For insurers, the current economic environment appears to have brought one thing along with it: an increase in the incidence of fraud. This is true particularly in the area of so-called soft fraud, which the Coalition Against Insurance Fraud defines as "small-time cheating by normally honest people"--a phenomenon recently addressed in the Journal of Business Ethics that accounts for up to 30 percent of lost claim revenue each year.
And while there's no research data to prove the link between the state of the economy and the uptick of insurance fraud, the most recent questionable claims numbers (coming from the National Insurance Crime Bureau and the Insurance Information Institute) comparing the first quarter of 2008 with the same period in 2009 are certainly telling: property hail damage, up 407 percent; commercial slip and fall, up 77 percent; commercial fire and arson, up 76 percent.
In all, approximately 41,600 questionable claims were reported by insurance companies in the first half of 2009, compared with 36,700 in the same period last year, according to the NICB.
With annual fraud losses reported in the Journal of Business Ethics hovering between $80 billion and $120 billion per year, even in the good times, the recent 13 percent increase in suspicious claims is further elevating the matter on the radar screens of insurers, regulators, and consumers alike.
While policyholders are seeking low rates in a highly competitive environment, insurers are being asked to keep prices level as they also deal with escalating fraud-related costs.
At the regulatory level, state regulators have been stepping up efforts to ensure companies have sound fraud-fighting policies and fraud-reporting networks in place.
And on the federal level, a bill was introduced in recent months that would create a federal division of insurance fraud that would be a part of a proposed Office of National Insurance within the U.S. Treasury.
All that being said, now is a particularly good time for insurers to be paying attention to the fraud space, according to Frank Scafidi, director of public affairs for the NICB.
"This is exactly the kind of climate where [insurers] need to be focused," he indicates. "Where there is a sense that there may be more of this soft fraud going on in lean times, companies must be more attentive to it, to maintain their fraud investigation units and not pull back."
Considered to be the second-largest economic crime committed in the United States after income tax evasion, insurance fraud has been around as long as the industry itself. Spanning back to the 1600s, people have sought to bilk insurance companies through elaborate schemes and by opportunistic avenues.
And while hard-core scams such as staged auto accident rings and commercial arson tend to make the headlines, what is not seen on the front page are the everyday occurrences that account for the majority of fraud losses and are more likely to happen when times get tough.
The problem here is, according to studies, a growing number of consumers are not recognizing it is unethical to pad insurance claims and to pursue other opportunistic avenues to bilk insurance companies.
According to a survey of the Coalition Against Insurance Fraud, the public has become increasingly more tolerant of insurance fraud. In the area of misrepresentation of facts on an insurance claim, 82 percent of respondents to a recent study said they believed the practice to be unethical, where 91 percent thought the same back when the same poll was conducted in 1997.
The study also found 84 percent of today's respondents reported the practice of inflating claims was unethical, compared with 91 percent that held this view in the 1997 study.
These trends likely indicate a greater tolerance for, and acceptance of, unethical insurance behavior, despite a perceived general societal understanding of how such actions ultimately come back to cost everyone who purchases insurance policies more money.
For insurance companies, soft fraud claims often have been a difficult area to trace and to suppress illegal activities. According to the III, the industry historically has been loath to enter this arena due to the fine line between investigating suspicious claims and harassing legitimate claimants when the occasional and inevitable "false positive" occurs. In the past, some insurers feared by taking aggressive action against fraud, they might be perceived to be "anti-consumer."
This philosophy began to change in the late 1980s, when organized insurance fraud rings began to emerge, and law enforcement agencies were forced to take notice.
Today, most insurers have deployed special investigation units (SIUs) within the company, and most states have instituted public fraud bureaus that work with law enforcement in landing prosecutions. Both functions rely heavily on information technology and enhanced business processes to sort through vast amounts of information to red flag incidents of suspected fraud. It is estimated more than 80 percent of all insurance companies employ SIUs as part of their business model, according to the III.
However, numbers showing the activity of SIUs within insurance companies have been at a flat rate recently, indicating insurers are trimming their fraud-fighting budgets in an effort to cut costs in the current market, according to Dennis Jay, executive director of the Coalition Against Insurance Fraud.
"Our research has shown citizens want insurers to be tough," Jay told Deloitte. "They understand they end up paying for all of this."
When it comes to insurers cracking down on consumer fraud, such focus need not be public relations-unfriendly or unreasonably costly. The solutions can be as simple as boosting technology, building nonconfrontational business processes that discourage soft fraud, and strengthening relationships with regulators and policymakers.
Consider the following actions steps:
o Make your special investigations unit a priority: Technology can enable insurers to see fraud as it comes through the door, early in the claims process. In this arena, insurers with existing SIUs would be wise to view the unit as a priority, keeping it well staffed and financed.
o Invest in data analytics: By using predictive analytic technology applications, companies gain the ability to identify potentially fraudulent claims, decide which claims need additional review, and refine claim and related business processes to handle those transactions that are marked for review.
o Work with your insurance regulator: A number of states now are checking insurers to test for sound antifraud policy. In addition, state regulators have begun to step up oversight by mandating insurers to file reports to a national database maintained by the National Association of Insurance Commissioners (NAIC).
By staying current and involved in state regulatory activity as it pertains to fraud fighting, insurers open the door for dialogue and a place at the table as decisions are being made.
Some regulators have asked insurers to demonstrate they are doing more to improve fraud fighting as a precondition for granting rate increases--so, be proactive with regulators to show diligence in your antifraud efforts.
o Work with your state legislators: Insurance fraud laws are not uniform across the U.S. Key here are immunity laws, which allow insurers the ability to build cases by sharing claim-related information with other insurers that may have had interactions with a suspect.
The campaign of the New York Alliance Against Insurance Fraud, "Fraud, the Crime You Pay For," sponsors a television spot featuring a man in a business suit sitting behind bars with two hard-looking characters.
When questioned by one of the tough guys about why he's in there, the man confesses, "Who, me? Oh, I was arrested for lying on an insurance claim."
Funded by the insurance industry, the organization's research shows most cases of insurance fraud are not committed by thugs but by regular people who find themselves in desperate financial circumstances or just don't see anything wrong with padding a claim.
Insurance fraud is not something to be ignored in hopes it will go away. In fact, in challenging economic times, the number of suspicious claims appears to rise.
The good news is every dollar spent fighting insurance fraud can return significant savings to the bottom line. Other investments add up, as well.
In addition to investing in such tools as fraud-fighting technology and business-process redesign, insurers also should seek to build relationships with state regulators who are setting the agenda while also keeping abreast of related legislative developments in Washington.
To be sure, the increased challenges of insurance fraud are likely to remain with us in the short term. But insurers that tackle it head on not only put themselves in line to reap the benefits for consumers, investors, and other stakeholders, but they also will do much to boost the company's financial health and competitive advantage down the line.
John Lucker leads Deloitte's actuarial and insurance solutions data mining and predictive modeling practice. He provides clients with end-to-end business, operational, and technical consulting services in the areas of data mining, predictive modeling, advanced analytics, data quality remediation, scoring engines, rules engines, and large scale data management.
Howard Mills is a director and chief advisor of the Insurance Industry Group of Deloitte LLP. An experienced and prominent leader in the insurance industry, Mills came to Deloitte after serving as superintendent of the New York State Insurance Department.