Finally, a new number to bounce around thep&c insurance industry lexicon: $80 billion. Gulp.That's quite a number, isn't it?

For years, we have been estimating that insurance fraud siphonsabout $30 billion from insurers' pockets, and arguably much morefrom the 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 every line ofbusiness, 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-fraudtechnologies, U.S.carriers are going to have to spend…a lot. Infact, spending allocated to fraud solutions (split roughly evenlybetween analytics and scoring products and services) is expected togrow by 44 percent between 2011 and 2016, according to "TheEscalating War on Insurance Fraud: P&C Carriers and FraudstersUp Their Games," Aite Group's overview of the North Americanp&c insurance 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," says Applebaum."Insurers must focus on solutions that enable detection as early aspossible 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 about14 percent of the total net premium written in the U.S. P&Cindustry. When breaking down the cost by product line, Aite findsprivate passenger auto suffered by far the greatest hit, accountingfor $26 billion of the total $64 billion in 2012. After that,homeowners' multi-peril ($14 billion) and workers' comp ($8billion) were the only other two lines to suffer costs more than $4billion.

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 anticipates spending to annually rise $20 million per year,on average. This means that by 2016, insurer spending could top$360 million, split evenly between scoring and analyticsinvestments.

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 as well.

Better Claims Service, Less Fraud

Michael A. Costonis, managing director in Accenture Property andCasualty Insurance Services, wrote that a recent European survey indicated that 76percent of p&c carrier respondents planned to implementadvanced fraud-detection techniques, such as predictive modelingtools and enhanced data collection, to assess historical fraudulentclaims and identify predictors of fraud. Unfortunately, thesemeasures alone may not be enough to significantly reduce losses.Without a modern core claims system, insurers will remain a step(or two) behind the fraudsters.

According to Costonis, a core claimssystem should be able to support better claims service, not justfraud detection and prevention. Earlier research has indicated astrong correlation between poor claims service and the propensityof customers to commit fraud. Thus, a claims system should embodythese four core capabilities:

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 European respondentssaid their systems were not flexible and modern enough to dothis.
2. Independence. Nearly half (47 percent) of ourEuropean survey respondents said their systems don't allow changesin system behaviors and business processes without interventionfrom the IT department. This prevents claims handlers from morequickly and easily configuring these applications to theirneeds.
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 to collectand analyze this data to help refine and improve claimsmanagement.
4. Multi-channel access. It's evident that thisis a big challenge in both Europe and theU.S., with three-quartersof European respondents saying the ability to integrate newtechnologies to support multi-channel access is a top priority.This capability not only addresses policyholders' concerns but alsohelps streamline the entire claims reporting process, from firstnotice of loss (FNOL) notification to documentation of damagesustained.

Claims processing remain a central function—if not thecentral function—for p&c insurers, and more effective fraudprevention can offer big benefits. Getting the most out ofpredictive analytics, business rules for stopping known fraud typesand linkages to external databases, however, depends on having acore system that can support these and other advances whileproviding steady improvements in the speed and quality ofservice.