Claims leakage is money an insurer pays out on claims beyond what the policy terms and the facts of each loss required, through overpayment, error, missed recoveries, avoidable handling cost or fraud that goes undetected. It is measured against the correct outcome of each claim, not against the size of the claim.
This entry covers the types of leakage, the published evidence on fraud and claim buildup, the recovery, supplier and delay costs that a leakage review examines, how leakage is measured in closed file reviews and how it differs from claims inflation and from underpayment. UK rules and data are used unless stated.
Claims leakage in numbers
What published sources measure
None of the regulator and trade body sources used for this entry publishes a market-wide rate of claims leakage. The figures that exist measure parts of it: fraud that insurers detected, buildup found in samples of closed claims, and the cost components a regulator has examined. Leakage percentages that circulate in industry commentary are left out of this entry where their source publishes no sample or method.
What counts as claims leakage
Leakage is assessed claim by claim, against the outcome that the policy and the evidence required. A large claim that was valid and correctly settled has no leakage, however much it cost. A small claim can carry leakage if, for example, the excess was not deducted. The measure is the difference between what was paid, including avoidable handling cost, and what should have been paid. Leakage is also distinct from the loss ratio, which compares total claims with premium and includes leakage without separating it.
The term does not appear in the FCA's claims handling rules. ICOBS 8.1.1R requires an insurer to handle claims promptly and fairly, to provide reasonable guidance to help a policyholder make a claim and appropriate information on its progress, not to unreasonably reject a claim and to settle claims promptly once settlement terms are agreed.1 That rule sets the other side of the measure: the correct outcome includes paying everything the customer is owed.
Types of claims leakage
| Type | What it is | Examples | Where a reviewer looks |
|---|---|---|---|
| Coverage | Paying for a loss the policy does not cover, or without applying a limit, excess or exclusion | Excess not deducted; a claim paid on a lapsed policy; an endorsement that removed cover not applied | Policy wording and schedule in force on the date of loss |
| Indemnity | Paying more than the loss on a valid claim | Settling at the claimed figure without validation; paying for betterment | Evidence of the loss, valuations, repair estimates |
| Supplier | Paying a supplier above agreed rates, for work not done or twice | Invoice above the agreed labour rate; duplicate invoice paid | Agreed rates, invoices, payment records |
| Recovery | Failing to recover money that others owe | Subrogation against a negligent third party not pursued; salvage not realised; contribution from another insurer not claimed; time limit missed | Liability evidence, salvage records, recovery ledger |
| Fraud | Paying a claim that is invented or deliberately exaggerated | Staged accident; inflated contents list | Fraud indicators, investigation outcomes |
| Process | Avoidable cost caused by delay, rework or poor handling | Extra hire days while authorisation waits; legal costs of an avoidable dispute | Claim timelines, hire and legal spend |
The categories overlap. An inflated repair invoice is supplier leakage if it is an error and fraud if it is deliberate, and the classification depends on evidence of intent. Process leakage is the hardest to quantify, because the avoidable part of a delay has to be estimated.
Fraud and exaggeration
Fraud is one source of leakage, and the one for which UK data are published. Under section 12 of the Insurance Act 2015, an insurer is not liable to pay a fraudulent claim.2 Fraud that is detected before payment is not leakage; fraud that is paid without being detected is.
The Home Office reported that in 2023 insurers detected 84,400 fraudulent claims, in ABI figures, worth £1.1 billion, a 16% increase in the number of detected claims compared with the previous year.3 For motor insurance, the FCA's 2025 claims analysis reported ABI data on confirmed and suspected fraud.4
| Measure | 2019 | 2023 |
|---|---|---|
| Confirmed fraud, cases | 4,423 | 6,263 |
| Confirmed fraud, value | £49m | £65m |
| Suspected fraud, cases | 40,106 | 29,892 |
| Suspected fraud, value | £423m | £316m |
The FCA said that the rise in confirmed cases while suspected fraud declined suggests either improved fraud detection mechanisms or a shift in fraudulent behaviour.4 It reported growing evidence that some claimants are exaggerating, layering and fabricating some minor injury claim types, and insurers told it that a growing number of claims involve altered media, with fraudsters increasingly using generative AI to create fake images of vehicle damage.4 Detected fraud figures describe what insurers found. They do not measure fraud that was paid without being detected, which is the part that counts as leakage.
Claim buildup: evidence from closed claim studies
Buildup, which the US Insurance Research Council (IRC) defines as the inflation of an otherwise legitimate claim, such as through unnecessary medical treatments or diagnostic procedures, starts from a genuine loss.5 The IRC's closed claim studies measure it by asking claim file reviewers to indicate whether specific elements of fraud or buildup appear in each claim.5 That is a file-by-file method, like a closed file review.
| Claims year | Excess payments | Share of total payments | Study basis |
|---|---|---|---|
| 2002 | $4.3bn to $5.8bn | 11% to 15% | As reported in the IRC's 2008 edition5 |
| 2007 | $4.8bn to $6.8bn | 13% to 18% | More than 42,000 claims from 22 insurers with 58% of the market5 |
| 2012 | $5.6bn to $7.7bn | 13% to 17% | More than 35,000 claims from 12 insurers with 52% of the market6 |
The IRC said that because its study involves only claims closed with payment, it likely understates the incidence of fraud and buildup in all claims filed.5 Its estimates also exclude the cost of insurers' efforts to fight fraud and buildup.6 In 2012, file reviewers found the appearance of fraud or buildup in 21% of bodily injury claims and 18% of personal injury protection claims closed with payment, and claims with the appearance of buildup accounted for 15% of dollars paid for those two coverages.6 The figures describe US auto injury claims and are not a measure for the UK or for other classes of insurance.
Missed recoveries: subrogation, salvage and contribution
When a third party caused a loss, the insurer that paid its policyholder can pursue that party through subrogation, and where two policies cover the same loss, the paying insurer may be able to claim a contribution from the other. A recovery that is not pursued, or is pursued too late, leaves the insurer bearing a cost that someone else was liable for. In England and Wales, an action founded on tort cannot be brought after six years from the date on which the cause of action accrued, under section 2 of the Limitation Act 1980.7
In FCA data from 11 motor insurers, the average recovery by non-fault insurers from third parties rose by 49%, from £2,780 in 2019 to £4,134 in 2023.4 The 12 firms in the review wrote off 296,135 vehicles on first party claims in 2023, against 272,042 in 2019.4 A written-off vehicle is salvage: what it realises when sold reduces the net cost of the claim, and an unsold or undervalued salvage item is recovery leakage.
Supplier and delay costs in the FCA's motor data
The FCA's 2025 motor claims analysis, based on 12 insurers representing over 50% of the UK private motor insurance market, does not use the term leakage, but it measures several of the costs a leakage review examines.4 One large firm told the FCA that, on a like-for-like basis, repair claims where the claimant chose the garage were 7% more costly than outsourced repairs.4 In credit hire, a firm provides a replacement vehicle to a non-fault driver and claims the cost from the at-fault driver's insurer; the FCA reported the costs of settled credit hire claims for 2019 and 2023.4
| Measure | 2019 | 2023 | Change |
|---|---|---|---|
| GTA daily rate (8 firms) | £67 | £75 | 12% |
| GTA hire duration, days (8 firms) | 19 | 25 | 32% |
| GTA cost per claim (8 firms) | £1,295 | £1,901 | 47% |
| Non-GTA daily rate (10 firms) | £78 | £93 | 19% |
| Non-GTA hire duration, days (10 firms) | 20 | 27 | 35% |
| Non-GTA cost per claim (10 firms) | £1,564 | £2,537 | 62% |
The General Terms of Agreement (GTA) is a voluntary agreement between insurers and credit hire firms establishing maximum car hire rates for different vehicles; non-GTA claims do not have set rates.4 One large insurer told the FCA that the proportion of its non-GTA claims where the initial claim amount was more than double the final settlement increased from 13% to 28% between 2019 and 2023.4
In motor claims, hire costs accrue by the day, so delay adds cost. The FCA measured the time from first notification of loss (FNOL) to final settlement, which it defines as the point at which the claim is completely resolved for the insurer, including any recoveries from third parties.4
| Stage | 2019 | 2023 | Change |
|---|---|---|---|
| FNOL to final settlement: property damage | 287 | 353 | 23% |
| FNOL to final settlement: accidental damage | 187 | 240 | 28% |
| FNOL to final settlement: replacement vehicle | 222 | 298 | 34% |
| Repair lead time, incident to start of repair (9 firms) | 15 | 31 | 110% |
| Repair time, key to key (9 firms) | 11 | 15 | 36% |
The FCA said these extended durations contribute to higher claims costs, primarily through increased costs for courtesy and replacement car provision, credit hire and the repair itself.4 Insurers also told it that claims handled by claims management and accident management companies are notified later than if the customer had contacted the insurer directly.4
How claims leakage is measured
A closed file review takes a sample of settled claims and re-examines each one against the policy, the evidence and the firm's own procedures, recording any difference between what was paid and what should have been paid, and its cause. It can be run by a claims quality or internal audit team, by a capacity provider auditing a third-party administrator, or by an external reviewer.
Stages of a closed file review (illustrative)
This entry uses hard leakage for a specific overpayment that can be calculated, such as an excess that was not deducted, and soft leakage for an estimate, such as the additional cost of slow handling or the value of a recovery that was never tested. The table below is an invented example.
| Finding | Files | Amount | Classification |
|---|---|---|---|
| Excess not deducted (6 files at £250) | 6 | £1,500 | Hard |
| Contractor invoices above agreed rates | 9 | £7,380 | Hard |
| Duplicate invoice paid | 1 | £1,140 | Hard |
| Item excluded by the policy paid | 2 | £3,980 | Hard |
| Total hard leakage | 18 | £14,000 | 1.12% of £1,250,000 |
| Recovery from a liable third party not considered (estimated recoverable value) | 3 | £9,600 | Soft |
| Avoidable hire during delayed authorisation (14 files, 4 days each, at £75 a day) | 14 | £4,200 | Soft |
| Total soft leakage | 17 | £13,800 | 1.104% of £1,250,000 |
| Underpayments owed to customers | 4 | £2,300 | Reported separately; not netted off |
In this illustration, hard leakage is 1.12% of the amount paid in the sample and soft leakage a further 1.104%, a combined 2.224%. Applied to a portfolio of £50,000,000 of paid claims, the hard rate alone would imply £560,000, but a sample of 200 files carries sampling error, so an extrapolated figure is an estimate with a margin of error. The underpayments are paid to the customers concerned and are not deducted from the leakage figure.
Rules in a claims system can apply excesses, limits and agreed supplier rates automatically. Under straight-through processing, the same rule is applied to every eligible claim, so a correct rule applies consistently and an incorrect one repeats its error on every claim it touches. Reviews can sample automated claims for that reason.
Claims leakage and claims inflation
Claims inflation is a rise in what it costs to settle claims, whether or not each claim is handled correctly. The Prudential Regulation Authority, writing to general insurers' chief actuaries in October 2022, described it as the increase in the cost over time to settle general insurance claims.8 Leakage is avoidable cost on top of the correct settlement; inflation raises the correct settlement itself.
In the FCA's sample of 12 motor insurers, the average claim cost rose by 37%, from £2,410 in 2019 to £3,293 in 2023, while claims frequency fell from 12.8% to 11.9%.4 The average insured vehicle value rose 42%, from £9,319 in 2019 to £13,223 in 2023, double CPI inflation of 21% over the same period.4 Those rises lift the correct cost of every claim. A leakage review measures each settlement against the cost that was correct when it was made, so a higher agreed repair rate is not leakage, while a bill above the agreed rate is.
| Term | What it measures | Relationship to leakage |
|---|---|---|
| Claims leakage | Avoidable cost above the correct outcome of each claim | The subject of this entry |
| Claims inflation | The increase in the cost over time to settle claims8 | Raises the correct cost; not leakage in itself |
| Claims fraud | Claims that are invented or deliberately exaggerated | Fraud paid without being detected is one type of leakage |
| Buildup | Inflation of an otherwise legitimate claim5 | Indemnity or fraud leakage, depending on intent |
| Underpayment | Paying less than the policy entitles the customer to | The opposite error; offering less than the customer is entitled to under the policy, to control claims costs, is a breach of ICOBS 8.1.1R(1)9 |
| Loss ratio | Claims incurred as a share of earned premium | Includes leakage but does not separate it |
Underpayment is not a saving
A programme that lowers payments below what policies provide moves the error from the insurer to the customer. In a review published in March 2024 of how insurers value written-off and stolen vehicles, the FCA surveyed 12 firms making up an estimated 70% of the market.9 It found that some firms reported average settlement values lower than the available guide prices, and that most firms deducted 20% from the settlement value if the vehicle had previously been a total loss in any category, with no indication of having considered individual circumstances.9 The FCA reminded firms that attempts to control claims costs by making offers lower than the customer is entitled to under their policy is a breach of ICOBS 8.1.1R(1).9
Under the Consumer Duty, which came into force in July 2023, the FCA expects firms to use data to identify issues that may be leading to foreseeable customer harm, and to monitor that a change in valuation method does not produce systematically lower settlement payments.9 Value can also fail at product level. In February 2024, several insurers agreed to pause GAP insurance sales at the FCA's request, after its value measures data showed only 6% of the amount customers paid in premiums for GAP insurance being paid out in claims.10 The FCA later said the firms that agreed account for 80% of the GAP market.10 The FCA uses its value measures data, which report claims acceptance rates, average claims payouts and the proportion of premiums paid out in claims by product, to identify areas where consumers may not be receiving fair value or good outcomes.11
Leakage under delegated authority
When a third-party administrator (TPA) or managing general agent (MGA) settles claims under delegated authority, the money paid is the insurer's, so leakage in the delegated claims operation falls on the capacity provider. In its vehicle valuation review, the FCA found that most of the firms it reviewed outsource at least part of their claims handling some of the time, and said that firms can outsource claims handling activities but cannot outsource accountability for ensuring these meet regulatory requirements.9 Claims bordereaux report each claim paid under the authority, and a capacity provider's audit of the administrator's files can take the form of a closed file review.
Show References Hide References
- FCA Handbook. ICOBS 8.1: Insurers: general. Read 10 November 2026.
- Insurance Act 2015. Section 12: Remedies for fraudulent claims. legislation.gov.uk.
- Home Office. Major new crackdown on insurance fraud. GOV.UK, 25 October 2024.
- Financial Conduct Authority. Motor Insurance Claims Analysis. July 2025.
- Insurance Research Council. Fraud and Buildup Add 13 to 18 Percent in Excess Payments to Auto Injury Claims. News release, 24 November 2008.
- Insurance Research Council. Insurance Research Council Finds That Fraud and Buildup Add Up to $7.7 Billion in Excess Payments for Auto Injury Claims. News release, 3 February 2015.
- Limitation Act 1980. Section 2: Time limit for actions founded on tort. legislation.gov.uk.
- Prudential Regulation Authority. Insights from PRA thematic review of general insurance reserving and capital modelling. Letter to chief actuaries, 20 October 2022.
- Financial Conduct Authority. Findings of multi-firm review into insurers' valuation of vehicles. Published 27 March 2024, last updated 3 December 2025.
- Financial Conduct Authority. GAP insurers agree to suspend sales following FCA concerns over fair value. Press release, 9 February 2024.
- Financial Conduct Authority. General insurance value measures data 2025. First published 21 July 2026.
Frequently Asked Questions
Does reducing claims leakage mean paying claims less?
Not where the reduction comes from paying less than the policy provides. In its review of how insurers value written-off vehicles, the FCA found that firms would sometimes make initial settlement offers below the vehicle's estimated market value, or at the lower end of an identified range, expecting to increase the offer if the customer challenged it or complained, even if the customer provided no additional information. The FCA said this can lead to systematically different outcomes for different customers, largely based on their propensity to challenge or complain, and that knowingly offering less than a customer is entitled to under the policy is likely to breach the requirement to act in good faith towards retail customers (PRIN 2A.2.1R).
The same FCA review described practice it regarded as good. Some firms offered average settlement values closely aligned to retail guide prices, and none of the firms reviewed used incentives, targets or other performance management practices that would encourage claims staff to depress vehicle valuations. The FCA noted that the Financial Ombudsman Service compares prices in multiple guides and, if there is significant difference and it thinks the firm's valuation is unfair, relies on the highest value unless it has evidence supporting a modification, so the FCA would not generally expect firms to rely on a single trade guide. It also said vulnerable customers may be at greater risk of harm from low initial offers, as they may have less financial knowledge or experience of challenging an insurer's initial offer.
What can an insurer do if a claim turns out to be fraudulent?
In the UK, section 12 of the Insurance Act 2015 sets the remedies. If the insured makes a fraudulent claim, the insurer is not liable to pay it, may recover from the insured any sums already paid in respect of it, and may by notice treat the contract as terminated from the time of the fraudulent act. If it does so, it may refuse liability for any relevant event occurring after the fraudulent act and need not return any of the premiums paid. Termination does not affect the parties' rights and obligations for a relevant event before the fraudulent act, so a genuine earlier claim is unaffected. For consumer claims subject to the Act, the FCA's guidance in ICOBS 8.1.2AG says rejection for fraud is unreasonable unless the insurer is able to rely on the Act's relevant provisions.
Fraud also adds to operating costs. The FCA's motor claims analysis reported that insurers spend heavily to deter, prevent and detect fraud, through additional headcount, fraud detection software, legal costs for litigation and rising levies to the Insurance Fraud Bureau. The Home Office reported in October 2024 that the Insurance Fraud Bureau was investigating over 6,000 suspected fraudulent motor insurance claims which could be linked to crash for cash scams, estimated to be worth over £70 million in potential fraud.
Is claims inflation a form of claims leakage?
No. The PRA's October 2022 letter to general insurers' chief actuaries said claims inflation was already evident within the settled claim data for firms writing motor and property insurance, and that firms with exposure to casualty lines in the US, Australia and some other countries had been observing social inflation in their claim settlements for a number of years. It described good practice as considering the different drivers of inflation separately, such as wages, car parts, court settlements and medical costs, and said higher claims inflation may persist for longer than expected where there is a lag before cost increases pass through to settlements.
Some drivers sit outside insurers' claims processes altogether. The FCA's 2025 motor analysis noted that the 17th edition of the Judicial College Guidelines, published in April 2024, introduced an average 22% increase in general damages to account for inflation, and that the Motor Insurers' Bureau reported the cost of claims it handled involving uninsured drivers rising from £329m in 2019 to £452m in 2024.
How do credit hire referral fees affect motor claims costs?
The FCA's motor claims analysis found that, for first party non-fault claims, many insurers introduce some claimants to credit hire companies even where they have courtesy car cover as standard on their policy, and that insurers of the driver not at fault often earn referral fees by doing so. Across 10 firms, average referral fees rose by 29%, from £439 in 2019 to £565 in 2023, while the number of customers introduced fell by 7%, from 268,879 to 251,359. The FCA calculated those firms' total referral fees at £83m in 2019, £62m in 2020 and £94m in 2023.
One firm's outsourced courtesy car data for 2023, cited by the FCA, showed an average daily cost of £37 and an average duration of 20 days, totalling £740, which the FCA said suggests courtesy car costs may be significantly lower than credit hire claim costs. Referral fees from claims management and accident management companies ranged from £30 to over £1,000, and the FCA said these fees and other compensation ultimately increase claims costs. It recommended that the ABI and firms develop a good practice code to reduce referrals to other parties, and said it would work with them on better claims management, including robust procedures to challenge unreasonable third party claims costs.
What does FCA data show about claims outcomes by product?
The FCA's general insurance value measures for 2025 report claims frequency, claims acceptance rates, average claims payout, claims complaints rates and the proportion of premiums paid out in claims. Claims acceptance rates were 62% to 71% for home insurance, compared with 83% to 86% for travel and 99% for motor, although the FCA says inconsistencies in how firms report home insurance acceptance data mean those rates should be used with caution. Claims complaints as a percentage of claims registered were 7% to 13% for home and 5% to 6% for travel, whereas most other products fell between 0% and 6%.
Across products where enough firms reported, the value measures show claims costs ranging from 17% of premium for wedding and party insurance to 68% for healthcare cash plans, excluding GAP insurance. In travel insurance, premiums rose by 12% but the amount paid out in claims rose by 47%, taking claims costs to 44% to 48% of premium, from 31% to 37% in 2024. The FCA describes the publication as a factual summary and says firms with significant, multiple or recurring outlier indicators should expect greater supervisory focus and action. The measures describe outcomes by product. They do not show whether individual claims were paid correctly, so they are not a measure of leakage.
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