Stuart Rose is Global Insurance Marketing Director atSAS.

Everyone wants cheaper auto insurance policies. We have all seenthe commercials from Progressive, Geico, State Farm, Allstate, andmany others offering low-priced insurance. But the number ofdrivers desperately looking for a better deal has also led to anincrease in underwriting fraud.

Recent studies have shown that insurers lose approximately 10percent of their total revenue to premium leakage and underwritingfraud. In 2010, rating errors reduced private passenger autoinsurance premium revenue by $15.4 billion in the UnitedStates.

According to Dennis Jay, Executive Director of the CoalitionAgainst Insurance Fraud, “Application fraud traditionally has beenthe poor cousin of claims fraud, receiving little attention and notbeing fully understood. Forward-thinking insurers are developingnew strategies and employing new tools to not only detectunderwriting fraud, but to prevent it as well.”

This was reflected in a survey by the Coalition AgainstInsurance Fraud in 2012, that found that 88 percent of insurers areemploying anti-fraud technology such as business rules engines,predictive analytics and link analysis tools. However less thanhalf are using technology for non-claims functions, such asunderwriting fraud.

Premium or underwriting fraud occurs when someone intentionallyconceals or misrepresents information when obtaining insurancecoverage at any stage in the policy life cycle. For example: aconsumer might underestimate the value of their property; aconsumer might front other drivers on an auto policy; or a businessowner might underreport payroll or misclassify the business inorder to reduce workers' compensation premiums.

In addition, analysis has shown that a substantial proportion ofclaims fraud originates from fraudulent applications. Insurancecompanies that can reduce underwriting fraud can significantlydecrease the exposure to certain types of claims fraud.

Buying from insurers directly online is increasing globally andin many countries is the predominant distribution channel forpersonal insurance. Unfortunately, this growth in online and directinsurance has created a lucrative market for an emerging trendknown as “ghost brokering.”

A recent exposé of this criminal activityrevealed that many customers could be driving uninsured afterhaving been tricked into paying for a faulty or bogus insurancepolicy. A ghost broker will offer significantly cheaper insurancethan legitimate insurance agents by altering key quote details toget a lower premium for the insured. For instance, a ghost brokermight transpose the applicant's year of birth, changing 1968 to1986.

Ghost brokers operate through websites or small ads that targetyoung motorists who face rocketing premiums or individuals who lackan understanding about the way the insurance industry works. Theseghost brokers then charge the consumer a fee for their service. Tojustify why they can offer lower prices, many ghost brokers claimto be an insurance company staff member, explaining that thereduced rates are due to staff discounts. One red flag forcustomers to watch out for is that many ghost brokers will ask foran initial payment in cash.

The unfortunate part of this scam is that the policies theseunsuspecting victims purchase are essentially worthless. In theevent of an accident, they will not be covered.

Insurance companies have begun to implement analytics to look atcharacteristics of an application that suggest ghost brokering istaking place. For example, the same address or credit card may beused on multiple policies. Another method deploys statisticalanalysis and cross-referencing information like date of birth anddriver's license information with industry databases to determineif the insured is attempting premium fraud through ratemanipulation.

Insurance is fiercely competitive, with consumers often choosingan insurer based on price. To ensure rating integrity and preventbillions of dollars in premium leakage, insurers need to implementanalytical technologies and conduct sophisticated data analysis inreal time. Together, these techniques are powerful deterrents forwould-be fraudsters, such as ghost brokers, who seek to profit atthe expense of insurance companies and their honestpolicyholders.