Recently, members of a Florida ring accused of staging fires and floods to make fraudulent home insurance claims were arrested. The suspects are accused of bilking homeowners insurers out of $7 million. Paul Bermingham, executive director of Xchanging Claims Services, a $1 billion business processing, procurement and technology services provider for the global insurance industry , explains why the industry needs to adopt a more holistic approach by incorporating a range of different measures that take advantage of technology and demand cultural and behavioral changes.
- How prevalent is insurance fraud in the U.S. compared to other countries?
According to the National Insurance Crime Bureau (NICB), cases of suspected fraud in the U.S. rose 27 percent from 2010 through 2012, reaching more than 100,000 questionable claims. Fraud costs U.S. property and casualty insurers approximately $30 billion annually. Just look at the recent example that occurred in Miami, Florida in February. Twenty two people were charged in a major home insurance fraud ring totaling about $7.6 million in losses from various insurance companies. At least 17 fake home damage incidents such as fires and floods were staged and false claims were paid out to the fraudsters. This is just one example of many. In 2012, home insurance fraud in the U.S. was the second most popular type of fraud with 17,000 questionable claims made.
In the UK, the Association of British Insurers (ABI) cites that insurance fraud is currently more than a $1.6 billion a year industry with an average of 2,670 fraudulent claims made every week in the UK. The problem is also significant in Singapore as well, with the General Insurance Association of Singapore estimating that 20 percent of all automotive insurance claims paid (about $140 million) were fraudulent. Now, more than ever before, it is crucial for our entire industry – regardless of region – to protect itself and its honest policyholders.
- What affect does fraud have on the industry?
Fraud has a negative effect both on insurance companies and consumers. Insurance companies are all too aware of its ability to grossly erode profit margins, not to mention the hours staff spend on efforts to combat the fraud, and consumers see their premiums rise.
- What are the type five most common types of fraud in the US?
The NICB found that automotive fraud was most prevalent, followed by home, workers’ compensation and employers’ liability, commercial automotive, and commercial general liability.
- Why is it so difficult to correct this problem?
Insurance companies have taken steps to improve the ability to identify and address fraudulent claims, but these efforts are typically fragmented. Because of the lack of a collective industry approach – most carriers work independently. In relation to technology, insurers sometimes lack the proper data mining system to help identify potential fraud and the business processes to follow up on flagged claims activity. Another major issue prohibiting the discouragement of fraud is consumers’ tolerant attitude toward insurance fraud. And finally, it’s a challenge because insurance lends itself well to many different types of fraud. While the vast majority of fraudulent acts relate to first party fraud (such as is the case with the Florida fraud ring), third party fraud is also quite prevalent.
- Has there been a shift in consumers’ attitudes toward instances of fraud then?
Many consumers are surprisingly tolerant about the idea of defrauding their insurer. A 2008 survey by the Coalition Against Insurance Fraud found that one in five adults in the US – that’s around 45 million people – felt that it was acceptable to defraud insurance companies under certain circumstances. Many of this group would probably be horrified to be labeled as ‘fraudsters,’ but yet they still harbor the Robin Hood mentality.
- What are insurance companies already doing to try to stem the tide?
As the number of fraudulent claims continues to rise, fraud management has moved higher on the priority list of senior management. Some companies have invested in improving data quality and adopting technology tools, but many still lack the business processes, workforce competencies, and organizational structure needed to act on the insights gained from data analysis. Other companies have worked to enhance their operating model, but have failed to develop a clear strategy of what they hope to achieve.
- What role does technology play in fighting against the rise in fraud?
Insurance companies are armed with powerful tools like big data and predictive analytics today that allow them to create a clearer picture of questionable behaviors whereas they were following paper trails and operating blindly before. This means they can more easily zero in on fraud indicators and reveal patterns and habits to either stop a fraud before it can occur or prevent future frauds from occurring from that same individual(s) or company. Additionally, analytics models analyze transactional and relationship data to allow insurers the ability to uncover formerly unknown types of fraud, ongoing fraud schemes, and discover entire fraud networks.
In fact, whole databases are being built in the UK to keep a digital record of claims filed and paid in order to more easily identify records of fraud. Some carriers are already implementing advanced analytics and claims predictive modeling to help in areas such as workers’ compensation claims and auto bodily injury. As companies have adopted more technology and smarter uses of that technology to fight off hackers, the insurance industry will also increasingly turn toward technology to fight the battle.
- What approach do you think works best in dealing with fraud?
I don’t believe that any single approach can solve this epidemic, but I do subscribe to the belief that a holistic approach always works best to solve complex problems. It requires the application of technology, behavioral and cultural changes, and the implementation of corporate policies.
- What additional steps would you recommend the industry take to eliminate, or significantly reduce, fraud?
In accordance with a holistic approach, I would call for easier access to fraud figures through the SEC requiring insurance companies to file a section on fraud in their annual reports. This would ensure that carriers make fraud an extremely high priority in their businesses. Additionally, I encourage carriers to build fraud detection into their underwriting process to catch an incident before a claim has been filed.
In relation to technology, carriers need to create a more streamlined way of sharing information universally. If information was shared in bulk across the entire industry, the data set would be massive and would decrease the possibility of fraudulent claims falling through the cracks.
Finally, the industry-wide behavior toward claims needs to be re-examined. If a claim is paid in cash for a ‘stolen’ item, does that reward a potential fraud? Better perhaps to provide a ‘like-for-like’ service. Unfortunately, some carriers have focused on cost cutting in areas such as providing a replacement service for household goods, arguing that paying out in cash is cheaper and easier. It might make sense in the short term, but it can have the unfortunate effect of promoting fraud and increasing costs over a longer period.
- If a company was looking to create a fraud management program, how would they do so?
I suggest a four-pronged approach to building successful fraud management programs:
- Take a public stance – Promote a culture that does not tolerate fraud and aggressively pursue prosecutions.
- Build organizational capacity – Enhance business processes and invest in additional resources to handle fraud claims.
- Create a data-centric culture – Use data as a competitive advantage and differentiator; invest in mining high-quality, consistent data that is integrated across the organization and easily accessible.
- Rely on advanced analytics and claims predictive modeling – Use company data and external data sources to identify potential fraudulent claims.
- Do you think fraud can ever be completely eliminated?
As markets mature, they get better at managing fraud, but I don’t believe that it can ever be managed out completely. Incidents like the Florida fraud ring may still happen, but the goal is to ensure that fraud happens on a smaller scale or less frequently. Solutions like the ones mentioned above are intended to make this a reality and re-set the balance between consumers and insurance companies.