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Insurers tackle thorny issues in fraud detection and prevention

Insurance Fraud Panel PBLS

Frank Llende, Tom Wolfe and Deb Smallwood discuss trends in fighting fraud

At last week’s Premier Business Leadership Series conference in Orlando (which, by the way, was sunny and warm – unlike the snow I returned to in Connecticut) three insurance thought leaders gave a presentation innocuously titled “The Latest Advances in Fraud Detection and Prevention for Insurance.” Now, for the non-insurance people of the world, this topic may sound a little dry, but I came away with a whole new way of thinking about fraud, its impact on me as a consumer of insurance, and (as consumers) our responsibility and expectations around combatting fraud.

Our moderator Deb Smallwood, founder of Strategy Meets Action, a strategy firm focusing on the insurance industry; and our two industry experts were: Frank Llende, Senior Manager of Allstate’s special investigative unit (SIU); and Tim Wolfe, the SIU Director at CNA. Simply stated, SIUs investigate suspicious claim activity for the insurer, and if fraud is identified, the insurer can deny the claim and/or refer the matter to state prosecutors for further action. According to Wolfe, SIUs became more prevalent in the industry in the early 1990s when states began requiring insurers to have fraud investigation teams. The teams are traditionally made up of people with expertise in field investigations, typically ex-police or military personnel.

While the true dollar impact of fraudulent claims is almost impossible to measure, the Insurance Information Institute estimates that it represents approximately 10 percent of all property/casualty insurance claims: In the 2005-2009 period, the dollar impact of that fraud totals $30 billion. So now you’re saying – fine, the insurance company just writes that off and it doesn’t impact me. Wrong. Fraudulent claim costs are in many ways passed down to all policyholders in the form of increased premium: You’re paying for the bad behavior of others. So, it’s in everyone’s best interests to limit fraudulent activity: Insurers, regulators and policyholders.

In his introduction, Allstate’s Frank Llende told us that personal lines insurance fraud is on the rise: “I’ve never seen anything like the economy we’re in today. I don’t know if it’s increased Medicare or Medicaid fraud, the soft economy or more sophisticated crime rings … but our customers are being attacked and we have to be good stewards of those [premium] dollars. Our customers have a high expectation that we are guarding their dollars. Our customers expect us to be financially sound.”

And CNA’s Tim Wolfe says that “Fraud is hot due to a downturn in the economy…[in commercial lines insurance, where the claim severity is much higher] a couple of big claims could put an insurer out of business. What we’re seeing is more grandiose schemes [from providers], especially around medical billing, equipment, services and transportation. The fraudsters are slick in the way they set up the billing – they know the insurance company’s weaknesses.”

As fraud becomes more sophisticated, insurers are changing their game as well. Here are some of the ways that the industry is evolving their capabilities:

  • Data-driven decision making: At Allstate, “Over the past couple of years, we’ve transformed our home office into an innovation environment. We’ve started to look at data and how it can influence decisions. For us, we always used data in the underwriting process, but we hadn’t looked at how we could use data to manage resources [related to the claims process]. We used to hire ex-military and police, but now we’re hiring modelers [in our SIU]. What we’ve been able to do for the enterprise has been phenomenal. We can show the business where our customers’ dollars are being attacked and allow them to make better decisions about the business: There is no room for fraud.”
  • Empowering the field to make smarter decisions: At CNA, “Typically, the SIUs have provided training to adjusters on the [fraudulent] “flags” when they’re in the field. We hope that adjusters recognize the flags and inform the SIU – but what we found was that most of the referrals into the SIU came from a tiny group of adjusters; they weren’t consistently used. We’re making it easier by providing the information that they need to make better decisions and referrals. We’ve started to implement predictive models and…[we can use those models to] help educate the adjuster in following their instincts. We’re finding that our mindset needs to change” from going to a reactive to a proactive model.

But it’s not all about finding the bad. Llende reminds us that “if you can identify folks quickly that aren’t associated with fraud, you can give them a better customer experience.”

The evolution of these SIUs from “gumshoe detectives” to analytic leaders can be a challenging journey because the influencers of fraud impact every functional area within the organization. “There are clear and distinct data points that help us identify fraud: We can identify these data points and [operationalize them] early in the process, be more predictive, and use more analytic tools to better manage resources. We want to think about a different way of collecting information at the start of the claims process. We want to work with our product partners to see if there are products that are attracting more fraud and ultimately influence product design.” Both insurers echo that fraud detection is not all analytics: “We still need feet on the street. The technology [and analytics] help you identify cases with fraud detection, but you still need people out there doing the hard work and asking the right questions.”

And a final thought from Llende: “I never thought I would find myself recruiting modelers, but there is intense internal competition for these jobs…because the problem is so interesting to solve.”

*NOTE: Originally published in The Analytic Insurer.

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  1. Posted November 14, 2011 at 2:33 pm | Permalink

    Great discussion and article. I believe that we all pay the cost of Fraud, especially our business owners. They more than anyone see what is going on in their workplaces and activities their once injured employee is involved in, while at home. What makes law enforcement work is the preception of police presence. Owners want their employees to know that investigators are out and about at the start of the Red Flag claim. “Feet on the street”

    • Posted November 14, 2011 at 9:22 pm | Permalink

      Thanks for your comment James. You’re right that a strong anti-fraud program can have a deterrent effect. I’ve found that many employers prefer workers’ compensation insurers with good anti-fraud strategies in place. Analytics plays a key role here in helping identify the true suspicious claims and minimizing the false positives so that investigators can focus their energy where it can be most valuable. As Tim Wolfe alludes to in his comments, manual red flags may be inconsitently enforced but predictive analytics can help insurers become more accurate and more proactive in detecting suspicious claim activity.

One Trackback

  1. [...] With challenging economic times driving the need for better underwriting discipline and expense control, predictive analytics can provide an advantage. Fraud detection is a common use case for early adoption of analytics within an insurance organization because the return is high, the risk is relatively low, and claims data tends to be robust enough to build effective models. In fact, this phenomenon is starting to change the face of Special Investigation Units (SIUs) in the industry. “We used to hire ex-military and police, but now we’re hiring modelers [in our SIU],” commented Frank Llende at Allstate during a recent panel discussion. [...]