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Fraud costs insurers a huge amount of money every year. In the U.S., recent estimates for the cost of insurance fraud ranges from USD14 billion to USD80 billion across Life/Health and Property/Casualty classes.1 Meanwhile in the UK, the Association of British Insurers estimated that insurance fraud adds approximately GBP50 per year to all other policyholders’ premiums. It’s clear that insurers need to have a plan in place to identify and address the problem in all lines of business.
There are many reasons an individual or group engages in fraudulent behaviour, and many factors can contribute to companies becoming victims. But for fraud to succeed, perpetrators need adequate opportunity, which occurs when they have the chance to abuse trust for personal gain. For example, there may be the perception that detection is low or that enforcement of consequences is weak.
Fraud occurs on a continuum of behaviours, with innocent or accidental misrepresentation on one side, progressing all the way to deliberate criminal fraud on the other. Some of the most common types of fraud experienced by insurers include medical or financial misrepresentation, criminal fraud including policy/document forgery, and agent fraud.
Most insurers understand that it’s not possible to identify and eliminate fraud entirely. Rather, a realistic aim is to detect those categories of fraud that present the greatest risk to a specific portfolio and then allocate resources appropriately to improve outcomes.
The traditional method of fraud detection is to rely on claims assessors to identify suspicious claims using a number of red flags. This “bottom-up” approach to fraud detection starts with fraudulent activity being addressed on a case-by-case basis before any lessons are fed back into the insurance product design and process. The two key components to this approach are ensuring the claims team has adequate skills for fraud detection and can identify which red flags to look for.
A single positive red flag is rarely definitive proof of fraud in and of itself; rather, red flags serve as clues or warning signs that further investigation may be needed.
Big improvements in data gathering and a growing sophistication in analytics has allowed many insurers to combine this “bottom-up” approach with a “top-down” strategy, whereby they track policy portfolios to identify suspect behaviours or patterns.
The “top-down” approach to insurance fraud uses behavioural economics and data analytics to prevent and detect fraud before claims are even submitted. Behavioural economics understands that our decision making is not always rational and is influenced significantly by contextual factors. For example, some trials have found truthfulness can be improved by having an honesty declaration at the beginning of the claims form and not the end, or by asking customers to read the honesty declaration aloud when submitting a telephonic claim.2
Once we have “nudged” behaviour to improve the veracity and quality of data, we can analyze that data to detect suspicious patterns.
Insurers are also using new sources of data to investigate claims, instead of simply relying on information provided by the insured or his/her beneficiaries. The growth of digitalization offers access to more varied information, resulting in increased opportunities for verification of claim details. One example, now frequently used, is online web and social media searches, where a wealth of information is available about a claimant’s activities and lifestyle. Of course, insurers must access and use information in accordance with local data privacy laws, but such searches can uncover big inconsistencies and lead to further investigation.
It would be naive to believe fraud does not exist in life insurance just because it’s hard to put a definitive number on the real cost of it. But by using the full range of tools available to us, and equipping ourselves with the necessary skills, we can all do better at identifying and minimizing the risk of fraud. We owe it to the vast number of honest policyholders out there who rely on us for their protection.
Review our quick list of red flags to see if there is something you’re missing in how your company identifies fraud in life insurance.
