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Is Your Claims System Stuck in the Back Office or is it out Fighting Fraud on the Front Line?

Article Appeared in Irish Broker Nov 2010

Enterprise claims systems play a significant role to support specialist fraud detection tools in the fight against fraudulent claims, writes Michael Kelly CEO at FINEOS.

Specialist fraud detection tools are at the forefront of the fight against insurance crime, but without an effective enterprise claims system to underpin them, insurers will struggle to realise their potential.

Insurance fraud represents one of the biggest risks faced by both the Irish and wider international insurance markets and its threat is being fuelled by the economic turmoil that we are currently enduring.

Whether it is soft fraud where a claimant exaggerates their claim or hard fraud from the likes of staged accidents, fraud is dramatically affecting all segments of the insurance market.

In a recent blog post, a spokesperson from the Irish Insurance Federation (IIF) highlighted the effect of the economic climate when he said: “There were almost 700 new cases of suspected insurance fraud reported to the Insurance Confidential hotline in 2009 – up from approximately 300 in 2008.  And as the recession continues, the risk of fraud will increase.”

Furthermore, in a recent report from PricewaterhouseCoopers, Fraud in a Downturn, 2009, criminologist Dr. Donald Cressey highlights three factors that drive fraud. These are:

  • Incentive or pressure
  • Attitude or rationalism
  • Opportunity

In practice, the current economic environment has created what Dr. Cressey describes as a “perfect storm” for fraudulent activity.

None of this is good news for the insurance industry and a brief look at some of the many statistics published on fraud, shows just how hard insurers are being hit by criminals and how significant the potential savings are:

  • Fraud costs an estimated €100m a year in Ireland
  • Between 2008 and 2009 there was an approx. 250% increase in calls to the Irish Insurance Fraud Hotline
  • Fraud costs non-life UK insurers £1.9bn a year
  • Current annual increase of 30% in UK fraudulent claims
  • General Insurance fraud in the US costs $30bn a year

So just how are insurers mitigating against this risk that is costing the industry millions of Euros every year?

We know an excellent enterprise claims solution underpins high standards of quality customer service, prevents unnecessary claims leakage and is essential for Risk Management, particularly in the context of Solvency II. Furthermore, a well managed, efficient and a tightly controlled claims department will help stamp out high levels of fraudulent activity.

At the moment, many fraudsters believe insurance companies will not prosecute them, as it is too expensive to investigate the claim. This is driven by the fact that the recovery value is often lower than the investigation cost.

Criminals also understand how insurers work and further protect themselves by making sure the value of many fraudulent claims falls just below the amount mandated for further analysis.

At the same time, insurance carriers are concerned about accidentally investigating genuine claims with the subsequent cost incurred and the resulting poor customer experience for these genuine claimants.

Indeed some insurers simply accept the high levels of fraud as a cost of doing business and ultimately pass it on to the policyholder. However, with fraudulent activity proven to be on the increase, this cost is becoming less acceptable and steps must be taken to eradicate it.

There is a significant role for technology to play and it cam provide protection for insurers from fraud. However, rather than seeking to solve the problem with a single silver bullet, insurers should be reviewing all aspects of the claims process.

Rather than investing solely in specialist tools to fight against fraud, it is important for insurers to evaluate the effectiveness of the most important piece of their infrastructure: the enterprise claims system.

From a fraud perspective, the enterprise claims system is the first and arguably the most important line of defence. At a minimum, it should be able to:

  • Apply multiple configurable fraud rules
  • Dynamically run these rules at every touch point and apply a fraud score to Red Flag a case
  • Automatically create and track notifications to the Special Investigation Unit (SIU)
  • Review Claim History for any Claimant level, Case Level or Role Level e.g. claimant in one case but witness in another
  • Immediately look up external databases/systems e.g. Insurance Link, ISO, QAS, Risk Intelligence Ireland.
  • Supply structured information claims data to predictive analytics tools such as SAS or IBM SPSS
  • Restrict payments so they cannot be made if a claim is under investigation
  • Provide “Four eyes verification” used to avoid internal fraud for payments
  • Automatically monitor the activity and payments of all Service Providers of a claim

Being on the front line, the major success of these features in an enterprise claims system is that they will prevent payments being made to fraudsters and avoid insurers having to try and recover monies at a later date.

Rather than complicating the claims process, early fraud detection by enterprise claims systems can be integrated seamlessly with the primary business of settling claims efficiently and fairly for genuine policyholders.

This improves the level of service these customers get, deters fraudsters going forward and saves insurers millions of Euros. Surely these benefits are too great to ignore?