Claims leakage is the difference between what an insurer actually pays on claims and what should have been paid based on accurate assessment of coverage, damages, and liability.

Claims leakage includes both overpayment (paying more than owed due to adjuster error, fraud, or inflated estimates) and underpayment (paying less than owed, which creates compliance risk and customer dissatisfaction). Most insurers focus on overpayment when measuring leakage, but underpayment can be equally costly through regulatory action and litigation.

Industry estimates suggest leakage ranges from 5-10% of total claims spend for average performers. For a $1 billion book, that's $50-100 million in unnecessary payouts annually. Even small improvements in leakage have outsized P&L impact because every dollar of reduced leakage flows directly to underwriting profit.

Leakage is difficult to measure precisely because you're comparing actual payments to a hypothetical correct amount. Most insurers use sampling-based audits, comparing closed claims against independent re-adjudication. AI-powered claims review can now do this continuously rather than through periodic audits, flagging potential overpayments before they occur.

Related terms: Loss Adjustment Expense ratio, Fraud detection, Claims resolution rate