Part One began our discussion of insurance fraud, its impact on the industry, and how many insurers have begun to focus specifically on claims fraud as part of their enterprise risk management (ERM) strategy.

Today, we delve deeper into how risk professionals can more accurately gauge the potential for internal and external fraud in all departments and functional areas of their respective organizations. Are the real risks of fraud being adequately addressed? What are some opportunities for improvement?

Better fraud risk management begins with awareness. Once an organization has answered these preliminary questions, it can incorporate ERM techniques in the following ways to ultimately quell fraud:

Develop an enterprise-wide fraud strategy. Putting a defined strategy in place can help companies lower both the frequency and severity of fraud incidents. An important “first step” in the process is changing senior management perceptions of fraud control efforts. Fraud prevention initiatives and technology should not only be addressed to isolated incidents within specific departments, but should be considered a longer term, coordinated investment. Fraud-detection resources may need to be re-evaluated as purely expense or a cost center, and re-cast as cost –savings activities. Ultimately, “avoided fraud loss” can be a significant percentage of total revenue.

Invest in analytics. Expanding data analysis and analytics can be a significant move in expanding fraud fighting efforts and improving fraud risk detection and identification. Recent studies indicate that anti-fraud technology increasingly is viewed as integral to insurers' battle against insurance fraud, but major challenges remain for insurers to fully deploy technology solutions beyond the claim department, according to a 2012 study conducted by the Coalition Against Insurance Fraud.

Many new software programs are available today which allow companies to go beyond “red flag tagging,” scanning not only variances and anomalies in claim reporting and settlement patterns, but also detecting more accounting, payroll, underwriting or point-of-sale and vendor transaction fraud. Companies may also benefit from predictive modeling, social media relationship mining, geographic data mapping and other advanced analytics. While technology may never replace human intuition, instincts and auditor or adjuster expertise, it can provide more immediate feedback and data to speed and improve the quality of investigations.

Rework your SIU team. A practical next step offered by the Forrester Report is re-organizing special investigative unit (SIU) teams to include more cross-functional staff, adding team members from all departments, and including specialized experts in audit and data analysis such as statisticians. As noted by the Report, as insurance fraud requires more and more analytics, “anecdotal and rule-based systems won't cut it moving forward. You need resources that can: 1) understand requirements for fraud scoring of insurance cases; 2) work with fraud management vendors to internalize fraud management knowledge in the organization; and 3) update analytical fraud risk scoring models so that they are always effective at cutting fraud losses.”

Centralize your data. In addition, as with other ERM program risks, monitoring internal and external losses in a centralized location, across departments, is crucial to both educating management and staff about fraud, and developing better controls over time. Again, an enterprise-wide approach to recording losses, tracking associated tasks, issues and actions taken by the company as a result of a fraud incidents, and capturing financial estimates of “near misses” can help the company predict future pain points. It can also enable insurers to make more educated decisions about where and when to deploy resources.

Tracking External Fraud Trends

Tracking insurance fraud trends is another way to improve risk management. In addition to state department of insurance websites, advocacy groups may provide news and resources for identifying fraud trends, claim and non-claim.

The Coalition Against Insurance Fraud also provides real-time examples of uncovered and prosecuted fraud countrywide, which can help risk professionals evaluate trends in specific states or regions. The Coalition is an anti-fraud alliance speaking for consumers, insurance companies, government agencies and others which provide educational resources, research & data, services and insight as a “leading voice of the anti-fraud community.” Their news service offers daily updates with concrete scenarios of fraud attempts and successful schemes for which controls might be better designed.

In one recent example the coalition reported on a $4.5 million contractor fraud ring that had been discovered in Colorado. Disaster Restoration Inc. is a general contractor specializing in emergency insurance claim restoration. According to charges, Disaster Restoration was instructing their sub-contractors to inflate their estimates by 20 to 30 percent above actual projected costs, and then skimming the overpayments.

More on Risk Mitigation

Monitoring the news for these kinds of “real-life” fraud scenarios can also help a company identify areas for improved controls and loss mitigation strategies. In looking at this particular case, the insurer might consider some of the following ideas for risk mitigation:

Thoroughly audit repairs and bills. Conduct a more detailed review and confirmation of sub-contractor estimates.
Request a back-up subcontractor estimate.
Have an independent examiner verify estimates.
Increase on-site spot inspections by home office staff.
Conduct internal claims-handler file reviews while increasing peer reviews or internal audits to ensure that the carrier's own employees are not involved in fraud.
Aggressively prosecute contractors and subcontractors, or sue them in civil court.

These published reports often include details of the actual dollar amounts of losses and fines, fees or penalties assessed against fraud perpetrators, which can help an insurer better quantify the frequency and severity of its own potential losses.

Fighting Fraud Together

As with any other risk being evaluated by an ERM program, fraud risk must be continually assessed thoroughly across all operations. In the process, both the traditional control environment—people and processes—and sophisticated information technology should be equally considered. The best first step in fight insurance fraud is to be proactive, and bring all functional departments together to expand and coordinate fraud management, technology, monitoring and reporting efforts.

Special Reports /

Using ERM Techniques To Mitigate Fraud

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