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Winning the insurance fraud race

Insurance fraud has no doubt existed wherever insurance policies are written, taking different forms to suit the economic times. In early maritime insurance it became a common scam for boat owners to hide the boat in a foreign port and collect the insurance money. In the 19th century came the advent of “railway spine” which led to “trip and fall” and “whiplash” claims in the 20th century.

Even with these fraudulent schemes, fraud received little attention until the 1980s. By this time, rising premiums especially for auto and health policies, plus the growth in organized crime activities, made fraud an issue that insurers could no longer ignore. Today the magnitude of insurance fraud is not only startling but increasing. Recent studies by the National Insurance Crime Bureau (NICB) reported an 18.3 percent rise in questionable claims for the period 2009 to 2011.

In reality the full scale of insurance fraud is unknown. Unlike with credit card fraud where fraud is usually identified within a relatively short period of time. With insurance fraud, if the fraudulent behavior is not discovered right away, the insurer may never know it occurred. Consequently, an uninvestigated claim cannot be labeled with respect to fraud.

Fraud is prevalent throughout the insurance lifecycle. While a lot of the focus has been on claims fraud, fraud frequently begins during the initial insurance application process.   “Underwriting fraud” or “rate evasion” is the result of misrepresentation of facts that directly affect rating, such as under reporting mileage driven, failure to report prior claims, misrepresent the characteristics of a property etc. Even the Life Insurance industry, normally immune to fraud is experiencing stranger-owned life insurance scams.

Fraud drains profits. Insurance fraud costs companies billions and in turn costs policy holders real money. Lax fraud management practices put a company at a competitive disadvantage. Companies that invested in automated fraud detection systems have been rewarded for their decisions. For example Hyundai Marine & Fire, Korea’s largest P&C insurer, has built a system using SAS that prevents claims fraud and improves premium payment processing, thereby protecting it’s most profitable customers.

The time is right for insurance companies to invest in technology to prevent insurance fraud. Technology-based tools can be used individually or in combination to help companies detect and prevent suspicious activities by uncovering fraud rings, internal fraud and leakage.

To learn more about how Insurers are using information and analytics to stay ahead of criminals read“The Insurance Fraud Race”.

NOTE: Originally published in The Analytic Insurer.

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