North American p&c insurers are facing a difficultchallenge. They must be able to detect fraudulent or inflatedclaims while processing legitimate claims efficiently and fairly. Insurers who are able toaccomplish that are in position to build customer satisfaction andloyalty by improving claims service—the one spot with thepotential to either delight or disappoint insurance customersin dramatic fashion.

Our survey of over three dozen European P&C insurers earlierthis year indicated just how difficult this undertaking canbe. More than two-thirds—71 percent—of the claims executiveswe surveyed said they have seen an increase in the number offraudulent claims over the past three years. The reportedincrease averaged 10 percent over thattime. Additionally, more than one-third (39 percent) ofrespondents said they believe that five to 10 percent of claimspaid by their organizations over the past year were actuallyfraudulent, yet went undetected because of inadequate detection capabilities.

Fraud Rampant Overseas

We estimate that the annual losses related to fraudulent claimscould be in the range of $10 to $15 billion for the Europeanp&c insurance industry. Now that is a lot of money,particularly for an industry struggling to maintain profitablegrowth. European insurers could save billions eachyear if they had appropriate fraud-detection tools in place;however, many insurers still depend on aging technology andinsufficiently sophisticated analytics tools. Because theperpetrators of fraud are sophisticated and adapt quickly, theseoutmoded resources do not always work.

The U.S. situation isn't much more encouraging. A surveyconducted in late 2012 by FICO and the Property Casualty InsurersAssociation of America (PCIAA) showed that more than half—54percent to be precise—of insurers expect to see an increase in thecost of fraud this year on personal lines, and that less than threepercent expect to see a decline in the cost of fraud on personallines.

More Effective Measures

Of course, companies are responding to this problem. Our European survey indicated that 76percent of respondents planned to implement advancedfraud-detection techniques, such as predictive modeling tools andenhanced data collection, to assess historical fraudulent claimsand identify predictors of fraud. Unfortunately, thesemeasures on their own may not be enough to reduce losses bysignificant amounts. Without a modern core claims system—onethat, for example, enables further automation of certainclaims processes to accelerate claims settlement time—insurers willremain a step or two behind the fraudsters.

The core claims system should be able to support better claimsservice, not just fraud detection and prevention. Our earlierresearch indicated a strong correlation between poor claims serviceand the propensity of customers to commit fraud. And, asmentioned, high performance in claims service is and will remain animportant competitive differentiation point.

The claims system should embody these four corecapabilities:

1. Flexibility. The system should addresspolicyholders' evolving needs, such as their desire to obtaininformation on the progress of their claims, when and where theywant it. The vast majority (84 percent) of Europeanrespondents said their systems were not flexible and modern enoughto do this.
2. Independence. Nearly half (47 percent) ofour European survey respondents said their systems don't allowchanges in system behaviors and business processes withoutintervention from the IT department. This prevents claimshandlers from more quickly and easily configuring theseapplications to their needs.
3. Data capacity. The growing volume of dataincludes insights about consumers from social media, usage datacollected from telemetry and GPS technology, and a host of otherinformation. The claims system should have the capacity tocollect and analyze this data to help refine and improve claimsmanagement.
4. Multi-channel access. It's evident thatthis is a big challenge in both Europe and the U.S., withthree-quarters of European respondents saying the ability tointegrate new technologies to support multi-channel access is a toppriority. This capability not only addresses policyholders'concerns but also helps streamline the entire claims reportingprocess, from first notice of loss (FNOL) notification todocumentation of damage sustained.

Claims processing remain a central function—if not thecentral function—for p&c insurers, and more effectivefraud prevention can offer big benefits. Getting the most outof innovative technologies such as predictive analytics, businessrules for stopping known fraud types and linkages to externaldatabases, however, depends on having a core claims system that cansupport these and other advances while providing steadyimprovements in the speed and quality of service. Insurerswithout the right claims operating model and the right core systemwill remain a step behind fraudsters and, importantly, a stepbehind their competitors.