Insurers are facing a critical juncture where margins, often hovering precariously between 1% and 2%, are being squeezed by operational inefficiencies. According to Ian Drysdale, CEO of One Inc, a significant and frequently overlooked contributor to this margin compression lies within the company’s payments function. What was once considered a mere technology upgrade is now being reframed as a vital financial strategy for the industry.
The Hidden Cost of Legacy Payment Systems
Drysdale articulated in a discussion with PYMNTS CEO Karen Webster that insurers are not solely losing ground in underwriting; outdated, check-based payment systems, particularly within claims operations, are actively diminishing profitability. These legacy workflows were designed for an era with lower claims volumes, less sophisticated fraud, and different customer expectations regarding speed.
Today, these systems create substantial operational drag. Paper checks remain prevalent across claims, commissions, refunds, and subrogation payments. Each check incurs not only the direct issuance expense, estimated by financial institutions to be between $4 and $20, but also downstream costs associated with tracking, reissuing, and managing exceptions. These costs compound rapidly.
The complexity of insurance payments, often involving multiple stakeholders such as policyholders, contractors, medical providers, and lenders, necessitates extensive validation processes. This results in friction-heavy operations that can extend payout timelines to four to eight weeks. Such delays are not merely operational inconveniences; they directly impact customer satisfaction, can increase claims severity, and ultimately erode profit margins.
Furthermore, the escalating risk of fraud presents a growing threat. Checks are susceptible to interception, alteration, or misdirection, exposing insurers to preventable and increasing losses.
Payments Modernization as a Margin Strategy
The transition to digital payments fundamentally alters the economic equation. Modern payout platforms incorporate upfront recipient validation, thereby reducing fraud exposure and enabling near-instant disbursements once claims are approved. Crucially, they eliminate the manual processes and administrative overhead associated with paper-based transactions.
Drysdale highlighted the measurable impact of this shift, citing potential annual savings that can reach tens of millions of dollars for large carriers. In some instances, digital payment methods like virtual cards can effectively eliminate payout costs for insurers, with vendors accepting nominal fees in exchange for expedited access to funds. This represents not an incremental improvement, but a structural expansion of margins.
“It’s a margin recovery strategy,” Drysdale stated, emphasizing that digitizing payments alone can contribute one to two percentage points back to the bottom line. This is a significant gain in an industry where such margin percentages are critical for viability.
From Operational Fix to Strategic Imperative
A notable shift is occurring in how insurers perceive payments. Historically relegated to a back-office function, payments are now being re-evaluated as a core driver of financial performance and a source of competitive differentiation. Faster payouts enhance customer experience, lower costs boost profitability, and reduced fraud strengthens operational resilience.
Adoption trends reflect this evolving perspective. Carriers that initially exhibit low digital payment penetration often rapidly transition to processing a majority of payments electronically once modern infrastructure is implemented. Artificial intelligence is also beginning to play a role, not as a wholesale transformation, but as a targeted tool to enhance reporting, reconciliation, and operational visibility. Adoption in this area remains cautious due to regulatory and privacy considerations.
Modernization Under Pressure
The urgency for payments modernization is being amplified by external forces beyond insurers’ direct control. The increasing frequency and severity of catastrophe losses are placing greater pressure on claims volumes and associated costs. Simultaneously, policyholders expect payouts to be as swift as any other digital transaction.
Legacy systems are ill-equipped to handle either of these realities. This mismatch necessitates a broader strategic re-evaluation. If insurers cannot fully control losses or pricing, they must focus on cost management, and payments represent one of the few areas where immediate gains are attainable.
Payments modernization is no longer an optional endeavor; it has transcended mere efficiency to become a critical driver of margin expansion. Insurers that embrace modernization can achieve cost reductions, accelerate claims processing, mitigate fraud, and improve customer outcomes, all while reclaiming vital basis points of profitability. Conversely, those that fail to adapt risk further erosion of their margins under the weight of outdated systems built for a bygone era. As Drysdale suggests, the future resilience of the insurance industry will hinge on its capacity to embrace this essential capability.
