In the world of insurance, "hard fraud" is committed bysophisticated professional criminals who find ways to manipulatethe insurance system and reap monies fraudulently on a more thanoccasional basis. "Soft fraud" on the other hand, is committed byconsumers who see the opportunity to either "pad" a legitimateinsurance claim or submit a fraudulent household claim on aone-time basis.

In the United Kingdom, for example, researchers at the University of Portsmouthexamined some 40,000 claims handled by fraud investigators andfound that the majority of cases tended to involve usually honestpeople indulging in an opportunistic low-value crime. The typicalopportunistic fraud committed was making a claim for the equivalentof less than $1,000 for accidental damage to a computer, televisionor mobile phone. The research found that 82% of fraudsterssubmitted claims for accidental damages, since such claims do notrequire official documentation.

A February 2013 poll by the Insurance Research Council found thatin the United States 24% of people believe it is acceptable to padan insurance claim to make up for their deductible, down from 33%in 2002. While the good news is that the opportunistic insurancefraud is increasingly frowned upon by consumers, the fact is itstill occurs at an alarming rate and the cost is significant.According to the Insurance Information Institute, soft fraud costsinsurers roughly $32 billion a year.

The hard realities of soft fraud

The role of the Special Investigation Unit at an insurancecarrier is to stop fraud, improve efficiencies, pursue fairness andjustice and support the overall claim process by ensuring thecustomer is paid the right amount. While SIU directors are expectedto achieve these goals, they are expected to do so while avoidingany negative impact to customer satisfaction. The primary problemwith soft fraud is that it's frequently opportunistic and thus,it's difficult to disprove claims without alienating customers.When insurance investigators ask too many questions, policyholdersallege poor service and find a justifiable excuse to jump toanother insurer.

Beyond the service issue, special investigative units (SIUs)wrestle with the risk/reward formula. Do they risk devoting timeand resources to a claim, and possibly losing a customer, just tosave a few hundred dollars?

Tools to fight soft fraud fall short

Many commercial tools focus on profiling policyholders andgenerating alerts on criteria such as credit score and otherpersonal risk factors. While this information is useful, it's not acomplete picture of insurance claims since it doesn't look atline-item claim details.

Another common approach is the use of business rules andalgorithms that set up certain threshold values. Suspiciousactivity is flagged if a certain threshold is exceeded. Thedrawback to behavior-based fraud systems is that they can generatetoo many alerts, increasing the percentage of false positives.

Examining claim line detail via analytics helps identifysuspicious activity

Fraud tools had been incapable of flagging claimed items withvalues that exceed market benchmarks. For example, a $50 coffeemaker claimed at an inflated value of $500, would not have beenflagged in the past. The latest trend shows technology that canexamine claim line detail, comparing and contrasting pricing datafor signs of exaggerated or padded claim values that may point toopportunistic fraud. Demographic data can be pulled in and analyzedto determine what the usual contents are for a home of a givensize, in a given zip code, on a given block. Line item values canthen be compared against average retail and replacement cost valuesof the same item with the same brand and age, achieving twoimportant outcomes:

1. |
   1. If claimed items are markedly different than those on similarclaims in the area, the SIU is alerted.
   2. If the value of the items submitted appears to be inflated orfabricated, the SIU receives an alert.

Ideally, the end gain here is to determine if there issufficient rationale for a more in-depth review of the claim. Thisreduces the number of false-positives while not overwhelming theSIU with too many superfluous referrals. The result is an increasein the percentage of successful investigations, which leads to amore streamlined SIU and an overall business outcome for thecarrier.

Joseph Bracken is vice president, product management forEnservio,a provider of contents claim software, payments solutions,inventory and valuation services for property insurers. He waspreviously with CRICO/RMF responsible for delivering SaaS-basedinsurance and data analytics solut