Fraud exacts an enormous economic toll on the insurance industry, costing P&C insurers an estimated $30 billion in losses each year. To address the enormity of the problem, insurers must move away from fragmented approaches, says Deloitte in a new report titled, "A Call to Action: Identifying Strategies to Win the War Against Insurance Fraud."

The key to winning the war on fraud, Deloitte explains, is an integrated approach that leverages technology and operational improvements. Deloitte also stresses that although emboldened scammers continute to instigate a constellation of schemes, "soft fraud" represents a sizeable portion of claims-related losses. For the purposes of the report, the firm defines this soft fraud as exaggerated values on legitimate claims or misrepresented information in order to obtain lower policy premiums. By contrast, hard fraud—which is nevertheless pernicious and rampant—is described as deliberate deception, including faking an accident and fabricating a claim.

At present, workers' compensation and automobile insurance lines represent the areas of largest fraud activity for P&C insurers, with the number of fraudulent claims growing at an alarming rate. The National Insurance Crime Bureau (NICB) reported that in 2011 questionable claims for the first time had exceeded 100,000 referrals and had increased by 19 percent compared to 2009, and that specific categories saw even larger increases, such as casualty and miscellaneous types.

NICB: Surge in Suspicious Claims

Moreover, new findings from the NICB point to a 20-percent uptick in questionable claims (QCs) during the first half of 2012 compared to the same period the previous year, from 48, 887 QCs in 2011 to 58,523 this year. In its mid-year 2012 QCs referral reason analysis, NICB examined six referral reason categories of claims—property, casualty, commercial, workers' compensation, vehicle and miscellaneous—and identified non-vehicle-related property fraud as a growing area of concern.

Suspicious non-vehicle theft/loss in particular generated the largest increase in volume for a single referral reason in property QCs (5,255) and contributed to the property category's 40-percent rise in QCs compared to the first half of 2011. Casualty QC referral reasons increased 12 percent; commercial increased by 23 percent; workers' comp increased 20 percent and vehicle increased 20 percent. Meanwhile, the miscellaneous QC category posted the smallest year-over-year increase at 10 percent.

While NICB's latest findings are disconcerting, statistics provided in Deloitte's "Call to Action" emphasize the prevalence of fraud across all insurance sectors. According to the Coalition Against Insurance Fraud (CAIF), for example, fraud for all types of insurance costs $80 billion annually, making it the second largest economic crime in the United States after tax evasion.

Thus, fraudulent claims can have a drastic impact on the bottom line of an insurance carrier. According to the Insurance Research Council-Insurance Services Office, almost half of P&C companies report that between 11 and 30 cents or more of each premium dollar is lost to soft fraud alone.

Barriers in the Fraud Fight

Deloitte explains that numerous factors contribute to the overall fraud pandemic and the industry's ability to curb abuse, including:

Lack of a collective industry approach
Limited legal options and enforcement power
Increased potential for fraud in personal injury protection (PIP) states
Issues with legacy systems and data quality
Ongoing talent crisis
Tolerant consumer attitudes

Even so, Deloitte is quick to point out that insurers can take measures to overcome the aforementioned roadblocks. To this end, it encourages P&C insurers to adopt an end-to-end fraud management process for the sake of their individual bottom lines and that of the industry as a whole.

The firm outlines four "pillars" of an integrated fraud management program, such as developing a fraud management strategy, aligning the operating model, improving information quality, and leveraging advanced technology tools and analytics.

"Some companies have invested in improving data quality and adopting technology tools, but still lack the business processes, workforce competencies and organizational structure needed to act on the insights gained from data analysis," the report states. "Other[s] have worked to enhance their operating model, but have failed to develop a clear strategy of what they hope to achieve. Although these efforts can yield some benefits, they are unlikely to capture the potential synergies among the different aspects of fraud management."

End-to-End Process Improvement

Deloitte goes on to explain four steps toward reaching an end-to-end process: First, developing a fraud management strategy that identifies the end-goal to be achieved, during which a company needs to ask themselves how public they want to be in their stances on fraud and how aggressively they will pursue fraudulent claims. Second, operational models need to be aligned along with that strategy—for example, fraud objectives should be incorporated into performance goals and evaluations, guidelines for referring claims and SIU duties established and staffs bolstered or reduced as needed.

The last two steps in the process specifically involve technology: The third step should find companies focusing on improving the quality of information by establishing data standards and enhancing data sharing, and the last step is leveraging technology tools and investments in analytics.

The authors conclude with a compelling call to action, reminding insurers that the fight against fraud will not be won in isolation; namely that "heighted awareness and collaborative action by governmental entities, law enforcement, and society as a whole can play in important role in achieving real and meaningful progress."

Special Reports /

Deloitte Report Addresses $30B Fraud Pandemic

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