Insurance companies are under pressure and working on the edge. Although margins often range between 1% and 2%, even small inefficiencies can erase profitability. One of the biggest and most overlooked drivers of margin pressure is located within the payments function.
according to One company CEO Ian DrysdaleModernizing payments is no longer just a technological upgrade. It’s a financial strategy.
In a conversation with Karen Webster, CEO of PYMNTS, Drysdale laid out the issue clearly. Insurers don’t just lose margin in underwriting. They also lose out on legacy check-based payment systems built into claims processes.
Hidden cost center drags margins down
Legacy payment workflows were created for a different era, one with lower claims volume, less fraud, and lower expectations about speed. Today, they are creating an operational recall at exactly the wrong time.
Paper checks remain included in claims, commissions, refunds and subrogation payments. Each check carries a cost, not only the $4-$20 issuance expense cited by financial institutions, but also the ultimate burden of tracking, reissuing, reconciling and managing exceptions.
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These costs add up quickly.
Payments often involve multiple stakeholders including policyholders, contractors, medical providers, and lenders. Each requires validation. The result is high-friction processes that can extend payment timelines to four to eight weeks.
This delay is not just an operational issue. It directly impacts customer satisfaction, increases the severity of claims and ultimately erodes margins.
At the same time, Risk of fraud Mounts. Checks can be intercepted, altered or misdirected, exposing insurance companies to avoidable and increased losses.
Why modernizing payments is a fringe strategy
The shift to digital payments is fundamentally changing the economy.
Modern payment platforms validate recipients up front, reducing exposure to fraud while enabling near-instant payments once claims are approved. Most importantly, it eliminates manual processes and administrative expenses associated with paper.
The impact is measurable, Drysdale said.
It indicates savings that could amount to tens of millions of dollars annually for major transportation companies. In some cases, digital methods such as virtual cards can completely eliminate payment costs for insurers, while vendors accept small fees in exchange for faster access to funds.
This is not an incremental improvement. It is the expansion of the structural margin.
“It’s a margin recovery strategy,” Drysdale said, noting that digitizing payments alone could add one or two percentage points to the bottom line. This is a meaningful shift in an industry where that margin determines viability.
From operational reform to strategic priority
What’s changing now is how insurers think about payouts, Drysdale said.
Historically treated as a back-office function, payments are being reevaluated as an essential tool for financial performance and competitive differentiation. Faster payments improve customer experience. Lower costs improve profitability. Reducing fraud improves resilience.
Adoption curves reflect this shift. Carriers that start out with low digital penetration often quickly transition to the majority of payments being processed electronically once modern infrastructure is in place.
AI is also beginning to play a role, not as a blanket transformation, but as a targeted tool to improve reporting, reconciliation and operational visibility. Adoption of this technology remains cautious, given regulatory and privacy concerns.
Modernization under pressure
The urgency is driven by external forces that insurance companies cannot control.
Catastrophe losses are increasing in frequency and severity, putting pressure on the volume and costs of claims. Meanwhile, policyholders expect payments to move as quickly as any other digital transaction.
Legacy systems were not built to confront either reality.
This mismatch forces us to rethink more broadly. If insurance companies cannot fully control losses or rates, they must control costs. Payments are one of the few areas where immediate gains can be made.
Bottom line
Modernizing payments is no longer optional, and it’s no longer just about efficiency.
It’s about expanding margin.
Insurers that modernize can reduce cost, expedite claims, reduce fraud, and improve customer outcomes, while restoring key points important to profitability.
And those that don’t risk seeing their margins erode further under the weight of regulations designed for a different time.
As Drysdale puts it, the future of the industry will depend on one capability: flexibility.
