North American p&c insurers are facing a difficult challenge. They must be able to detect fraudulent or inflated claims while processing legitimate claims efficiently and fairly. Insurers who are able to accomplish that are in position to build customer satisfaction and loyalty by improving claims service—the one spot with the potential to either delight or disappoint insurance customers in dramatic fashion.
Our survey of over three dozen European P&C insurers earlier this year indicated just how difficult this undertaking can be. More than two-thirds—71 percent—of the claims executives we surveyed said they have seen an increase in the number of fraudulent claims over the past three years. The reported increase averaged 10 percent over that time. Additionally, more than one-third (39 percent) of respondents said they believe that five to 10 percent of claims paid by their organizations over the past year were actually fraudulent, yet went undetected because of inadequate detection capabilities.
Fraud Rampant Overseas
We estimate that the annual losses related to fraudulent claims could be in the range of $10 to $15 billion for the European p&c insurance industry. Now that is a lot of money, particularly for an industry struggling to maintain profitable growth. European insurers could save billions each year if they had appropriate fraud-detection tools in place; however, many insurers still depend on aging technology and insufficiently sophisticated analytics tools. Because the perpetrators of fraud are sophisticated and adapt quickly, these outmoded resources do not always work.
The U.S. situation isn’t much more encouraging. A survey conducted in late 2012 by FICO and the Property Casualty Insurers Association of America (PCIAA) showed that more than half—54 percent to be precise—of insurers expect to see an increase in the cost of fraud this year on personal lines, and that less than three percent expect to see a decline in the cost of fraud on personal lines.
More Effective Measures
Of course, companies are responding to this problem. Our European survey indicated that 76 percent of respondents planned to implement advanced fraud-detection techniques, such as predictive modeling tools and enhanced data collection, to assess historical fraudulent claims and identify predictors of fraud. Unfortunately, these measures on their own may not be enough to reduce losses by significant amounts. Without a modern core claims system—one that, for example, enables further automation of certain claims processes to accelerate claims settlement time—insurers will remain a step or two behind the fraudsters.
The core claims system should be able to support better claims service, not just fraud detection and prevention. Our earlier research indicated a strong correlation between poor claims service and the propensity of customers to commit fraud. And, as mentioned, high performance in claims service is and will remain an important competitive differentiation point.
The claims system should embody these four core capabilities:
- Flexibility. The system should address policyholders’ evolving needs, such as their desire to obtain information on the progress of their claims, when and where they want it. The vast majority (84 percent) of European respondents said their systems were not flexible and modern enough to do this.
- Independence. Nearly half (47 percent) of our European survey respondents said their systems don’t allow changes in system behaviors and business processes without intervention from the IT department. This prevents claims handlers from more quickly and easily configuring these applications to their needs.
- Data capacity. The growing volume of data includes insights about consumers from social media, usage data collected from telemetry and GPS technology, and a host of other information. The claims system should have the capacity to collect and analyze this data to help refine and improve claims management.
- Multi-channel access. It’s evident that this is a big challenge in both Europe and the U.S., with three-quarters of European respondents saying the ability to integrate new technologies to support multi-channel access is a top priority. This capability not only addresses policyholders’ concerns but also helps streamline the entire claims reporting process, from first notice of loss (FNOL) notification to documentation of damage sustained.
Claims processing remain a central function—if not the central function—for p&c insurers, and more effective fraud prevention can offer big benefits. Getting the most out of innovative technologies such as predictive analytics, business rules for stopping known fraud types and linkages to external databases, however, depends on having a core claims system that can support these and other advances while providing steady improvements in the speed and quality of service. Insurers without the right claims operating model and the right core system will remain a step behind fraudsters and, importantly, a step behind their competitors.