Final answer:
Claims management is the process that insurance companies use to handle and process insurance claims, which includes evaluating and authorizing payments. It is crucial for maintaining the financial balance between the premiums collected and the claims paid out. Effective claims management also involves significant administrative costs and protects against fraudulent claims.
Step-by-step explanation:
Claims management refers to the process of handling and processing insurance claims by insurance companies. This includes a range of activities from receiving and evaluating claims to determining the extent of the insurance company's liability and, finally, to authorizing payment. The goal of effective claims management is to ensure that legitimate claims are paid out in a timely and efficient manner, while also protecting against fraudulent or excessive claims. The administrative costs associated with claims management, such as hiring workers, administering accounts, and processing claims, are significant for insurance companies and often constitute one of the major additional costs of running the insurance business.
For insurance companies, the revenues primarily come from insurance premiums paid by policyholders. These premiums, along with investment income, fund the claims payments. Claims management is therefore a critical component of an insurance company's operations as it directly affects the financial balance between premiums collected and claims paid out. Poor claims management can lead to underpayment of claims affecting the insured or overpayment which affects the profitability of the insurer.