Within most insurers, and at almost every insurance conference as of late, there is palpable buzz around digital transformation initiatives. Digital disruption is poised to significantly impact, if not reinvent, many insurers and their current business practices.
As with many new paradigms, it’s hard to firmly pigeon-hole exactly what this means for each insurer (and each program), but we can overall summarize this progress as:
— Moving to incorporate a range of digital technologies within and across the insurance process;
— Seeking opportunities outside the standard insurance business model — for example, becoming risk managers for their clients;
— Mapping out and managing the customer journey across the customer lifecycle.
In short, digitization and digital transformation programs are rapidly becoming engrained in the U.S. insurance culture.
Putting the customer at the center
In the industry’s dawning digital age, it is a clear priority for every insurer to both retain and grow its customer base, to leverage technology to steward customers 24x7.
Terminology such as "managing the customer journey," "enriching the customer experience," and "a customer-centric view of the organization" all fit the nomenclature of this key business topic. Many insurers are investing heavily into their websites, operational systems and processes to make this vision a reality. Added to this is the real need to manage operational expenses (often people) to ensure they can compete with smaller, more agile insurance start-ups.
The current state of insurance fraud
The head of the Insurance Information Institute recently testified before Congress, estimating that P&C and auto insurance fraud costs insurers more than $30 billion annually. That equates to about 10 cents of every dollar paid in claims being pocketed by a fraudster.
Beyond claims fraud, many insurers are concerned about potential upticks in application fraud, where customers and even insurance agents game the system to either reduce the premiums they pay or have risk accepted.
Fraudsters love digital
Insurers, in increasing number, are adopting digital technologies to put the customer at the center of their business and optimize customer experience. Well intentioned as it may be, this strategy also serves to remove experienced insurance professionals from frontline roles, where they would normally introduce and manage the customer relationship, and replace them with easy-to-use web pages. While streamlining human interaction may seemingly make sense from an operational expense perspective, not many insurers have thought through the potential impact on fraud rates and the related hit to their underwriting results.
Many insurers underestimate the sophistication of these online scammers and their dedication to boosting their ill-gotten gains. Make no mistake; organized criminal gangs and individuals or households who deliberately invent or expand claims will find and exploit any weaknesses in an insurer's ability to defend itself against fraud. And once the fraudsters discover specific avenues, expect them to strike quickly. As with all things digital, the velocity of fraud is increasing.
With digitization, the billion-dollar question is: Are insurers making it too easy for premeditative fraudsters to make fraudulent claims? (Photo: iStock)
Rise of the armchair fraudster
It seems inevitable that digitization will birth novel schemes and strategies for bilking insurance companies out of billions of dollars each year.
Digitization makes fraud all too easy for opportunistic insurance cheats, who can practice their duplicity from the comfort of an armchair. Consider for a moment how simple it is to manipulate an online auto insurance quote. Changing rating factors such as annual mileage or where a vehicle is kept overnight can significantly reduce the premium paid. Similarly, when making on online property claim, one can falsely add items to a claim or increase the value of damaged or stolen items with just a few clicks of a mouse.
Let’s be clear. For the 90 percent of genuine and honest customers who file legitimate claims, it is imperative insurers provide them the best service possible — and many digitization programs are addressing exactly that and should be applauded.
But what about the one in 10?
Tackling fraud with analytics
What if insurers could use data to progress the claimant or new business applicant down a specific path? Straight Through Processing (STP) has been around for many years now, but what if insurers could have real confidence that claimants going down an STP route are part of the 90 percent, not the one in 10?
They can with fraud analytics that help steer the customer journey. Insurers can use analytics to derive which claimants should go through the STP channel — automatically accepted as new business — and, critically, which claimants or applicants would be better handled by an experienced insurance professional.
Does an application fit into a known high-scoring fraud ring? Then pass it on to a specialist for further scrutiny and action. Properly equipped with the right analytic technology, insurers can see emerging threats and trends that may well keep them ahead of the next fraud wave.
Insurers using digital transformation programs to truly place the insured at the center of their business should be encouraged. They — and the customers they serve — will be the long-term winners. But those insurers who do not seriously contemplate the growing threat of online insurance fraud and correspondingly build analytical safeguards into their digital programs do so at their own peril.
Digitization, let’s not forget the one in 10.
David Hartley is director of Insurance Solutions at SAS. The opinions expressed here are his own. This author can be reached by sending email to David.Hartley@sas.com.