Claims leakage is the gap between what an insurer paid on claims and what it should have paid under the policy and good practice. It comes from overpayment, missed recoveries, undetected fraud, process gaps and delay. Insurers measure it by reviewing samples of closed claims, and reduce it with payment controls, fraud checks and consistent processes.
Key takeaways
- Leakage is money lost through avoidable error, not the cost of claims that were rightly paid.
- According to PwC Australia's 2015 paper, the industry benchmark for leakage is roughly 3%, with most insurers well above it.
- Leakage is measured mainly through closed-claim file reviews, which compare what was paid with what should have been.
- According to the Insurance Council of Australia, the total cost of insurance fraud "is challenging to estimate with precision".
- The main fixes are controls on payments, checks for fraud and duplicates, prompt recoveries and consistent decisions.
What is claims leakage?
Claims leakage is the difference between the amount an insurer actually paid on its claims and the amount it should have paid, had every claim been handled correctly. It includes overpayments, payments that should not have been made, missed recoveries and avoidable costs such as delay. It is a measure of lost value, not of claims volume.
Leakage is easy to miss. A single overpayment on one claim may look small. Across thousands of claims, the total can be large.
Leakage is not the same as a claim the insurer wishes it had not paid. A valid claim paid correctly is the product working. Leakage is the part of the spend that good process would have avoided.
How is claims leakage measured?
Insurers usually measure claims leakage through closed-claim file reviews. Experienced reviewers take a sample of finalised claims, assess what should have been paid against the policy and best practice, and compare that with what was actually paid. The gap, scaled up across the portfolio, gives an estimate of leakage by line of business.
The method depends on judgement. Reviewers decide what "should have been paid", so a consistent standard matters. External reviewers are often used for independence.
Published leakage rates vary widely and few are well sourced. According to PwC Australia's 2015 paper "Stopping the leaks", the industry benchmark is roughly 3%, but most insurers sit well above it. In the same paper, PwC reported leakage of up to 25% at some insurers, particularly in life insurance.
What are the common causes of claims leakage?
The common causes of claims leakage are overpayment, missed recoveries, undetected fraud, process gaps and delay. Overpayment includes paying above the policy limit or the fair cost of repair. Missed recoveries include unpursued subrogation and excesses not collected. Process gaps and delay add costs that a well-run claim would avoid.
- Overpayment. Example: Paying a supplier above the agreed rate, or above the policy limit.
- Duplicate payment. Example: Paying the same invoice twice.
- Missed recovery. Example: Not pursuing a third party at fault, or not collecting the excess.
- Undetected fraud. Example: Paying an exaggerated or fabricated claim.
- Process gaps. Example: Inconsistent decisions between handlers on similar claims.
- Delay. Example: Extra hire car days or temporary accommodation while a claim stalls.
Fraud is part of the picture but hard to size. According to the Insurance Council of Australia, "an estimate of the value of undetected insurance fraud in the Australian market is not yet available". It also says the most common form of fraud is the exaggeration of personal claims.
Resourcing affects all of these. According to ASIC's Report 768, insurers increased claims resourcing after the 2022 floods, "albeit with a significantly increased reliance on temporary staff". Less experienced handlers make leakage more likely.
How can insurers reduce claims leakage?
Insurers reduce claims leakage by putting controls on payments, checking for fraud and duplicates, pursuing recoveries promptly, and making decisions consistent between handlers. Regular file reviews show where leakage occurs, so fixes can be targeted. Technology helps most with payment controls and checks, which are repetitive and easy to get wrong by hand.
Payments are the first place to look. Every payment should match an approved amount, a valid payee and the policy. Reconciliation catches errors after the fact.
ClaimsGateway (claimsgateway.com) builds payments into its claims platform, with automated payment set-up and tracking, payment histories, and reconciliation through an integrated payment system. It also includes fraud detection and AML sanctions checks. The ClaimsGateway insurers page describes its approach.
Software is one part of the answer. Recoveries, supplier management and handler training still depend on people and process. The earlier post on tech debt in claims covers how older systems add to leakage.
Frequently asked questions
What is claims leakage?
Claims leakage is the difference between what an insurer paid on claims and what it should have paid if every claim had been handled correctly. It includes overpayments, duplicate payments, missed recoveries, undetected fraud and avoidable costs from delay. It measures lost value, not the cost of claims that were rightly paid.
How much claims leakage is typical?
Estimates vary and few are well sourced. According to PwC Australia's 2015 paper "Stopping the leaks", the industry benchmark is roughly 3%, with most insurers well above it, and up to 25% at some insurers, particularly in life insurance. An insurer's own file reviews give the most reliable figure.
How do insurers measure leakage?
Insurers measure leakage mainly through closed-claim file reviews. Reviewers take a sample of finalised claims, assess what should have been paid against the policy and good practice, and compare it with what was paid. The gap, scaled across the portfolio, estimates leakage by line of business.
Is fraud part of claims leakage?
Yes. Undetected fraud, such as an exaggerated or fabricated claim, is one cause of leakage. It is hard to size: the Insurance Council of Australia says an estimate of undetected fraud in the Australian market is not yet available. Overpayment, missed recoveries and process gaps are other causes.
What technology reduces claims leakage?
Technology that controls and checks payments reduces leakage most directly: automated payment set-up, reconciliation, and checks for duplicates, fraud and sanctions. Consistent workflows reduce variation between handlers. Software does not replace recoveries work, supplier management or file reviews, which still depend on people and process.
About the author
ClaimsGateway builds cloud claims management software for insurers, underwriting agencies, brokers, TPAs and self-insured organisations in Australia and New Zealand. Every regulator figure in this article links to its source, and every vendor fact was checked on the vendor's own site on the date shown.
Related reading
- Claims management best practices: practices that hold up in Australia.
- Build or buy claims software: when an in-house build makes sense.
- Claims management systems explained: what a claims system does.
Sources
- PwC Australia. "Stopping the leaks." January 2015. https://www.pwc.com.au/industry/insurance/assets/stopping-the-leaks-jan15.pdf (read through search results, 24 October 2026)
- Insurance Council of Australia. "Insurance fraud." Checked 24 October 2026. https://insurancecouncil.com.au/consumers/insurance-fraud/
- ASIC. "Report 768: Navigating the storm: ASIC's review of home insurance claims." 16 August 2023. https://download.asic.gov.au/media/tgrozota/rep768-published-16-august-2023.pdf
