Fraud exacts an enormous economic toll on the insuranceindustry, costing P&C insurers an estimated $30 billion inlosses each year. To address the enormity of the problem, insurersmust move away from fragmented approaches, says Deloitte in a newreport titled, "A Call to Action: Identifying Strategies to Win theWar Against Insurance Fraud."

The key to winning the war on fraud, Deloitte explains,is an integrated approach that leverages technology andoperational improvements. Deloitte also stresses that althoughemboldened scammers continute to instigate a constellation ofschemes, "soft fraud" represents a sizeable portion ofclaims-related losses. For the purposes of the report, the firmdefines this soft fraud as exaggerated values on legitimate claimsor misrepresented information in order to obtain lower policypremiums. By contrast, hard fraud—which is neverthelesspernicious and rampant—is described as deliberate deception,including faking an accident and fabricating a claim.

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

NICB: Surge in Suspicious Claims

Moreover, new findings from the NICB point to a20-percent uptick in questionable claims (QCs) during the firsthalf of 2012 compared to the same period the previous year, from48, 887 QCs in 2011 to 58,523 this year. In itsmid-year 2012 QCs referral reason analysis, NICB examined sixreferral reason categories of claims—property, casualty,commercial, workers' compensation, vehicle andmiscellaneous—and identified non-vehicle-related propertyfraud as a growing area of concern.

Suspicious non-vehicle theft/loss in particular generated thelargest increase in volume for a single referral reason in propertyQCs (5,255) and contributed to the property category's 40-percentrise in QCs compared to the first half of 2011. Casualty QCreferral reasons increased 12 percent; commercial increased by 23percent; workers' comp increased 20 percent and vehicle increased20 percent. Meanwhile, the miscellaneous QC category posted thesmallest year-over-year increase at 10 percent.

While NICB's latest findings are disconcerting, statisticsprovided in Deloitte's "Call to Action" emphasize theprevalence of fraud across all insurancesectors. According to the Coalition Against InsuranceFraud (CAIF), for example, fraud for all types ofinsurance costs $80 billion annually, making it the second largesteconomic crime in the United States after tax evasion.

Thus, fraudulent claims can have a drastic impact on the bottomline of an insurance carrier. According to the Insurance ResearchCouncil-Insurance Services Office, almost half of P&C companiesreport that between 11 and 30 cents or more of each premium dollaris lost to soft fraud alone.

Barriers in the Fraud Fight

Deloitte explains that numerous factorscontribute to the overall fraud pandemic and theindustry'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 outthat insurers can take measures to overcome theaforementioned roadblocks. To this end, it encourages P&Cinsurers to adopt an end-to-end fraud management process for thesake of their individual bottom lines and that of the industry as awhole.

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

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

End-to-End Process Improvement

Deloitte goes on to explain four steps towardreaching an end-to-end process: First, developing a fraudmanagement strategy that identifies the end-goal to be achieved,during which a company needs to ask themselves how public they wantto be in their stances on fraud and how aggressively they willpursue fraudulent claims. Second, operational models need to bealigned along with that strategy—for example, fraud objectivesshould be incorporated into performance goals and evaluations,guidelines for referring claims and SIU duties established andstaffs bolstered or reduced as needed.

The last two steps in the process specifically involvetechnology: The third step should find companies focusing onimproving the quality of information by establishing data standardsand enhancing data sharing, and the last step is leveragingtechnology tools and investments in analytics.

The authors conclude with a compelling call to action, remindinginsurers that the fight against fraud will not be won in isolation;namely that "heighted awareness and collaborative actionby governmental entities, law enforcement, and society as a wholecan play in important role in achieving real and meaningfulprogress."