Finally, a new number to bounce around the P&C insuranceindustry lexicon: $80 billion. Gulp. That's quite anumber, isn't it?

For years, we have been estimating that fraud siphons about $30billion from P&C insurers' pockets, and arguably much more fromthe public at large. I must confess to having grown tired, andrather skeptical, of this figure, even in spite of the disclaimersabout its opacity.

But having a shiny new projection is the opposite of refreshing;it's alarming. That's because, according to Aite Group,we'll be contending with about $80 billion in fraud “taxes” by2015. As for 2012, Aite estimates this rampant crime cost P&Cinsurers about $64 billion.

As claims departments and their SIU brethren attempt to keep upwith the growth in fraud, which is penetrating everyline of business, it's clear that a more realistic snapshot of themagnitude of the problem is at best, a sort of preface to aTolstoy-esque novel.

However, to deploy more effective anti-fraud technologies, U.S.carriers are going to have to spend…a lot. In fact, spendingallocated to fraud solutions (split roughly evenly betweenanalytics and scoring products and services) is expected to grow by44 percent between 2011 and 2016, according to “The Escalating Waron Insurance Fraud: P&C Carriers and Fraudsters Up TheirGames,” Aite Group's overview of the North American P&Cinsurance fraud battlefield, including its history andevolution.

Stephen Applebaum, the author of the Aite report, based hisfindings on interviews with 22 p&c insurance industrystakeholders and fraud-prevention organizations conducted from July2012 to March 2013.

“The growth in both cost and type of fraud show no sign ofeasing, even as claims frequency and premiums written have remainedrelatively flat,” explains Applebaum. “What puzzles and strikes memore than anything is that [fraud] keeps growing in spite of thesignificant efforts expended in traditional detection anddeterrence processes.

“More potentially effective solutions are available, bothtechnological and in the areas of industry and public agencyinformation exchange and cooperation,” he continues. “[Thesesolutions] are proven to work, but need to be more aggressivelyadopted.”

Bigger Cheese, More Mice

Applebaum cautions that insurers that fail to “up their game”could will not only become competitively disadvantaged but alsoadversely selected by enterprising fraudsters. Therefore, carriersshould revisit and update their enterprise fraud strategies andactively review new and more effective solutions in themarketplace. “Simple rules-based scoring and workflow solutions,while still effective, are now just table stakes,” saysApplebaum.

“Insurers must focus on solutions that enable detection as earlyas possible in the process—preferably in underwriting or at leastduring the claims reporting process—before payments are made andvaluable investigative opportunities are lost. This capability willnot only yield the highest financial results but will alsoencourage fraudsters to seek softer targets.”

Sizing Up The Rats

Last year, claims fraud costs averaged about 14 percent of thetotal net premium written in the U.S. P&C industry. Whenbreaking down the cost by product line, Aite finds privatepassenger auto suffered by far the greatest hit, accounting for $26billion of the total $64 billion in 2012. After that, homeowners'multi-peril ($14 billion) and workers' comp ($8 billion) were theonly other two lines to suffer costs more than $4 billion.

Numbers released earlier this year by the National InsuranceCrime Bureau (NICB) reaffirm the magnitude and scope of thispervasive crime. Questionable claims (QCs) are piling up, as NICBnotes a 27-percent increase in QCs over the last three years. In2010, the agency logged 91,652 QCs from member insurers, with100,201 in 2011 and 116,171 in 2012.

There is compelling evidence that U.S. p&cinsurers are not exactly resting on their laurels. The sector spent$271 million last year on fraud analytics and scoring products andis expected to spend $291 million this year. Aite anticipatesspending to annually rise $20 million per year, on average. Thismeans that by 2016, insurer spending could top $360 million, splitevenly between scoring and analytics investments.

Applebaum emphasizes the importance of text mining, casemanagement, visual link/social networks analytics, and more-evolvedinstances of identity management and verification in earlydetection and fraud deterrence. Increasingly, cyber defenses andoutlier detection, along with fresh investigative techniques, suchas behavioral analytics and speech biometrics, will be key tostrengthen insurers' holistic, proactive solutions aswell.