjuster's or one office's miss can repeat across many files before anyone connects them.
How is claims leakage measured?
Through a claims audit or quality review. Reviewers compare each file with best practices and the carrier's guidelines, flag each deviation, and estimate its dollar effect. The sample results are then extrapolated to the whole book.
A traditional audit reviews about 2% of files, usually after they close. That limits the precision of the estimate, and the finding arrives too late to fix the claim. Reviewing open claims and a larger share of the book catches leakage while the adjuster can still act on it; see AI claims audit.
Who carries the cost of leakage?
Carriers carry it directly in their loss and expense results. MGAs (managing general agents) with delegated claims authority answer to their capacity providers for it, and TPAs are scored on it in client audits. Reinsurers and self-insured organizations pay for it whenever a ceded or retained loss runs higher than the file supports.
The same reviews check for the opposite error: claims closed without payment, including denials that involve AI.
Ely Audit, Elysian's AI claims audit software, reviews up to 100% of a portfolio's open and closed files and reports the leakage patterns it finds.
