The First Line of Defence - Combating Fraud from the Back Office - Part 1

Graham Newman, European Product Marketing Manager, FINEOS

I want to further explore and expand upon a topic I visited during the recent FINEOS Claims Summit in Ireland, namely how fraud can be tackled from within the claims system itself.  I’ll split up the material and deal with this over a few posts.  Let’s take a look first of all at the nature of the problem, what the difficulties really are and the cost it makes on the industry and on its customers.

Insurance fraud – so what’s the problem?

Is it really so bad?  It’s mainly exaggeration or a bit of creative add-ons around the edges isn’t it?  A few extras added on to the car repair bill that were pre-existing damage.  Some medical charges for non-existing conditions.  And anyway, those insurance premiums are so high there must be a way of getting a little back, I’ve been paying premiums for years and never claimed.  It’s not much really, it’s a victimless crime.

If you are reading this there’s a pretty good chance that you know it isn’t.  It’s big money, it’s now even big business, and there is a cost – a big one.  That’s a lot of “BIGs”.

So how much does insurance fraud actually cost?

Fraud is a global phenomenon, present in all cultures and afflicting all types of insurance to some extent.  Depending on the line of business, fraud can be implicated in as many as 10% of all claims, often more.  Many companies still see this as a cost of doing business, almost as just another expense.  But fraud has been rising – up 5% in the UK from 2010 to 2011 and by an even more impressive 7% in America.  The question needs to posed: “Is this an acceptable cost of sale?”

The known fraud is massive.  Where I come from in Britain a staggering 2,670 fraudulent insurance claims worth £19 million were detected every week. Last year, this added up to 140,000 fraudulent claims.  That’s up 5% on the previous year.  Home insurance was the most common target with 71,000 dishonest claims worth £106 million.  Motor claims saw a loss of £541 million out of 45,000 bogus claims, with that old favourite whiplash being the most used ruse. (Source: Association of British Insurers).

But that’s just what is uncovered.  The ABI estimates it at £2.1 billion a year, adding £50, on average, to every policy.

In America the figures are – as you would expect – even more impressive – or depressing.  P&C fraud strips $30 billion from the industry each year. (Source: The Insurance Information Institute).  The National Insurance Crime Bureau, (NICB), estimates that fraud is involved in approximately 10% of all losses.  One in ten of all losses you handle are likely to be dodgy, fake, stripping money out of your company that shouldn’t be going.  This ends up by adding $200-$300 a year in additional premiums to everyone else.  Also showing a growing trend the rise in fraudulent claims in America was 7% up on 2010 to 2011, (Source: NICB).

Even in the relatively small insurance market in Ireland fraud is costing over €100m a year.  Between 2008 and 2009 there was an approximate 250% increase in calls to the Insurance Confidential Hotline.

So, who commits fraud?

Professional criminals obviously.  Well, yes, more of them later.  Actually it’s more likely to be someone living down your street.  As Richard Davies, the group fraud risk manager for AXA said of fraudsters:

“Often they are middle-class families who are looking for a way of getting extra money to help with the mortgage or to service other debts”.

How much battering would your finances have to take before you would consider breaking the law? “I’d never do that!” you are no doubt crying.   Well, I’m sure you, dear reader, wouldn’t, but over 12% of Americans agreed that it is OK to submit claims for items that are not lost or damaged, or for personal injuries that didn’t occur and 68% of Americans say people commit fraud because they can get away with it.  (Source: Accenture study, 2010: ‘The Insurance Consumer Fraud survey’).

A similar dispiriting picture appears in the UK.  According to a survey from Royal & Sun Alliance, 1.4 million Brits consider insurance fraud more acceptable now than we did 12 months ago. Apparently that makes a total of almost 5 million of us that do not think making a false claim is wrong.

The industry refers to this as “Opportunistic Fraud”.  I’m sure you are all familiar with this, you know the sort of thing: “I also lost an iPod . . . and a digital camera . . . and there was also . . . ”

Opportunistic fraud is usually perpetrated by an individual who simply has a chance to inflate a claim or get an exaggerated estimate for losses or repairs to his or her insurance company. This person might know an insider, but generally isn’t operating with an insider’s knowledge of the insurer’s fraud detection systems or thresholds. Opportunistic fraud is commonplace, but the dollar amount per incident is relatively low.

Typical examples of insurance fraud include failing to disclose motoring convictions or previous claims when applying for cover, or exaggerating claims by adding extra items to a genuine claim. More drastic examples include people hiding their valuables and staging a burglary in an attempt to claim thousands on their insurance policies, or dropping their old television down the stairs so they can claim for a new flat-screen model.

There are signs that people are not just considering fraud, but are going through with it.  Fraudulent travel claims were up 80% by the end of last summer, according to the Association of British Insurance.  Holidaymakers were pretending that expensive cameras and iPods had been stolen, or were upping the value of what had been stolen in the case of genuine theft. Other travellers who suddenly realise the holiday they booked in more buoyant times is going to be unaffordable have been cancelling trips, feigning illness and then conning doctors into providing them with medical certificates to verify their “illness”.

Professional Fraud

Organised crime focused on fraud is on a big scale and is becoming ever more resourceful.  Staged and induced accidents, organised use of suspect accident management companies and crooked doctors, online global enterprises, Internet anonymity, multiple, false identities – these forces have helped make insurance fraud a low-risk, high-return criminal activity, second only to tax evasion in economic crime.

The incidence of organised fraud is lower than ordinary insurance fraud, but the dollar amount per incident is far greater.

So, it’s a big problem, and it’s getting bigger,

But it’s still seen by many as a ‘cost of sale’, but are you prepared to lose €X million $, £ etc. a year.

Are you happy with the status quo?

From talking to many claims professionals in the industry I suspect that this – ‘cost of doing business’ – is a misnomer.

Combating fraud – why is it difficult?

Some incidences of fraud appear so blatant you wonder why anyone thought they would get away with it.  Others involve high levels of sophistication and organisation.  All, however, leave tell-tale signs if you know where to look for them – and have the time and resources to check these things.

  • A group of 30 men, who hired a coach to take them greyhound racing all claimed whiplash following a staged accident with the car behind which they had arranged beforehand.
  • A family made over 100 claims for damage to their property. These usually involved alleged storm damage to roofs and damage to walls caused by untraced vehicles. The family members concerned were sentenced to 15 months in prison.
  • Insurers, working with Bedfordshire Police in the UK and assisted by the Insurance Fraud Bureau, helped uncover a staged motor accident gang that it was believed were involved in 180 staged and induced accidents, linked to 230 insurance claims, worth  £3.2 million. In total 37 people received prison sentences.
  • A man who cut his thumb in a gym made a claim for a more serious injury using a photograph he downloaded from the internet.

Part of the problem lies with the systems used to process and administer claims and policies.  The ubiquity of data silos makes it difficult to make connections, to link together the mass of information you will have on policies, customers, claimants, witnesses and so on.  May insurers will find it impossible to assemble a complete view of a customer, account history or transaction path.

How can such a company identify separate entities that are operating in collusion, or identify patterns that would only be suspicious when viewed from a broader perspective?

There are other issues too, many insurers believe it is simply too expensive to really tackle it.  Mix that with a reluctance to stall claims processing in the light of customer service and the possibility of making a mistake and damaging brand reputation and you have a nice set of barriers that encourage acceptance of the status quo.

In summary then, why is it difficult?  It’s about:

  • Cost
  • Staff, resources and the energy needed
  • Return on investment
  • Risk of false positives
  • A problem with public attitudes.

However, as I would like to demonstrate, all of these are perceptions.  Now, I know as well as anyone that perception is reality, but there are ways that both may be persuaded to change; in other words, to change both the perception and the reality.

I’ll deal with this in the next blog later this week.

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