The disconnect between underwriting and claims is oft lamented.The undercurrent of animosity that exists between the two—whichsome construe as conflicting fiefdoms; or simply conflictingpriorities—is a multi-faceted problem that we have no delusions ofadequately exploring in this one article. Suffice it to say, asidefrom exacerbating bruised egos and awkward encounters at thecompany picnic, lack of collaboration between the two takes asignificant toll on insurers' ability to effectively assign andmanage risks, assess adequate premium, and control claimscosts.

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Compounding the issues associated with this communicationbreakdown is a vague air of depersonalization that has seeped intovirtually every nook and cranny of the industry. For the sake ofexpediency and process cost reduction, in both claims processingand managing policies, there has been a proliferation ofself-service options. Within the capabilities of modern technologies, consumers may now seek coverage andclaimants can report loss incidents often with virtually nil humaninteraction. Consequently, insurers are losing contact with theirpolicyholders, as neither may be able to associate a “face” or“personality” to the other. Behind the guise of anonymity (orimpunity) afforded by the Internet, including “how to scaminsurers” tutorials, consumers are able to execute what may end upbeing a deceiving self-service policy and claim reporting options.This subset of carrier customers make it their business to know asmuch as they can about automated rating and claim handlingpractices so as to intentionally misrepresent their circumstancesto obtain lower auto and homeowners' policy premiums, therebysetting the stage for higher claim payouts completely unrelated tothe risk they realistically represent.

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Also galvanizing scammers is the unfortunate publicmisperception of insurance fraud as a “victimless crime.” Thus, forinsurers, the best defense is defining and meticulously executingspecific fraud-detection programs, which encompass the right people,processes, and technology that marry quality claims andunderwriting data.

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Begin with the Basics

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Whether we want to blame technology, precarious organizationalchannels, or overall public perceptions regarding insurance fraud,the first step is to admit that silos between underwriting andclaims exist and must be eliminated. Period. Both claims andunderwriting need to share data, and “good” data at that sofraudsters do not sliver their way into lower-than-adequate premiumcalculations or inappropriate or undeserved claims payouts.

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As is the case with many things, successfully identifyingsuspicious activity and possible rating discrepancies begins withadopting a cohesive strategic vision and then translating thatvision to a series of linked, goal-oriented tacticalactions.   Within this priority, each insurancecarrier must cultivate an overall fraud-mitigating philosophy thattakes into account department-specific resources.

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“An insurer must figure out what its overall fraud philosophy isand what its ultimate goal will be,” advised Mike Mahoney, seniordirector of product marketing at Mitchell Auto Casualty Solutions. “Where do you want to go? Or,on a more granular level, is your aim to deny the potentiallyfraudulent claim or simply have it go away? Do you plan toprosecute or to seek reimbursement? Without an answer to this, itis virtually impossible to establish the right people, processes,and technology to effectively combat claim— or premium—fraud.” Mahoney points out that many insurers make themistake of fixating on one aspect of the problem or organization.One carrier may focus on optimizing the capabilities of its SIU,whereas another may focus primarily on technological kinks. He alsoillustrates that insurer complacency and accepting fraud as “anecessary evil of doing business” is an exercise in futility andextremely damaging to the industry's fraud-fighting efforts on thewhole.

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“To put it all in perspective, let's suppose there is a5-percent burglary rate in my area,” he explained. “If I considerthis just 'part of the neighborhood,' I focus my effortsinward—such as putting bars on my windows—with no guarantee ofsuccess versus outward—such as being part of a neighborhoodwatch—where the entire neighborhood in engaged in eliminating theissue and punishing the perpetrators.”

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For insurers, preventing money from going out the door involvesapportionment of SIU, claims, and underwriting resources in such a way as toexecute a smooth loss-mitigation program that keeps all investedparties on high alert, yet not feeling burdened with extra stepsoutside of the daily demands of the job.

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There are definitive data links that can be identified betweenclaims data and potential premium fraud. To this end, managementmay need to emphasize to harried adjusters with brimming caseloadsthat placing useful information on the underwriter's desk—even iffiguratively speaking—is essential. The secret is to do it in a waythat is integrated with day-to-day claims data collection andhandling practices that will not divert attention from thetime-sensitive claims-handling process.

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“Back in the day, the adjuster almost didn't want to flagsuspicious claims,” Mahoney said. “Already working an extensivecase load, the fraud-savvy adjuster would have to fill out a form, photocopythe claim file, and then send it all to the SIU to examine thecase. If the SIU decides not pursue the case at that point ordevotes a significant amount of time investigating [a dead end],then the claim will go back to the adjuster, who has lost[precious] days of potential claim progress and most likely will beaccepting back a more difficult case to settle.”

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There are gentle avenues to enable adjusters to be morecognizant of claim fraud without obstructing the handling process.Insurers should evaluate the work flow and tools necessary toachieve heightened awareness, while adjusters must have aconvenient way to share information that will be of interest tounderwriters as they assess risk. In lieu of a paper-based systemby which claims would have to step away from the file and manuallycomplete forms, a carrier should employ a system allowingtransmission of automated alerts to underwriting when necessary.This could entail a series of prompts and pull-down menus, withcross-claims business analytics. In regard to businessintelligence, a company can program a pattern to be recognized.When actual technology implementation begins, the insurer can drawfrom the collective knowledge of its top claims fraud experts andincorporate that knowledge within the claims handling systems. Forinstance, let's say you recover a stolen vehicle that is now acharred mess. Was the policyholder having financial problems orunemployed?

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Quantifying “Quality”Data
Top claims professionals can generally define the logic they use toflag worrisome details. However, we would be remiss withoutmentioning predictive analytics as part of the carrier's solution.In mining the right data, the carrier can discover new patterns.Once these patterns have been identified, they can be programmed,so the capability to recognize and mitigate claims fraud isconstantly evolving.

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“In regard to predictive analytics' potential impact on claimsfraud, studies from as recently as 2007 pointed to a typicalreduction of 3 to 5 percent in claims costs, with some carriersattaining savings as much as 5 to 10 percent,” Mahoney said.

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When measuring the quality of your data, there are two crucialparameters: the right information and accurate information. Ofteninsurers will have multiple and duplicate data systems. Consider,for instance, a claim involving the theft of a vehicle. The claimant alleges the car was snatchedfrom a Manhattan address. However, the adjuster may not know theunderwriting information—namely, that the policy covers the car asbeing stored at a garage location in upstate New York. Thepolicyholder also claims to only drive 10,000 miles each year. Sowhich record is now accurate? Who can update this information?

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Let's look at other hypothetical examples of when it isadvantageous to compare reported claim facts to data in theunderwriting file:

  • A workers' compensation claim is filed for a hot tar burn. Theinsured business is reported as a florist.
  • A business interruption (BI) claim reporting wage loss for moreemployees than stated in workers' compensation underwriting fileand/or underwriting file indicates “independent contractors” usedfor duties reported that the injured party was engaged at the timeof incident. 
  • A general liability for damage to property in insured care,custody and control when the underwriting file indicates theinsured business as “do-it-yourself” equipment rental.
  • Injury to “for hire passenger” when the underwriting fileindicates no such exposure. 
  • A homeowners' liability claim for a slip and fall where the injured party was at the premises topick up a child from day-care. This begs the question of what doesthe property underwriting file say about “business onpremises.”

So how far can combined quality data, claims-handling savvy, andadvance analytics can take an insurer? “The absolute upper limitmight be a measure against banking efforts in reducing credit cardfraud,” Mahoney said. “About 85 percent of U.S. credit cardtransactions are screened for fraud, with reports of reductions ashigh as 50 percent in card fraud. While this is a great benchmark,it is important to recognize the differences between credit cardtransactions and the complexities of a claim file. Compared to a claim, a credit card fraud model may be relativelysimple, as card-holder purchase patterns are easy to establish,based upon multiple transactions, and with few data points pertransaction to sample—basically where, when, what, and how much.With claims fraud, an insurer may have one claim and then never seethat perpetrator again.” Aside from consumerfraud, another primary cause for rating errors is the inability ofinsurers to keep track of some key life events and driving habitsof their customers. The sidebar on the opposite page summarizes thefindings of a recent report on premium leakage as it pertains toauto and touches on how seemingly small changes can have a largeimpact on risk and the corollary underwriting decisions.

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Because our lives are in a constant state of flux, carriers mustserve as an insured's “life event partner” in a way. This meansinitiating contact to stay attuned to whether a policyholder's sonis going off to college, for example. Will he need a laptop, whichmay necessitate a rider designed for students?

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Establishing an effective leakage detection program will help tosolidify a partnership between the policyholder and the insurer whilebreaking down barriers so that underwriters and claims can work asimpassioned allies in the fight against fraud. Direct contact—inaddition to curbing losses related to premium and claims—will pavea smoother road for all in the winding journey ahead.

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